Political opposition to sovereign wealth funds (SWFs) can be economically disastrous, says billionaire Stephen Schwarzman, CEO of private equity giant Blackstone Group.
Alienate the funds, and they’ll be happy to take their money elsewhere, he warns.
Politicians are up in arms over their U.S. investments, but Schwarzman calls that "political grandstanding." Funds from oil-rich countries in the Gulf and from Asia have dumped billions into U.S. investments, and heavily into financial stocks.
"From the point of view of a rational economist, this is frightening. It is difficult to think of how much worse off we would be in the current financial crisis without SWFs," Schwarzman wrote in the Financial Times.
Congressmen Jim Moran (D-Va.) and Tom Davis (R-Va.) are leading a task force that’s studying possible regulations for foreign-controlled funds.
"Many SWFs lack transparency making it difficult to determine how much money is involved, whose money it is, and how these massive funds are being used," Moran stated in a press release.
"Significant concerns are being raised due to the recent purchase of equity stakes in some of the biggest American companies."
But Schwarzman argues that foreign money — $55 billion into U.S. and European financial institutions since the fourth quarter of last year — greatly benefits shareholders.
Treasury Secretary Henry Paulson said funds should be more transparent. Irritated, managers of the government owned funds feel they are being asked for disclosures not required from hedge funds and private equity firms.
Some of the funds see disclosure requirements as problematic, Schwarzman wrote. Some countries’ ties to the West, for instance, could prompt domestic political opposition.
He reports the frustration of the president of China Investment Corp., China’s fund (which has a 9.4 percent nonvoting interest in Blackstone), on meeting political opposition.
Fortunately, the president said, many other countries are happy to work with him.
That take-us-or-leave-us attitude, shared by many foreign funds, "has serious implications for the economic well-being of the U.S. and other Western countries where political opposition to SWF investments has mounted," wrote the Blackstone CEO.
"SWFs are both amazed and annoyed that their actions, which are such a positive for the U.S. economy, have been met with such hostility and anger in some quarters," he wrote.
"This hostility is dangerous because we are reaching a stage in the global economy where … SWFs have other options."
Plus, if foreigners didn’t buy Treasuries en masse, interest rates would shoot up, inflation would increase, the dollar would fall even faster, and economic growth would be slow or negative.
Those countries holding large amounts of U.S. Treasuries also have large sovereign funds.
"The U.S. is the world's largest debtor nation, and we are now in an uneasy relationship with our creditors," he wrote. "We cannot afford to get this wrong."
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