THE INFLUENTIAL SOVEREIGN WEALTH FUNDS
By Eric J. Weiner

A few years ago, the U.S. economy was moving to gain traction in global financial markets and then Treasury Secretary, Henry Paulson, spent four days touring the Middle East, hat in hand, looking for investors. Paulson emphasized a meeting with heads of the Abu Dhabi Investment Authority, the world's largest "sovereign wealth fund" with roughly $875 billion in assets, and encouraged them to buy American businesses. Of course, it's nothing new for U.S. officials to rely on the deepest pockets in the world in times of crisis. Just a century ago, J.P. Morgan became an American icon by single-handedly rescuing the financial markets during the stock market panic of 1907. What is new, however, is that our economic problems have become so big that they no longer can be remedied by a few affluent individuals or investment firms. Only extremely wealthy countries have the resources to clean up this mess. So, Paulson is forced to visit oil rich Arabian emirates from Qatar to Abu Dhabi and beg for help. This is economic globalization in its most raw form---and a dramatic change in the way the worldwide economy operates. Today, the real power in international finance is held by rich countries, not institutions, corporations or private investors. And these countries are flexing their increasingly bulging muscles through investment vehicles known as sovereign wealth funds.

THE CREATION OF LARGE SCALE MUTUAL FUNDS

Sovereign wealth funds, or SFW's, basically are mutual funds that invest the excess capital generated by a region or country. The first one was established by Kuwait when it was still a British territory. After World War Two, as Kuwait was negotiating independence, its leader, Sheik Abdullah Al Salem of Sabah, asked the British to help him create a fund that would invest the nations's oil profits. The Kuwait Investment Board, which eventually became the Kuwait Investment Authority, today has about $250 billion in assets and is one of the largest sovereign wealth funds in the world. As the British Empire crumbled, the government created similar funds for many of its territories and colonies (including the islands of Kirbati, which profitably exported guano for fertilizer). Meanwhile, other countries with growing wealth started setting up similar funds. These countries would include the oil rich nations of Saudi Arabia, the United Arab Emirates, Norway and Russia, as well as other countries that generated lots of excess capital through highly productive economies. Countries like China, Singapore and South Korea. Still, it is only recently that SWF's have become major players on the financial stage.

REDEFINING THE DYNAMICS OF INTERNATIONAL FINANCE

In 1990, sovereign wealth funds held just $500 billion in combined assets. Today, that figure is about $3.5 trillion. For comparison purposes, that's more than all of the assets controlled by all of the hedge funds in the world. And by 2012, the figure will be at least $10 trillion, according to estimates by the International Monetary Fund. The primary reason for this expansion is, in a word, oil. As its price has soared from less than $25 a barrel in 2002 to more than $125 a barrel today, the value of sovereign wealth funds held by oil-rich nations has skyrocketed. And this trend isn't expected to change any time soon. The new power of SWF's has been on graphic display during our recent mortgage crisis. They've essentially rescued the international financial system by injecting tens of billions of dollars into troubled banks. Citigroup, for instance, raised about $20 billion from a consortium of SWF's from Abu Dhabi, Kuwait and Singapore. UBS secured nearly $10 billion from a Singapore fund that now controls 9% of the bank. Merril Lynch took in about $11 billion from SWF's from Kuwait, Singapore and South Korea. And Morgan Stanley got $5 billion from China's SWF. These investments are steadying global financial markets by ensuring the success of these key banks. As sovereign wealth funds grow in size, they will be in a position to control large swaths of the global business market since these funds will own sizable stakes in companies within important industries such as finance, computer technology, aerospace and biotechnology.