The real questions about sovereign wealth funds: a roundtable discussion.

• Position: VERBATIM - Broadcast transcript - Discussion

Already the buzz this year in financial circles, sovereign wealth funds have been initially welcomed in the United States (and to a lesser degree in Europe) as white knights whose capital investments have helped rescue troubled financial institutions and other companies stricken by the credit-market crisis. But these funds, even as they are currently sought after by financially-bleeding companies, could easily become controversial with public opinion and regulators in the United States and European countries because of their potential political dimensions. The very fact of their emergence is a symptom of profound new shifts in the global financial order. To head off potential jingoist reactions against the proposed buy-ins by these new investors, there is a need to probe a set of questions about how these funds work and about whether rules can be reached--by mutual agreement--to ensure that the funds prove compatible with global capital movements.

Sovereign wealth funds--essentially investment funds controlled by foreign governments--are not a new financial instrument. They were prominent after the oil crises in the 1970s when oil-exporting Arab states used state-run agencies to "recycle" their surplus cash into dollar-denominated investments, notably U.S. Treasury bonds. It was a mutually satisfactory exercise at the time, but nowadays the game has changed dramatically, mainly because of historic macroeconomic shifts between developing nations with huge export surpluses and capital-starved Western countries. For the newly rich countries, they can expect massive account surpluses for the foreseeable future: for some, oil prices have risen very high (and seem likely to stay that way), and for others, such as China, their export balances are also enormous and growing. Another part of the shift is that the new sovereign wealth funds are not buying short-term securities: they are buying into banks and other businesses, where they will remain as investors with part ownership. So far, this practice has been restricted to non-controlling minority shares, sometimes without voting rights. But these new investors are not only major players of a much bigger dimension and with very different objectives; they are also government-controlled. So the question arises: do they operate with normal business objectives that are likely to be beneficial to the companies they want to partly own? Or might these investors weigh on the decisions of Western corporations in ways designed to serve the political interests of their governments. The answer is not in. Certainly the potential is there for a political agenda by the sovereign funds' owner-governments--which these days tend to be governments that are not necessarily well-disposed to Western interests.

The scale of the stakes is truly enormous. China's new sovereign fund (generated by export profits, not oil or other resources) has $200 billion to invest by itself. Altogether, such state-managed funds (including those of Norway, Singapore, Russia and the Arab states) seem likely to control as much as $12 trillion by 2015, making them major players in the roiling global markets.

With the dollar so cheap, U.S. companies are for sale at what amounts to discount prices. In late 2007, prominent Wall Street banks (including Merrill Lynch, Citigroup and Morgan Stanley, plus the private-equity fund Blackstone) have sold stakes in themselves to these funds, pressed to do so in order to replace their steep losses in the global capital upheaval. Looking for acquisitions that are deeper in the American financial pyramid, these government-controlled foreign entities have bought stakes in U.S. companies in sectors as varied as steel-making, energy and real estate. The relatively low production costs in the United States (due in part to exchange rates) have also attracted European manufacturers (for example, in cars and specialized textiles) because they export their "made-in-USA" goods duty-free to customers in Canada and Mexico under the North American Free Trade Agreement. The new American manufacturing jobs are welcome--but the prospect of foreign government control is a bugaboo with a long history in the United States, even during times when protectionist feelings were more dormant than they seem likely to be in the next few years.

The history of foreign investment in the United States is fraught with complications. Theoretically welcome, these inflows have often triggered a backlash: in 2006, a Dubai-owned company was blocked when it tried to buy American ports, and since then, the Bush administration has overhauled the semi-secretive U.S. Committee on Foreign Investments (CFIUS), seeking to streamline and clarify the rules of this regulatory agency that reviews takeovers of U.S. companies by non-American buyers. Despite these bureaucratic fixes in Washington, the overall question of foreign investment in the United States may suffer fresh tensions stemming from the fact that these new players' big money is tied to their governments--and therefore perhaps influenced by these governments' politics in a crisis.

"This is a phenomenon that could be called the growth of state capitalism as opposed to market capitalism," Jeffrey E...