Wednesday, March 5, 2008

Carlyle Group, JPMorgan, and IMF plot strategy to protect wealth funds

Carlyle Group, JPMorgan, and IMF plot strategy to protect wealth funds

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Sovereign wealth funds are teaming up with the private equity industry, business trade associations and major financial institutions to strategize a defense against the growing political scrutiny of the $3 trillion funds.

Last week, about 30 lawyers and lobbyists — organized, according to one attendee, by a representative from private equity firm The Carlyle Group — conferred at JPMorgan’s New York offices to discuss their role in the growing political issue.

Congress, the Treasury Department, the International Monetary Fund and the European Union are questioning the government-backed investment funds that have made several high-profile investments in Western financial institutions in recent months.

Two subcommittees of the House Financial Services Committee plan to hold a joint hearing Wednesday to discuss the role of foreign governments’ investments in the United States.

According to an attendee of last week’s New York meeting, most in the group rejected the idea of starting a trade association. Many in the group worried that a formalized association would project the wrong image.

“I don’t think the funds think the answer to the problem is to look like [the Organization of the Petroleum Exporting Countries] or the Trilateral Commission or something coordinated and scary,” said another attendee. “I think the point is that they are going to work under the umbrellas of their government agencies or multilateral institutions.”

The funds themselves, say others, are also reluctant to join forces. Each fund, run by a host of diverse countries, carries its own geopolitical challenges. For instance, Norway, which boasts one of the oldest and most transparent funds, does not want to be lumped together with the more controversial China Investment Corp.

Many of the funds have hired their own lobbyists and public relations specialists, who informally discuss the issue. They also work through existing diplomatic channels, including embassies and congressional trips abroad.

That hasn’t stopped others from trying to start a trade association. In the past few weeks, a small group of mostly Republican lobbyists founded the Sovereign Investment Council, a membership association for the sovereign wealth funds and their domestic financial institution partners. Membership fees range from $200,000 to $1 million.

The council has attracted no funds as members, according to lobbyists close to the issue. “It’s an entrepreneurial group of lobbyists just trying to raise money,” explained one business lobbyist.

Council board members did not return calls for comment.

Over the past weeks, lawmakers have launched a series of inquiries into the funds. The IMF estimates that more than 20 of the funds, financed mostly by petrodollars and excess foreign exchange reserves, manage as much as $2.9 trillion — more money than either hedge funds or the private equity industry.

Last week, Virginia Reps. Jim Moran, a Democrat, and Tom Davis, a Republican, created a new task force to explore the funds’ ability to affect the international economy.

Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking, Housing and Urban Affairs Committee, held a hearing last November and plans a second. Committee staff members met with fund representatives from the United Arab Emirates and Singapore.

Executives from two of the largest sovereign-wealth funds — the Abu Dhabi Investment Authority and the Government of Singapore Investment Corp. — met two weeks ago with Clay Lowery, the assistant treasury secretary for international affairs. The administration is supporting IMF efforts to create a voluntary code of conduct.

For policymakers, regulating the funds is a delicate balancing act. On one hand, fund investments have propped up financial institutions, bringing in much-needed capital and creating jobs during a period of economic anxiety. Over the past 11 months, the funds infused about $69 billion into financial institutions sapped by the subprime mortgage crisis, according to some estimates.

But some lawmakers wonder whether foreign governments are more interested in making money or gaining political influence. Former Treasury Secretary Larry Summers warns that government-related investment entities could politicize the economics of corporations.

“If you think of an investment made by a state fund, there could be multiple motives. Perhaps we want the airline to fly to our country. Perhaps we want the bank to do extensive business in the country. Suppose we want suppliers in our country to be sourced. Perhaps we want some disablement of a competitor for our country’s national champion,” he said at a session on the issue at the World Economic Forum in Davos, Switzerland.

Voters also question the fund’s true motives. A survey conducted last week by Public Strategies Inc. found that 55 percent of registered voters thought sovereign-wealth fund investments would hurt national security, and 49 percent believed that investments would negatively affect the U.S. economy.

Sen. Evan Bayh (D-Ind.), chairman of the Senate Security and International Trade and Finance Subcommittee, argues that the government funds — particularly those owned by China and Russia — raise serious national security questions. Last week, he met with fund managers in Qatar, Saudi Arabia and Abu Dhabi.

Bayh and others would like stronger legislation limiting how much control the funds have over the domestic company and forcing the funds to be more transparent about their own business.

The debate is reminiscent of one that occurred two years ago, when a United Arab Emirates-owned company, Dubai Ports World, purchased a British-owned shipping company and gained control over parts of several U.S. port facilities.

Congress held a series of high-profile hearings on the issue and eventually passed legislation strengthening the Committee on Foreign Investment in the United States, the multiagency federal panel that evaluates foreign deals that raise national security concerns.

The foreign investment issue has returned to the spotlight over the past few months, as state-owned funds bought a series of passive but high-profile stakes in iconic Western brands including Carlyle, Citigroup, Merrill Lynch and Blackstone.

Last week, U.S. private equity firm Bain Capital and China’s Huawei Co. withdrew their application seeking approval for a planned $2.2 billion buyout of technology company 3Com Corp. after concerns that it would be rejected by CFIUS. They plan to restructure the deal to limit Huawei’s access to some critical U.S.-related Ethernet technologies.

The business community says that the withdrawal of the 3Com deal proves that the United States can effectively monitor foreign investment in sensitive industries.

“When Congress takes a second look at the law they passed last year, they’ll find it’s exactly the right tool to deal with that subset of investment that might deal with national security but also allows us to have an open investment environment that welcomes investment,” said Todd Malan, CEO of the Organization for International Investment.

Some members of Congress aren’t convinced. In testimony last month, Bayh described CFIUS as a “toothless watchdog” willing to “sacrifice our nation’s security on the altar of both ideology and monetary gain.”

And with the economy struggling and with the pressing presidential campaign, few expect Congress to leave the issue alone.

“One of the funds will ignore the advice of all the counselors and do something in the midst of an election and become the next Dubai Ports,” said one business lobbyist working on the issue. “That and a dicey economic situation will create the political atmosphere for something to happen next year.”

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