Citi stake sale shines spotlight on wealth funds

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - Citigroup's sale of a stake in the company to Abu Dhabi's investment arm highlights the blessing and curse of government-controlled wealth funds.

With more than $2 trillion in assets, the funds have the deep pockets to serve as a stabilizing force in wobbly financial markets. But their secretive nature has generated tough questions about how to safeguard U.S. national security without discouraging much-needed investment.

"These (wealth funds) are arms of the government. They're not independent investors," said Dale Oesterle, a law professor at Ohio State University's Moritz College of Law.

"Right now they want money, like all good investors do, which is great. What's worrisome is that at some point these investors could turn into a foreign policy arm of their government," he said.

The U.S. Treasury Department and Congress are discussing ways to ensure that these funds base their decisions on financial -- not political -- motivations, and that their purchases of U.S. assets don't compromise national security.

The concern is that some of the largest wealth funds are controlled by countries with strained U.S. relationships, and could seek to acquire companies with sensitive technology or try to destabilize markets by dumping shares.

Wealth funds, concentrated in oil-exporting nations, are designed to invest surplus reserves and generate bigger returns than what would normally be earned by holding cash or bonds.

They have been around for more than 50 years but have grown in number and wealth recently, thanks to high oil prices and China's increasingly powerful position in global trade.

Abu Dhabi Investment Authority, which is buying up to a 4.9 percent stake in Citigroup (C.N) for $7.5 billion, is considered the world's largest wealth fund, with assets estimated as high as $875 billion.

The fund does not disclose its total assets, nor does it regularly detail its investment activity, making it hard to quantify its true worth and harder still to glean much insight into its strategies.

Edwin Truman, a senior fellow at the Peterson Institute for International Economics, developed a "scoreboard" to rate sovereign wealth funds on their structure, governance, transparency and accountability, and behavior. Abu Dhabi Investment Authority ranked last out of 32 funds analyzed, scoring just 0.5 point out of a possible 25.

Other recent wealth fund transactions include China's purchase of a $3 billion stake in U.S. private equity firm Blackstone Group (BX.N) in May. One U.S. senator said that deal may have national security implications since the firm's holdings included military and satellite technology companies.

WEAK DOLLAR DRAWS INTEREST

The rise of wealth funds comes at a delicate time for the U.S. economy, which is grappling with a housing downturn, tightening credit terms and rising oil prices, and needs to attract foreign investment to finance a hefty debt pile.

With the dollar hovering near a record low against a basket of world currencies, and many financial stocks beaten up over bad loans tied to subprime mortgages, state-owned funds smell bargains and are likely to remain aggressive in seeking investments in the United States.