Friday, August 22, 2008

Sovereign Wealth Funds: A Smattering of Opinions that Count But Perhaps Ought Not

I have suggested that Sovereign wealth Funds represent a critical nexus point for the convergence of public and private law. Larry Catá Backer, The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law. Tulane Law Review, Vol. 82, No. 1, 2008. It represents on the one hand, attempts by states to participate in global markets like private individuals. On the other hand, it also possesses the possibility of governance by other means--turning markets into another vector for regulaiton--the way that surveillance and monitoring has already become. See Larry Catá Backer, Global Panopticism: States, Corporations and the Governance Effects of Monitoring Regimes. Indiana Journal of Global Legal Studies, Vol. 15, 2007.

Sovereign wealth funds are viewed as another factor in international financial politics. As noted in a geopolitical context by Yoichi Funabashi, the Editor in Chief of the Asahi Shimbun, published in Tokyo, Japan:
Compounding the effects of its diplomatic fumbling, Washington is also losing economic clout in Asia. With the dramatic growth of sovereign wealth funds (SWFS) in recent years, Western economies have had a rude awakening t the rapidly shifting balance of global economic power: the line between political and financial power is becoming increasingly blurred.
Yoichi Funabashi, Keeping Up With Asia: America and the New Balance of Power, 87(5) Foreign Affairs 110, 116 (September/October 2008). Yet for all that, I have suggested the extent of the complexity of the issues sovereign wealth funds create, requiring an analysis beyond the fear--and the longing . . . for money. Larry Catá Backer, Sovereign Wealth Funds And Hungry States: Adjusting the Borders of Public and Sovereign Activity Across Borders, Law at the End of the Day, June 6, 2008. That fear and longing is nicely expressed at times by conflicting statements put out by governmental sources--perhaps attempting top test the culturo-political waters. Thus, for example, the French finance minister has suggested that SWFs are welcome to invest in France, while the French President suggests that SFWS are in need of substantial control. Sarkozy to use CDC to defend French cos against ‘aggressive’ speculators, THOMSON FINANCIAL NEWS, Jan. 8, 2008. Similarly, the German president has been heard ot propose a law to regulate SWFs, while the German finance minister tries to lessen the implications of regulation by saying ‘nobody wants to block investment, that would be crazy”. See Grant Clelland, Governments split over sovereign wealth funds, DOW JONES INDUSTRIAL NEWS ONLINE, May 23, 2008.

Recently I had my research assistant at Tulane Law School, Jacob Welch (Tulane 2010) to gather together the current crop of influential political pronouncements on public policy responses to sovereign wealth funds. Most, of course, political and policy players are not expert, but expertise would get in the way of intuition. And it is not clear that in the production of political culture knowledge is necessary. But that is nothing new for elite legislators and taste makers. One does not have to know to produce culture or cultural responses--one just needs a particular authority or legitimacy to speak. Cf. Pierre Bourdieu, The Field of Cultural Production (Randal Johnson, ed. & Trans., New York: Columbia University Press, 1993). And a willingness to use that authority. Cf. Eric A. Nordlinger, On the Autonomy of the Democratic State 7 (Cambridge: Harvard University Press, 1981). As my research assistent noted: "The political response has run the gamut from fearful protectionism, to welcoming the funds as a source of stabilizing cash for businesses caught in a downturn. Most adept politicians are taking a ‘wait and see’ approach, while financial insiders tend to stress the importance of keeping markets open and welcoming the inflow."

And so to those sources of authoritative or legitimate sources of opinion for the common people. For this purpose I use the classification system devised by my research assistant: (1) fearful; (2) Moderate/Cautious; and (3) Welcoming. We then report on the reactions by personages attached to some of the sovereign wealth funds.

1. Fearful:

A. Senate Banking Subcommittee on Security and International Trade and Finance Chairman Evan Bayh, "Sovereign nations have interests other than maximizing profits and can be expected to pursue them with every tool at their disposal, including financial power. For this reason, Congress must establish standards for transparency and behavior now to prevent unwarranted interference in our economy by foreign governments." Evan Bayh, Editorial, Time for Sovereign Wealth Fund Rules, Wall St. J., Feb. 13, 2008 (follow the “02.13.08 The Wall Street Journal – Time for Sovereign Wealth Fund Rules” hyperlink).

