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04 December 2023

America's blind hypocrisy on SWFs

By Paul Murphy


It was bound to happen. It was bound to be ugly when it did. But now that it has arrived, it is looking rather uglier than this correspondent expected. We’re talking about the political backlash to sovereign wealth funds (SWFs) in the US.

It’s not the racial undertones that shock. Or even the naked political point scoring to which SWF-bashing is employed. No, what gets under the skin is the blind hypocrisy. Consider a couple of the statements uttered by prominent people in the US over the past fortnight or so. “We are concerned that some sovereign wealth funds, or persons associated with them… may undermine market integrity by engaging in insider trading or other market abuses.”

That’s SEC Director of Enforcement Linda Chatman Thomsen, in recent testimony before the US/China Economic and Security Review Commission. As a top official in the premier US financial regulator, Ms Chatman Thomsen was explaining sovereign wealth fund assets were expected to jump from $2.5 trillion (Dh9.17trn) currently to more than $12trn in the next eight years. Along the way she named the Abu Dhabi Investment Authority, Norway’s Government Pension Fund, and Saudi Arabia’s wealth fund as each now holding more than $250 billion to invest.

Second tier SWFs included Kuwait, Singapore, Russia and Hong Kong, each with more than $100bn in assets. And there was China Investment Corporation, the main focus of the meeting, with about $200bn.

Ms Chatman Thomsen then went on to say that, unlike hedge funds, SWF’s “have power derived from being governmental entities, which may give them access to government officials and information that is not available to other investors”. Hence the suggestion the SEC faces a potentially huge threat of market abuse.

Warming to her theme, the regulator noted the SEC has contacts with other regulators all over the world, but that she is “concerned that if the government from which we seek assistance is also controlling the entity under investigation, the nature and extent of co-operation could be compromised”.

Could? Would? Will? Might? The big thing missing from Chatman Thomsen’s testimony was the slightest fleck of evidence. To state, blithely, that SWFs, as a new class of investor, automatically bring new risks of market abuse is as absurd as it is offensive.

Research shows about a quarter of price sensitive news surrounding all mergers and acquisitions in Europe and the US leaks in advance of the formal announcement. Regulators know this because they monitor suspicious price movements. The point here being that bodies like the SEC have enough on their plate dealing with American insider dealers before worrying about a phantom threat from abroad. But Ms Thomsen’s testimony was probably not intentionally discriminatory. She will simply have been joining the growing chorus expressing unease about the way Wall St is having to draw in massive emergency funding from the Middle East and Asia.

We should be alive to how distressing this is to Americans in particular (as opposed, generally, to Europeans). If the injection of petro and export dollars into the likes of Citigroup, Merrill Lynch and Bear Stearns had been suggested six months ago, the chorus of outrage would have been deafening.

The fact is, while America and its banks routinely chant the mantra of open markets, free trade and unencumbered capital flows, the fact is these principals are cast aside at the slightest whiff of domestic unease. Hypocritical, yes, but a reality all the same.

But then that is not to excuse the following from New York senator Chuck Schumer, who is threatening legislation to force SWFs to improve their transparency and ensure they do not invest with “non-economic motivations”. At a hearing of the US Congress’s joint economic committee, which he chairs, the senator declared: “SWFs are their own worst enemies. Most are not transparent or publicly accountable, and we know little about their governance structures or fiduciary controls. So the bottom line is we don’t know if their decisions are made exclusively on an economic basis.”

When, pray, did America restrict its global investments to purely economic considerations? The good senator needs to consult a good history book.

Paul Murphy is Associate Editor of the Financial Times.