SWF's Are Making Political Waves in the U.S. and EU

By Karol, Thomas J. | European Affairs, Fall 2008 | Go to article overview

SWF's Are Making Political Waves in the U.S. and EU


Karol, Thomas J., European Affairs


I have been asked to provide an assessment of the current political climate in the U.S. and its impact on the debate about Sovereign Wealth Funds and also to discuss the potential ramifications for future transatlantic and international collaboration on this front.

At the Sovereign Investment Council, we have been devoting quite a bit of attention to discussing SWFs with Washington policy-makers. The Council is the only association in Washington that is solely devoted to monitoring SWF developments to educate policy-makers about SWFs and influence public opinion in support of them.

We believe that the present U.S. political climate for SWFs is very volatile. The U.S. financial system has been severely disrupted; energy costs are skyrocketing; trade imbalances are growing. So, this being Washington, you need to find a reason for problems and a solution. In this environment, sovereign wealth funds can be a perfect political target: SWFs have:

* no U.S. employees

* no union members

* no factories or offices in electorally significant parts of the U.S.

* no constituents in the U.S.; in fact, the very countries maintaining some of the largest SWFs are unpopular in many Congressional districts.

A recent opinion poll showed that 58 percent of Americans think globalization is bad for the U.S., and just 28 percent think it has helped America. SWFs represent many of the negatives of globalization to the public and to some U.S. policy-makers. It is not difficult to find demagogic quotes from protectionist politicians under the guise of "strengthening national security." These politicians are not uninformed and, in saying such things, they are behaving rationally [for their political needs]. Polling shows American voters dislike many of the governments that control the largest SWFs. It is far easier to side with public opinion than refute it. For most politicians, refuting public opinion could be a career-ending decision.

We believe that in the coming months you will see a number of anti-SWF bills proposed in Congress that will have no possibility of passing, but they will appeal to voters back home who are paying $4 a gallon for gasoline and see that money going to foreigners who have trillion-dollar investment funds.

Collectively, SWFs have not found any strong allies in Washington. Various Washington groups have tucked SWFs into their portfolios [of issues], but SWFs have never been the primary constituency of any interest groups. In fact, our Sovereign Investment Council was created because we saw no group that was willing to publicly provide any positive information on SWFs, no public source of information about the benefits of SWFs or groups that would take a position to educate policy-makers about SWFs.

In the U.S. government, at least eight Congressional groups and several federal agencies have claimed some jurisdiction over the SWF issue, on the basis of national security, financial services, securities regulation, foreign relations and other aspects of SWF activity. In Congress, Senate Banking and House Financial Services are seen to be the leaders.

* Senate Banking Committee Chairman Chris Dodd has said that "SWFs have been and will continue to be a high priority for the Committee."

* Spokesman for House Financial Services Chairman Barney Frank has stated: "We are going to look at the big picture of this phenomenon and try to gauge what are the policy implications for these funds in the U.S."

On a more positive note, it is true to say that, generally, Congress and the current administration understand that SWFs are very individual, highly complex and have provided substantial investment to major U.S. institutions in time of need. Most policy-makers in Washington privately understand that SWFs have not committed any illegal or unethical acts and should not be presumed guilty because of size or confidentiality. …

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