[Joint House and Senate Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-499
 
                  DO SOVEREIGN WEALTH FUNDS MAKE THE 
         U.S. ECONOMY STRONGER OR POSE NATIONAL SECURITY RISKS? 

=======================================================================

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 13, 2008

                               __________

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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

SENATE                               HOUSE OF REPRESENTATIVES
Charles E. Schumer, New York,        Carolyn B. Maloney, New York, Vice 
    Chairman                             Chair
Edward M. Kennedy, Massachusetts     Maurice D. Hinchey, New York
Jeff Bingaman, New Mexico            Baron P. Hill, Indiana
Amy Klobuchar, Minnesota             Loretta Sanchez, California
Robert P. Casey, Jr., Pennsylvania   Elijah E. Cummings, Maryland
Jim Webb, Virginia                   Lloyd Doggett, Texas
Sam Brownback, Kansas                Jim Saxton, New Jersey, Ranking 
John E. Sununu, New Hampshire            Minority
Jim DeMint, South Carolina           Kevin Brady, Texas
Robert F. Bennett, Utah              Phil English, Pennsylvania
                                     Ron Paul, Texas

                  Michael Laskawy, Executive Director
            Christopher J. Frenze, Republican Staff Director














































                            C O N T E N T S

                              ----------                              

                                Members

Statement of Hon. Charles E. Schumer, Chairman, a U.S. Senator 
  from New York..................................................     1
Statement of Hon. Carolyn B. Maloney, Vice Chair, a U.S. 
  Representative from New York...................................     4
Statement of Hon. Amy Klobuchar, a U.S. Senator from Minnesota...     6

                               Witnesses

Statement of David McCormick, Under Secretary for International 
  Affairs, U.S. Department of the Treasury, Washington, DC.......     7
Statement of Stuart Eizenstat, Partner, Covington & Burling, 
  former Deputy Secretary of the Treasury and Ambassador to the 
  European Union, Washington, DC.................................    18
Statement of Douglas Rediker, co-director, Global Strategic 
  Financial Initiative, The New America Foundation, Washington, 
  DC.............................................................    20

                       Submissions for the Record

Prepared statement of Senator Charles E. Schumer, Chairman.......    29
Prepared statement of Representative Carolyn B. Maloney, Vice 
  Chair..........................................................    32
Prepared statement of David H. McCormick, Under Secretary for 
  International Affairs, U.S. Treasury Department Office of 
  Public Affairs.................................................    33
Prepared statement of Stuart E. Eizenstat, partner and chair of 
  the International Practice Group, Covington & Burling LLP......    36
Prepared statement of Douglas Rediker, co-director, Global 
  Strategic Financial Initiative, The New America Foundation.....    41


                   DO SOVEREIGN WEALTH FUNDS MAKE THE
         U.S. ECONOMY STRONGER OR POSE NATIONAL SECURITY RISKS?

                              ----------                              


                      WEDNESDAY, FEBRUARY 13, 2008

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The Committee met at 2:05 p.m. in room SD-106 of the 
Dirksen Senate Office Building, the Honorable Charles E. 
Schumer (Chairman of the Committee) presiding.
    Senators present: Klobuchar, Maloney, Schumer, and Webb.
    Representatives present: Maloney.
    Staff present: Christina Baumgardner, Ted Boll, Heather 
Boushey, Stacy Ettinger, Anna Fodor, Chris Frenze, Nan Gibson, 
Rachel Greszler, Colleen Healy, Aaron Kabaker, Tim Kane, Israel 
Klein, Michael Laskawy, Robert O'Quinn, Jeff Schlagenhauf, 
Robert Weingart, and Jeff Wrase.

