At long last, Uncle Sam has got a sovereign wealth fund, or SWF, to call his own. And guess what? Treasury secretary Henry Paulson’s new fund is better than anything yet cooked up by the governments of Kuwait, China, Singapore, Abu Dhabi or others that have sprinkled their taxpayers’ surplus cash around the world the past few years.
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That’s not to say Paulson’s plan to help take on the crummier assets of US financial companies in exchange for ownership claims will mint taxpayers a big dividend cheque. In fact, there’s a good chance they will lose money. But, hey, show us an SWF that’s made money for its people. With one or two exceptions, the investments made by these quasi-government funds over the past year are under water.
Yet the Paulson SWF has several unique advantages over, say, the China Investment Corp., Kuwait Investment Authority or the Government of Singapore Investment Corp. These are the funds that, earlier in the credit crunch, swooped in and invested the likes of Merrill Lynch, Citigroup Inc., Blackstone Group, the London Stock Exchange and Barclays Plc.
Their arrival created hysteria in Washington and on Main Street. Politicians worried they would have undue influence over the flow of capital. The International Monetary Fund even went so far as to draft a code of conduct, a little blue book telling the emirs and mandarins running SWFs how to play nice. In response, the funds made it clear that they wouldn’t seek board seats and they would under no circumstances seek control. This was even when the size of their investments amounted to more than a 10th of their target’s outstanding stock — far more than activists such as Carl Icahn usually invest, despite winding up with lots of board seats and sway over the companies they pursue. Where did all of this get SWFs? Well, so far it’s brought them big losses.
So, why will it be different this time for Uncle Sam’s SWF? Well, the details of the US version have yet to be hammered out. But, let’s use the bailout of insurer American International Group Inc., or AIG, as a guide. The Federal Reserve lent the insurer $85 billion (Rs3.9 trillion) so that it could right itself, sell off its pieces and unwind all of its fancy derivatives contracts. In return, the Fed—which is financed by the treasury — gets a claim on the company’s assets. That’s a euphemistic way of saying it gets to take control, without calling it a nationalization of the biggest US insurer. But if anyone had any doubt about who calls the shots, the Fed got to oust AIG’s management team and put its own men in charge. The government also did that at Fannie Mae and Freddie Mac, where US taxpayers have taken on mortgage exposures worth some $5 trillion. Unlike most SWFs, the US government gets not only to meddle in the affairs of its investee companies, it gains control and nominates its executives.
Here’s the other thing — timing. The US government is getting companies such as Fannie, Freddie and AIG at their very cheapest valuations. Sure, it’s taking on lots of their liabilities. But it’s paying nothing for the equity. It’s functioning more like a vulture fund, swooping in on distressed companies a step away from bankruptcy and taking control by snaffling up their debt. Moreover, Uncle Sam’s SWF finances itself incredibly cheaply. It sells tens of billions in treasury bonds at ultra-cheap interest rates—the 10-year bond only pays investors 3.7%. The lion’s share of these treasury bonds is bought by foreign governments and central banks.
Finally, all of this money goes to supporting US companies, with thousands of American employees, and their assets — thus far mainly their mortgages. It’s not like the government of Kuwait is sending its taxpayers’ surplus cash to help keep New York- and London-based investment bankers in Hermes ties and make their Maserati Quattroporte payments.