Mortgaging America

Investment funds run by foreign governments are keeping the U.S. afloat.

By Eric J. Weiner

05/06/08 “Los Angeles Times” — - 04/06/08 — America’s for sale. Just ask Treasury Secretary Henry Paulson.

With the U.S. economy in shambles, Paulson just spent four days touring the Middle East, hat in hand, looking for investors to bail us out. Specifically, on Monday, Paulson met with heads of the Abu Dhabi Investment Authority, the world’s largest “sovereign wealth fund” with roughly $875 billion in assets, and encouraged them to buy American businesses.

Of course, it’s nothing new for U.S. officials to reach out to the deepest pockets in the world in times of crisis. Just a century ago, J.P. Morgan became an American icon by single-handedly rescuing the financial markets during the stock market panic of 1907.

What is new, however, is that our economic problems have become so big that they no longer can be remedied by a few affluent individuals or investment firms. Only extremely wealthy countries have the resources to clean up this mess. So Paulson is forced to visit flush, oil-slicked Arabian emirates from Qatar to Abu Dhabi and beg for help.

This is economic globalization in its most raw form — and a dramatic change in the way the worldwide economy operates. Today, the real power in international finance is held by rich countries, not wealthy institutions, corporations or private investors. And these countries are flexing their increasingly bulging muscles through investment vehicles known as sovereign wealth funds.

Sovereign wealth funds, or SWFs, basically are mutual funds that invest the excess capital generated by a region or country. The first one was established by Kuwait when it still was a British territory. After World War II, as Kuwait was negotiating independence, its leader, Sheik Abdullah al Salem al Sabah, asked the British to help him create a fund that would invest the nation’s oil profits. The Kuwait Investment Board, which eventually became the Kuwait Investment Authority, today has about $250 billion in assets and is one of the largest sovereign wealth funds in the world.

As the British Empire crumbled, the government created similar funds for many of its territories and colonies (including the islands of Kiribati, which profitably exported guano for fertilizer). Meanwhile, other countries with growing wealth started setting up similar funds, such as the oil-rich nations of Saudi Arabia, the United Arab Emirates, Norway and Russia, as well as China, Singapore and South Korea, which had highly productive economies that also generated lots of excess capital.

Still, it’s only recently that SWFs have become major players on the financial stage.

In 1990, the funds held just $500 billion in assets combined. Today, that figure is about $3.5 trillion. For comparison purposes, that’s more than all of the assets controlled by all of the hedge funds in the world. And by 2012, the figure will be at least $10 trillion, according to estimates by the International Monetary Fund.

The primary reason for this explosion is, in a word, oil. As its price has soared from less than $25 a barrel in 2002 to more than $125 a barrel today, the value of sovereign wealth funds held by oil-rich nations has skyrocketed. And this trend isn’t expected to change any time soon.

The new power of SWFs has been on graphic display during our recent mortgage crisis. They’ve essentially rescued the international financial system by injecting tens of billions of dollars into troubled banks. Citigroup, for instance, raised about $20 billion from a consortium of SWFs from Abu Dhabi, Kuwait and Singapore. UBS secured nearly $10 billion from a Singapore fund that now controls 9% of the bank. Merrill Lynch took in about $11 billion from SWFs from Kuwait, Singapore and South Korea. And even august Morgan Stanley got $5 billion from China’s SWF.

These investments are steadying global financial markets by ensuring that none of these key banks goes under. But there are important questions to ask about the increasing influence that sovereign wealth funds have over our economy. As SWFs grow in size, they will be in a position to control large swaths of the global business world. That means foreign governments, which control the funds, will increasingly own sizable stakes in companies in such important industries as computer technology, aerospace and biotechnology.

These kinds of investments raise “profound questions” of geopolitical power, as former Treasury Secretary Lawrence Summers pointed out a few months ago at the World Economic Forum in Davos, Switzerland. Summers’ essential complaint is that there is no way of knowing if there is a political agenda behind a country’s investment in these essential industries.

To that end, the International Monetary Fund is trying to draft a code of “best practices” that SWFs can adopt voluntarily. The funds generally have been resistant to the idea, although Abu Dhabi and Singapore have signed an agreement with the Treasury Department that lays out principles for the countries’ funds to be more transparent and not politicize their investments.

But on a practical level, the growing influence of SWFs really brings up much more basic concerns. What does it mean for Americans to have decisions about our jobs, our home loans, our school loans and so on to ultimately rest with foreign governments? What does it mean to surrender this level of control over our own economy?

The trouble is, we don’t know. And that raises perhaps the most important question of all: What if the cure to our mortgage crisis is more deadly than the disease itself?