OPENING STATEMENT OF HON. CHARLES E. SCHUMER, CHAIRMAN, A U.S. 
                     SENATOR FROM NEW YORK

    Chairman Schumer. Good afternoon, everyone. Our hearing of 
the Joint Economic Committee on Sovereign Wealth Funds, will 
come to order.
    I'll make a brief opening statement, as will my Ranking 
Member, Vice Chair Maloney, and then we'll get right to our 
witnesses.
    Anyway, I want to thank everybody for coming. Today the 
Joint Economic Committee is having the first hearing of 2008 on 
the rise of foreign-government-controlled funds investing large 
sums of money in our economy.
    The question of the day is whether these huge pools of 
investment dollars known as sovereign wealth funds make the 
U.S. economy stronger or pose serious national security risks.
    I'm not sure we'll answer that question to anyone's 
satisfaction today, but at the very least this Committee and 
the Federal Government need to spend a great deal of time 
thinking about it.
    To help us do some of the thinking today we're honored to 
have an outstanding panel, including the current Treasury Under 
Secretary, David McCormick, a former Treasury Deputy Secretary 
under President Clinton and a former Ambassador to the European 
Union, Stuart Eizenstat, and a prominent foreign investment 
expert, Doug Rediker.
    The initial focus of Congress is, correctly, on the 
transparency of these funds and whether that is best achieved 
voluntarily, perhaps working through international bodies such 
as the IMF, or, if that approach doesn't work, through Federal 
legislation.
    My preference would be for the former, but we may have to 
consider the latter.
    I'd like to take a few minutes to discuss the broader 
economy and why I believe we're faced with such an increase in 
investment by sovereign wealth funds in U.S. companies.
    It's no secret that our economy is not in good shape now. 
There's increasing evidence that a recession will be deeper 
than this Administration is willing to admit.
    We've spent too much and saved too little as a country and 
as consumers. Our national savings rate is just above zero.
    Commercial and consumer credit markets have seized; home 
foreclosures are rising in both subprime and prime markets; the 
value of the dollar has fallen in relation to other world 
currencies; job growth is at historic lows, lower than it has 
been since January of 2001; and trade deficits are ballooning 
to historic highs.
    But we also have long-term structural problems in the 
economy. The U.S. debt-to-GDP ratio is steeply rising, which is 
a reflection of this Adminstration's bad fiscal policy, putting 
tax cuts before everything else even during wartime.
    Our current account deficit is at historic highs, 
approaching a trillion dollars, and this highlights massive 
borrowing by the Federal Government to pay for rising defense 
and domestic spending.
    So it shouldn't surprise us that, as Larry Summers said 
last year, the world's greatest power has become the world's 
greatest borrower.
    Even when the economy was going well there wasn't enough of 
our own capital, because we spend more than we save; we import 
more than we export; and we consume more than we produce. So as 
the economy has slowed, we haven't had the resources to keep it 
moving.
    Creating a perfect sovereign wealth storm, foreign 
countries have benefitted from our unwitting largess. Thanks to 
the Bush administration's failure to control the trade deficit, 
address currency market manipulation, and bring down oil prices 
by reducing our dependence on foreign oil, foreign governments 
have a lot of extra money and we do not.
    These governments are using their sovereign wealth funds to 
go on a buying spree in the United States. The bottom line is 
that we're overextended, and there may only be two options, 
neither of which is very attractive: We can allow a dramatic 
contraction of our economy, or we can allow foreign investment, 
in a measured way, to stave off further job loss and keep the 
economy humming.
    It shouldn't surprise us that the international bargain-
hunters have descended on the U.S. economy. The acquisition of 
multibillion-dollar stakes in Wall Street firms like Merrill 
Lynch, Citigroup, and Morgan Stanley by Asian and Middle 
Eastern sovereign wealth funds, quite naturally, has sparked 
increasing interest and concern about their impact on the U.S. 
economy.
    With domestic credit markets locked up, U.S. businesses 
seem to have little choice but to turn to sovereign wealth 
funds as a source of much needed capital.
    Until recently, much of the criticism has occurred when 
money is sent out of the United States, taking American jobs 
and moving the abroad. It is contradictory to complain about 
similar investments, when they're now being made by foreign 
entities, in the United States.
    In general, foreign investment has a healthy impact on the 
U.S. economy, and I've supported it. It augments domestic 
sources of capital and provides much needed capital and 
liquidity.
    It can also create jobs and improve productivity. However, 
where the foreign investor is a government or a government-
controlled fund, we should have concerns about their 
motivations.
    We have seen plenty of private foreign investors put money 
into U.S. companies, without much evidence they're investing 
for non-economic purposes.
    But it would be perfectly rational to expect a foreign 
government-controlled fund to have non-economic motivations. 
For instance, foreign governments might have an interest in 
controlling strategic assets, securing access to sensitive 
information or technology, promoting a political agenda, or 
cornering the market on raw materials.
    The closer foreign governments come to exercising control 
and influence, the greater our concerns. When Dubai Ports World 
attempted to purchase major U.S. seaports in 2006, alarm bells 
went off.
    When it comes to a vital security asset, like a port or 
even a basic infrastructure asset like a utility, we are right 
to be concerned. For instance, if a Russian sovereign wealth 
fund bought a natural gas utility here, alarm bells would be 
going off, again, because serious questions and concerns would 
be raised about the motivation of the Russian fund in natural 
gas. Russia has used natural gas as a political weapon in the 
past towards Western Europe.
    In this regard, sovereign wealth funds are sometimes their 
own worst enemies. Most are not transparent or publicly 
accountable, and we know little about their government 
structures or fiduciary controls.
    So, the bottom line is we don't know if their decisions are 
made exclusively on an economic basis. We invited some of the 
largest sovereign wealth funds to testify before us today, but 
they directly declined or their government embassies in the 
United States declined for them.
    While managing directors of these funds won't appear in 
front of Congress, a number of them have been quoted in the 
press recently, attempting to assure lawmakers and the public 
that their motivations are purely financial, and they do not 
take direction from their governments.
    I don't think the American people are yet persuaded. The 
funds need to do much more to make their case.
    I met recently with the head of China's sovereign wealth 
fund. I asked him about the fund's investment policies and its 
interaction with government officials, but got no real answers. 
I did get this nice glossy brochure, but frankly, if you look 
through it, it tells you nothing about those questions.
    It is clear that we need to find out more about sovereign 
wealth funds, how they are run, what drives their investment 
decisions. Sovereign wealth funds should voluntarily provide 
information and agree to guidelines that promote good 
governance, accountability, and transparency.
    Here are some questions that I believe they should answer: 
Do sovereign wealth funds report to an independent board of 
directors or directly to the government?
    Do they disclose their investment goals? If the goals 
change, is that made public?
    Are directors and the investment management teams selected 
on the basis of business qualifications and not political 
affiliation? Are their professional qualifications and 
experience made public?
    Is there a stringent code of conduct that compels members 
of the board of directors and management to report any attempts 
by the government to influence investment decisions?
    Do they disclose publicly, quarterly financial and annual 
audited financial statements?
    Do they publicly disclose all their portfolio holdings?
    I also think we ought to review whether the reforms to the 
CFIUS process made by the Foreign Investment National 
Securities Act of 2007, FINSA, are sufficient to address the 
unique risks associated with investments by sovereign wealth 
funds, and if not, propose additional legislation to close any 
loopholes.
    I'll be taking a hard look at the new FINSA regulations, 
due to be published in the spring, in this regard.
    Finally, it's important to point out that many of the 
countries with the largest sovereign wealth funds still 
maintain high levels of protection against investment in their 
domestic industries. China and financial services come 
immediately to mind.
    I hope that Treasury and the U.S. Trade Representative do 
better to ensure reciprocal market access for U.S. investors.
    Ultimately, we need to maintain a careful balance between 
welcoming foreign investment and protecting national and 
financial security, as well as market stability.
    Sovereign wealth funds need to assuage concerns that they 
will manage their investments in terms of political or economic 
power objectives. The alternative, I fear, already proposed by 
a number of lawmakers and other critics, is restrictions on 
sovereign wealth fund investments in the United States.
    My hope is that sovereign wealth funds can assure us that 
they will behave like other economic actors, and if they do so, 
that's all to the good. But until they do so, they should not 
get a carte blanche.
    [The prepared statement of Chairman Schumer appears in the 
Submissions for the Record on page 29.]
    Chairman Schumer. Vice Chair Maloney.

