[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
FOREIGN GOVERNMENT INVESTMENT
IN THE U.S. ECONOMY AND
FINANCIAL SECTOR
=======================================================================
JOINT HEARING
BEFORE THE
SUBCOMMITTEE ON
DOMESTIC AND INTERNATIONAL
MONETARY POLICY, TRADE, AND TECHNOLOGY
AND THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
MARCH 5, 2008
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-94
----------
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For sale by the Superintendent of Documents, U.S. Government Printing
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York RON PAUL, Texas
BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York GARY G. MILLER, California
JOE BACA, California SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
AL GREEN, Texas SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma KEVIN McCARTHY, California
DEAN HELLER, Nevada
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Domestic and International Monetary Policy, Trade, and
Technology
LUIS V. GUTIERREZ, Illinois, Chairman
CAROLYN B. MALONEY, New York RON PAUL, Texas
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
PAUL E. KANJORSKI, Pennsylvania FRANK D. LUCAS, Oklahoma
BRAD SHERMAN, California DONALD A. MANZULLO, Illinois
GWEN MOORE, Wisconsin WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JEB HENSARLING, Texas
WM. LACY CLAY, Missouri TOM PRICE, Georgia
KEITH ELLISON, Minnesota PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio MICHELE BACHMANN, Minnesota
ROBERT WEXLER, Florida PETER J. ROSKAM, Illinois
JIM MARSHALL, Georgia KENNY MARCHANT, Texas
DAN BOREN, Oklahoma DEAN HELLER, Nevada
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises
PAUL E. KANJORSKI, Pennsylvania, Chairman
GARY L. ACKERMAN, New York DEBORAH PRYCE, Ohio
BRAD SHERMAN, California JEB HENSARLING, Texas
GREGORY W. MEEKS, New York CHRISTOPHER SHAYS, Connecticut
DENNIS MOORE, Kansas MICHAEL N. CASTLE, Delaware
MICHAEL E. CAPUANO, Massachusetts PETER T. KING, New York
RUBEN HINOJOSA, Texas FRANK D. LUCAS, Oklahoma
CAROLYN McCARTHY, New York DONALD A. MANZULLO, Illinois
JOE BACA, California EDWARD R. ROYCE, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia ADAM PUTNAM, Florida
NYDIA M. VELAZQUEZ, New York J. GRESHAM BARRETT, South Carolina
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, TOM FEENEY, Florida
LINCOLN DAVIS, Tennessee SCOTT GARRETT, New Jersey
PAUL W. HODES, New Hampshire JIM GERLACH, Pennsylvania
RON KLEIN, Florida TOM PRICE, Georgia
TIM MAHONEY, Florida GEOFF DAVIS, Kentucky
ED PERLMUTTER, Colorado JOHN CAMPBELL, California
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
C O N T E N T S
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Page
Hearing held on:
March 5, 2008................................................ 1
Appendix:
March 5, 2008................................................ 43
WITNESSES
Wednesday, March 5, 2008
Alvarez, Scott G., General Counsel, Board of Governors of the
Federal Reserve System......................................... 12
Denison, David, President and CEO, Canada Pension Plan Investment
Board.......................................................... 28
Israel, Simon Claude, Executive Director, Temasek Holdings
(Private) Limited.............................................. 25
McCormick, David H., Under Secretary for International Affairs,
U.S. Department of the Treasury................................ 8
Skancke, Martin, Director General, Asset Management Department,
Norwegian Ministry of Finance.................................. 24
Slaughter, Matthew J., Professor, Tuck School of Business,
Dartmouth College.............................................. 29
Tafara, Ethiopis, Director, Office of International Affairs, U.S.
Securities and Exchange Commission............................. 10
APPENDIX
Prepared statements:
Bachus, Hon. Spencer......................................... 44
Brown-Waite, Hon. Ginny...................................... 47
Kanjorski, Hon. Paul E....................................... 49
Manzullo, Hon. Donald A...................................... 51
Meeks, Hon. Gregory.......................................... 56
Pryce, Hon. Deborah.......................................... 58
Alvarez, Scott G............................................. 61
Denison, David............................................... 75
Israel, Simon................................................ 120
McCormick, David H........................................... 134
Skancke, Martin.............................................. 139
Slaughter, Matthew J......................................... 152
Tafara, Ethiopis............................................. 155
FOREIGN GOVERNMENT INVESTMENT
IN THE U.S. ECONOMY AND
FINANCIAL SECTOR
----------
Wednesday, March 5, 2008
U.S. House of Representatives,
Subcommittee on Domestic and
International Monetary Policy,
Trade, and Technology, and
Subcommittee on Capital Markets,
Insurance, and Government
Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittees met, pursuant to notice, at 2:47 p.m., in
room 2128, Rayburn House Office Building, Hon. Luis V.
Gutierrez [chairman of the Subcommittee on Domestic and
International Monetary Policy, Trade, and Technology
Subcommittee] presiding.
Members present: Representatives Kanjorski, Maloney,
Gutierrez, Meeks, Capuano, Scott, Hodes, Perlmutter; Pryce,
Royce, Paul, Manzullo, Jones, Shays, Roskam, McCotter, and
Heller.
Ex officio: Representatives Frank and Bachus.
Also present: Representative Moran.
Chairman Gutierrez. This joint hearing of the Subcommittee
on Domestic and International Monetary Policy, Trade, and
Technology and the Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises will come to order.
The subject of today's hearing is foreign government
investment in the U.S. economy and financial sector.
First, I wanted to say good afternoon and thank you to all
the witnesses for agreeing to appear before our subcommittees.
Our first panel includes the Federal regulators with
primary jurisdiction over this complex subject matter and our
second panel includes two sovereign wealth funds and a foreign
pension fund. I should note that this is the first time these
kinds of funds have testified before a congressional committee.
We will be limiting opening statements to the chairs and
ranking members of the two subcommittees. Without objection,
all members' opening statements will be made a part of the
record.
At this point, I also want to give general leave if there
are other statements from any interested parties that Members
would like to enter into the record, without objection, that
will be granted.
I yield myself 5 minutes.
Too often these days when most Americans, Members of
Congress included, hear the term ``sovereign wealth fund'' or
``foreign investment,'' they are likely to conjure images of
unfriendly foreign governments attempting to take control of
U.S. companies. This vision is easily propagated through one-
sided media reports, and in some cases, overreaction by many,
including Members of Congress.
We tend to focus our attention on more controversial deals,
such as the defunct 2005 Dubai Ports' deal or the China
National Offshore Oil Corporation's attempt to acquire Unocal.
We do not hear much about the run-of-the-mill, relatively
small dollar sovereign fund investment in companies like
Motorola and Home Depot that take place on a daily basis and
provide much-needed capital for the American economy.
In 2007, foreign investors invested $414 billion into
purchasing stakes in U.S. companies, a 90 percent increase over
2006, which represented one-fourth of all the announced deals
for 2007.
Where would our economy be right now without these deals?
Where would our economy go if these investments were taken
away?
As we know, the subprime mortgage crisis has caused a
significant strain on U.S. financial institutions, and it has
led a number of large banks to seek injections of foreign
capital.
In November of 2007, the Abu Dhabi Investment Authority
announced a $7.5 billion investment in Citigroup, and in
December of last year, Temasek announced a $4.4 billion
investment in Merrill Lynch.
These are the kinds of high profile investments that raise
questions, especially when we see several of them occurring
over a couple of months, and our questions become more
punctuated by the many misconceptions about foreign wealth
funds, what they are, what they do, and how they are monitored.
Our primary goal today is to answer these questions, to
educate members, and to begin a factual substantive dialogue on
the issues surrounding foreign investment in the United States
and sovereign wealth funds in particular.
For these purposes, I think we have two outstanding panels
and an opportunity to learn from some of the best players in
international investment. I look forward to a vigorous
discussion.
I will now recognize the ranking member of the Subcommittee
on Domestic and International Monetary Policy, Trade, and
Technology, Mr. Paul, for 5 minutes.
Dr. Paul. Thank you, Mr. Chairman. Mr. Chairman, many
Americans have expressed concern over the growing role played
by sovereign wealth funds in the U.S. economy. Such fears are
to a large extent misplaced, as we should be more concerned
with the underlying causes that have allowed sovereign wealth
funds to accumulate as much capital as they have.
The two major types of sovereign wealth funds are those
which are funded by proceeds from natural resources sales and
those funded by accumulation of foreign exchange.
The former category includes sovereign wealth funds in
Saudi Arabia, Kuwait, and the UAE. Flush with dollars due to
the high price of oil, they are looking for opportunities to
make that money work for them. The high price of oil is due in
large part to our inflationary monetary policy.
We have literally exported inflation across the globe,
spurring malinvestment and a subsequent commodities boom.
The second major category of sovereign wealth funds
includes China's sovereign wealth fund, which has the potential
to draw on China's more than $1 trillion in foreign exchange
reserves. Because of China's current account surplus, it
continues to accumulate foreign exchange. Much of this is due
to the United States' persistent current account deficit.
Inflationary monetary policy and a desire to stimulate the
economy at all costs has led us to become the world's largest
debtor, and this debt must be eventually repaid.
The current account deficit has come about because our
economy does not produce enough capital goods to satisfy the
wants of our foreign creditors. Tired of holding increasingly
worthless dollars, it is only natural that our creditors would
want to purchase tangibles, which in the present case are
stakes in American companies.
Rather than bemoaning the fact that foreign governments are
using their dollars to purchase stakes in American companies,
we should welcome the stability that such investment is
bringing to our economy.
While I am as reluctant as anyone in this room to involve
any government in any sort of intervention in the market, the
fact remains that without injections of capital from foreign
wealth funds, the results of the subprime crisis would have
been far worse for many financial firms.
Even now we read that Citicorp, despite the massive funding
it has received from sovereign wealth funds, is in danger of
collapse until it receives additional funding.
I have always been a staunch advocate of abandoning our
loose monetary policy and facing the consequences now, rather
than continuing easy money in the hopes of never having to face
a recession.
Now that it is clear that decades of Federal Reserve
monetary manipulation have led to a severe recession, the
thought of sovereign wealth funds investing in the financial
sector holds far more appeal than that of a complete collapse
of major industry players which would cause catastrophic
effects throughout the economy.
Sovereign wealth funds are a necessary consequence of
fiscal and monetary policies which have left us overextended.
Actions to stifle the operations of sovereign wealth funds and
corresponding retaliatory actions by foreign countries could
have the same detrimental effect on the economy as the trade
wars begun after the passage of the Smoot-Hawley Tariff Act of
1930.
Rather than take actions to limit or prohibit the actions
of sovereign wealth funds, I would urge my colleagues to take
action to end our inflationary monetary policy.
I yield back.
Chairman Gutierrez. I now recognize, for 5 minutes, the
chairman of the Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises, Chairman Kanjorski.
Chairman Kanjorski. Mr. Chairman, good afternoon. We meet
today at this joint hearing to learn more about foreign
government investment in the United States. We will in
particular focus on the tremendous growth of foreign wealth
funds' investment in our economy.
This hearing also represents the first time that sovereign
wealth funds have appeared before a congressional committee.
Sovereign wealth funds currently maintain anywhere from $2- to
$3.2 trillion in assets globally.
By 2015, some estimate that this figure will reach $12- to
$15 trillion. Since 2005, 12 sovereign wealth funds have been
created and approximately 40 such funds exist today.
Over the last 11 months, sovereign wealth funds have
additionally invested more than $69 billion in U.S. financial
institutions. Because these funds are growing so rapidly, both
in number and in size, today's hearing comes not a moment too
soon.
Currency reserves and profits from commodities are the two
primary sources of revenue for foreign wealth funds. The trade
imbalances we have created, particularly with China, all but
guarantee that the growth of these funds will continue. Couple
that reality with the record high price of oil and the picture
becomes even clearer; continued foreign investment in the U.S.
economy is here for some time to come.
As we begin, I want to welcome our panelists who represent
foreign government investors, including funds from Norway and
Singapore, as well as Canada's Pension Board.
We are pleased that you have stepped forward. Today, we can
begin a dialogue with you and hopefully other sovereign wealth
funds will step forward in the future to do the same.
As we proceed today, everyone should understand how our
actions have contributed to the growth of sovereign wealth fund
investment in the United States. We created the huge trade
imbalances that bolster other governments' currency reserves
and enable them to invest in our economy.
