by Ron Orol | Published June 10, 2008 at 11:00 AM
On June 2, Treasury Secretary Henry Paulson told participants in the US-UAE Business Council in Abu Dhabi that the U.S. is "open" to investments from sovereign wealth funds. Back in Washington, and on the other end of the political spectrum, is Rep. Frank Wolf, a 69-year-old Republican congressman who has represented the Washington suburban area of Herndon, Va., for almost three decades. Wolf argues that sovereign funds, the investment arms of governments located mostly in Asia and the Middle East, are tempted to make direct investments to further their political interests rather than simply to maximize returns. He's particularly uncomfortable with the sovereign funds from China and Persian Gulf states because of their complicated relations with the U.S.
To further his agenda, Wolf recently helped form a House task force on
sovereign wealth funds. His position puts him at odds not just with
Paulson, but with other members of the task force, including the panel
head Rep. Jim Moran, a Democrat representing the nearby district
encapsulating Alexandria, Va.
Moran argues the funds have become critical to the U.S. economy. Their infusions have shored up some struggling U.S. financial institutions, including Citigroup Inc., while the subprime crisis eats at their profits. Wolf says Moran helped form the task force to discourage lawmakers from opposing the investment vehicles.
As the ranking Republican on the State and Foreign Operations subcommittee, Wolf has serious influence on the congressional budget when it comes to sovereign investments. He was the lead sponsor in 2004 establishing a Securities and Exchange Commission office charged with monitoring whether companies listed or trading on U.S. stock exchanges are providing enough disclosure about material security issues, such as whether a U.S.-traded business is contributing to nuclear proliferation or selling weapons components to terrorist-sponsoring countries. (He complains that the office is still not fulfilling its function.)
Wolf recently spoke with The Deal's Ron Orol about why he believes pressing funds for greater transparency won't help matters and how he believes China can use its sovereign fund to advance its political agenda. The Deal: Rep. Moran and the task force are planning a trip in August to meet with sovereign managers in Norway and China. Do you plan to participate?
Frank Wolf: I'm not sure yet that I will go to these meetings, particularly the trip to meet with sovereign fund managers in China in August. I believe those meetings are taking place during the Olympics, and I don't want to give the impression that I am supporting their Olympics when they are arresting Roman Catholic bishops, persecuting Muslims and plundering Tibet. Would you want to do business with a bank that was arresting Catholic bishops and plundering Tibet?
You have a particular problem with China's sovereign wealth fund, China Investment Corp. Ltd., or CIC, which acquired stakes in Morgan Stanley and the Blackstone Group.
China now holds $1 trillion of our debt. They are, in essence, our banker now. Sovereign funds can purchase companies that can give China a technological advantage over us. We know they are buying up certain companies so they can get a technical expertise. Are you going to allow a country that is a direct threat to the U.S. to purchase our investment banks?
At the same time, we have watched that they have done nothing to stop the genocide in Khartoum, Sudan.
They have the largest influence over there, since they buy all of Sudan's oil.
There seems to be an effort in the international financial community to pressure China to disclose its stakes as a means to get a better handle on their investments. CIC president Gao Xiqing told "60 Minutes" in April that he agrees that CIC should be as transparent as Norway's sovereign fund. Norway's fund discloses its positions once a year, and it provides details accounting for how capital is allocated.
Norway is very public and transparent, which is a very big difference from China's fund. Their fund is not open or transparent. They aren't like Canada or Great Britain. Having them disclose their positions would not satisfy me. A country with their track record, I simply would not believe they were being genuine in disclosing the companies they owned stakes in. I don't think we should be allowing China, with their record, to make these kinds of investments in the U.S. They can use their investments in U.S. banks as political leverage. I would like to know which sovereign funds are investors in U.S. private equity companies so we can evaluate their investments.