Eric J. Weiner recently wrote an interesting article for the Los Angeles Times about the really bad shape our economy is in. It turns out it is in really bad shape. So bad that US Treasury Secretary Henry Paulson has been shopping around trying to get Middle Eastern investors to buy up American companies.
It’s not like this is the first time the American economy has had to be bailed out by rich investors. But unlike in the past when one or two wealthy individuals or investment banks could step in and stop the bleeding, the economy is in such bad shape that only the investment income of rich countries can make a difference. Just recently Paulson approached the heads of Abu Dhabi Investment Authority, the world’s largest “sovereign wealth fund” (SWF) encouraging them to buy American businesses.
SWFs are excess capital generated by a country or region that is invested in mutual funds. In the 1990s the funds held $500 billion combined. Today they hold about $3.5 trillion. That’s more than all of the assets controlled by all the hedge funds in the world. By the end of 2012 this figure is expected to be at least $10 trillion.
According to Weiner, the new power of SWFs has been on 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. Even Morgan Stanley got $5 billion from China’s SWF. Weiner notes that this is a change in the way globalization has traditionally worked. In the past real power in international finance was held by a few individuals, whereas now it is held by rich countries.
This turn of events is not without potential problems. Since it is foreign governments which control the funds, these countries will increasingly own substantial investments in companies in important industries such as biotechnology, computer technology, and aerospace. According to former treasury secretary, Larry Summers, there is no way to know the political intent behind these investments. It may reach a point where decisions about our jobs, home loans, school loans rest on with foreign governments.
