Sandy Weill
Charlie Rose had an interesting conversation with Sandy Weill, Chairman Emeritus, Citigroup.
The most interesting tidbit to emerge from that conversation was this...
We keep buying oil and gas from all those other oil-producing countries. They take our money and put it into what they call "sovereign funds", which are owned by the various oil rich countries.
The problem is that these country-owned investment funds have to re-cycle these dollars and use them for something... which could either be good... such as creating educational opportunities, reducing poverty or improving health care... or they potentially could be used for not-so-good purposes, such as financing terrorism and helping to undermine the entire US economy.
The problem is not just the purposes these funds can be put to, but the very size of these funds, which are, even today, a very large part of overall global wealth.
According to Sandy Weill, "sovereign funds" today are about $2.3 TRILLION dollars in size. If you assume that oil will stay around $80 to $100 a barrel (not such a good assumption... have you visited a gas station lately?), then these "sovereign funds" will automatically grow to about $13 TRILLION dollars in size in just seven years (2015).
If you then assume that the oil price will much higher than it is today, the total value of all "sovereign funds" will be correspondingly much higher, and represent an even greater percentage of total global wealth, with enhanced capabilities to do either good or evil.
This is an important consideration for global finance going forward, and should be studied VERY seriously.
------------------------
And here is an article, Mortgaging America: Investment funds run by foreign governments are keeping the U.S. afloat, by Eric J. Weiner, from the Los Angeles Times on June 4 2008, that discusses this very topic!
Important points...
Sovereign wealth funds, or SWFs, basically are mutual funds that invest the excess capital generated by a region or country. The first one was established by Kuwait when it still was a British territory. After World War II, as Kuwait was negotiating independence, its leader, Sheik Abdullah al Salem al Sabah, asked the British to help him create a fund that would invest the nation's oil profits. The Kuwait Investment Board, which eventually became the Kuwait Investment Authority, today has about $250 billion in assets and is one of the largest sovereign wealth funds in the world.
As the British Empire crumbled, the government created similar funds for many of its territories and colonies (including the islands of Kiribati, which profitably exported guano for fertilizer). Meanwhile, other countries with growing wealth started setting up similar funds, such as the oil-rich nations of Saudi Arabia, the United Arab Emirates, Norway and Russia, as well as China, Singapore and South Korea, which had highly productive economies that also generated lots of excess capital.
In 1990, the funds held just $500 billion in assets combined. Today, that figure is about $3.5 trillion. For comparison purposes, that's more than all of the assets controlled by all of the hedge funds in the world. And by 2012, the figure will be at least $10 trillion, according to estimates by the International Monetary Fund.
The primary reason for this explosion is, in a word, oil. As its price has soared from less than $25 a barrel in 2002 to more than $125 a barrel today, the value of sovereign wealth funds held by oil-rich nations has skyrocketed. And this trend isn't expected to change any time soon.
The new power of SWFs has been on graphic display during our recent mortgage crisis. They've essentially rescued the international financial system by injecting tens of billions of dollars into troubled banks. Citigroup, for instance, raised about $20 billion from a consortium of SWFs from Abu Dhabi, Kuwait and Singapore. UBS secured nearly $10 billion from a Singapore fund that now controls 9% of the bank. Merrill Lynch took in about $11 billion from SWFs from Kuwait, Singapore and South Korea. And even august Morgan Stanley got $5 billion from China's SWF.
These investments are steadying global financial markets by ensuring that none of these key banks goes under. But there are important questions to ask about the increasing influence that sovereign wealth funds have over our economy. As SWFs grow in size, they will be in a position to control large swaths of the global business world. That means foreign governments, which control the funds, will increasingly own sizable stakes in companies in such important industries as computer technology, aerospace and biotechnology.
These kinds of investments raise "profound questions" of geopolitical power, as former Treasury Secretary Lawrence Summers pointed out a few months ago at the World Economic Forum in Davos, Switzerland. Summers' essential complaint is that there is no way of knowing if there is a political agenda behind a country's investment in these essential industries.