B. Senator Hillary Clinton, "We need to have a lot more control over what they [sovereign-wealth funds] do and how they do it." Editorial, The invasion of the sovereign-wealth funds, The Economist, Jan. 17, 2008.

C. Securities and Exchange Commission Chairman Christopher Cox: “[The emergence of sovereign funds] challenges us to ask whether these many benefits of markets and private ownership will be threatened if government ownership in the economy … becomes more significant. When the regulator and the regulated are one and the same, deference to [sovereign wealth funds] can all too easily trump vigorous and neutral enforcement. When individuals with government power also possess enormous commercial power and exercise control over large amounts of investable assets, the risk of misuse of those assets, and of their conversion for personal gain, rises markedly. Unchecked, this would be the ultimate insider trading tool." David Cho and Thomas Heath, Oil and Trade Gains Make Major Investors Of Developing Nations; WASH. POST, Oct. 30, 2007.

D. French president Nicolas Sarkozy, "In the face of the increasing power of extremely aggressive speculative funds and sovereign funds which do not obey economic logic (France is taking) the political and strategic choice to protect its companies, to give them the means to defend and develop themselves." Sarkozy to use CDC to defend French cos against ‘aggressive’ speculators, THOMSON FINANCIAL NEWS, Jan. 8, 2008.

E. Sarkozy, again: “[domestic] corporations will be sold down the river.” Id.

F. Former Treasury Secretary Lawrence Summers, "The logic of the capitalist system depends on shareholders causing companies to act so as to maximize the value of their shares. It is far from obvious that this will over time be the only motivation of governments as shareholders. 'Imagine that a SWF makes an investment in a major bank of another nation that goes bad.' 'Is there anybody in the world that can assert that, with billions of dollars on the line, their head of state and foreign minister are not going to get involved in the negotiations." Lawrence Summers, Opinion: Sovereign Funds Shake the Logic of Capitalism, FIN. TIMES, July 30, 2007.

G. Deputy Assistant Treasury Secretary for Asia Robert Dohner, '"ransactions involving investment by sovereign wealth funds, as with other types of foreign investment, may raise legitimate national security." Press Release, Robert Dohner, HP-873: Statement by Deputy Assistant Secretary Robert Dohner before the U.S.-China Economic and Security Review Commission, Feb. 7, 2008.


A. Senate Banking Committee Chairman Chris Dodd, "SWFs have been and will continue to be a high priority for the Committee." Ron Orol, Congress Probes Sovereign Wealth Funds, LAW.COM, Jan. 15, 2008.

B. Senator Chuck Schumer, "Because sovereign wealth funds, by definition, are potentially susceptible to noneconomic interests, the closer they come to exercising control and influence, the greater concerns we have. The question of the day is whether these huge pools of investment dollars, known as sovereign wealth funds, make the U.S. economy stronger or pose serious national security risks." Joint Economic Committee Hearing: “Do Sovereign Wealth Funds Make the U.S. Economy Stronger or Pose National Security Risks?” Opening Statement of Chairman Charles E. Schumer, Feb. 13, 2008.

C. Senator Barack Obama, "I am concerned if these ... sovereign wealth funds are motivated by more than just market considerations, and that's obviously a possibility. If they are buying big chunks of financial institutions and their board(s) of directors influence how credit flows in this country and they may be swayed by political considerations or foreign policy considerations, I think that is ... a concern." Obama says concerned about sovereign wealth funds, Reuters, Feb. 7, 2008.

D. Spokesman for House Financial Services Chairman Barney Frank, "We are going to look at the big picture of this phenomenon and try to gauge what are the policy implications for these funds in the U.S." Ron Orol, Congress Probes Sovereign Wealth Funds, LAW.COM, Jan. 15, 2008.

E. Wharton finance professor Franklin Allen: "I think [the threat of SWF’s being used to exert political] pressure is a legitimate worry, but I'm not sure we have seen signs of that yet." KNOWLEDGE@WHARTON.COM, Dec. 12, 2007.

