Wall Street Bailout: The World’s Largest Sovereign Wealth Fund?

More than 20 countries have set up sovereign wealth funds while a dozen more have expressed interest in establishing them. Many of these sovereign wealth funds are picking up stakes in U.S. companies, which is raising concerns about the need for regulating them. Up until the $700 billion bailout, which effectively is a U.S. Treasury-directed fund, the United States did not have a sovereign wealth fund.

This fund is the world’s largest, beating the $600 billion sovereign wealth fund of the oil-rich emirate of Abu Dhabi in the United Arab Emirates.

The fund has many characteristics of sovereign wealth funds. It endorses the latest trend – the most powerful financial entities are not risk-happy investment banks but state-sponsored investment entities that are more cautious.

So far, the United States government has stayed away from investing in the markets. The fund presumes that the government must play a crucial role in deciding how best to deploy a nation’s investment capital.

Critics have long argued that sovereign funds be allowed the privilege of holding positions in public companies when the U.S. government did not do so. When the fund was approved by Congress, it took the sting out of this argument. But there is a difference between this fund and sovereign wealth funds. Sovereign wealth funds invest surplus funds, and in many cases they are doing so abroad for the purpose of financial diversification. The money for this fund has to be borrowed by the Treasury: $700 billion. It will only be investing in the United States. It will make no investments abroad.

The mandate to the fund is clear - avoid further financial collapse by extending a lifeline to U.S. institutions hobbled by their exposure to toxic mortgage assets. This is similar to the goal of sovereign wealth funds – advancing national economic goals. The only difference is that sovereign wealth funds openly state that their goals are political. This fund on the other hand seeks the best prices for the assets it buys.

There are some who feel that the fund does not resemble a sovereign wealth fund, but some sovereign wealth funds are beginning to look like the fund. The present credit crisis is not restricted to the U.S. alone. It is having a worldwide impact. There is tremendous pressure of many of the sovereign wealth funds to come to the rescue of home markets that have wobbled in recent months.

The U.S. Treasury fund’s mandate will run out after two years. But the government might have other ideas if, at the end of two years, it has more than $1 trillion in assets - it has the benefit of starting to buy at what may well be the rock bottom. It could become a permanent fund, and its mandate could be broadened to allow it to invest abroad. It would then become a full-fledged sovereign wealth fund.

4 comments to Wall Street Bailout: The World’s Largest Sovereign Wealth Fund?

  • raymond

    The US government already have this.

    I’s called Foreign “Aid”

  • Foreign aid is based on solely diplomatic considerations. Sovereign funds make investments based on commercial considerations.

  • Raymond

    Thanks for clarifying that for me.
    Both however, are funded by taxpayer money (at least initially for SWF) and managed by governments.

    The US government is also managing taxpayer money to invest in the private sector.

    Except here we call it bail-out money parceled out by the US Treasury Secretary.

  • Foreign aid has always been a part of the US foreign policy. We have to wait and see if the SWF will become a diplomatic instrument.

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