Congress Wary of Foreign Governments' U.S. Investments

WASHINGTON — Many foreign governments, flush from sales of oil and manufactured goods, increasingly are using their U.S. dollars to take ownership stakes in American companies.

And that has Congress worried.

On Wednesday, two House subcommittees held a hearing to explore the economic and security implications of these "sovereign wealth funds," which invested an estimated $21.5 billion in U.S. companies last year.

"We now live within a global economy, but the national security and national interests of the United States must always remain paramount," said capital markets subcommittee chairman Paul Kanjorski, D-Pa.

He speculated on the dangers of having hostile foreign governments gain control over U.S. electric utilities. Rather than attack this country with weapons, they instead could "turn off the power," he said. "What's going to stop them from doing that?"

Critics say that while private investors typically seek nothing more than profits, some foreign governments could use their mountains of cash to purchase political or military advantages.

Many Western Europeans share this concern. For example, German Chancellor Angela Merkel has suggested Russia may be using its sovereign wealth fund to purchase oil pipelines and other assets to cut off her country's access to energy resources.

Nervousness has been growing in Washington because the targets of foreign investments so often are U.S. financial giants, which can provide vital expertise in financial systems, including those connected with trade. In recent months, Citigroup, Merrill Lynch and Morgan Stanley have been targets of major investments from Kuwait, Dubai and China.

David McCormick, the Treasury Department's under secretary for international affairs, acknowledged that fears have been rising along with the number of funds, which have doubled to nearly 40 since 2000. The funds now have as much as $2.9 trillion in assets, and private analysts project that sum could shoot to $15 trillion by 2015, he said.

Most of the largest funds are operated by Russia and Arab nations that have sold Americans oil, and Asian manufacturing giants that have run up large trade surpluses.

As U.S. dollars return to this country via asset purchases by sovereign wealth funds, some transactions "may raise legitimate national security concerns," McCormick said.

But he also said the cash infusions can strengthen the U.S. economy because they generally are operated by "long-term, stable investors," and they can bolster financial markets by providing "significant capital to the system."

Federal Reserve Board general counsel Scott Alvarez agreed, saying "sovereign wealth funds have been a beneficial source of capital for U.S. financial institutions."

McCormick said the Bush administration has formed a working group to study the funds, and has been promoting global cooperation with International Monetary Fund and World Bank to "develop voluntary best practices for sovereign wealth funds."

Martin Skancke, head of the Asset Management Department of the Norwegian Ministry of Finance, said that while his country supports the development of voluntary best-practices standards, "we see no cause for regulations that would restrict the present investment activities of our fund."

The issue of foreign investments flared up in 2006 when a firm tied to the Dubai government wanted to operate some U.S. ports. That spurred Congress to toughen the rules governing the Committee on Foreign Investment in the United States, or CFIUS. The committee, composed of executive-branch agencies, screens the sale of U.S. assets to foreign interests.

Last October, the new law took effect. The White House argues that because the reforms have barely had a chance to work, Congress should avoid further action on foreign investments.

But some lawmakers fear that with sovereign wealth funds growing so rapidly now, even the reformed CFIUS regulations may be inadequate. They question whether U.S. securities regulators would be able to conduct fraud investigations if foreign governments refuse to cooperate.

Ethiopis Tafara, director of the Office of International Affairs for the Securities and Exchange Commission, said such concerns may be overblown because foreigners are not shielded from U.S. securities laws. "It is a well-established principle of American jurisprudence and international law that sovereign immunity does not extend to a state's commercial activities in another jurisdiction," he said.

Financial experts say legislating restrictions on sovereign wealth funds may be difficult because the funds can vary so greatly in their practices. Those from Norway and New Zealand, for example, operate with considerable transparency and accountability. But those from China and the Middle East are regarded as far less transparent about their actions.

THE LARGEST SOVEREIGN WEALTH FUNDS

1. Abu Dhabi Investment Authority and Corporation, $875 billion

2. Government of Singapore Investment Corp., $330 billion

3. Government Pension Fund-Global (Norway), $322 billion

4. Saudi Arabia Monetary Agency, $300 billion

5. Kuwait Investment Authority, $250 billion

6. China Investment Corp., $200 billion

7. Hong Kong Monetary Authority Investment Portfolio, $140 billion

8. Stabilization Fund of the Russian Federation, $127 billion

9. Temasek Holding (Singapore), $108 billion

10. Central Hujin Investment Corp. (China), $100 billion

Source: Joint Economic Committee