Government steps in on foreign fund investment

Real Estate Weekly,  March 26, 2008  by Daniel Geiger

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Treasury secretary Henry Paulson and deputy secretary Robert Kimmitt met last week with sovereign wealth funds, the Abu Dhabi Investment Authority and the Government of Singapore Investment Corporation, as well as officials from the two countries, to agree on a set of principles that they said should guide how such international, state sponsored funds should invest.

The agreement, which includes the provision that funds not be used to influence geopolitics, appear to be aimed at alleviating some of the concerns that have stemmed from the series of large investments sovereign wealth funds have made in the U.S. in recent months. A number of funds, primarily from politically charged areas in the Middle East and Asia, have made large investments in major U.S. financial firms that have sought large infusions of capital to shore up their balance sheets after being rocked by billions of dollars in subprime write downs.

Among the institutions to receive funding was Citigroup, which in January took $12.5 billion from a group of investors, including $6.88 billion from the Government of Singapore Investment Corp. and undisclosed sums from the Kuwait Investment Authority and Saudi Prince Alwaleed bin Talal bin Abdulaziz Alsaud. Last November, Citigroup also received a $7.5 billion investment from the Abu Dhabi Investment Authority to deal with the subprime losses, which amounted to an $18 billion write off in the fourth quarter of 2007.

Merrill Lynch was also among the list of investment firms to receive funding after steep losses, raising $6.6 billion in January in a preferred stock offering to the Korean Investment Corporation, Kuwait Investment Authority and the Japanese financial institution, Mizuho Corporate Bank. Merrill had previously raised $6.2 billion in December 2007 from selling newly created shares to Temasek Holdings and Davis Selected Advisors. Temasek is another investment fund operated by the Singapore Government.

The deals, although they conformed to laws in the U.S. limiting the ownership stake overseas investors can have in major financial institutions, created fears nonetheless that foreign governments could be gaining a foothold that would give them undue influence over the U.S. financial system. The voluntary agreement, which also calls for funds to provide better disclosures about their objectives, returns and other financial information, appears to be a way of soothing domestic concerns about the direct investment of foreign governments in the U.S. without imposing a more restrictive framework that could limit the increasingly important role sovereign wealth funds have played in providing the ailing financial industry with much needed cash amid the credit crunch. Treasury officials said they hoped the measures would support a more comprehensive set of voluntary best practices that the International Monetary Fund and the Organization for Economic Cooperation and Development is currently developing for sovereign wealth funds.

"The U.S. welcomes sovereign wealth fund investment and looks forward to continuing to work with these two countries and others to support the initiatives underway at the IMF and OECD to develop best practices for sovereign wealth funds and recipient countries," Paulson said. "The principles we agreed to here today will further those efforts."

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