Similarly, our dependence on foreign oil and our resistance
to adopting a sustainable energy policy has made other
governments rich with our dollars and allowed them to purchase
shares in our companies.
Finally, our national savings rate has been negative in
recent years. Although we created these market conditions, we
must now take an active role in seeing to it that foreign
governments invest with a fair degree of transparency,
predictability, and good governance, and do so with an eye
toward promoting economic interest as opposed to strategic or
political goals.
Without question, we now live in a global economy, but the
national security and the national interest of the United
States must always remain paramount. Governments generally act
in their own best interest. In considering our best interest,
we cannot afford to assume that all foreign governments are
merely rational economic actors seeking to maximize profits.
This principle may be true in many or even most cases.
Governments have strategic interests, too. It is a geopolitical
reality. The question becomes: Are they really acting on those
strategic interests when investing in American companies?
Merely asking questions here today does not make one a
protectionist or an alarmist. Seeking to understand the
operations of sovereign wealth funds does not make us fearful
of or hostile to foreign governments.
We are not overreacting by conducting this hearing, as some
might want to suggest. Rather, we are opening an important
conversation and fulfilling our constitutional duty to regulate
foreign commerce.
Ultimately, we may decide that developments in this sector
warrant the adoption of new laws or regulations. I want all of
the witnesses to know that I have an open mind on these
matters. Your comments today will help us to determine the best
course of action going forward.
In closing, I look forward to hearing the panelists'
thoughts on these matters. I want to thank each of you for
appearing. Your views will help us to understand where we are
and where we are going. We must find a way to promote efficient
and viable capital markets in a global world while safeguarding
American sovereignty.
Thank you, Mr. Chairman.
Chairman Gutierrez. You are welcome, and thank you.
We will now recognize for 5 minutes Congressman Royce,
representing Subcommittee Chairwoman Pryce.
Mr. Royce. Thank you. I will be very short, Mr. Chairman,
but I appreciate your holding this hearing.
We have all seen the media coverage of the recent infusions
of cash into some of our struggling financial institutions.
Citigroup, UBS, Morgan Stanley, and Merrill Lynch have all been
on the receiving end of much-needed support from sovereign
wealth funds, and this has been over the last 6 months.
I think it is worth noting the impact that these
investments have had on these cash strapped financial
institutions during this tumultuous period in our capital
markets.
This afternoon's oversight hearing gives us an opportunity
to explore the issue further. I welcome that opportunity.
Considering the attention garnered by these funds, I
believe it would be beneficial for all parties if these funds
consider the adoption of the best practice standards currently
being devised by the IMF, and I would like to commend Mr.
Skancke and Norway's willingness to openly operate their Fund
in a transparent and publicly accountable manner.
However, I would caution against legislative proposals
which may lead us down the road towards investment
protectionism. I believe such a move has the potential to
hinder U.S. economic growth and could hinder job creation in
this country.
It is critical that we convey a consistent message of
openness to foreign investment. Additionally, we presently have
a system in place to investigate potential national security
threats resulting from foreign investment transactions. CFIUS
allows us to fully scrutinize these deals without unnecessarily
limiting the benefits of an open society.
In a global economy, capital will and should flow freely.
Unnecessary constraints on foreign capital will only serve to
increase the cost of existing capital and may in fact
discourage future foreign investment in our economy throughout
the years ahead.
I again thank you, Chairman Gutierrez and Chairman
Kanjorski, and I look forward to hearing from our two panels of
witnesses.
Chairman Gutierrez. Thank you very much. We will now yield
5 minutes to Full Committee Chairman Barney Frank.
The Chairman. Thank you, Mr. Chairman. I am very pleased we
are having this joint subcommittee hearing on this important
issue.
I have been asked from time to time what I think about
sovereign wealth funds. To some extent, that is like asking me
what I think about countries. Some I like a lot, some not so
much. The fact is that sovereign wealth funds are reflections
of their countries; some are fine and some make me nervous.
Let me begin by expressing some agreement with the
gentleman from Texas on the issue that the reason we are here
is primarily problems in the American economy. We would differ
about what caused them. We are here because of problems in the
American economy because decisions made in America,
particularly in the financial community, created needs that
sovereign wealth funds have filled.
The best defense against sovereign wealth funds having
undue influence is for American financial companies not to
screw up, so they do not need the money.
Given that they need the money, I am glad that it came. We
would be worse off if there had not been those injections of
funds.
Having said that, that does not mean there are not reasons
for us to be careful. Again, it varies. There are different
countries with different motives.
On the whole, the evidence has been that people have
invested to try to make money. One of the things we need to
avoid doing is making the assumption that when foreigners
invest, they are all-wise, all-knowing, and are going to outfox
us.
The last time we had this round of concern over foreign
investment was when the Japanese, about 20 years ago, decided
to go and buy trophy properties in the United States and it
became the best foreign aid for the United States that we had
in a very long time. They bought Rockefeller Center, Pebble
Beach, and a whole range of other properties, and paid way too
much for them. That was a mistake.
Of course, the most recent current example is the brilliant
move by the Chinese in buying into Blackstone at exactly the
wrong moment. We should not assume that these clever foreigners
are always going to outfox us.
It is clearly something we want to look at. I do have one
suggestion and one other point, which is that I think this
committee can take credit on a bipartisan basis, because this
is a bill that passed the House under the Republican leadership
of the committee 2 years ago, passed it again in a bipartisan
way, and that is the establishment on a statutory basis of the
Committee on Foreign Investment in the United States. It has
already proven its worth in the 3M case.
We are often told, oh, you guys always come in after the
fact. Here, the Congress anticipated the problem. We reacted
because we did not want to see the Dubai Ports' thing be a
signal that we did not want money. We did not want it to have
that negative effect.
We put through legislation which I think works very well
and has worked very well.
I do have one proposal that has to be considered. There has
been some confusion. I got it wrong myself, about this 10
percent figure. There are people who think the CFIUS statute
sets 10 percent as the trigger. As I have since been reminded
by staff that I was mis-remembering this bill that I sponsored,
the 10 percent number is not in the bill; 10 percent is in the
regulations, and even there, not as a hard and fast figure, but
as an indicator.
Given that, however, I think we need to clarify it. As my
colleague from Virginia who has been working on this points
out, people get suspicious with 9.9 and 9.8 percent. In fact,
the way the law is written and even the way the regulations are
written, that does not get you out from under, but perception
is a big part of this. I think we need to clarify that in the
regulations, and one of the things we have to consider is
should we be more explicit that if it is a government owned
purchase, if it is a government purchase, will that
automatically trigger a higher degree of scrutiny?
I think that is not going to be rejectionist, but it does
seem to me that would reassure people that yes, we do
understand the difference between a country buying this and a
purely private set of investors. It does not mean that one is
always allowed and one is always prohibited. I think we should
be explicit, rather than the 10 percent, and if you do that,
maybe it is ``X'' percent lower for the private sector people.
With those things, I think we can go forward and do it.
My friend from Virginia is here. We have talked about this.
He has formed this taskforce. We have designated a member to
stand there, and I do not think he will be offended. We did get
some questions. What is this taskforce, and what is happening,
and are you people going to sort of fracture this?
Jurisdiction over this issue remains fully with this
committee. We have a cooperative relationship with the
gentleman from Virginia. I welcome his input and the other
members. This does not mean that we are going to be dealing
with this in a split-up fashion.
We will continue to do this in a reasonable way. I do urge,
however, that with regard to that 10 percent, we do some
clarification and we make it clear that it is not as firm as
people think it is, and particularly, that you do not avoid
scrutiny by going slightly under 10 percent, and also that we
make it clear as we look at it, the fact that it is owned by a
government is reason to be more skeptical at the outset or at
least to take more of a look than if it was owned by a purely
private entity.
Thank you, Mr. Chairman.
Chairman Gutierrez. Thank you, Mr. Chairman. Given those
very kind, generous, and warm remarks about the taskforce
headed by Congressman Moran, I ask unanimous consent that
Congressman Moran be permitted to participate in today's
hearing. Hearing no objection, it is so ordered.
First, on our panel is Mr. David McCormick. Mr. McCormick
is the Under Secretary for International Affairs at the U.S.
Department of the Treasury.
Next, we have Mr. Ethiopis Tafara. Mr. Tafara is the
Director of the Office of International Affairs at the
Securities and Exchange Commission.
And finally, we have Mr. Scott Alvarez. Mr. Alvarez is
General Counsel at the Federal Reserve Board.
Welcome to you all. Mr. McCormick, you may proceed.
STATEMENT OF DAVID H. McCORMICK, UNDER SECRETARY FOR
INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE TREASURY
Mr. McCormick. Thank you, Chairman Gutierrez, Chairman
Kanjorski, Ranking Member Paul, and Congressman Royce, and also
Chairman Frank. It is great to be here today. Thank you for the
invitation.
I very much appreciate the opportunity to be able to speak
to this committee about sovereign wealth funds. At Treasury, we
have been focused on this issue for more than a year now. I am
pleased to be able to share some of our views with this
committee.
While the term ``sovereign wealth fund'' was coined a few
years ago, the funds it describes are not new. Sovereign wealth
funds have existed in various forms for decades, in places as
diverse as the Central Pacific, Southeast Asia, Europe, and the
Persian Gulf.
At the turn of the century, just 8 years ago, there were
about 20 sovereign wealth funds with worldwide assets in the
area of several hundred billion dollars.
Since that time, there has been a rapid increase in both
the number and the size of sovereign wealth funds. This has
been fueled by high commodity prices and the rapid accumulation
of official reserves, and 20 new funds have been created since
2000, more than half of those, as mentioned, since 2005. Today,
there are nearly 40 funds with total assets between $2- and $3
trillion.
In contrast to traditional reserves, which are typically
invested for liquidity and safety, sovereign wealth funds seek
a higher rate of return and are invested in a wider range of
assets. They emphasize expected returns over liquidity and can
take the form of stakes in U.S. companies as has been witnessed
in recent months.
Sovereign wealth fund assets are currently fairly
concentrated. By some market estimates, only a handful of funds
account for the majority of total sovereign wealth assets, and
roughly two-thirds of sovereign wealth fund assets are
commodity fund assets, as was mentioned earlier, while the
remaining one-third are non-commodity funds transferred from
official reserves.
While sovereign wealth fund assets may be small relative to
the $190 trillion of stock in global financial assets, with
roughly $62 million held by private institutional investors,
they are larger than the total assets under management in hedge
funds or private equity funds. They are growing at a much
faster rate.
The rise of sovereign wealth funds clearly has implications
for the international financial system. They bring both
benefits as well as some potential concerns.
As the President reaffirmed in his May 10, 2007, statement
on open economies, the United States is committed to open
investment and advancing open markets at home and abroad.
The U.S. economy benefits enormously from open investment,
including the investment from sovereign wealth funds. Those
benefits come in the forms of jobs, R&D spending, and higher
wages.
Over 5 million Americans, 4.6 percent of the private
sector, are directly employed by foreign owned firms with U.S.
operations. These 5 million jobs pay 25 percent higher
compensation on average than U.S. firms and another roughly 5
million jobs are indirectly supported by this foreign
investment.
Foreign firms contributed about 6 percent of U.S. output,
and 14 percent of U.S. R&D spending in 2006, and in that same
year, foreign owned firms reinvested over half of their income,
that is $71 billion, back into the U.S. economy.
The case for open investment is strong.
Sovereign wealth funds are an important part of this
investment flow. The United States can continue to benefit from
sovereign wealth funds to the extent that this investment is
economically and not politically driven.
As many observers have pointed out, sovereign wealth funds
have the potential to promote financial stability and they
generally, over that 50-year period, have had a track record of
stable long-term investment and they provided significant
capital to the system.
Their long-term investment horizon should enable them to
maintain their strategic asset allocations in periods of short-
term volatility.
None of this is meant to say that there are not some
potential issues to consider. Sovereign wealth funds represent
large concentrated and sometimes non-transparent positions in
financial markets, with the potential to actually move markets.
Actual or perceived shifts in their asset allocations could
cause market volatility.
There are two specific sets of issues to consider. First,
as is the case with other types of foreign investment in U.S.
companies, a small number of sovereign wealth investments in
U.S. companies may raise legitimate national security concerns.
Second, sovereign wealth funds raise a number of non-
national security related issues about the larger role of
foreign governments in markets.
For example, through the inefficient allocation of capital,
the perceived unfair competition with private firms, or the
pursuit of strategic over return oriented investments,
sovereign wealth funds could potentially distort markets.
