Sovereign funds are not really that sovereign

Sir John Kay when arguing “Sovereign wealth investment is a force for stability” February 27 says “the lesson of history is that the problems are for the investor not the investee” and that “Investments across borders binds us together by creating actors with much to lose from political tension”. Both arguments clearly point to the fact that when push comes to shove, once committed to an investment, sovereign wealth funds are not really that sovereign.

These days the International Monetary Fund is drafting good conduct rules for the Sovereign Wealth Funds. I wonder if they should take the opportunity to include some good conduct rules about how the countries receiving the investments should behave… or would that infringe too much on someone’s sovereignty? There are arbitrage procedures to settle investor against country dispute but, do these apply in country against country cases?

Come on what about that stiff upper lip?

Sir your “How to deal with sovereign wealth” January 28 reads like you are being very nervous about the sovereign wealth funds; asking for a code of conduct that would put order and limits on what these monsters could do to you. Come on what about that stiff uper lip?

Suppose these funds do not behave? Do you really think there would not be a market response to that? Would a Saudi Citibank or a Chinese Microsoft be able to keep the value of these companies in your markets if they are seen as having bad intentions?

This is a moment when the world really needs these capitals to recycle and help out and, if there is really anyone who would like to see a code-of-conduct it might very well be the investors who could want an assurance that your nationals will give them the most favoured investors status. By the way your editorial might very well have reduced in some billions the price they would be willing to pay for those assets they are thinking of buying.

That is not the route!

Sir, Jeffrey Garten’s “We need rules for sovereign funds” August 8, includes a mind-boggling list of proposals “that many will see . . . as having a protectionist thrust.” No kidding? The only real conclusion I reached was to tell my daughter to watch up if she was thinking of studying international trade or finance at Yale.

Not only does Garten analyze the issue of sovereign funds as if trying to carve out for himself the role as The High Priest of financial nativism but also, even if he was absolutely right about his deepest misgivings, the type of solutions he proposes, like requiring from the government owned investment companies that they “publish internationally audited reports on their entire portfolios at least twice a year” could not serve any rational purpose and could in fact even serve as a dangerous valium.

What on earth is Garten up to? Trying to extend Sarbanes Oxley to the rest of the world governments? Asking the credit rating agencies to rate the sovereign funds? Allowing these funds only to buy government paper? Good luck! This type of approach would only have much of the current world imbalances try to go underground, making them so much harder to manage. Do I then mean that sovereign funds do not pose any threat? Of course not…some do, the same way that some non-sovereign funds could also be dangerous for any sovereignty.

About the low cost of equity and the need of Chinese “sovereign” walls

Sir, John Plender in “An unseen risk in sovereign wealth funds” (from China) June 22, mention that they might lead us “from unusually low interest rates to the conundrum of an artificially low cost of equity capital”. It sounds correct but then when later reading, that same day and just four pages away, “One door opens…” by Francesco Guerrera and James Politi that describes Blackstone’s core business as “buying companies and assets, loading them up with debt and selling them for a profit; and Ben White’s “A banking flotilla offers safe passage” that indicates a proposed Blackstone valuation of “about 26 times last year’s pro-forma economic net income, Plender’s risk prediction becomes more a reporting of facts. Also, given that China’s willingness to keep on continuing financing the market will have an impact on interest rates one cannot help but to think of how to adapt the corporate concept such as a “Chinese wall” which separates traders with conflicts of interest to a sovereign environment.