[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]

                        IN THE U.S. ECONOMY AND 
                            FINANCIAL SECTOR 


                             JOINT HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                       DOMESTIC AND INTERNATIONAL


                                AND THE

                            SUBCOMMITTEE ON



                                 OF THE


                     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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41-725 PDF                     WASHINGTON : 2008 

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                 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
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 

                 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 

               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
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
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

Hearing held on:
    March 5, 2008................................................     1
    March 5, 2008................................................    43

                        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


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


                        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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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-
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    [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.
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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?

                   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 
    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-
    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 
    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 
    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 
    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.

                     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 
    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 
    Nonetheless, we have a perspective on the central issues of 
transparency and accountability that may be of interest to the 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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.
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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