Saturday, January 12, 2008

Sovereign Funds Investigated by US Agency

Congressional Watchdog Investigates U.S. Oversight of Sovereign Wealth Fund Investments.

A congressional watchdog agency has begun a review of foreign state-run investment funds and the U.S. government's oversight of them, an agency spokeswoman said Friday. The review could lead to heightened congressional scrutiny of the state-run funds, also known as sovereign wealth funds, just as U.S. banks and investment firms are increasingly turning overseas for much-needed capital.

Citigroup Inc. and Merrill Lynch & Co. Inc., facing up to $25 billion of additional losses from the ongoing housing slump and credit crisis, are expected to seek additional capital from the funds to shore up their balance sheets, according to a report Thursday in the Wall Street Journal. Most large wealth funds are in the Middle East and Asia. They have invested about $27 billion in Merrill, Citi, Switzerland's UBS AG and Morgan Stanley.

The Government Accountability Office formally began a review this week, but there's no timeline for completion, agency official Yvonne Jones said. The GAO will report its findings to Congress.

Last fall, Alabama Sen. Richard Shelby, senior Republican on the Senate Banking Committee, requested the review. Shelby requested the report "because he believes it's important to conduct vigilant oversight and understand the issues associated with the major role that sovereign wealth funds play in the global economy," said Jonathan Graffeo, a spokesman for the senator.

Graffeo said the report will focus on countries with sovereign wealth funds, the funds' size, the type of investments they make and their potential impact on the U.S. economy. In addition, the report will look at whether that impact is "effectively monitored," Graffeo said, and how U.S. laws governing security reviews of foreign investments apply to the sovereign wealth funds.

Closer inspection could make business groups and the Bush administration, both advocates of sovereign wealth funds, nervous. The Senate Banking Committee spearheaded legislation last year that toughened the foreign investment review process. Among other things, the law required a more extensive investigation by U.S. security agencies when a foreign investment in the United States is made by a government-owned company.

The sovereign wealth funds, however, have been trying to avoid such scrutiny by buying small stakes in U.S. companies and downplaying their influence by not taking board seats. Generally, passive investments that amount to ownership of less than 10 percent can avoid review by a government panel.

The GAO report could become the basis for hearings later this year. An aide to Sen. Chris Dodd, D-Conn., chairman of the Banking Committee, has said the panel is likely to hold hearings on the subject later this year.

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