F. European Commissioner for Economic and Monetary Policy Joaquin Almunia, '"There are situations that are quite striking when the investor is a sovereign fund, a foreign state. This requires transparency. We need to set out European principles because we can't fulfil the internal market and its roles if each member state has different principles." EC to rule on sovereign wealth funds, TELEGRAPH.CO.UK, Nov. 29, 2007.

G. Germany Chancellor Angela Merkel, "How do we actually deal with funds in state hands This is a phenomenon which until now has not existed on such a scale." Steven R. Weisman, A Fear of Foreign Investment, N.Y. TIMES, Aug. 20, 2007,

H. Vice President of the European Commission for Enterprise & Industry Günter Verheugen, '" think the question that must be discussed is how we can defend our strategic interests without violating our most important principles of the freedom of movement of capital in the internal market. I think it is an important issue." Id.


A. David Lewis, Lord Mayor of the City of London “We open our arms to hug them. If they wish to conduct acquisitions in London, there will be no problem if the acquisitions are in accordance with British supervisory laws.” Zhou Jiangong Chinese Companies Preferring London to New York City; CHINASTAKES.COM, June 19, 2008.

B. European Union Internal Market Commissioner Charlie McCreevy 'Let us be brutally frank about this: sovereign wealth funds have been positive and long-term investors. There is, as far as I know, no instance of sovereign wealth funds acting in any manner other than responsibly up until now.” EU In sovereign wealth fund call, BBC NEWS, Feb. 27, 2008.

C. The IMF Joint Committee report: "unencumbered trade in goods and services and cross border investment creates the greatest opportunity for growth both in the United States and abroad," while "policies that impede cross border investment can lead to inefficient decisions and potentially reduce aggregate investment." Putting greater restrictions on SWFs "may be interpreted by other potential investors as an indication that the United States is inhospitable to foreign investors." Winter Casey, Opening the Door to Foreign Investment: Sovereign wealth funds enjoy tax breaks in the U.S., NATIONAL JOURNAL.COM, Jun. 20, 2008.

D. Douglas Redikerof of New America Foundation "We want to be encouraging people to invest as much of this money in the U.S. as we can. We are driving our way around the country every day and sending them our U.S. dollars at $3 or $4 a gallon. ... You really want those dollars recycled back into your economy, because if they aren't, it means they are going somewhere else and the dollar is less attractive and will continue to weaken." David Cho and Thomas Heath, Oil and Trade Gains Make Major Investors Of Developing Nations; WASH. POST, Oct. 30, 2007. Mr. Welch, my research assistant notes, "Mr. Redikerof points out that the money invested in the US is from oil profits, but fails to make the connection that Americans may rebel against SWFs for that very same reason."

E. Germany’s Finance Minister Peer Steinbrueck has previously described the German plans to defend domestic firms as modest compared to those of other countries, including Britain, France and the United States.
"Sovereign wealth funds are welcome in Germany," he said in the text of a speech for delivery in Bonn. "Their commitment contributes to value creation and employment in Germany, and also to stabilisation in times of financial market turbulence, as we are currently experiencing." Steinbrueck has previously described the German plans to defend domestic firms as modest compared to those of other countries, including Britain, France and the United States." Sovereign funds welcome in Germany, finmin says, REUTERS INDIA, May 9, 2008.
F. Peter Weinberger, former CEO of Goldman Sachs Int.: "SWFs have invested most actively in the US: approximately $85bn (€54bn, £43bn) or 0.5 per cent of the total value of the US equity market. It is hard to see why these investments have harmed Americans. They are a tiny fraction of the total market. In each case, the entities receiving the capital decided that the price and terms were superior to what they could secure elsewhere. More important, this is how the markets are supposed to work... it is only a matter of time before SWFs are represented on boards of companies in which they invest – and they should be. All shareholders would benefit from a large, important SWF in the boardroom." Peter Weinberger, Opinion: Sovereign funds offer a wealth of benefits, FIN. TIMES, May 22, 2008,

To these, one can add the official approaches suggested by me in an earlier post: Larry Catá Backer, Sovereign Wealth Funds And Hungry States: Adjusting the Borders of Public and Sovereign Activity Across Borders, Law at the End of the Day, June 6, 2008.

