For financial types, the hot session at Davos this morning—after the Bono/Al Gore love-in—was the sovereign wealth funds panel. Sovereign wealth funds are the much-talked-about, little-understood enormous pools of government-controlled capital that have recently vaulted to prominence. The panel included: Muhammad Al Jasser, vice-governor of the Saudi Arabian Monetary Agency; Bader al-Sa'ad, managing director of the Kuwait Investment Authority; Kristin Halvorsen, Norway's minister of finance; and Aleksey Kudrin, Russia's minister of finance, who all have billions upon billions in state oil profits to invest around the world. Also in attendance was former U.S. treasury secretary and one-time Harvard University president Larry Summers.
As one, the officials reassured audiences that they had nothing to fear from the SWFs. After all, they're just passive investors, seeking to provide some security for their commodity-based economies. The governments of said nations aren't interested in using ownership stakes in publicly held companies to advance geopolitical goals. According to the panelists, the SWFs are nothing more than cuddly mutual funds—only really big ones whose managers speak with strange accents and whose shareholders are Scandinavian citizens, oil sheikhs, and Vladimir Putin's regime.
It fell to Summers to inject a slightly discordant note. His few well-chosen words were the smartest, best performance I've seen at Davos so far. While agreeing that the U.S. financial system has been helped in recent months by SWFs that have invested in American banks, and noting that "there's not much that SWFs have done to date that one can be critical of," Summers gave voice to some of the concerns that plenty of free-trading, noneconomic-nationalists have about SWFs. "In the U.S. we have made a decision that our national Social Security Trust Fund will not be invested in anything but government bonds," he said. "Given that we've made that decision, it is not absurd to have certain concerns about the possibilities when other countries invest."
Summers said he has three principal concerns about SWFs becoming more active investors:
1. Corporate governance. SWFs may protect the management of poorly run companies. "SWFs are some people's model investors," said Summers, "and other people's version of 1-800-ENTRENCH. What could be better for not entirely secure management than a long-term, nonvoting shareholder?"
2. Multiple-motive issues. "It's the premise of capitalism that people own shares to maximize value. But if you think of an investment made by a state fund, there could be multiple motives. Perhaps we want the airline to fly to our country, perhaps we want the bank to do extensive business in the country, suppose we want suppliers in our country to be sourced, perhaps we want some disablement of a competitor for our country's national champion. When there's no assurance that value maximization is not being pursued, there is a potential question."
3. General politicization. He provided two examples. "First, suppose that a country ran an active trading operation, and say it was a very inspired one, and found itself in an investment much like George Soros's short position in the pound. Would we be comfortable with the concept that the nation of X had decided that nation of Y's currency was overvalued and launched an attack? There should be some kind of understanding that that won't happen. Also, the SWF of Country A makes an investment in a major bank in Country B. The bank gets in big trouble. Is there any control in the world that can assert that, with billions of dollars on the line, their head of state and foreign minister are not going to get involved in the negotiations?"
His proposed remedy: a code of conduct. "I'm baffled by why SWFs don't get together and put an end to all this discussion by agreeing on some piece of paper that says, We're under no circumstances going to speculate in currencies; we're always going to be a long-term investor; we're never going to use our SWF to pursue any political objective."
The SWF managers protested, as one, that since they had never engaged in any of the activities that Summers expressed concern about, there was no reason to try to regulate them so. "You're talking about how to pre-emptively regulate something that may happen," said Muhammad Al Jasser of Saudi Arabia. "We've had a lot of resistance to regulating the hedge funds, and the rating agencies, even though there were failures galore. So let's be a little bit more balanced." Touché! Kristin Halvorson of Norway responded that while Norway would appreciate having some common rules, the hypothetical examples Summers cited "would never be possible in Norway."
Summers responded with an anecdote about how the Norwegian fund had sold short the shares of Icelandic banks, and the potential political complications those actions raised. Touché right back! (At which point I turned to the private-equity executive sitting behind me and said, "He's so sharp they should make him the president of Harvard." The response from the Harvard grad: "This is why he didn't make it as president of Harvard.")
Later, however, in discussing the rising concern in the United States about SWFs buying American assets, Halvorson had the last word: "It seems you don't like us, but you need our money."