A year or two ago "sovereign wealth fund" was a term familiar only to a relative few on Wall Street. But that changed dramatically after credit began drying up and major financial institutions such as Citigroup (C) and Merrill Lynch (MER) began scouring the globe for cash infusions. Now, sovereign wealth funds are a page-one story. In fact, the power of these investment vehicles—many controlled by cash-rich petro-states—was in stark relief on Mar. 4 when comments by the chief of a Dubai fund knocked Citi shares down to a 52-week low. Meantime, concern about the funds' lack of transparency has led the U.S. and Europe to encourage the International Monetary Fund to draw up voluntary guidelines. Among those calling for more disclosure from the funds is Senator Chuck Schumer (D-N.Y.), an influential member of the Senate Finance Committee.
Senator, you've been vocal about the need for sovereign wealth funds to be more transparent. Will the plan to press for more disclosure be enough?
Senator Charles E. Schumer
Well, the proof of the pudding will be in the eating. But obviously my call for transparency is being echoed in other places. Which is good. The IMF believes in transparency. Most of the commentators who have looked at these funds believe in transparency. Right now, the U.S. finds itself in a difficult position. Some of our financial institutions have made mistakes and need capital. So we're short of capital because of the credit crunch, and in the longer run because of our own habits. We import more than we export; we consume more than we save. The best choice would be that financial institutions could raise capital within the U.S. But we don't have that choice. So they raise capital from where it exists, and sovereign wealth funds are the most available form of capital right now. Or [financial institutions] can dramatically shrink, and we can lose thousands and thousands of jobs. The choice is a simple one, and the issue with sovereign wealth funds can be defined in a single sentence: Because they are government-owned, noneconomic factors may influence their decision-making and the pressure they put on companies that they own a piece of.
What exactly are we worried about?
Let me give you an example. If you asked most Americans or most experts, should a Russian sovereign wealth fund be able to buy an American natural gas company, they'd say no. Why? Because Russia has used its control of natural gas for political purposes with Europe and with other places. That's the archetype of what we should be worried about, and this is not at all protectionist. Protectionism would say, "Don't have foreign investment here." Nobody is saying that—and certainly I am not saying that.
Some leading sovereign wealth fund managers in the Middle East have told me they don't like being put in the same bucket as the Russians and the Chinese. They feel like: "Look, we're not the bad guys here. It's the Russians and the Chinese. Why are we bundled together?"
I think that's a very valid consideration, and you shouldn't treat every country alike. The trouble is, how do you make rules for one and not for the other? Some of these small countries that have large amounts of wealth are just looking to invest for economic purposes, just like any other investor. And that would be just fine. It does seem to me that countries like Russia and China put a political agenda alongside their economic agenda. That gives you some pause. But the answer in all of this is simple transparency.
One sovereign wealth fund manager said to me: "I don't mind having rules to play by, but the problem with the U.S. is that it changes the rules in the middle of the game."
I think that that's why the IMF is a good place for this to come about. The IMF is an international organization, it believes in trade. It's going to publish some guidelines. They're experts on this. And if the sovereign wealth funds follow what the IMF does, we won't have a problem.
But with some of these funds coming to the rescue of American financial institutions in distress, is this really the time to be holding their feet to the fire?
I don't think it's asking very much. Dubai has already said it's going to comply with transparency.
But is there any real evidence that these funds plan to use their investments to further political agendas?
Well, there's no track record. They're brand new. So we just don't know. Even if one country, say Singapore, has a very good record here, are you sure that the next country, whose fund is newer, will also? So setting rules, particularly voluntary rules created by an international organization that apply to all countries, is the right thing to do.
Has anyone from the Israel lobby called you and politely suggested you press ahead with calls for disclosure?
Has anyone on Wall Street called you and politely suggested that you back off?
No, I think most of Wall Street thinks I'm pursuing this in a very rational way. Transparency, openness, that's part of Adam Smith's rules.
I heard that when the Abu Dhabi Investment Authority wanted to invest in Citigroup, Citi executives called you or your colleagues and warned against opposing the deal because if it didn't go through, there would be a lot of layoffs in New York.
That didn't happen in my office. But we're working our way through this, and as long as we don't do anything rash or motivated by either protectionism or xenophobia, I think we're going to do just fine.
One last question about taxes. Here we are in a slowing economy, and Democratic candidates are talking about not extending the Bush tax cuts. Is this the right time to raise taxes?
I think we have to let the economy play out for a while. But while you certainly don't want to raise taxes on middle-class people, wealth is agglomerating to the very, very top. If we're going to have to raise revenues, it has to come from the highest-end people. And I think there has been a change in America. Ronald Reagan and the Republicans were very successful at saying tax cuts for the rich were tax cuts for everybody. I don't think that equation holds anymore.