Fund Responses

Mr. Welch notes that "Those speaking out against scrutiny of the funds include businesses such as Blackstone , Merrill Lynch , and Citigroup , all of whom have benefited from a cash inflow from SWF’s during the credit crisis of the past few years. Funds themselves have also been critical of any negative response of their investments, especially immediately after the announcement of the IMF’s plan to create a code of conduct." On Blackstone, see, e.g., Megan Davis, UPDATE 2-Blackstone CEO says SWF scrutiny causing chill, REUTERS, Apr. 14, 2008. On the Code of conduct idea, see Sovereign Wealth Funds And Hungry States:, supra.

Mr. Welch has noted that "Merrill Lynch, who has especially benefited from an inflow of cash from Singapore’s Temask and Korea’s investment fund during a downturn, praised SWF’s in a recent press release: "’Investors should rejoice in the more balanced global economy and the impetus that SWFs will provide to continued growth and development of global asset markets,’ said Alex Patelis, head of international economics at Merrill Lynch.” See: Press Release, Merrill Lynch, Merrill Lynch Economists Expect Sovereign Wealth Fund Assets to Quadruple by 2011 (Oct. 12, 2007). It is well known that Citigroup has aggressively sought funding abroad, beginning with a large sale to ADIA in the 90s, and recently courting the funds of China, Kuwait, and Singapore simultaneously, Mr. Welch suggests, citing to Andrew Dash and Andrew Ross Sorkin, Escalating Losses Force Citigroup to Seek More Foreign Investment, N.Y. TIMES, Jan. 12, 2008, at Business Section.

A. Mohamed Al-Jasser, vice governor of the Saudi Arabian Monetary Agency, "It's like the sovereign wealth funds are guilty until proven innocent." Yoolim Lee and A. Craig Copetas, Wealth Funds Hear Disclosure Warning in Davos Meeting (Update4), BLOOMBERG ONLINE, Jan. 24, 2008

B. Sultan Ahmed Bin Sulayem, chairman of Dubai World: "If somebody comes with regulations that make it difficult for someone from certain geographical locations to invest in Europe or the west, people will take their investment somewhere else. If you put a politician in charge of an investment, believe me, that investment fund will not last for a very long time." Dubai fund hits back at criticism, BBC News, Feb. 29, 2008-

C. Gao Xiqing, president of CIC said a code of conduct for SWF would only “hurt feelings” and “it’s stupid.” Thomas H. Wilkins, A Code of Conduct for Sovereign Wealth Funds “Stupid”, Says CIC, CHINASTAKES.COM, Apr. 8, 2008.

D. [UAE] Central Bank Governor Sultan bin Nassir Al Suwaidi said the IMF lacks sufficient experience in such issues and its involvement following Western pressure could discourage further SWF investment in the United States. The states he represented included Bahrain, Egypt, Qatar, Jordan, Kuwait, Iraq, Lebanon, Libya, Oman, Syria, and Yemen. "We reiterate our misgivings regarding the Fund's involvement in setting best practices for Sovereign Wealth Funds… the IMF does not have the requisite expertise in the areas of governance and transparency to take the lead in producing a set of best practices for SWFs," Al Suwaidi said at a meeting of the IMF and its Financial Committee in Washington. Staff Writer, Suwaidi critical of IMF attempt to monitor SWF investments in West, EMIRATES BUSINESS24-7, May 9, 2008.

Thus one has the makings of an interesting conversation about sovereign wealth funds at the level of which public policy is culturally produced. Within that context, interestingly enough, the Americans are playing a fairly minor role. The fear is easy enough to describe-- that states will apply a set of welfare maximization criteria to their investment activities different from that of other actors (even juridical persons like corporations). The difference? Political criteria. But what are these political criteria? Simply stated they are an expression of those welfare maximizing actions and ideals of the demos of any state that its politicians are duty bound to advance. Notice the parallels to the corporate actions of boards of directors that last description were meant to conjure. The holders of office within a political apparatus owe duties to and are subject to discipline by their stakeholders (citizens, interests groups, residents, etc.). The directors of a large corporation also owe duties to and are subject to discipline by their stakeholders (shareholders, lenders, employees, etc.). The duties will vary depending on the relationship between stakeholder and entity. The duty of welfare maximization of the state to its citizens is distinct from that owed to its non-citizen residents; the welfare maximization duty of corporations to shareholders are distinct from that owed to its lenders. But there is duty all the same.