These investment policy concerns also have the potential to
provoke protectionist responses from recipient governments.
It is my view that this protectionist sentiment stems
partly from a lack of information and understanding about
sovereign wealth funds, which is partly due to the lack of
transparency and clear communication on the part of the Funds
themselves.
Clearly, better information sharing and understanding on
both sides of the investment relationship is therefore needed.
Chairman Gutierrez. Will the gentleman please wrap up? Your
5 minutes have expired.
Mr. McCormick. Yes, I will. Thank you.
Let me just say briefly, there are a number of policy
responses to this issue. One is the implementation of the law,
the CFIUS law, that the chairman mentioned. A second is a set
of multilateral efforts through the IMF and the OECD, and then
third is a set of actions within the government monitoring
among the different agencies to improve our understanding and
continually be able to report to Congress on the development of
sovereign wealth funds.
Thank you.
[The prepared statement of Mr. McCormick can be found on
page 134 of the appendix.]
Chairman Gutierrez. Thank you. Let me advise the witnesses
that there is a little light up there. Green means to start,
yellow means that you have 30 seconds left, and red means to
stop. You have 5 minutes. I will tap very lightly up here as an
extra reminder. We want you to finish your thought, and not be
in a rush.
Mr. Tafara, please, you are recognized for 5 minutes.
STATEMENT OF ETHIOPIS TAFARA, DIRECTOR, OFFICE OF INTERNATIONAL
AFFAIRS, U.S. SECURITIES AND EXCHANGE COMMISSION
Mr. Tafara. Mr. Chairman, thank you for inviting me to
testify on behalf of the Securities and Exchange Commission on
the subject of foreign government investment in the U.S.
economy and financial sector.
I am going to say a few words about the impact of sovereign
wealth funds on the U.S. capital market and SEC regulations
regarding these entities.
Today, sovereign wealth funds hold by some estimates more
than $2.5 trillion in assets. Some projections estimate that
their size will increase fivefold by the middle of the next
decade, quite possibly making these funds collectively and
individually the largest shareholders in many of the world's
biggest companies.
Sovereign wealth fund investment in the United States is
not new. Sovereign wealth funds based on foreign exchange
reserves have always tended to invest abroad since their
capital was based on foreign currency.
One thing that is new, however, is the size of their
investment in the equity markets for public companies and their
concomitant focus away from bond markets.
Sovereign wealth investment in the U.S. capital market
offers definite benefits. Foreign investors, including
sovereign wealth funds, that invest in the United States can
offer U.S. companies a lower cost of capital and a more liquid
market for their securities than might otherwise be available.
However, sovereign wealth funds raise a number of concerns
for regulators and other market participants. Some of these
concerns mirror those raised by large funds, generally.
In particular, by combining the foreign exchange reserves
brought about by thousands or millions of international
transactions, an investment fund can wield enormous clout on a
market. This creates opportunities for market manipulation and
where the entity owns enough shares of an issuer to control it,
it possibly raises issues with respect to insider trading as
well.
It also raises classic corporate governance issues
particularly in the case of creeping takeovers where minority
shareholders are unaware of a pending takeover and suddenly
find the value of the shares reduced once the takeover is
complete.
Sovereign wealth funds also raise other issues. Because the
fund manager is the government, it may have different and more
complex incentives than those that normally drive private
market participants to make decisions.
This is an issue that Chairman Cox has touched on in the
past, the concern that sovereign wealth funds, because they are
national entities, may not necessarily act like ordinary market
participants, and therefore may have a distorting effect on a
market.
Sovereign wealth funds are not necessarily transparent in
their motivations or operations. This is particularly true when
sovereign wealth funds are linked to a nation's foreign
exchange reserves.
As you are all aware, exchange rate policies traditionally
are closely tied to matters relating to national sovereignty,
trade policy, and a nation's economy.
The point here is that sovereigns are not just concerned
about making a profit. They have other national objectives as
well.
The SEC's mandate is focused on investor protection,
maintaining fair and orderly markets, and capital formation.
Consequently, the SEC has in place several rules that require
disclosure of sovereign wealth activities that address many of
the concerns we hear voiced here and in other markets.
For example, the SEC requires that any beneficial owner
holding 10 percent or more of an issuer's equity securities
disclose their ownership and any change in this interest.
Likewise, the SEC requires beneficial owners of 5 percent
or more of an issuer's equity securities to disclose the
ownership, the source and amount of funds being used to
purchase the securities, and their future intentions with
regard to this ownership interest.
Finally, the SEC requires fund managers to exercise
investment discretion over $100 million or more of SEC
registered securities to file a quarterly disclosure of the
fund's long holdings of these securities, as well as whether
they have exercised voting authority over these shares.
Of course, such requirements are only as strong as the
mechanisms we have in place to enforce compliance. In this
regard, the Commission has the power to pursue sovereign wealth
funds that violate U.S. securities laws.
Neither the United States nor international law shields
foreign countries' commercial activities in the United States
from the jurisdiction of the U.S. courts. The SEC has a strong
track record investigating cross border violations of our
securities laws, which we do working closely with our foreign
counterparts.
The issue that arises with sovereign wealth funds is the
possibility that the same government from whom we seek
assistance might also be the controlling person behind the
entity under investigation.
I should note that the concerns about sovereign wealth
funds are not just concerns in the United States, but they are
concerns in other jurisdictions as well.
Currently, the IMF, the OECD, and the European Commission
are discussing best practices for sovereign wealth funds that
in many ways mirror our own disclosure requirements.
I find these international developments comforting because
I believe that at least with regard to the disclosures that
sovereign wealth funds should make, there appears to be
widespread consensus that we are on the right track.
Indeed, I would argue that we here in the United States are
ahead of the curve on this, given that these disclosures are
not voluntary but mandatory, at least for a sovereign wealth
fund of any size.
Finally, sovereign wealth funds historically have been
long-term investors, and many of their recent investments in
troubled industries seem to follow this trend.
We should be aware that if we prohibit sovereign wealth
funds from investing in our market for fear they might
introduce market distortions, we might actually end up doing
precisely this ourselves through the prohibition, that a better
approach is to address the underlying issues of transparency,
independent regulation, de-politicizing of investment
decisions, and conflicts of interest.
Thank you for inviting me to appear today and I would be
happy to answer any questions.
[The prepared statement of Mr. Tafara can be found on page
155 of the appendix.]
Chairman Gutierrez. Thank you very much.
Mr. Alvarez, you are recognized for 5 minutes.
STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Alvarez. Chairman Gutierrez, Ranking Member Paul, and
members of the subcommittee, I am pleased to be here today.
I will focus my remarks on a narrow issue, the thresholds
that trigger review by the Federal Reserve and the other
Federal banking agencies of investments by sovereign wealth
funds in U.S. banking organizations.
As a general matter, investments by sovereign wealth funds
are subject to the same statutory and regulatory thresholds and
requirements for review by the Federal banking agencies as
apply to investments by other domestic and foreign investors in
U.S. banking organizations. These requirements are established
primarily in two Federal statutes, the Bank Holding Company Act
and the Change In Bank Control Act.
The Bank Holding Company Act requires any company to obtain
approval from the Federal Reserve before making an investment
in a U.S. bank or bank holding company, if the investment meets
certain thresholds.
In particular, the Bank Holding Company Act requires Board
review when a company acquires ownership or control of 25
percent or more of any class of voting securities of a bank or
bank holding company, control of the election of a majority of
the board of directors of the banking organization, or the
ability to exercise a controlling influence over the management
or policies of the bank or bank holding company.
In determining whether an investor may exercise a
controlling influence over the management or policies of a U.S.
banking organization and thereby trigger formal review of the
investment, the Board considers the size of the investment, the
involvement of the investor in the management of the banking
organization, any business relationships between the investor
and the banking organization, and a number of other relevant
factors.
The Bank Holding Company Act itself presumes that an
investor that controls less than 5 percent of the voting shares
of a banking organization does not have a controlling influence
over that organization, and based on its experience, the Board
generally has not found that a controlling influence exists if
the investment represents less than 10 percent of the
organization's voting shares.
The Bank Holding Company Act sets forth the standards that
the Board must consider in acting on an application by a
company to acquire a bank or bank holding company. Those
standards require review of the competitive, supervisory,
convenience and needs, financial and managerial effects of the
transaction.
The managerial standard includes consideration of the
competence, experience, and integrity of the investor.
Upon the acquisition of control of a U.S. bank or bank
holding company, the investing company would by statute become
subject to supervision by the Federal Reserve, including
examination, reporting, and capital requirements, as well as to
the Act's restrictions on the mixing of banking and commerce.
Importantly, the restrictions of Sections 23A and 23B of
the Federal Reserve Act, which impose quantitative and
qualitative limitations on transactions between U.S. banks and
their affiliates, would apply to transactions between the U.S.
bank and any company, including a sovereign wealth fund, that
controls a U.S. banking organization.
These restrictions help assure that the U.S. bank does not
engage in unsafe or unsound practices for the benefit of the
parent company or any other affiliate.
Investments by sovereign wealth funds that do not trigger
the prior approval requirement under the Bank Holding Company
Act may nevertheless require review by a Federal banking agency
under the Change in Bank Control Act. Prior review under that
Act is generally required for any acquisition of 10 percent or
more of the voting securities of a U.S. banking organization.
The Change in Bank Control Act also establishes specific
standards that must be considered, and those standards focus on
the competitive effects of the proposal, the managerial
competence, experience, integrity, and financial strength of
the acquirer, certain informational requirements, and whether
the transaction would result in an adverse effect on the
Deposit Insurance Fund.
Unlike the Bank Holding Company Act, however, the Change in
Bank Control Act does not impose any activity limitations or
any ongoing supervisory requirements on the owners of banks.
The recent investments by sovereign wealth funds in U.S.
financial institutions have remained below 10 percent, and
often below 5 percent, of the voting equity of the banking
organization.
Consequently, these investments have not triggered the
formal review requirements of either the Bank Holding Company
Act or the Change in Bank Control Act.
Sovereign wealth funds have been a beneficial source of
capital for U.S. financial institutions. Over the past several
months, sovereign wealth funds have provided equity capital to
U.S. financial firms that accounts for a significant portion of
the total additional capital raised by these companies during
this recent period of stress.
All of these investments, as well as similar investments
made by U.S. private equity firms, have been structured as
passive investments that do not trigger the thresholds that
require review.
If, however, the investment were structured to represent
control, it would be reviewed by the Federal banking agencies
in accordance with the statutes that Congress has enacted.
Thank you very much. I would be happy to answer any
questions you might have.
[The prepared statement of Mr. Alvarez can be found on page
61 of the appendix.]
Chairman Gutierrez. I thank the witnesses for their
presentations.
Mr. Tafara, in your testimony, you referred to
``significant policy issues that are raised by foreign
government ownership of a U.S. bank.'' How are those issues
different or mitigated by a separate corporate structure like a
sovereign wealth fund owning a U.S. bank?
I am sorry. I mean that for Mr. Alvarez.
Mr. Alvarez. If the investment is made through a sovereign
wealth fund, a corporation owned by the government and it is
made in a banking organization, that would be subject to review
by the Federal Reserve or one of the other banking agencies if
it reached various thresholds.
Those investments made directly by a foreign government
generally are not subject to review under the banking laws.
There is an extra level of transparency and review potential
for investments made through sovereign wealth funds.
Chairman Gutierrez. You think it is more?
Mr. Alvarez. I think there is more protection when the
investments are made through a sovereign wealth fund.
Chairman Gutierrez. What is the difference for you?
Mr. Alvarez. The difference for me is that the Bank Holding
Company Act only gives us authority to review transactions made
by a company. A foreign government is not a company, so it is
not subject to the Bank Holding Company Act.
Sovereign wealth funds are all incorporated or a
partnership or--
Chairman Gutierrez. Do you think there should be such a
distinction?
Mr. Alvarez. I am not quite sure if we want to effect
foreign policy through the Bank Holding Company Act. I
understand the sensitivity in crafting the definition as
Congress has crafted it so far.
Chairman Gutierrez. Interesting. Thank you.
Mr. McCormick, by now, we are all aware of the major
sovereign wealth fund investments that were made in U.S.
financial institutions in late 2007. After that surge we saw in
December, reports indicate that the value of U.S. acquisition
of foreign buyers dropped to $25.4 billion in the first 2
months of 2008, and that is down 50 percent from a year ago.