Eric J. Weiner is the author of “What Goes Up: The Uncensored History of Modern Wall Street as Told by the Bankers, CEOs, and Scoundrels Who Made it Happen.”
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Re Hypothesis #4, not actually spelled out in this “comment”, I probably need to explain what I’m hypothesizing to give you a fair chance to criticize it. In a nutshell, the US’s usual hole card/savior of last resort has so far refused to come riding over the hill bugling “Fellow Worshippers, Inshallah Let Us Now Prevent Instability, that is, Let’s Increase Production, Wa Aleikum Salam, Piece Upon Yawll.” The Saud family enterprise, “Kuwait”, UAE, Qatar normally can be counted on to show up dragging Gadafi & Algeria to the party, but at the moment it seems they’re going along more with the Iranian/Venezuelan/Ecuadorian agenda than with that of Condoleeza/Bernanke/Paulson/Lameduck & Assoc.

My guess is that recent and ongoing events in Gaza, which seldom make it onto TV News in the US but are Topic No 1 amongst residents of Fertile Crescent & adjacent areas, have a good deal to do with this uncharacteristic lack of empathy for Unca Sugar’s predicament.

I’m dying to learn who it was who beat me to the punch on that one by nailing down the “Intellectual Propitty” rights, esp. since doesn’t seem to require a lot of intellectual capacity to figure out that there may be more than a coincidental linkage between the two anomalous phenomena, i.e., between ongoing atrocities shading over into Gradual Genocide in Gaza, and that “King Gas” station over on El Camino & Howe which yesterday was offering Unleaded Reg. for a mere U$4.35 9/10ths.
Is it possible that Elders of the extended Saudi Royal Family could be at the moment more worried about the threat to their Regime’s stability posed by widespread outrage among their Subjects than they are about any potential for US/IMF/OECD/World Bank retaliation?

What’s Bush/Bernanke/AIPAC gonna do, embargo sales of Military Hardware? Hehe, “Salamat, Nin Hao Ma”;)

Many thanks also to Diane Johnson for kind words. Global Research/Chossudovsky (sic?) have been ahead of the curve often, so I’ll take your suggestion & chk the take on Gasprices. Online Journal? I usta sub to it, didn’t it go under? Has it been Born Again, resurrected, I’ll go & look, it used to be really good.

“Experienced professional economist” is in my experience the job description of a professional bullshit artist. Far as I’m concerned this “economics” as it’s called is not a science at all, rather it is a species of Ideological Class Warfare. “Political Economy” & those who claim to practice it come off slightly better IMHO, but only slightly and only on specific occasions, since much of the time they too are F. of S.

(Which is only natural, to be expected from people who associate with SEIU honchae & their project to spread Zionist ideological/organizational dominance into the Latin American labor movement. I’m talking about all these “Democratic Socialists”, “Communist Party USA” etc clowns, among others particpating in the current plot to subvert the Boriqueno teachers union).

But just a quick glance gives us a few factors deserving consideration:
1) conditions facilitating speculation by parties possessing nec. knowledge, access to credit, & freedom from other worries;

2) some increase in global demand;

3) possibility that major oil firms making Windfall Profits above/beyond the current avg. return on invested capital;

4) possibility that Producers/Producing Countries are starting the whole ball of wax by demanding higher prices for the commodity when it is sold for the first time. (which fits most easily into my rule of thumb: When in Doubt, Cherchez Les Zionistes. But this hypothesis too needs to be proven so please continue to Assume Nothing.)

It should not be impossible to nail down the impact/lack thereof of each candidate for the role of Prime Causal Factor, given the resources of a university Econ or Sociology dept, or of a major US newspaper like the NYT/LAT/CSM/WSJ. Or say the UK Guardian, Telegraph, Le Monde even? But it’s too much for me, I’m off my own focus as it is, so you got it, time for me to practice my flamadiddles & rustle up some scarf:)

Thanks again,

Dan:)

you may find something at Global Research or at OnLine Journal but then they will probably agree with Mike you see economics is not an exact science :-)

His “commodity speculation did it all” explanation may be more plausible than Hank Paulson’s “supply & demand” faith-based Fundamentalism, or PSl/ANSWER/Becker family’s “Big Oil’s record profits in 2007 explain it all”, including why the US invaded & continues to occupy Iraq, but I for one am not satisfied.

Not with those explanations, or any of my own speculations to this pt. I want to see a cause & effect explanation of this phenomenal price rise, based on data which meets at least minimum “scientific method” standards.

If there’s anything like that out there, anything on any of the Marxist Highbrow sites/blogs/listserves, I hope somebody posts it here on DV where I’ll see it, or sends me a flash. This is something that demands explanation but for some reason it’s getting a lower editorial/punditorial priority than it should. ??

Thanks,

Dan