At the root of this uneasiness, of course, is the way in which sovereign wealth funds serve to destabilize the old order assumptions about public and private law. Sovereign wealth funds, like multinational corporations with public functions suggest that the old "each in their own place" nostrums about the division of economics and politics, and its effects of the construction of law is no longer reflective of any reality "on the ground." This results form the mixing of two once distinct spheres of activity. Though it has been foolish to consider them distinct. Just as corporations might consider cross holdings hostile (excet perhaps among certain industries following certain rules in state like Japan), so states might consider hostile attempts by other states to invest in domestic economic enterprises for precisely the same reason--as shareholders both corpñorate and states would seek to maximize their own welfare (including the values--economic, political, moral, social, religious, etc.) that contributes to that maximization. But in a world neatly divided into categories--public and private--this makes no sense. While states appear to be mimicking corporate (private) behavior, they are not behaving like private enterporises. Why? Precisely because they do not maximize welfare like economic entities.

Ahh, so what the argument suggests is not merely an implausibility of converghing public and private law where entities seek to participate in markets. Instead, the real objective is to privilege a single view of those factors that together constitute appropriate considerations for welfare maximizing behavior by shareholders. And for that purpose, the desires of popular sovereigns, expressed through their political representatives or their delegees within the governance organization of sovereign wealth funds, is recategorized as NOT legitimately welfare maximizing for purposes of asserting rights as shareholders. This is effectively what is being attempted within the jurisprudence of the European Union. See, Larry Catá Backer, The End of Golden Shares in the EU: The EU Commission Takes a Step in its Abolition, It Ought to Harmonize the Rules of Sovereign Investments Instead, Law at the End of the Day, March 9, 2008.

This is a a position I have criticized before. See Larry Catá Backer, State Subsidies and the Character of the Market Transactions of Sovereigns: The Case of EADS, Law at the End of the Day, May 29, 2008. See, e.g., Larry Catá Backer, Brazil Builds a Sovereign Wealth Fund and Norway Flexes Its Muscles: Private Participation in the Market or Regulation by Other Means, Law at the End of the Day, May 24, 2008; Larry Catá Backer, Extraterritoriality and Corporate Social Responsibility: Governing Corporations, Governing Developing States, Law at the End of the Day, March 27, 2008. Though I do take the point that not all shareholder values are legitimate. Two chestnuts from the more ancient history of American law point out a good starting point for consideration of limits. One suggests the limits of director discretion in acting in the name of the entity--looking to institutional welfare maximization for the benefit of its constituent community. Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668 (1919) ("A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. . . . There is committed to the discretion of directors, a discretion ot be exercised in good faith, the infinite details of business. . . . The judges are not business experts. It is recognized that plans often must be made for a long future, for expected competition, for a continuing as well as an immediately profitable venture."). The other suggests similar (though more broadly put) limits on shareholder discretion ot exercise her rights as represented by her stake in the entity. Gamble v. Queens County Water Co. 123 N.Y. 91, 25 N.E. 201 (1890). Both essentially point to limitations based on duties of loyalty to the entity--duties that can at times sound like those extracted from the German constitutional conception of Bundestreue. See Larry Catá Backer, Restraining Power from Below: The European's Constitution Text and the Effectiveness of Protection of Member State Power within the EU Framework (July 2004), Federal Trust Constitutional Online Paper No. 14/04, at 12-13.