Foreign buyers dropped to $11.1 billion in transactions in
the United States in January, the lowest monthly total since
May 2006.
As a percentage of overall U.S. deal volume, acquisition by
overseas buyers has shrunk. In January and February, the value
of U.S. acquisition by foreign buyers accounted for 15.8 and
15.3 percent of U.S. deal volume, respectively. This compares
to last year when it constituted 23 percent.
In light of these numbers, are you concerned that we
actually may be facing a substantial drop-off in foreign direct
investment, and if a drop-off is taking place, what do you
think is the cost?
Mr. McCormick. Mr. Chairman, I think if you look at the
broader U.S. investment numbers into the United States over the
past--
Chairman Gutierrez. Mr. McCormick, could you pull the
microphone just a little bit closer? Thank you.
Mr. McCormick. If you look at the data over the last year
in terms of the investment numbers, in all asset classes and in
all foreign investment, I think you would see that there has
been a pretty healthy investment throughout the 12-month
period.
In the period of August/September, we saw a pretty
significant drop-off in the investment data, which then
recovered and we had strong months in October and November and
a little bit of a downturn in December.
There has clearly been some shifting that has taken place
between different asset classes. In other words, whether
foreign firms are investing in other firms or equities or
treasuries, the overall investment numbers in the United States
remain strong year over year.
Chairman Gutierrez. Mr. Tafara, you indicated that when a
fund manager or business owner is a government, it may have
different incentives than those that normally drive private
sector participants to make decisions.
This really goes to the heart of many concerns with foreign
sovereign investments in the United States. You asked the
question in your testimony, ``If government controlled
companies and investment funds increasingly direct the
investment of business and capital, what will be the effect on
the pricing of assets and the allocation of resources?''
I would like you to answer your own question. What are the
potential distorted effects of government controlled
investments?
Mr. Tafara. For me, what becomes important in that
situation is that there be transparency with regard to
motivations of a sovereign wealth fund in making an asset
purchase.
The manner in which I would answer my question is to say
that provisions like Section 13 of the Securities and Exchange
Act become important because they require that there be
disclosure as to what your motivations are with respect to a
stake that you take in a company, and that transparency can
provide a sense of comfort as to what the sovereign wealth fund
intends for a particular company.
Potential distortions: I think the distortions that people
like to talk about are the worst-case scenario that they like
to present, that a sovereign takes a stake that it holds in
multiple U.S. companies and dumps them.
If you look at the size of sovereign wealth funds against
the market capitalization in the United States, it is pretty
small. We are talking about a couple of trillion, whereas
market capitalization in the United States is between $50- and
$60 trillion.
At the end of the day, that dumping would have some impact
upon the market, but I think you would find there is enough
liquidity there that others would come and pick up what would
be a fire sale, because the assets that are being dumped would
have value, despite the motivations of the sovereign wealth
fund.
Chairman Gutierrez. Thank you very much. Mr. Alvarez, we
will be following up with you. Mr. Bernanke is kind of busy
these days, so maybe we will take up some time with you.
I think it is a serious concern in distinguishing between a
government and a foreign investment entity owning an American
financial institution. I think we really should take a look at
that.
Thank you, Mr. Alvarez, for the candor of your answer.
Congressman Paul, you are recognized for 5 minutes.
Dr. Paul. Thank you, Mr. Chairman.
I have just a brief question for the panel and it is a
follow-up from my opening statement dealing with monetary
policy, just wondering how the panel feels about whether or not
this problem is much of our own making, and part of the system
of money that we follow.
When a country has a currency that is commodity-backed,
there is always a limit to the current account deficit because
you cannot keep exporting the currency. You run out of money.
You have to go back to work. Your prices drop. Then your
currency comes back in or real value comes back in. It is self-
adjusting.
The system that we have today is quite different,
especially for the country that is privileged to issue the
currency of the world, the reserve currency. We have had that
privilege. We have literally been given license to create money
out of thin air, export our money, and then eventually there is
an accumulation, and once there is a sense that the value of
the currency, the dollar, is going down, we best invest it more
wisely, and that is what we are facing, and that makes a lot of
people nervous.
In one way, it is a problem for some people, but in another
way, it is self-adjusting in a different manner, that those
dollars are coming back in and buying up hard assets.
The question I have is really when you think about this
problem, do you think about it as a consequence of a monetary
system or is it always just because we have overextended
ourselves and if we just have more regulation--I sort of sense
it is a big problem. We are dealing with a symptom and we think
if we adjust this with some regulations, and say we will pick
and choose, we are trying to do what the market could have done
in a much more orderly fashion.
I would like to see if I can get some comments on that
issue. Mr. McCormick?
Mr. McCormick. Congressman Paul, I would first of all begin
with the acknowledgement that sovereign wealth funds are just
one small sliver of a set of global imbalances which are driven
by a whole set of macroeconomic factors.
What we try to differentiate as we think about the policy
response to the fact that there are some root causes--both on
the commodity and the non-commodity side for the funds, for
example, on the non-commodity side, the lack of market driven
currencies in some countries around the world, namely China, is
one that is particularly noteworthy--from the fact that these
sovereign wealth funds exist, and these investment flows exist.
When we have thought about a policy response, recognizing
there is a whole set of macroeconomic policies and issues, the
policy response on sovereign wealth funds has been very much
targeted on the fact that these investment flows exist and will
continue to grow, and how do we best accommodate those, not
with regulation from our perspective, but in terms of a set of
voluntary best practices that would give some assurances around
the intent of that investment being commercially driven.
Dr. Paul. Would anybody else care to make a comment?
[No response]
Dr. Paul. I do not have any further questions.
Chairman Gutierrez. Thank you very much. Chairman
Kanjorski, you are recognized for 5 minutes.
Chairman Kanjorski. Thank you, Mr. Chairman.
I do not see enough gray hair to maybe remember what I am
going to refer to; do any of you remember the BCCI scandal? I
see that Mr. Alvarez does.
The reason I bring that up is I recall testimony some 20
years ago or more where Clark Clifford and Mr. Altman were
involved in controlling certain banks that were in a line of
ownership of foreign banks, and the banks that they were in
charge of were American banks.
We had before us one afternoon a former United States
Senator, for whom I had a great deal of admiration, Matt
Mathias, if you remember, from Maryland. He did not testify. He
just sat in the audience and listened.
Immediately after the hearing, he contacted me and wanted
to go to lunch with me. I had no idea why he would want to see
a lowly Congressman from Pennsylvania, but he did. We went to
lunch.
He said in a very nervous way, ``Congressman, I am
frightened to death; I do not know what to do. I am a director
of an American bank, and I have spent a considerable amount of
time, more than a year, and I cannot determine who owns the
bank that owns my bank or who appointed me director of my bank
or what banks my bank owns.''
I was listening to all the regulations, Mr. Alvarez, you
said the Federal Reserve had. The question is, how much work do
they do to follow that line of who does what, when, and where,
and under what circumstances?
Or are the powers you are referring to all new powers that
never existed 20 years ago?
Mr. Alvarez. The Bank Holding Company Act and essentially
what I outlined was enacted in 1956 and tightened up in 1970,
and then the Change in Bank Control Act is 1978.
You may recall, in BCCI, that the investors there
intentionally hid their ownership relationship from the
regulators. There was in fact an application filed with the
Federal Reserve. The true owners lied about their involvement.
That was not a flaw in the Act. That was an intentional attempt
to avoid--
Chairman Kanjorski. How was that corrected? Why could I not
do the same thing today?
Mr. Alvarez. Fraud is always a difficult thing to prevent,
and there is no law that can absolutely prevent fraud. We do
the best we can to follow-up on--
Chairman Kanjorski. Mr. Alvarez, you gave me the impression
when you were testifying that there was a methodology and a
process here that should make us all feel very secure that we
are not going to have a problem with sovereign wealth funds.
Yet, if they want to be devious, just like the BCCI problem,
they can be devious. They can accomplish many things.
Let me give you an example of what I am worried about: $69
billion has been invested in the last 9 months in American
financial institutions, forgetting other institutions.
We know that we have certain limitations on exercise of
power by banks. If you have more than 10 percent of the deposit
accounts in the country, you cannot buy additional banks to
gain greater than the 10 percent. You are limited. We do that
because we do not want one bank dominating all of the deposits
in the United States. I think that is good public policy.
Recently, you are probably aware of the fact that there has
been tremendous pressure by some large banking institutions in
the United States that are hitting that cap, that are making
the argument that they can grow, they do good business and they
do, and they want us to raise that cap.
Sometimes the pressures they put on us are to say well, if
you do not allow us to raise the cap, the State of Illinois is
not going to get economic funding for its progress, and the
chairman is going to be responsible for the loss of employment.
There is a great sympathy in the Congress to attempt to
accommodate.
What is going to stop us from seeing, when we go from $2
trillion in sovereign wealth funds to $15 trillion, a sevenfold
growth in a matter of a decade?
They are going to be so placed in the American market that
they are going to be able to say look, you are either going to
allow us to exercise more power, more influence, more control,
more ownership, or your financial institutions are going to
fail. Because, after all, your people have a negative savings
rate of 2 percent. You are not going to pick it up from
American citizens. You are going to pick it up from the foreign
countries and will that not happen, or is there not that
potential to happen?
What are we going to do to make sure there is not an abuse
of power, particularly from a strategic standpoint?
We make a very classic assumption in this country: Since we
are a capitalist nation, we believe that everybody is driven by
profit. Some countries are not driven by profit. They are
driven by political and national interests and security.
Now we are dealing directly with the funds of countries
that in some instances are adversaries of ours. If I were
China, I would put my sovereign wealth funds highly invested in
the energy field of the United States. I would buy as many
electric utilities as I could, and then at my own desire,
rather than sending an army over here some time in the future
or an airplane to do damage, I would just issue the order as
the owner of the electrical utility networks of the United
States to turn off the power.
What is going to stop them from doing that?
Mr. Alvarez. I obviously cannot speak to electric power
companies and how we will deal with that. I do have a lot of
faith in the backbone of Congress to stop things when there is
pressure.
I think in the banking area, one thing we can take comfort
in is that so far, the sovereign wealth funds have not taken
significant interest in any banking organization. They have not
taken positions that would allow them to shut off credit or
limit--
Chairman Kanjorski. That is not quite true. You know that
when we had bank failures, the FDIC went in and paid deposits
that were way in excess of $100,000 insurance in order not to
discourage foreigners from investing in American banks or
depositing in American banks.
What national banks failed in New York? We went in
literally with hundreds and millions of dollars to cover Middle
Eastern money deposits that were not covered under the Act. We
had no obligation. As a matter of fact, there was no power
except a political decision made in the United States that if
we failed to honor those deposits with insurance, we would not
get future deposits, and it could cause a disruption in the
investments in U.S. banks. Is that not correct?
Mr. Alvarez. Sir, if I could say two things on that. First,
that was not the result of foreign ownership of a bank. That
was because of deposits placed in the bank.
And second, Congress did address that situation and stopped
the FDIC from paying uninsured deposits by putting in place
depositor preference requirements, least cost resolution, and
other limitations that prevent that kind of resolution again.
Chairman Kanjorski. Before those protective laws were
passed or regulations made, it was expeditiously and
politically decided that we would act contrary to the law to
satisfy the need of retaining those deposits.
What I am saying is, do you not see the corollary, that if
we are trying to entice private individual funds and avoid our
own laws and regulations in the banking institutions, we sure
as hell are going to do it with government funds, or do you not
see that?
Mr. Alvarez. No. I see your point. I appreciate your point.
There are certainly costs that are associated with allowing
investments freely. There are benefits as well.
I think one of the things that is important for Congress to
do is consider both the costs and the benefits and try to
devise a system that they think is best.
Chairman Gutierrez. Thank you, Mr. Alvarez. The time of the
gentleman has expired. The ranking member of the full
committee, Mr. Bachus, is recognized for 5 minutes.
Mr. Bachus. I thank the chairman. I do believe this is a
very important hearing. There has been a lot of conversation
about foreign government investment in the financial services
industry and the U.S. economy as a whole.
What Mr. Alvarez said, I actually came down here to give
this statement because I did want at least a balanced approach
to this, and there are benefits.
The past few months, we have seen exceeding stress and
challenging times for both the U.S. economy and for the
financial services industry. During that time, we should never
forget this, we have had extraordinary infusions of capital
from sovereign investment funds and to some of our largest
banks.
