Sovereign Wealth Funds Top Davos Talk

Some object to the buying power of the international entities as they take larger positions in U.S. blue chips. Others say fears are unfounded

Jude Edginton/Redux

by Stanley Reed

What's the hottest topic at Davos this year? Probably sovereign wealth funds, those big pools of capital mushrooming in the Gulf, Asia, and elsewhere (BusinessWeek.com, 11/1/07). Conference participants and a large press contingent lined up early to attend a Davos session on the subject Jan. 24.

The funds are controversial in countries like the U.S. because they already have a lot of firepower, and it is growing fast thanks to high oil prices and U.S.trade imbalances. Richard Fuld, chairman and chief executive officer of Lehman Brothers (LEH) said the wealth funds, whose present value he pegged at as much as $3 trillion, could command as much as $20 trillion in five years. "The impact will be huge," he said, though he noted pension funds command some $60 trillion.

While few U.S. and European politicians have raised objections to the large stakes various funds have taken (BusinessWeek.com, 12/7/07) in blue chip U.S. and European banks such as Citigroup (C), Morgan Stanley (MS), Merrill Lynch (MER), and UBS (UBS), greater tensions may well be brewing as the funds grow larger and more ambitious. The notion of foreign entities buying up blue chip assets goes against the grain in the U.S. and other Western countries. Perhaps the greatest danger arising from the huge growth of these funds isn't that they will buy strategic assets in the U.S. and elsewhere, but rather that they will trigger a wave of protectionism that could gum up the international financial system.

Fears Have No Basis

On the Davos panel, only former U.S. Treasury Secretary Lawrence Summers expressed serious concerns about the sovereign wealth funds, and he acknowledged the world was a better place for their having poured money into damaged banks in recent months. Among the concerns the former Harvard University president mentioned was worry that the funds could be used by host governments to exert political clout or otherwise sway decisions in target countries and companies.

Those who spoke for the funds seemed on the defensive, although they were encountering very little criticism from the movers and shakers at Davos. Bader Al Sa'ad, managing director of the Kuwait Investment Authority, which recently bought chunks of Merrill Lynch and Citigroup (BusinessWeek.com, 1/10/08) said, "All the fears about the sovereign wealth funds have no basis and no case to build on."

Muhammad al Jasser, the deputy governor of the Saudi Arabian Monetary Agency, the central bank, which manages most of Saudi Arabia's overseas assets, was more relaxed. But he brushed off Summers' suggestion that the funds would be wise to adopt a good-conduct code to ease worries, claiming there has been huge resistance in the U.S. to regulating hedge funds and rating agencies—even those "who created turmoil in the world economy."