The most interesting tidbit to emerge from that conversation was this...
We keep buying oil and gas from all those other oil-producing countries. They take our money and put it into what they call "sovereign funds", which are owned by the various oil rich countries.
The problem is that these country-owned investment funds have to re-cycle these dollars and use them for something... which could either be good... such as creating educational opportunities, reducing poverty or improving health care... or they potentially could be used for not-so-good purposes, such as financing terrorism and helping to undermine the entire US economy.
The problem is not just the purposes these funds can be put to, but the very size of these funds, which are, even today, a very large part of overall global wealth.
According to Sandy Weill, "sovereign funds" today are about $2.3 TRILLION dollars in size. If you assume that oil will stay around $80 to $100 a barrel (not such a good assumption... have you visited a gas station lately?), then these "sovereign funds" will automatically grow to about $13 TRILLION dollars in size in just seven years (2015).
If you then assume that the oil price will much higher than it is today, the total value of all "sovereign funds" will be correspondingly much higher, and represent an even greater percentage of total global wealth, with enhanced capabilities to do either good or evil.
This is an important consideration for global finance going forward, and should be studied VERY seriously.
------------------------
And here is an article, Mortgaging America: Investment funds run by foreign governments are keeping the U.S. afloat, by Eric J. Weiner, from the Los Angeles Times on June 4 2008, that discusses this very topic!
Important points...
Sovereign wealth funds, or SWFs, basically are mutual funds that invest the excess capital generated by a region or country. The first one was established by Kuwait when it still was a British territory. After World War II, as Kuwait was negotiating independence, its leader, Sheik Abdullah al Salem al Sabah, asked the British to help him create a fund that would invest the nation's oil profits. The Kuwait Investment Board, which eventually became the Kuwait Investment Authority, today has about $250 billion in assets and is one of the largest sovereign wealth funds in the world.
As the British Empire crumbled, the government created similar funds for many of its territories and colonies (including the islands of Kiribati, which profitably exported guano for fertilizer). Meanwhile, other countries with growing wealth started setting up similar funds, such as the oil-rich nations of Saudi Arabia, the United Arab Emirates, Norway and Russia, as well as China, Singapore and South Korea, which had highly productive economies that also generated lots of excess capital.
In 1990, the funds held just $500 billion in assets combined. Today, that figure is about $3.5 trillion. For comparison purposes, that's more than all of the assets controlled by all of the hedge funds in the world. And by 2012, the figure will be at least $10 trillion, according to estimates by the International Monetary Fund.
The primary reason for this explosion is, in a word, oil. As its price has soared from less than $25 a barrel in 2002 to more than $125 a barrel today, the value of sovereign wealth funds held by oil-rich nations has skyrocketed. And this trend isn't expected to change any time soon.
The new power of SWFs has been on graphic display during our recent mortgage crisis. They've essentially rescued the international financial system by injecting tens of billions of dollars into troubled banks. Citigroup, for instance, raised about $20 billion from a consortium of SWFs from Abu Dhabi, Kuwait and Singapore. UBS secured nearly $10 billion from a Singapore fund that now controls 9% of the bank. Merrill Lynch took in about $11 billion from SWFs from Kuwait, Singapore and South Korea. And even august Morgan Stanley got $5 billion from China's SWF.
These investments are steadying global financial markets by ensuring that none of these key banks goes under. But there are important questions to ask about the increasing influence that sovereign wealth funds have over our economy. As SWFs grow in size, they will be in a position to control large swaths of the global business world. That means foreign governments, which control the funds, will increasingly own sizable stakes in companies in such important industries as computer technology, aerospace and biotechnology.
These kinds of investments raise "profound questions" of geopolitical power, as former Treasury Secretary Lawrence Summers pointed out a few months ago at the World Economic Forum in Davos, Switzerland. Summers' essential complaint is that there is no way of knowing if there is a political agenda behind a country's investment in these essential industries.
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