What has that done? What is the result of that? The first
result, and I am actually going to read a statement instead of
ask questions, but the first result is that these banks have
shored up their capital reserves. That is nothing but a
positive.
Second, by increasing their reserves, we really have
enhanced the safety and soundness of our financial system.
I am very grateful that source of funds was available.
No one can disagree that the vitality of our financial
services sector is critical to the Nation's continued economic
growth.
These recent capital infusions given by the sovereign
wealth funds and the countries that administer them, it has
given them a vested interest, not only in the companies, but
more importantly, it has given them a vested interest in the
continuing health of the U.S. financial services industry and
the U.S. economy.
Like any investor, a sovereign wealth fund expects their
investments to succeed. It is in their economic self-interest
that U.S. industries in which they have invested continue to
grow and prosper.
It is in the interest of the United States and our economy
to welcome this investment. Foreign investment, whether from a
private investor who lives abroad, a publicly listed company
that trades on a foreign exchange, or from a sovereign wealth
fund, creates jobs in the United States and fosters economic
growth.
I can tell you as a Member of Congress who has Honda and
Mercedes in my District, and many of their workers, that
foreign investment has created very high-paying jobs in my
District.
Nonetheless, I would agree there are important questions
that we have to ask about the growth of these sovereign wealth
funds. We must ensure that we have policies in place that
prevent this investment, however welcome it is, from
compromising our national security. We must ensure that these
sovereign wealth funds play by the same rules that all large
investors play by when they invest in U.S. companies, and we
must ensure that sovereign wealth funds do not pursue purely
nationalistic or strategic economic objectives at the expense
of U.S. companies in which they invest.
We cannot forget that capital today is more mobile than it
has ever been in the history of the world, and that capital can
and will travel anywhere.
We must reserve the right to reject foreign investments
that compromise our national security or place us at an
economic disadvantage, but we must also avoid, and it is very
critical that we avoid creating an investment climate that is
hostile to legitimate foreign investment.
If we do, the world's capital will simply flow elsewhere.
Investments will be made outside the United States and jobs
created, perhaps with far more serious and harmful long-term
effects on our own economy.
The key principles must be transparency and fairness. We
should insist on equal treatment for U.S. investment, meaning
that we should be able to invest in other countries in the same
way they invest here.
To address the national security concerns, you will recall
Congress passed a strong bipartisan legislation last year,
written by this committee, to reform the process followed by
the Committee on Foreign Investment in the United States, or as
most of us refer to it, CFIUS.
We established a thorough mechanism to review proposed
investments for threats to national security and to ensure
greater government accountability in the approval process. That
has already been done.
Mr. Chairman, while remaining vigilant to potential threats
to our national security and our economy, our country must act
responsibly to maintain and encourage an environment that is
free and open to international investment. Our welfare and our
economy depends on it, so that all Americans can continue to
benefit from inflows of foreign capital that create jobs and
fuel economic growth here in the United States.
Thank you, Mr. Chairman.
Chairman Gutierrez. Thank you, Mr. Bachus. Are there any
other members who wish to ask questions of this panel before we
recess?
[No response]
Chairman Gutierrez. We have exactly 6 minutes. We will
recess, we will take our votes, and we will immediately come
back. We will be right back with you. Thank you.
[Recess]
Chairman Gutierrez. We will come to order. The Chair will
recognize, for 5 minutes, Mr. Jones. Congressman, please.
Mr. Jones. Mr. Chairman, thank you very much. I want to
thank you, and I want to thank the panel for waiting as long as
you have, and hopefully some other members wanted to ask you
questions.
This question that I would like to ask would be of Mr.
McCormick or Mr. Alvarez. I represent the Third District of
North Carolina, and I hear constantly from the people of my
District, why in the world is our Nation in such a bad
financial state that we continue borrow more and more money
from foreign governments?
I am looking at an article from CNNmoney.com, ``Feds to
Auction Another $60 Billion.''
Just very quickly before I get to the question, the Federal
Reserve announced Friday that it will auction another $60
billion in March as it continues to combat the effects of a
severe credit crisis.
It repeated a pledge to keep holding the auctions for as
long as necessary. The Central Bank said it will make $30
billion available to cash strapped banks at each of two
auctions on March 10th and 24th.
Last week, we had Mr. Zandi here, Dr. Mark Zandi, with
Moody's. I asked him quite frankly: How much longer can this
Nation continue to borrow money? I know we are talking about
foreign governments investing in banks and all this, and I
realize that.
The point comes to this: We owe China $447 billion and most
of that debt that China holds is in the way of Treasury notes.
There has to come a time that we get to a point of no return.
What the average taxpayer wants to know and by the way, I am an
average taxpayer, is how long do we keep going before the whole
economy of this country will just collapse?
I will ask Mr. Alvarez because the Federal Reserve is
putting these bonds out there, or I will ask Mr. McCormick.
There comes a time where I do not know how this country can
continue to float the way it has economically without--if you
let me use this as an example--a hole in the bottom of the
float and it sinks.
Mr. McCormick. Congressman, maybe I can take a quick shot
at it, giving you an answer, and then turning to my colleague
if he has something to add.
I think if you step back and look at the trends over the
last couple of years, two things would be notable. One, the
current account deficit has actually decreased fairly
dramatically over the last 12 to 18 months from roughly 6.8
percent of GDP to 5.1 percent of GDP. The deficit as a
percentage of GDP has also decreased quite significantly.
The projections going forward with the recent budget are
that the deficit will go back up as a percentage of GDP, but in
relative terms, it has decreased quite significantly.
That is one set of issues. The second set of issues is the
foreign investment coming into the United States, sovereign or
other. There are a number of reasons that is occurring.
The broader imbalances that Mr. Paul mentioned certainly is
part of it. The attractiveness of our investment climate is
another component of it, and Congressman, that is something
that I think we should celebrate, that foreign investment is
coming into the United States, it is investing in U.S. assets.
That is good for us. It is good for our prosperity.
Mr. Jones. Excuse me. Is the fact that China owns $447
billion of our Treasury notes, do you consider that an
investment?
Mr. McCormick. Yes, Congressman, I do.
Mr. Jones. What happens if China will not hold these notes
for 20 years, but instead decides in 5 years that they want to
sell those notes, and they want to play havoc with America's
financial markets? They could do that overnight.
Mr. McCormick. Congressman, they could. I think on the list
of owners of U.S. Treasuries, they are second or third on the
list. Japan is number one on the list. There are a number of
owners.
That is a validation, I think, in confidence in the United
States, and that is a very liquid market, as you know. There
are many buyers for it. China's interest is to invest in places
where it is going to get maximum return.
Mr. Jones. Mr. Alvarez, if you could, I have about 2
minutes. My time will be up. The issue is if we keep putting
all these bonds out there to be sold, billions here and
billions there, I would never argue with any economist or
people like yourselves, you are the professionals, but it has
been proven in the history books that great nations that have
to borrow money from foreign governments to pay their bills do
not long remain great nations, because what is going to happen
is that great nation is going to sink because its dollar has
very little value.
Mr. Alvarez. This is a debate that has gone on in this
country since Alexander Hamilton who believed that putting debt
out into the public actually gained the respect of others who
would then have an interest that would align with your
interest, so the self-interest of the investor and the country
would be aligned and helpful.
I would like to make one point if I could about the term
``auction facility'' that you referenced, the $60 billion that
the Federal Reserve is lending. That is not borrowing by us;
that is lending by the Federal Reserve to banks to help in the
short-term money market. It is a very different kind of thing.
I think the concerns you raised should not be directed in
that direction. I would be happy to talk with you more about
that at another time.
Mr. Jones. Thank you.
Chairman Gutierrez. Thank you very much. I thank the panel
for its patience. I am happy that you waited for us to come
back. I thank you so much. You are all excused. Thank you so
much.
We will be sitting the second panel. Thank you so much.
This is the second panel we have this afternoon. First on
our panel is Mr. Martin Skancke. Mr. Skancke is the director
general of the Asset Management Department of the Ministry of
Finance in Norway.
Next, we have Mr. Simon Israel, the executive director of
Temasek Holdings. Mr. Israel worked extensively in the Asian
Pacific region since the early 1980's with Sara Lee
Corporation. He currently serves as chairman of the Singapore
Tourism Board.
Third, we have Mr. David Denison. Mr. Denison is the
president and CEO of the Canada Pension Plan Investment Board.
Mr. Denison has 24 years of experience in the financial
services sector, including senior postings in the investment
consulting and mutual fund businesses in Canada, the United
States, and Europe.
And finally, we have Professor Matthew Slaughter. Professor
Slaughter is an associate dean of the MBA Program and Professor
of International Economics at the Tuck School of Business at
Dartmouth. He is also currently a research associate at the
National Bureau of Economic Research and a senior fellow at the
Council on Foreign Relations.
I welcome you all to the hearing. Mr. Skancke, you are
recognized for 5 minutes.
STATEMENT OF MARTIN SKANCKE, DIRECTOR GENERAL, ASSET MANAGEMENT
DEPARTMENT, NORWEGIAN MINISTRY OF FINANCE
Mr. Skancke. Thank you very much, Mr. Chairman. Thank you
for the invitation to address this distinguished committee on
issues related to sovereign wealth funds and their investments
in the United States.
The Norwegian Government Pension Fund is a large global
investor with assets around $380 billion. We are adding about
$1 billion per week in new funds to this portfolio.
One-third of the portfolio, about $125 billion, is invested
in bonds and equities in the U.S. market. The United States is
by far the largest recipient country for our investments.
The Fund has a twofold purpose of smoothing out the
spending of volatile revenues, and at the same time, acting as
a long-term savings vehicle, allowing the Norwegian Government
to accumulate financial assets in order to help cope with large
future financial commitments associated with an aging
population.
To effectively shield the non-oil economy from the effects
of a volatile flow of foreign currency, earnings from the oil
sector, the Fund has only invested abroad.
The management of the Fund is based on a few basic
principles. First, the Fund is a pure financial investor with
non-strategic holdings. The objective of the Fund is to
maximize financial returns.
There are clear lines of responsibility between the
Ministry of Finance's former owner of the Fund and the Central
Bank as operational manager. There is a high degree of
transparency in all aspects of its purpose and operation.
The equity portion of the Fund is in the process of being
increased to 60 percent from 40 percent previously. The rest is
invested in bonds, including real estate in the Fund's
strategic benchmark that is under consideration.
We believe that sovereign wealth funds are perhaps
particularly suited to contribute to stability in the
international financial markets. They typically have a long-
term horizon for their investments. They are not leveraged.
There are no imminent claims for withdrawal of funds in
turbulent markets, as we have seen recently.
Turning to the question of transparency, which is very
topical at the moment, we believe that transparency has several
benefits. It is a key tool in building trust, both domestically
and internationally. It provides a disciplinary effect on fund
management, and it may in itself contribute to stabilizing
international financial markets.
We, therefore, support the efforts of the IMF to establish
a set of best practices for funds in this area.
However, transparency is a very abstract concept, and we
need to have a more granular approach if we are to make
progress in this area.
It may be useful to distinguish between different areas of
transparency. Transparency with respect to governance
structure, who are the ultimate owners, who makes investment
decisions, and what are the arrangements for audit,
supervision, and control.
Investment objectives: What is the purpose of the Fund, the
time horizon, the rules governing allocation of withdrawals,
and the investment strategy and implementation.
Obviously, the last category will be the most difficult to
address, but even transparency about governance structure and
investment objectives should go a long way towards alleviating
concerns about sovereign wealth fund investments, and claims
for increased transparency has to be balanced against
legitimate business interests of investors.
Transparency has to run both ways. If recipient countries
set up screening processes to address perfectly legitimate
national security concerns, there must be transparency with
respect to how such screening decisions are made, by whom, and
under what criteria.
Lack of transparency in this area will lead to suspicions
of financial protectionism, introduce an element of uncertainty
to the investment process, reduce investor confidence, and may
ultimately reduce the relative attractiveness of a non-
transparent recipient country.
As I have explained, the Fund is a major shareholder in the
U.S. market and the holdings of U.S. equities will increase
significantly in the years to come. This reflects the size and
importance of the U.S. market but also our confidence in the
long-term potential of this market.
We are not running from the market in these more turbulent
times but are building up our portfolio based on a long-term
view.
