Sovereign funds too kind to US. too willing to bail out the American banking system, and have made it too easy for them. If they had been less keen to invest, Citigroup, Merrill Lynch and the others would perhaps have been forced into defensive mergers, or otherwise lost their independence, and that would have been a much more appropriate punishment, given the level of irresponsibility they have shown.
Sovereign funds too kind to US.
The spotlight was on sovereign wealth funds again yesterday at a breakfast seminar organised by energetically run thinktank Business for New Europe.
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Speaker Gerard Lyons, the highly respected Standard Chartered economist, explained that although sovereign wealth funds had been around for years, they were becoming much higher-profile because there were so many more of them, they were getting bigger by the day, and they had the financial firepower to become major investors in Western markets. But, he added, there were concerns that some might be politically rather than commercially directed.
Lyons felt there ought to be much more transparency, with funds publishing annual reports, being open about their investment philosophy and perhaps agreeing to forgo any claims to boardroom representation in the companies whose shares they bought.
What no one could really pin down, though, was why the West should be so worried. It was suggested that it was because they were state funds, and that carried with it the possibility of political interference. It was also suggested that they might insist on technology transfer, or direct the board to move some of the leading-edge research from here to there.
Perhaps they would, although that would be tough with a stake of less than 51% - and if they had more than that, why shouldn't they? It has long been a feature of capitalism that companies get bought so the purchaser can acquire the knowledge of the victim.
Others said that concerns about state ownership were simply a fig leaf, and the real concern, particularly in America, was simply that they were foreign. The concerns were an uncomfortable mixture of xenophobia and protectionism - and, being an election year, it was a mood politicians were playing to. Again, though, it does not make sense. If a Middle East power wanted to mess up the US economy, why would it try to do so by becoming a shareholder in its banks? It would be so much simpler just to cut off the flow of oil.
Nor was it clear why it was acceptable for the last five years for the Chinese to pour money into US Treasury bonds so that the Americans could continue to live way beyond their means, but it may not be acceptable for the Chinese to buy US equities where they might get a better return.
Again, if they had wanted to mess up the economy, they could have done so at any time in the last few years by refusing to buy Treasuries, leaving the Americans with a truly massive deficit that could only be funded at much higher interest rates.
There is also surely a wider macroeconomic point. If the global economy is to stay on an even keel, the vast surpluses in Asia and the Middle East have to be recycled back into the economies of the West - if we are to avoid a debilitating slump. When they buy shares, those funds are undertaking just such a recycling. The consequences of them not doing that would be much more severe than the risks when they do.
My complaint about sovereign wealth funds is the other way. They have been too willing to bail out the American banking system, and have made it too easy for them. If they had been less keen to invest, Citigroup, Merrill Lynch and the others would perhaps have been forced into defensive mergers, or otherwise lost their independence, and that would have been a much more appropriate punishment, given the level of irresponsibility they have shown.
By bailing them out, the sovereign wealth funds have let the banks and their executives off too lightly - and you could see, from the smug way they were cavorting around Davos last week, they are already rewriting history so that none of this is their fault.
French salvage op got it right
Although Société Générale has not talked much about the unmasking of its rogue trader, it has confirmed that became aware of the full extent of the problem over the weekend 10 days ago.
It then spent the following Monday and Tuesday unwinding his positions in the market and arranging for an emergency rights issue to cover e5bn (£3.7bn) hole in the balance sheet.
Having done all that, the bank made a public announcement about its problems.
Contrast this sure handling with the rescue of Northern Rock, which was fumbled at least in part because the Bank of England had been advised that under European law it would not be able to prop up the bank in secret but would have to make an immediate announcement to shareholders that it was pumping in money.
This severely constrained the Bank's freedom of manoeuvre. The French obviously apply their European law in a different way. Admittedly, the cases are not directly comparable, but one has to think the French salvage operation was rather better handled. |
