Sovereign Wealth Funds: The New Intersection of Money and Politics

By Christopher Balding | Go to book overview

CHAPTER 1
From Stabilization to
Sovereign Wealth Funds

In the summer of 2007, with oil prices trending upward at $70 per barrel and one full year before the financial crisis of 2008, concern about impending takeovers by sovereign wealth funds dominated policy circles and financial news. The continued robust economic growth in the United States and Europe focused political attention on the cash-rich oil exporters and rapidly expanding Chinese economy with its burgeoning foreign exchange reserves. The Director of the White House National Economic Council and former Secretary of the Treasury, Larry Summers, worriedly wrote,

The logic of the capitalist system depends on shareholders causing com-
panies to act so as to maximize the value of their shares. It is far from
obvious that this will over time be the only motivation of governments
as shareholders. They may want to see their national companies compete
effectively, or to extract technology or to achieve influence. (2007)1

This summed up the fears of many about a new wave of barbarians at the gate buying American assets. The fears appeared well-founded, coming fresh off the aborted acquisition attempts by Dubai Ports and by China National Offshore Oil Company of the port operator P&O and Unocal, respectively. Prompted by security threats of AlQaeda–linked shipping and Chinese purchases of global oil reserves, American politicians would not tolerate the purchase of domestic assets financed by high oil prices. Sovereign wealth funds presented a challenge to the global financial governance system constructed by developed countries (Drezner 2008). Despite evidence of the profit maximizing drive, political fear played the primary role in the debate about sovereign wealth funds (Deutsche Bank 2007). This raised concern for some about unequal treatment of investment depending

1 The irony of Lawrence Summers’s concern with the entrance of foreign government into asset management, as the man who oversaw the American bailout of financial services and the auto industry and the courting of foreign investors including sovereign wealth funds, has not gone unnoticed by many

-3-

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