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Politics : American Presidential Politics and foreign affairs -- Ignore unavailable to you. Want to Upgrade?

To: Peter Dierks who wrote (24288)	12/2/2007 11:05:28 PM
From: Peter Dierks	Read Replies (2) \| Respond to of 71588

There's a difference between Abu Dhabi now and Japan in the 1980s. Saturday, December 1, 2007 12:01 a.m. EST They've been around for decades, but their recent growth has been explosive. They often operate outside any regulatory framework, while their investments are often opaque and their intentions have been questioned by governments around the world. Their assets are now measured in trillions of dollars, up from the "mere" billions they controlled as recently as 1990. But wait--are these "sovereign wealth funds," or hedge funds? Actually, the description applies to both. And in both cases, it is easy to overstate the dangers in their recent growth. That said, there are important differences between the private pools of capital known as hedge funds and the public pools that have come to be called sovereign wealth funds. Abu Dhabi's investment this week in Citigroup has focused attention on the growth of these funds, but they were not invented yesterday. The Abu Dhabi Investment Authority, which put the $7.5 billion into Citi, was established in 1976, at the time of the first inflation-oil boom. Today it is estimated to control as much as $875 billion, although the exact amount is unknown. If even remotely accurate, $875 billion is an astonishing number. It would represent at least one-fourth of all the $2-$3 trillion in assets controlled by sovereign wealth funds. And here is one of the big differences between hedge funds and sovereign wealth funds--they are highly concentrated, numbering a few dozen in total, according to an analysis by Edwin Truman of the Peterson Institute for International Economics. The $1.4 trillion hedge fund industry is spread across thousands of autonomous firms. The sovereign trillions are also concentrated not just in a few hands, but in a few government-controlled hands. This increases the risk that investments are made, or withdrawn, for political rather than economic reasons. This distinguishes them from, say, the private Japanese investors who caused a stir in the late 1980s by buying up Pebble Beach, Rockefeller Center and so on. With so much money comes the temptation, and ability, to wield political influence--and they do. Just look at the former U.S. Senators lining up to "represent" Abu Dhabi and other foreign governments. That's one reason these funds have a special obligation to be more transparent about their objectives, strategies and management of the money under their control. Last month Mr. Truman testified before the Senate about a ranking he had constructed of the biggest sovereign wealth funds. The Abu Dhabi Investment Authority ranked dead last. It racked up one-half of one point--out of a possible 25--on measures of Structure, Governance, Behavior and Transparency & Accountability. We'd add that it is in their own interest for these funds to become more transparent. The American political system is remarkably open to foreign capital, and it should be. But it is not likely to accept a big buying spree of American assets by foreign governments through entities that operate in the shadows. This goes double for a city-statelet like Abu Dhabi, which has a history of flouting U.S. banking laws in the BCCI scandal. Perhaps the most disturbing part of that scandal was that it had to be uncovered by Manhattan DA Robert Morgenthau--because much of official Washington had been either conned or bought off. Sovereign wealth funds are not voluntary aggregations of capital earned by risk taking. They represent the concentration of wealth that results from government, rather than private, ownership of natural resources, especially oil. It's no accident the Abu Dhabi fund was formed in the first petrodollar era in the 1970s, and that it is booming again amid the current sequel. These funds owe much of their current size from bad U.S. monetary policy. We were nearly as "dependent on foreign oil" in the 1980s and 1990s as we are today. But with a responsible Federal Reserve and strong dollar, there was no boom in petrodollars. Only in this decade, amid the Fed's dollar abdication, have we again seen the boom in commodity prices that is enriching Russia, the Arab kingdoms, Venezuela (see below) and other dubious corners of the globe. Our own monetary mistakes have made these funds richer than they would be under normal market conditions. The response should not be to restrict their investment, but to start protecting the value of the dollar so that the price of oil falls back down to where it reflects supply and demand, not a cheapening U.S. currency. Then these funds will become less important as a source of global capital. In the meantime, "sovereign" money that invests in America should be welcome as long as it plays by American rules and doesn't threaten our national security. opinionjournal.com