March 5, 2008 / 7:50 PM / 11 years ago

UPDATE 1-US Treasury: sovereign funds can fan protectionism

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WASHINGTON, March 5 (Reuters) - A senior U.S. Treasury Department official said on Wednesday that sovereign wealth funds aid market stability but warned they may fan protectionism if their investment goals are not clear.

“It is my view that protectionist sentiment stems partly from a lack of information and understanding of sovereign wealth funds, which in turn is partly due to a lack of transparency and clear communication on the part of the funds themselves,” said Treasury’s undersecretary for international affairs, David McCormick.

McCormick was one of a series of officials testifying before a U.S. House of Representatives financial services subcommittee.

He said the International Monetary Fund should develop a voluntary code of behavior for the pools of foreign government-controlled capital to help soothe concerns about their reasons for making investments in the United States and elsewhere.

U.S. lawmakers’ concern about the activities of the funds has mounted as the funds become increasingly active in taking large stakes in troubled U.S. banks and financial institutions, raising questions whether it is in the U.S. interest for them to do so.

McCormick said the scrutiny they were receiving was “inevitable” but stressed the United States already has mechanisms in place, like the Committee on Foreign Investment in the United States or CFIUS, that closely reviews any investments that have implications for national security.

Sovereign wealth funds currently manage an estimated $1.9 trillion to $2.9 trillion, more than hedge funds and private equity funds, and could grow to $15 trillion in the coming eight years, experts have said.

The funds, many of them in the Middle East but also in Russia and China, have arisen as high oil prices and huge U.S. trade deficits have caused enormous accumulations of assets abroad that are being reinvested back in the United States.

Citigroup alone raised about $12.5 billion this year after announcing a record quarterly loss of nearly $10 billion. Nearly $7 billion of the infusion came from Singapore Investment Corp Pte and $3 billion from the Kuwait Investment Authority.

McCormick said in addition to having the IMF develop best practices for the wealth funds, the Bush administration wanted the Paris-based Organization for Economic Cooperation and Development identify best practices for countries that receive the investments.

“These should have a focus on avoiding protectionism,” he said, adding that the OECD expects to issue a statement on the issue of sovereign investment in June. (Reporting by Glenn Somerville; Editing by Neil Stempleman)

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