The Fund is not a strategic investor. It will not take over
businesses and run them. Even as a pure financial investor, the
Fund has to use its ownership rights as investors to protect
its long-term financial interest.
The Central Bank as manager has published a document
outlining the priorities and principles our corporate
governance work is built on.
They published yesterday a full record of how they have
voted on every single issue in every single company they have
voted, almost 40,000 individual issues, in more than 4,000
companies globally.
There are no hidden agendas in our corporate governance
work.
The Pension Fund has a very long time horizon. It will in
principle be permanently invested in global markets. It is in
our interest that companies we invest in are well-run,
profitable, and operate in well-functioning markets, and a
sound regulatory framework and good corporate governance
arrangements are important pre-conditions for this.
Thank you very much.
[The prepared statement of Mr. Skancke can be found on page
139 of the appendix.]
Chairman Gutierrez. Thank you very much.
Mr. Israel?
STATEMENT OF SIMON CLAUDE ISRAEL, EXECUTIVE DIRECTOR, TEMASEK
HOLDINGS (PRIVATE) LIMITED
Mr. Israel. Thank you, Mr. Chairman.
The Singapore Government founded Temasek in 1974 to hold
and manage investments in several government firms they owned
at the time. The objective was to separate the role of managing
commercial investments from the government's role of
policymaker and regulator.
Temasek's charter is to manage these investments
independent of the government on a purely commercial basis, in
order to generate sustainable returns for the benefit of future
generations.
In order to maximize and balance portfolio risks, Temasek
invests internationally within a directional framework of being
invested one-third Singapore, one-third Asia, one-third the
OECD, over time. This allocation is flexible in respect of its
weighting and is subject to both the state of markets and
investment opportunities at a given time.
Temasek seeks to have a portfolio which is diversified by
geography and sector. At this time, our portfolio is weighted
towards Asia and towards financial services,
telecommunications, and transportation, which are proxies for
economic growth in emerging markets.
On ownership and governance, Temasek is incorporated as a
private company with a sole shareholder, the Ministry of
Finance. While Temasek is state-owned, it is not state-
directed.
Temasek is governed by a Board of Directors, the majority
of whom are independent directors from the private sector. It
is the Board which approves Temasek's investment strategy and
investments. Independent non-executive directors chair the
three key committees that assist the Board.
Under the Singapore Companies Act, all directors are
charged with the fiduciary duty of acting in the best interest
of the company and its shareholders. As with all companies, the
CEO reports solely to the Board.
In addition, Temasek is advised by a 10-member Temasek
international advisory panel, comprising international business
leaders, including two Americans, to provide the firm with
global perspectives and advice.
Given Temasek's independence from the government, Temasek
does not discuss individual acquisitions or the management of
such investments with the government.
The government evaluates Temasek's performance on the basis
of the returns of the overall portfolio at the time.
Temasek's source of funds comes from its investment
activities, notably dividends, proceeds from divestments, a
modest level of debt, and occasional injections from our
shareholder.
For purposes of clarity, Temasek owns its assets. It is not
a fund manager.
Singapore's constitution reinforces Temasek's independence.
The constitution limits the ability of the government to draw
on Temasek's assets or to politically influence the selection
and work of the firm's directors and its chief executives.
Temasek's charter as a private commercial investor is to
maximize sustainable returns. We have done so, earning an 18
percent compound annual return since inception. Fundamentally,
this result has only been achievable due to our engaged Board,
sound governance, and professional management.
Temasek seeks to employ the best international investment
professionals; 40 percent of our senior management are non-
Singaporian, including Americans.
On disclosure and transparency, Temasek recognizes the
importance of good corporate governance. Good governance
requires adequate disclosure and transparency.
The firm is audited by international auditing firms, and
since 2004, it has annually published its financial performance
in the Temasek Review.
The Review includes an overview of the firm's governance
process, investment themes, financial performance, portfolio
holdings by geography and sector, major investments and
divestments.
It also provides an indication of the firm's future
direction. The firm also maintains a Web site allowing access
to annual reviews and other information.
The firm has made further regular disclosures since 2005
when we received our AAA credit ratings from Standard & Poor's
and Moody's. As a condition for receiving the ratings, both
agencies thoroughly scrutinized Temasek, and as a condition for
maintaining our ratings, every major transaction since has been
scrutinized further to ensure financial discipline.
We also issued a maden U.S. Dollar Bond in 2005, which was
and continues to be subject to SEC disclosure.
As a result of these disclosures, Temasek is acknowledged
as a well-governed and accountable firm.
Temasek understands that there remain concerns about the
role of state-owned entities, even if they are not state-
directed, in the global markets. As an investor, Temasek
believes that the IMF and the OECD are the best arenas in which
to discuss this issue and to develop voluntary codes of conduct
for state-owned entities and policies for investment receiving
companies.
Temasek's recent investment in Merrill Lynch is only the
latest linkage we have with the United States. Several Temasek
portfolio companies have significant U.S. operations.
As you know, the United States and Singapore enjoy close
strategic and economic relations. Temasek understands and fully
respects that the United States must take measures necessary to
protect its national security.
We have closely followed the enactment of the new Foreign
Investment and National Security Act and the drafting of its
regulations. We are aware of the vigorous debate in Europe and
the United States with respect to sovereign wealth funds.
We encourage Congress to maintain the right balance in
protecting national security in ways that continue the
traditional welcoming attitude of the United States towards
foreign investment.
Our course was set over 30 years ago when Temasek was
created. As we look to increase our holdings outside Singapore
and outside Asia, we remain committed to the commercial
principles that have made us successful.
In the process, the firm will maintain its 3-decade role as
an independent, commercially-driven, long-term investor in
companies throughout the world.
Thank you.
[The prepared statement of Mr. Israel can be found on page
120 of the appendix.]
Chairman Gutierrez. Thank you very much.
Mr. Denison, you are recognized for 5 minutes.
STATEMENT OF DAVID DENISON, PRESIDENT AND CEO, CANADA PENSION
PLAN INVESTMENT BOARD
Mr. Denison. Mr. Chairman, thank you for inviting me to
participate in this panel.
With regard to the issue of sovereign wealth funds, we
recognize that policymakers around the world are trying to
balance the requirement of openness towards foreign investment
and the need to preserve national security.
Through this lens, one can readily see the challenges posed
by some sovereign funds with billions of dollars of capital at
their disposal, but little in the way of transparency, clarity
of mandate, or public accountability.
I am pleased to appear before you today to share the CPP
Investment Board's perspective on these matters.
Although we have the word ``Canada'' in our name, and we
were created by an Act of Parliament, the CPP Investment Board
is not a sovereign organization or a sovereign wealth fund.
You noted this, in fact, in your invitation letter which
recognized that the CPPIB is not a sovereign wealth fund but
rather an independent public pension fund that is technically
owned by a foreign government but is also independent from
government.
This is so for a number of reasons, most simply because we
do not manage government assets nor are we controlled by any
government. Indeed, the assets we manage belong to 17 million
working Canadians and are strictly segregated from government
funds.
Nonetheless, we have a perspective on the central issues of
transparency and accountability that may be of interest to the
committee.
At the heart of the sovereign funds' issue is the question
of political control and the potential that sovereign funds may
be used in support of national or political rather than
economic goals.
The governance model of the CPP Investment Board is
instructive in this regard because it was specifically designed
to protect against political interference, while maintaining a
high degree of accountability.
We have provided a written statement that expands on how
these concepts are realized in our governance model, but for
now, let me note the following points.
The CPP Investment Board was created to help sustain the
Canada Pension Plan by investing those funds not needed to pay
current benefits. Our mandate, which is enshrined in law, is to
achieve a maximum rate of return without undue risk of loss.
Management of the CPP Investment Board reports not to
government but to an independent board of highly qualified
directors. The Board of Directors, not government, approves
investment policies, determines with management the
organization's strategic direction, and makes critical
operational decisions, such as hiring the chief executive
officer and determining executive compensation.
The CEO in turn hires and leads a management team including
the investment professionals who make the portfolio decisions
within investment policies that are agreed to by the Board of
Directors.
To be clear, we do not submit our investment strategy or
business plans for government approval. We do not have
government officials sitting on our Board. We do not submit our
policies for government approval, and indeed, our Code of
Conduct stipulates that any attempt by government to influence
our investment decisions, hiring practices, or procurement must
be reported to the chairman or the CEO, who will take
appropriate action.
It is in short a familiar private sector model but with
strong public accountability. Accountability is achieved
principally through transparency.
Our legislation requires a high level of transparency by
audits, special examinations, and public meetings. Beyond that,
our Board and management have voluntarily raised transparency
to an even higher level.
For example, we report our results on the same basis as
most Canadian public companies, including the presentation of
independently audited financial statements. We post our
investment policy and objectives on our Web site as well as a
full list of all our public and private equity, real estate,
and infrastructure holdings.
In short, we believe that it is possible to provide a very
high degree of transparency without compromising our
proprietary investment insights.
We believe that elements of Canada's blueprint could help
address some of the concerns raised about sovereign wealth
funds today.
These concerns can be alleviated to a great degree if such
funds clearly articulate their investment objectives and their
governance structure, and embrace a degree of transparency
sufficient to enable others to measure their actions against
their stated objectives.
In response to the emergence of sovereign wealth funds as
active direct investors of significant scale, we are seeing
calls for new protectionist legislation which could have
negative consequences for the free flow of capital.
It seems to us the challenge for policymakers is to
properly balance the desire for foreign investment with the
need for security and transparency, and we submit a key to
success can be found by looking beyond labels to examine the
underlying characteristics of these large pools of capital
according to some of the criteria I have outlined today.
Thank you.
[The prepared statement of Mr. Denison can be found on page
75 of the appendix.]
Chairman Gutierrez. Thank you, Mr. Denison.
Mr. Slaughter, you are recognized for 5 minutes.
STATEMENT OF MATTHEW SLAUGHTER, PROFESSOR, TUCK SCHOOL OF
BUSINESS, DARTMOUTH COLLEGE
Mr. Slaughter. Thank you. Mr. Chairman and members of the
subcommittees, thank you for inviting me to testify on these
important and timely issues.
Let me start by making three points about the economic
benefits of sovereign wealth funds.
First, many sovereign wealth funds were created as
legitimate stewards of national economic welfare, to manage
fiscal surpluses for sound goals such as intergenerational
transfers.
Here, it is important to remember that the United States
itself is home to such funds, for example, the Alaska Permanent
Reserve Fund.
Second, to the extent that sovereign wealth funds invest
for commercial motives of high risk adjusted rates of return,
the overall U.S. economy benefits from their investments.
America's commercial and investment banks are a prominent
recent example of these benefits.
Funds' investments provided many leading banks with much-
needed capital to stabilize their near term performance and
thereby support the overall economy.
The United States has long benefitted from open global
capital markets, of which these funds are now an important
part.
Third, to date, the magnitude of sovereign investments into
the United States remains quite small. At year end 2006, the
rest of the world owned $17.4 trillion of American assets. The
recent surge of investments into the United States by sovereign
funds is a lot of money to you and me, but it is still a
fraction of one percent of America's gross international
investment position.
These economic benefits aside, the ``s'' in sovereign
wealth funds presents a legitimate policy concern. Were these
funds to operate for non-commercial reasons, they could damage
the United States. Some of this damage could be economic but
much more importantly, some of this damage could be to national
security, were these funds to use their investments in American
companies to further their strategic interests in conflict with
those of the United States.
What to do about this legitimate policy concern: To answer,
let me first list three important costs to the U.S. economy
that we run the risk of incurring should excessive constraints
be placed on these funds in an attempt to address this concern.
First, we could incur economic damage to U.S. companies at
home. American companies have historically been strengthened by
foreign investment. A tangible example of this is jobs. In
2005, there were 5.1 million Americans working for U.S.
affiliates of foreign multinationals, earning an average annual
compensation of over $66,000.
Second, we could incur economic damage to U.S. companies
abroad. In a new Council on Foreign Relations' report, David
Marchick and I have documented a new protectionist drift in
inward investment policies around the world.
In this environment, new U.S. restrictions on inward
investment here may well be met by similar restrictions abroad
against U.S. companies, which would harm their global
competitiveness.
Third, we could incur economic damage to the overall U.S.
economy by raising the risk of a disorderly adjustment to the
chronic U.S. current account deficits of recent decades.
