NCPA - National Center for Policy Analysis


February 6, 2008

Although Americans are alarmed by the credit crisis currently convulsing the economy, they are sensibly placid about one consequence of the crisis, says columnist George Will.  It is the substantial investment by sovereign wealth funds -- government owned and run investment funds -- in financial institutions needing infusions of cash.

Sovereign wealth funds are not new: Kuwait launched one in 1953.

According to Matthew Higgins, an economist with the Federal Reserve Bank of New York:

  • The total assets of sovereign wealth funds are now about $2.5 trillion, much less than the $16 trillion, $18 trillion and $22 trillion managed by insurance companies, pension funds and mutual funds, respectively.
  • The $2.5 trillion is larger than the combined assets of all hedge funds but is equal to just 1.2 percent of the $201.6 trillion combined market capitalization of global bond and equity markets and commercial banks.
  • The high-end estimate is that the funds could be 4 percent of global financial markets by 2015.

Many countries exporting oil, toys or underwear to America are running trade surpluses.  These countries need to do something with their dollars -- it is better that they invest them than buy weapons with them -- and want something with a higher return than U.S. Treasury bonds offer.  By buying minority interests in U.S. financial institutions or other companies, sovereign wealth funds are gaining money-management expertise, says Will.

Various U.S. states and municipalities, too, are scrambling for higher returns through investments in equities.  Stephen Schwarzman, CEO of the Blackstone Group, a large private equity firm, says, "In our experience, there is virtually no difference between going to a sovereign fund (for investment capital) and going to a state pension fund in the United States."

Source: George Will, "The Hidden Costs of Recession,", February 3, 2008.

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