But to some extent, the Europeans, and their suspicions about the possibility of the private character of actions by public entities, is not irrational. If the Norwegian government, for a plausible example, might be able to apply the public policy embedded in their corporate statutes indirectly through assertions of shareholder power in ways that they could do directly (because they might not legislate beyond their borders) then are we really dealing with participation or governance? On the other hand, shareholder activity does not lose its private and participatory character merely because it serves as a motivation for shareholder action. Suppose that a large institutional shareholder embraced the same public policy notions and attachment for the Norwegian corporate code and used its institutional shareholder power to advance those objectives within the corporation? That, certainly, would not be viewed as either political or regulatory--and could be easily justified on traditional grounds (maximization of long term corporate welfare). And this quandary, of course, highlights another destabilizing aspect of state participatory activity in the market--the dissolution of the once firmer division between law and contract, or between statute and regulation. It suggests that just as there is a convergence of public and private law, so there appears to be a similar convergence between law as a formal and institutionalized set of tools over which public entities exercised a monopoly power (on the one hand), and governance as private, contractual, and informal methods of controlling or regulating behavior available to any community with sufficient power to assert it. See, e.g., Michel Foucault, Discipline and Punish: The Birth of the Prison (Alan Sheridan, trans., 19977, NY: Vintage Books 1995)). Law, like the state, might be harder to detect within the globalized institutional environment of soft and hard multi-level and polycontextual regulation. See Larry Catá Backer, Democracy Part XI: Mass Democracy and Shareholder Democracy Converge, Law at the End of the Day, June 30, 2008.

The difficulty, thus, is not with respect to the motives of the investors--public or private--but with the nature of the investment. And here, astonishing enough, the Americans may have it partially right (without necessarily meaning to)--the important distinction is not the character of the welfare maximizing matrix used by public or private shareholders in choosing how to assert their shareholder power, but whether the use of that power is participatory or regulatory. It is easy enough to turn this standard into nothing more than the public private distinction again, and use it as a back door to re-introducing the current thinking about "private reasonable investor" touchstones for public investment. But the Americans are also wrong--formalist analysis is hardly an adequate touchstone for regulatory policy in this context. States that participate in markets that they also regulate can hardly be said to be participating as equals with non governmental others. That was a crucial insight of the European Union's Golden Share cases, and one worth considering. See discussion in Larry Catá Backer, The Private Law of Public Law:, supra. Whether or not states participating in markets they regulate actually use their regulatory power, that power is always available and in any case their actions within their own jurisdictions might well have strong governance effects without the need of formal regulation in a way that cannot be countered. This would not be the case where the state invests in economic enterprises subject to foreign state political control. For those reasons, the rationale of cases like Hughes v. Alexandria Scrap Corp., 426 U.S. 794 (1976) and Reeves, Inc. v. State, 447 U.S. 429 (1980) ought to be generalized. But the application of those cases ought not to be considered further, at least in the context of sovereign wealth funds.

That approach might suggest another basis for regulation--grounded in a distinction based on the ability of host states to affect the investment. If the investing public entity is subject to treatment identical to that of other investors--including exposure to liability, constraints on actions and the like, and may not legislate its way around those equally applicable constraints, then the state investor ought to be deemed private and subject to no further regulation (with the usual exceptions for critical or sensitive industries--defense and the like). Where this is not the case, then the investment activity can be deemed regulatory and controlled like other intrusions by one polity into the affairs of another.

But people (and elites with power and status to protect) still wish it so. And they might have enough residual power to impede change, or at least reroute it. And that, more than the substance of their reactions, conversations, etc., provide the great teaching of these mouthpieces of elite thinking. "In October, the United States joined with Europe and Japan to call for a set of best practices to which funds would subscribe voluntarily. The practices would include pledges of nonpolitical governance structures and more disclosure of portfolio activities." Steven R. Weisman, Overseas Funds Resist Calls for a Code of Conduct, New York Times, Feb. 9, 2008.

And the solution--Windowdressing:
“These funds do not think of themselves as political, and so far they haven’t been,” said an I.M.F. official involved in the drafting of a code who would not speak on the record about internal discussions. “What we’re hearing from them is, ‘What are you so upset about?’ But the concerns are there, and they need to be taken care of in a code of best practices. . . . ” Id.
And diversion--the essence of managing a problem away: "Lou Jiwei, head of China’s $200 billion fund, said at a talk at the World Bank that the I.M.F.’s effort had run into disagreement over the meaning of transparency and political motivation." Id.

The real problem remains. It is not a fear of xenophobia--as Lawrence Summers suggests (id.), but the need to confront the changing landscape of power and regulation at the supra national plane.

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