To finance this excess of imports over exports caused by
low U.S. national savings, each year the United States must on
net sell an equivalent amount of assets to the rest of the
world. The likelihood of a gradual orderly evolution of the
U.S. current account deficit and of the value of the U.S.
dollar will be higher the wider is the range of U.S. assets the
rest of the world can reasonably purchase and the wider is the
range of foreign investors, including sovereign wealth funds.
Let me close my testimony with the second part of my reply
to the question of what to do. For now, I would suggest two
steps:
The first step is diligent U.S. participation in ongoing
multilateral dialogues with sovereign wealth funds to generate
more and more transparent information about their governance,
goals, and strategies.
Recent interest in these funds has revealed that for many,
there are some clear gaps in what we know, like in so many
areas, here, too, sound public policy is best founded on
complete and robust information.
An increase in the quality and quantity of information
about sovereign funds should help allay many concerns about the
likelihood of these funds operating for non-commercial reasons
that could threaten U.S. security.
The second step is to urge support by all interested
parties in the continued non-partisan operation of the
Committee on Foreign Investment in the United States. CFIUS is
well-suited to address any legitimate national security
concerns raised by U.S. investments by sovereign wealth funds,
or let me remind everyone, by any other foreign investor as
well.
One important reason for this is that CFIUS does not have
any statute of limitations, in that any inward transaction can
be brought to CFIUS, not just before, but also after closing,
should any concerns arise after the fact.
Thank you again for your time and interest, and I look
forward to answering any questions you may have.
[The prepared statement of Professor Slaughter can be found
on page 152 of the appendix.]
Chairman Kanjorski. I have a few questions, and I am sure
some of my colleagues will, as well.
First of all, let me thank all of you for appearing. I note
the make up of the panel is not necessarily the individuals or
nations that would be raising the question with the Congress or
the American people as to who should be an investor, although
we are very worried about Sweden's military intents against the
United States. We are going to watch that very closely.
That is humorous, for those reporters who do not know.
[Laughter]
Chairman Kanjorski. Or Norway, I should say. That is a real
threat, Norway.
May I say one of the problems is this massive amount of
funding and the idea of American corporations and international
corporations. There are so many of our larger entities that
have no nationality, and they happen to stop by to invest or do
business.
But I would not call them a citizen of any particular
nation, and probably the individual international companies are
driven more from profit motive than anything else, and least
driven by national interest, particularly the United States'
national interest.
What do we do about it? While it is small, while it is
identifiable and rather limited, as it is today, that is not
really my thought process. It is what do we do over the next
decade or two as these numbers severely run up.
Quite frankly, I am at a loss to know at what point we will
lose control. An example I gave earlier with the last panel:
What happens if we allow foreign equity to take control of our
utility companies, whether it is electric utilities, gas
utilities, or any form of energy, and there is a disagreement
between the two nations?
I think we have to be less than serious to think there
would not be a tendency to utilize those economic assets toward
a strategic end for the national interest of the nation
involved with the funds out there.
I remember the argument posed not too many years ago when
the Administration was arguing to privatize Social Security.
The question arose at that time and the argument was: Look how
much more we could get if we invested in Wall Street. And why
not instead of investing at 1.9 percent--I think that is the
amount of transfer interest payment within the government--why
not allow that to be invested by a trust or some entity in the
market?
Very quickly, with the amount of funds we are talking
about, all the equities on Wall Street would be owned by the
Fund. It would be, I guess, the ultimate end to capitalists, by
encouraging the supply of money to be provided by the
government, it would literally become a truly socialist nation,
since all the interests of equity would be sold out to funds of
the government.
I thought it was a legitimate argument that you would not
want Social Security funds directly used to purchase equity
positions or control positions of American business or
industry.
What is different in your estimation from that argument not
to use Social Security funds to be invested in our equity
markets and banks, etc., and foreign equity funds or sovereign
funds, rather than being just in credit instruments, now going
into equity instruments that determine policy and direction of
corporations?
Let me throw that out to the panel.
Mr. Slaughter. Mr. Chairman, I would offer a couple of
reflections on your thoughts. One is that your point is well-
taken. Governance, I think, is one of the issues of information
that is important to think about, meaning both for privately
owned and operated corporations and for various sovereign
funds, the fact that they may be domiciled in one particular
country leaves open the question of what are the linkages with
the government of those countries as well.
There are a lot of different structures that could exist,
and I think it is something for which information helps.
A second comment is your point is very well taken about
your example of owning equities as part of the economic damage
that can come when governments in some broad sense are in the
business of helping run businesses. I will point out that the
market offers a natural check against that, which is existing
shareholders, existing boards of directors of privately held
corporations recognize the potential limitation of a government
from asserting managerial control over a corporation, and that
is a natural check above and beyond what legitimate national
security concerns there might be on those potential
transactions.
Chairman Kanjorski. When you have such things as sovereign
funds and there is a violation of the law or regulations, who
do you identify as becoming the potential punishable party? How
do you implement that punishment?
If you invest and commit a fraud or commit some act that
violates the laws or regulations of the United States, we
charge you. If you are found guilty, you pay the appropriate
fine or incarceration.
How do we do it when it is a sovereign body? Do we invade?
Mr. Slaughter. I am an economist, not a lawyer, so I am not
quite sure of some of the important legal issues here, but I
will point out that when I served on the Council of Economic
Advisors, I served on CFIUS as one of the member agencies.
One of the important points about CFIUS was that CFIUS was
there on top of existing protections that we may have from our
financial regulators, for example, for the financial system,
for national security interests. CFIUS operates as a backstop
against a lot of existing U.S. law for when there might be a
national security concern for any commercial transaction.
I will reiterate something I said in my testimony, if I
may, which is that one of the important features of CFIUS, I
think, that provides a measure of safety is the fact that CFIUS
can address transactions at any time. It need not be before
that transaction occurs.
Even after the fact, if a legitimate national security
concern arises, CFIUS has purview over that.
Chairman Kanjorski. I think I better recognize my friend
from Texas. Ron?
Dr. Paul. Thank you, Mr. Chairman. I just have a brief
question for the panel, especially those who represent
sovereign wealth funds.
From your viewpoint, how do you see our discussion? Do you
worry about our discussion and what we might do? Is there
something that we would do that would be harmful both to you
and to us or can you quantify this problem?
Obviously, we see it as a problem because we are having
hearings and we are discussing it and there is a lot of
political talk about it.
Could any of you quantify it and say well, this is not as
big a problem as you think or it is much bigger, if you do
this, things are going to get much worse, it is going to be bad
for us and bad for the United States?
Does anyone want to volunteer a comment along those lines?
Mr. Israel. If I could, I believe from our perspective as
an investor, we look to open markets which are well-regulated,
which are efficient, which are competitive, and where capital
can flow freely.
The concern that we would have as an investor is seeing the
United States, or the world, if you will, lean towards
protectionism out of a concern for this issue. We believe that
would be damaging to our mutual interests in such respect.
Mr. Skancke. I do not think we are worried in the sense
that we think there is a great risk that there will be
restrictions on our investment activities as such with the
profile that we have because we have purely financial
investments, no strategic holdings.
With the investment strategy that we have, we do not assess
the probability of restrictions; we do not see it to be very
high.
However, of course, if there are restrictions put on, for
instance, the use of voting rights in companies, even as a
financial investor, of course, we have legitimate financial
concerns, and the relationship between shareholders and boards
where the managers are the agents and the board representing
the shareholders is the principal, and of course, if you cut
down that line of communication between shareholders and boards
and do not have any possibility of making boards responsible,
then we would see that this is a less attractive market because
it would erode the confidence in the corporate governance part
of the market.
I think further progress on accountability of corporate
boards will probably give a positive effect on the
attractiveness of the U.S. market.
Dr. Paul. Mr. Denison?
Mr. Denison. I would say in the public markets where our
activity is primarily portfolio investments, relatively small
investments in U.S. companies, it would not have any effect.
The potential effect is greater in the private markets, in
private equity transactions, in private real estate, or in
private infrastructure in this country, or in other countries.
We are an investor, where public policy has established
that infrastructure, for instance, can be owned privately, and
we are an interested investor in those kinds of assets. They
are a natural match for a long horizon investor like us.
If there is a degree of uncertainty that has entered into
how we will be viewed as a potential investor in those assets,
that will potentially have an impact on how we view individual
markets and where we would put our emphasis.
Dr. Paul. Mr. Slaughter, how serious do you think this
problem is? I know you have had testimony and addressed it to
some degree. Is this a very serious problem we are facing and
we have to deal with it, or could we overdo things?
Mr. Slaughter. I believe the potential for overdoing things
is there. I will come back to the point, you have talked about
the ongoing U.S. current account deficits. That requires us on
net every year to be selling several hundred billion dollars in
assets to the rest of the world.
The attractiveness of our sets of assets compared to those
in any of these other countries depends in part on the
perceived policy environment that we set up for these potential
investors.
I think in the near term, this is likely as long as the
United States continues to have low national savings relative
to the level of capital investment, we will need to continue
financing that deficit through asset sales to the rest of the
world.
I think that in broad context that is important to keep in
mind in thinking about these important issues.
Dr. Paul. Thank you.
Chairman Kanjorski. The gentleman from Illinois.
Chairman Gutierrez. Thank you, Mr. Chairman.
Mr. Skancke, let me ask you a question. The funds that you
control, who are the shareholders? People in Norway?
Mr. Skancke. Formally, the Fund is owned by the Ministry of
Finance.
Chairman Gutierrez. By the government?
Mr. Skancke. By the government. It is managed by our
Central Bank.
Chairman Gutierrez. Its purpose is to provide what?
Mr. Skancke. The purpose is really twofold. In the short
term, the oil revenues are very volatile. We want to smooth
them out. In the long term, we have to save--we have an aging
population, and we have to save for the future.
Chairman Gutierrez. Mr. Denison, in that sense, they are
saving up for their aging population. How about your Fund?
Mr. Denison. Our Fund supports the pension promise behind
the Canada Pension Plan, so it is for 17 million Canadians.
Chairman Gutierrez. Canadian people would be the
shareholders in your Fund?
Mr. Denison. The beneficiaries; yes.
Chairman Gutierrez. Mr. Israel, how does your Fund work?
Mr. Israel. First, we are not a fund. We are a corporation.
Chairman Gutierrez. I am sorry; corporation.
Mr. Israel. Which is an important point to us. Ultimately,
if you will, our Ministry of Finance owns 100 percent of our
corporation. However, I would suggest to you that the ultimate
beneficiaries are the citizens of Singapore.
The dividend from our Fund flows to the government and is
incorporated in the government budget as part of their
investment income, which serves the people.
I think the greater purpose of the Fund ultimately is to
build an endowment for the future for the citizens of
Singapore.
Chairman Gutierrez. Does the government use the 18 percent
return you have had over the last 20 years?
Mr. Israel. The government historically has earned a
dividend of 7 percent, which is a dividend recommended by the
Board and approved by the shareholders in an annual meeting.
Chairman Gutierrez. The other 11 percent?
Mr. Israel. The rest of the Fund accumulates and grows over
the years. Today, it is $110 billion U.S. dollars. It is really
an endowment for the future. I think you have to take into
account our context. Singapore is a tiny island nation about
the size of Lake Tahoe. We have no natural resources. We are
not self-sufficient in water. We are not self sufficient in
food.
We live in a volatile world with uncertain global markets
and changing political and economic forces.
Our belief is that as a nation in such circumstances, we
need to put something away for the future to deal with those
uncertainties.
Chairman Gutierrez. Yes. I think that would be good advice
for the United States of America, to put something away. Talk
about an aging population; we have tens of millions of baby
boomers. I think about 40 million of them, something like half
of our workforce, is going to retire in the next 20 years.
I think we should not only look at your corporation or your
funds, but start thinking about how strategically we are going
to deal with tens of millions of people who are going to be
retiring from our workforce in an unprecedented percentage,
unprecedented in recent memory, at least economic history in
the United States of America.
I am much more concerned obviously about what you do and
how you go about doing it to see if we might not learn and
incorporate some of what you do, so that as we look at our own
aging population, we can make some decisions about how we are
going to take care of them.
I thank Mr. Slaughter, an economist, for looking at that,
and maybe in a subsequent meeting, because I only have a minute
and 16 seconds left, we might look at this.
Actually, financial institutions in the United States do
not encourage saving money. We reduce--the Fed Chairman keeps
reducing the cost of money but actually the banks are charging
even more for mortgages at a time of a mortgage crisis.
