Sovereign funds face US threat

Sovereign funds face US threat

By James Politi in Washington

Published: February 14 2008 03:57 | Last updated: February 14 2008 03:57

The political heat surrounding sovereign wealth funds in the US increased on Wednesday as Chuck Schumer, the powerful New York senator, said he would consider legislation to improve their transparency and ensure they did not invest with “non-economic motivations”.

Mr Schumer said that state-controlled investors from the Middle East, China and elsewhere “need to do a lot more to make their case”.

“Sovereign wealth funds are their own worst enemies,” he said at a hearing of Congress’s joint economic committee, which he chairs.

“Most are not transparent or publicly accountable, and we know little about their governance structures or fiduciary controls. So the bottom line is that we don’t know if their decisions are made exclusively on an ­economic basis.”

Mr Schumer is considered a key arbiter of the fate of sovereign wealth funds in Washington because of his closeness to large financial services groups on Wall Street and his seniority within the Democratic party.

In 2006, Mr Schumer’s opposition to Dubai Ports World’s efforts to acquire ownership of six US ports contributed to the collapse of the transaction.

The New York senator has in recent months been cautious on the benefits of investments by sovereign wealth funds even as they have injected much-needed capital into leading banks. Mr Schumer has occasionally backed individual deals, such as the Abu Dhabi Investment Authority’s move to acquire a stake in Citigroup last year.

But Wednesday’s hearing signals a growing impatience with these funds as they snap up broader swathes of the US financial system. Mr Schumer said that if a proposal by the International Monetary Fund, backed by the US, to draft a voluntary code of conduct for sovereign wealth funds “doesn’t work”, he was prepared to consider responding with changes to the law.

In particular, Mr Schumer said he wanted to examine whether last year’s reforms to the Committee on Foreign Investment in the US, which vets US takeovers on national security grounds, were “sufficient” or if legislation was required to “close any loopholes”.

David McCormick, US Treasury undersecretary for international affairs, said at the hearing that the US remained “committed to open investment” and warned of the risks of mounting protectionism.

“If the United States imposed new restrictions, other countries could impose restrictions on US investors, jeopardising the benefits generated in the United States by US businesses that operate globally,” he said.