Chuck Schumer on the Rise of Sovereign Wealth Funds

By Maria Bartiromo

Chip Somodevilla/Getty Images

A year or two ago "sovereign wealth fund" was a term familiar only to a relative few on Wall Street. But that changed dramatically after credit began drying up and major financial institutions such as Citigroup (C) and Merrill Lynch (MER) began scouring the globe for cash infusions. Now, sovereign wealth funds are a page-one story. In fact, the power of these investment vehicles—many controlled by cash-rich petro-states—was in stark relief on Mar. 4 when comments by the chief of a Dubai fund knocked Citi shares down to a 52-week low. Meantime, concern about the funds' lack of transparency has led the U.S. and Europe to encourage the International Monetary Fund to draw up voluntary guidelines. Among those calling for more disclosure from the funds is Senator Chuck Schumer (D-N.Y.), an influential member of the Senate Finance Committee.

Maria Bartiromo

Senator, you've been vocal about the need for sovereign wealth funds to be more transparent. Will the plan to press for more disclosure be enough?

Senator Charles E. Schumer

Well, the proof of the pudding will be in the eating. But obviously my call for transparency is being echoed in other places. Which is good. The IMF believes in transparency. Most of the commentators who have looked at these funds believe in transparency. Right now, the U.S. finds itself in a difficult position. Some of our financial institutions have made mistakes and need capital. So we're short of capital because of the credit crunch, and in the longer run because of our own habits. We import more than we export; we consume more than we save. The best choice would be that financial institutions could raise capital within the U.S. But we don't have that choice. So they raise capital from where it exists, and sovereign wealth funds are the most available form of capital right now. Or [financial institutions] can dramatically shrink, and we can lose thousands and thousands of jobs. The choice is a simple one, and the issue with sovereign wealth funds can be defined in a single sentence: Because they are government-owned, noneconomic factors may influence their decision-making and the pressure they put on companies that they own a piece of.

What exactly are we worried about?
Let me give you an example. If you asked most Americans or most experts, should a Russian sovereign wealth fund be able to buy an American natural gas company, they'd say no. Why? Because Russia has used its control of natural gas for political purposes with Europe and with other places. That's the archetype of what we should be worried about, and this is not at all protectionist. Protectionism would say, "Don't have foreign investment here." Nobody is saying that—and certainly I am not saying that.

Some leading sovereign wealth fund managers in the Middle East have told me they don't like being put in the same bucket as the Russians and the Chinese. They feel like: "Look, we're not the bad guys here. It's the Russians and the Chinese. Why are we bundled together?"
I think that's a very valid consideration, and you shouldn't treat every country alike. The trouble is, how do you make rules for one and not for the other? Some of these small countries that have large amounts of wealth are just looking to invest for economic purposes, just like any other investor. And that would be just fine. It does seem to me that countries like Russia and China put a political agenda alongside their economic agenda. That gives you some pause. But the answer in all of this is simple transparency.

One sovereign wealth fund manager said to me: "I don't mind having rules to play by, but the problem with the U.S. is that it changes the rules in the middle of the game."
I think that that's why the IMF is a good place for this to come about. The IMF is an international organization, it believes in trade. It's going to publish some guidelines. They're experts on this.