Sovereign Wealth Funds Exceed 4 Trillion Dollars

4 Trillion Dollars in Sovereign Wealth Funds

I first heard about Sovereign Wealth Funds when Abu Dhabi’s State Investment Fund gave CitiGroup $7.5Bn in cash in 2007. At the time I did not take much notice as the world as we knew it was crashing, or so it seemed.

Now the smoke has cleared a little we can clearly see there is a trend for many nations to set up funds to supposedly help them manager their economy both internally and internationally. But if you believe your government will use the money to create wealth I think you may be in for a shock.

Their first priority will be political self-preservation. Maybe they may have to secretly loan money to their leading banks to prop them up during a financial crash. The  second one will be political influence. Convincing major corporations to support their green policies or carbon taxes in order for the corporations to get handout or compensations maybe.

Or using the sovereign funds to manipulate markets governments may want to influence. This could involve buying or selling large quantities of shares in a particular stock of a company they want to influence.

Do you now see how dangerous it is allowing governments to accumulate huge pools of money? Calling them “Sovereign” puts an acceptable spin on what is really a governments grab for the peoples’ money.

Little Transparency in Sovereign Wealth Funds

Over the ensuing four years since CitBank’s cash injection, it seems that sovereign wealth funds have experienced strong growth despite the financial crisis. $4 Trillion buys a lot of power and influence. This is a real cause for concern for several reasons:  These Funds are owned by National Governments not private companies

    • They are not answerable to the normal corporate watchdogs.
  • There appears to be very little accountability or transparency
    • The Australian Future Fund is applying to be exempt from the Freedom of Information Act. I don’t know if Corporate Laws will/do apply to them.
    • The Minister also announced plans to provide an
      exemption under the Freedom of Information Act 1982 in
      respect of acquiring, realising or managing investments
      of the Board. This will provide greater certainty in
      protecting sensitive information the release of which
      could reduce investment returns or limit the range of
      investments the Board can access.Ninja
  • There are huge amounts of money tied up in the Funds and you may not know where.
  • Investments may be done for other than financial returns
    • Political or market influence currency manipulation and other opaque activity
  • Retirement Funds are also getting very large and trying to buy publically listed companies.
  • Hedge Funds are known to affect markets
    • Weren’t they involved in the Russian Economic Meltdown some years back?Sick smile

Sovereign Wealth Fund Rankings

Here are the top 14 from the SWT Institute of the $4Tn Dollars:

So you can see it was Top 14 Sovereign Wealth Fundssmall change that Abu Dhabi gave CitiGroup to help them out.

Also note Libya has a $70Bn fund. If it is not all found and frozen that’ll but some fire-power and cause the Rebels some angst. Sad smile

Australia is there too with a $72.9Bn Fund set up after the sale of the national Telephone Company Telstra. It’s primary purpose is to fund the previously unfunded liability for Federal Public Service Pensions. Laughing out loud

There are some Pie Charts on SWT Institutes web site which are also very interesting. It looks like everyone is into Sovereign Funds in a big way except the USA. The Americas only have 3% of the market, whilst Asia and the Middle East have approximately 70%.

This is all very telling though. Remember these Funds are in government hands regardless of what legal face is put on the fund. We all know Commercial or Corporate Laws often do not apply to these entities. In Australia the Future Fund still reports to the Parliament.

Lines Blurred between Government and Business Entities

Now more than ever the lines are blurring between the government and businesses. There is a trend for government to fund “investments” in business they think are appropriate.

This can lead to favouritism, cronyism and corruption and possible fraud as public servants in powerful positions can either influence or are influenced by senior business people. This can often be done at the disadvantage of any shareholders.

Sovereign Wealth Funds Turbo-charged Market Power

But sovereign wealth funds can turbo charge this problem just because of their financial power. They can bid for or even threaten to buy a whole company or they can bribe the company officials and may often cut out the shareholders.

Often Governments do things for political reasons and not economic ones. So the money which may be the peoples’ money may not be spent in the best way or invested wisely. It may be spent or lent to further a political end.

Selling by Sovereign Funds can Unbalance Markets

If Saudi Arabia needed to get $36Bn quickly to help Bahrain it might have had to sell some assets quickly. It’s concern would not have been driven by economics in the face of a possible takeover of Bahrain by the Shiite majority. It might have decided to sell whatever assets it needed to do to realise the money. This could have caused another financial crisis since most developed countries where they would invest have major debt issues and selling their bonds might cause its own tsunami.

Retirement Funds Should Not be Buying Companies

I watched with interest as two Canadian Retirement Funds made a bid to buy Transurban an Australian Company running some Toll Roads and Tunnels in Australia. In my view, Retirement Funds should not be buying public companies nor should they be managing them. They should be managing their members funds and diversifying not concentrating the money. They should not be purchase a listed company without asking the fund members as it is their money. Investing in a compnaies stock is very different from buying the company.

In other words if they had to liquidate assets for cash to pay retirees quickly and they owned the companies outright it could present a far bigger problem than just selling shares in a full diversified portfolio of stocks. Hmm! haven’t I heard “diversified” in connection with minimising risk and here they are trying to putting a large number of retirement nest eggs (not their own most likely) into one basket.

So you see large sums of money is being “trapped” by our governments. Money has to flow to the place it can get the best return or economies get sick. You will recall governments are not good at managing large amount of money. It is not because they are incompetent. The problem is all governments have political agendas and these are more important to them than protecting your money. Bureaucrats are driven by their political masters to help them achieve their political ends – if they want to be promoted that is. Profit in a Sovereign Wealth Fund is likely to be a very poor second.

Just think how much wealth could be created if the Sovereign Wealth Funds money was allowed to flow into the hands of entrepreneurs or successful business men who know how to make that money work (Not Wall Street wallies or Government Bureaucrats).

Leave a Reply

CommentLuv badge