Here is money, it is cheaper. Charge the public more. When
you walk into a financial institution and then our taxing
system taxes it as ordinary income, if I invest in stocks, then
I have capital gains tax. If I put money in a financial
institution, in a savings account, then they charge me 2 to 3
times the same tax rate for saving money versus investing money
because of course, my colleagues on the other side like to
think about investing money, except in working class
neighborhoods people tend to save, not invest in stocks and in
equities.
Lastly, maybe from an economic point of view, I will write
you a letter, and you can share some things that we might share
with members of this committee about what we do.
The Norwegians are here saying we have extra oil. If you do
not play by the rules, we will just keep the oil in the ground.
It is only worth more next year than it was worth this year
probably. It is not as though it is something that is losing
value. They will just keep it there.
The Russians are doing the same thing. The comparison
between the Euro and the dollar, why would not Germans and the
rest of Europe want to come and buy us, especially when we are
cheap, and the Middle East and their oil supplies, the Chinese.
We just put $150 billion out there to stimulate our
economy. We are going to buy lots of Chinese goods at K-Mart
and Wal-Mart, and then they are going to come back and do what,
continue to buy bonds? I would not buy our bonds, especially if
I have $400-plus billion of them. I would buy a stake in
American companies, especially when we see the Chinese going
about the world acquiring and making relationships with
governments that help facilitate their industrial development
and their relationship to natural resources.
Why not come to the United States of America and develop
some of those natural resources?
We will be writing you a letter so that we can look at
that. I think a greater danger to our economy is what we do,
not what the rest of the world takes advantage of as we lack
any strategic planning in our economy.
Thank you all, the panelists, for being here this
afternoon.
Chairman Kanjorski. Mr. Meeks?
Mr. Meeks. Thank you, Mr. Chairman. I want to thank the
panelists for being here also. It is very intriguing.
I think as the chairman indicated, probably those who are
sitting at the table, not the ones that initially we were
worried about, but now that it is, you all are moving along
quietly, nobody was bothering you or anything of that nature,
and all of a sudden, because of the influx of money that has
come in from some of the other areas, that quite honestly have
been some of the trouble spots in the world and questions the
integrity of what they are going to do or what are their
purposes, is there an ulterior motive, I think that is what
comes to bear here.
With that, any time you have anything or any question, even
if you have good access, you have to figure out--everybody has
to fit within these rules and figure out how we move forward.
I look at sovereign wealth funds probably as yet another
example of the growth of capitalism and innovation in the
global marketplace, because we are in another place than we
were before, and we have to look at it and how we move forward.
I do believe this Congress should engage in a careful and
balanced examination of this important issue and when and if we
take action on the issue, what we should do and how we should
do it in a manner that encourages growth while maintaining the
global economic stability.
I think we are more interdependent upon one another
economically whether we like it or not with countries that we
may get along with or not now than we had ever before.
That being said, many of those of you sitting here and we
look at your sovereign wealth funds, there seems to be some
kind of transparency, issues that we can put our hands on, but
others, we cannot say the same.
I think Mr. Slaughter, in your testimony, you state that
the United States should continue to participate in ongoing
multilateral dialogues with sovereign wealth funds to generate
more and more transparent information from the funds.
My question to you would be what if there are certain funds
that just refuse to comply with the reasonable standards of
transparency and good governance?
How can we protect ourselves without running afoul of our
WTO commitments and/or inviting retaliatory restrictions
against U.S. investment?
I want that transparency, but somebody refuses. What do we
do?
Mr. Slaughter. That is a great question. Two things. One is
my sense is in a lot of other international economic policy
areas, discussion and deliberation tends to bring lots of
parties around to recognizing that a set of best practices are
in everybody's interest to follow.
I think there are parallels in international trade policy,
for example, where some countries have had very different trade
policy practices. They did not want to reveal certain things
about how they settle anti-dumping rules, for example. There
has been progress over time in many areas in international
trade policy that I think are parallel here.
That requires having all parties to the table and having
robust and candid discussions and again, my sense is the
International Monetary Fund, the OECD and other organizations
supported by our Treasury Department and others in our
government are having those conversations. That is one thing.
I think the second thing again in that transition time as
we are learning more about different sovereign funds, we have
with CFIUS a sound process in the United States for addressing
any legitimate national security concerns that might arise from
any particular investment.
CFIUS has flexibility on many dimensions to allow us to
have that certainty, and especially with reforms that the good
bilateral discussion last year in Congress in the new
legislation of FINSA, I think, strengthened a lot of CFIUS
practices, and will make that going forward an even better
process.
Mr. Meeks. I see I am out of time almost already. You
indicated in your testimony that CFIUS does not have a statute
of limitations.
I was wondering whether or not if you knew of any time or
how often it has happened that there has been a transaction
that was reviewed by CFIUS and after it had already been
closed, where they reviewed it again?
Mr. Slaughter. I think that is unusual. Again, I think it
speaks to the issue of all parties concerned having the
incentive to participate in best practices.
I think on that particular question, oftentimes acquiring
parties or target parties recognize the value in approaching
CFIUS member agencies before the transaction to start a
dialogue about it, because oftentimes, to the extent that there
are legitimate national security concerns, they are addressed
through various mitigation agreements that allow the
transaction still to go forward, to achieve the commercial
value that is desired, and yet still address whatever
legitimate concerns there are.
I think there are examples in the past, but they are
unusual after the transaction CFIUS investigation, but there is
a parallel with the issue that you raised about the value of
having robust discussion among all parties on best practices.
Mr. Meeks. Mr. Chairman, if I could just ask Mr. Denison
one quick question. I am just curious. He testified that the
Canadian Pension Plan Investment Board Act can only be amended
by a consensus of our federal government and at least two-
thirds, I think he said, of the participating provinces
representing two-thirds of the population.
I just want to know has an amendment ever been made or
attempted? If so, what changes were made?
Mr. Denison. Amendments have been made. They have all been
at the suggestion of the CCP Investment Board itself, and they
have been to deal with investment constraints which were
originally imposed upon the investment organization and at our
recommendation, we have asked for those to be lifted, and in
all cases, we have achieved not just the two-thirds, but we
have achieved unanimous consent.
There has not been any amendment, however, which has been
initiated by either our federal government or any of our
provincial governments.
Mr. Meeks. Thank you. Thank you, Mr. Chairman.
Chairman Kanjorski. Thank you, Mr. Meeks.
We are going to wrap this up very shortly. I do want to ask
the panel, you are individual nations. Do you have any
constraints on American investment or other nations' investment
in your nations, any standards that they have to rise to or
perform? How do you handle it? Are you all the same or are you
different in that regard?
Mr. Israel. Speaking on behalf of Singapore, Singapore
maintains a very open market, a very efficient competitive and
regulated market.
Chairman Kanjorski. We could buy any corporation? The
United States Government could buy any corporation in
Singapore?
Mr. Israel. You can invest in any corporation in Singapore.
Chairman Kanjorski. We could invest. We could not have a
controlling interest?
Mr. Israel. It is no different than the United States in
terms of it is a regulated industry. It would be subject to
certain tests which are probably very similar to the tests that
would be applied in the United States.
You have telecom regulators. You have banking regulators,
etc. Insofar as one is in compliance, I believe you are free to
invest.
Chairman Kanjorski. There are some industries that have
little or no regulation in the United States. Are there such
organizations in Singapore?
Mr. Israel. The parallels exist and you are free to invest.
Chairman Kanjorski. How about in Norway?
Mr. Skancke. The situation is very much the same in Norway.
We have had the pleasure of having a lot of American companies
in our oil sector, for instance, over the years.
We have some sectors where there are regulations. Those are
not really based on the nationality but they are based, for
instance, in the financial sector. We want to have spread
ownership. We do not want individual shareholders to own more
than 10 percent of a bank, either below 10 percent or above 90
percent, I think, to make sure it is a true mother/daughter
relationship in terms of the ownership or it is spread
ownership to avoid contagions in the banking system.
Those are not non-discriminatory rules. They are applied
equally to foreign and domestic investors. There are sectors
where there are regulatory concerns and where those apply to
foreign investors.
Chairman Kanjorski. Are there any laws that apply
particularly to foreign investment?
Mr. Skancke. No. We are a part of the European economic
area which comprises the European Union countries, so there is
a free movement to capital and we are not allowed to have any
other rules than European Union countries have.
We do not have like a CFIUS process or anything equivalent
to that.
Chairman Kanjorski. In Canada?
Mr. Denison. Generally, Canada is a very open market for
foreign ownership. It does have some regulated industries,
broadcasting, telecommunications, airlines, and financial
services, where there are restrictions on the concentration of
individual ownership and as well in some of those cases, a
restriction on cumulative foreign ownership, which generally is
about 50 percent.
Chairman Kanjorski. I do not think your three nations are
most representative. How about China, Russia, and some of these
other nations, do they have restrictions on foreign ownership?
I would suspect that North Korea does.
Are there any nations in the world that have restrictions
as opposed to either American, European, or other investment,
sovereign nation fund type investments?
Mr. Slaughter. Mr. Chairman, if I may, there are many
countries around the world that maintain foreign direct
investment restrictions in particular industries.
Many developing countries as part of their expansion of
market reforms, in countries like China and India, in recent
years, has been to pull back on many of those investment
restrictions. That is a work in progress. Many of those
developing countries still do maintain substantial
restrictions. It is oftentimes on an industry-by-industry
basis.
Chairman Kanjorski. In your role as a professor, why would
you not think it would be a wise thing for us to say there is a
need for treaty arrangements to standardize and uniformize the
use of capital anywhere in the world, so we are not mistreated
or abused if we want to go into a nation, and then that nation
could trade here.
If they do not agree to that international standard, then
they are just going to be excluded.
Mr. Slaughter. I think in principle, there are good
arguments for multilateral discussions about investment
restrictions and bringing those down, similar to trade
barriers, multilateral trade discussions in the WTO.
I think in practice, efforts have been made over the years
for these multilateral discussions. The have been very
difficult, akin to the difficulties we see now in the World
Trade Organization.
Chairman Kanjorski. If we did that, would it not be highly
likely that we would not have this theft of intellectual
property that occurs, for instance, in China?
They seem to be immune from any way of forcing them to
adhere to standards that would be acceptable in the rest of the
world.
If they do it to intellectual property, are they not going
to further their interest in doing other things?
Mr. Slaughter. Multilateral discussions on investment might
compliment the efforts that are there already in our trade
negotiations, so we have the TRIPS in the WTO, and when China,
for example, was seated to the WTO in 2001, they signed onto
the intellectual property components of the WTO in TRIPS.
Your point is well-taken. That is a process. It is a work
in progress. Even though in law countries like China implement
those policies and try to enforce them, in practice, that can
be difficult.
Chairman Kanjorski. Rather than this committee taking some
action to legalize or change or restrict or regulate sovereign
wealth funds' investment in the United States, would it not be
wiser for us to ask that a commission be established in the
United States to determine what our best interests and national
interests are, and then to reduce that to an international
conference to determine whether or not we have uniformity in
the world before we just allow this to happen?
Mr. Slaughter. I believe those sorts of discussions are
ongoing in the United States, as Under Secretary McCormick said
in his testimony, the President last year issued an open
economy statement for the United States, reiterating our
openness to international trade and investment in particular.
I think the value of that again, especially for our
American-based companies, one important feature of the economy
that is often underappreciated is our key global engaged
companies, they serve foreign markets overwhelmingly through
foreign direct investment, through sales of their affiliates
rather than through their exports going out of the United
States.
The most recent data we have on that is in 2005, the
parents of U.S.-headquartered multinationals, they exported to
the rest of the world about $450 billion in goods, but in that
same year, through their affiliates, they sold in foreign
markets almost $3 trillion worth of goods, through the
affiliates that they have established through foreign direct
investment.
For the competitiveness of the U.S. economy over the longer
term and for our companies, open investment in the rest of the
world is very, very important.
Chairman Kanjorski. I think we have had our session here
and everybody seems to have gone off to make foreign
investments.
[Laughter]
Chairman Kanjorski. The Chair notes that some Members may
have additional questions for today's witnesses, which they may
wish to submit in writing. Without objection, the hearing
record will remain open for 30 days for Members to submit
written questions to any of today's witnesses and to place
their responses in the record.
The panel is dismissed and this hearing is adjourned.
Thank you.
[Whereupon, at 5:36 p.m., the hearing was adjourned.]
A P P E N D I X
March 5, 2008
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