  OPENING STATEMENT OF HON. CAROLYN B. MALONEY, VICE CHAIR, A 
               U.S. REPRESENTATIVE FROM NEW YORK

    Vice Chair Maloney. Good afternoon. I want to thank 
Chairman Schumer for holding this hearing to examine the 
benefits and risks of sovereign wealth funds investing in the 
United States, and I want to welcome all of our witnesses and 
thank them for being here today.
    The term ``sovereign wealth fund'' has only recently 
entered our lexicon, but these government-controlled investment 
vehicles have been around and operating without incident for 
decades.
    At the moment, these fund are providing much needed capital 
to U.S. banks, trying to regain their footing in the wake of 
the mortgage crisis. However, the growing market clout of these 
funds and the steep rise of their investments in the United 
States require that they receive greater scrutiny by Congress.
    Bush administration policies have fostered a large amount 
of Federal borrowing from overseas, a greater reliance on 
foreign oil, and a weak dollar, all of which have created an 
environment that is ripe for foreign wealth funds with 
extraordinary oil profits or excess foreign exchange reserves 
to gobble up American assets at bargain prices.
    Governments can have very different motivations than 
financial investors, so we would be remiss not to carefully 
examine the potential risks from these State-owned investment 
funds.
    Reform of the Committee on Foreign Investment in the United 
States, CFIUS, was triggered by the revelation that the 
committee gave the green light to a deal that sold operation of 
many U.S. ports to a company owned by the Government of Dubai 
without any senior-level or national security review.
    With proper implementation by the Administration, the new 
reforms will strengthen the system by which foreign investment 
in businesses in the United States is vetted for security 
concerns, and provides certainty and predictability to the 
CFIUS process in order to expand economic activity, create 
jobs, and encourage safe foreign direct investment.
    I will continue to maintain a watchful eye over the ongoing 
implementation process, but I am confident that the Treasury 
Department intends to follow the law as I wrote it and have 
received assurances that the Department is already adhering to 
the new reforms.
    I would also like to mention that our antitrust laws and 
the review by DOJ's Antitrust Division, protect against 
monopolies or a takeover of any sector, whether by a foreign or 
domestic entity.
    In addition, I welcome the Administration's efforts to work 
with the International Monetary Fund to create an international 
code of conduct that would include greater disclosure of 
sovereign wealth fund activities and their governments.
    An important lesson of this summer's mortgage crisis is 
that when capital markets become too opaque and risk exposure 
is not well understood, the consequences can be devastating for 
institutions and individuals.
    Greater transparency of foreign wealth funds would be a 
welcome development, but it is not enough. Our challenge is to 
balance the potential risks to our economic and national 
security interests with our desire to maintain an open 
investment environment.
    Again, I'd like to thank our Chairman for holding this 
hearing, and I look forward to gaining insights from our 
witnesses about the appropriate oversight of sovereign wealth 
funds. I yield back.
    [The prepared statement of Vice Chair Maloney appears in 
the Submissions for the Record on page 31.]
    Chairman Schumer. Thank you, Vice Chair Maloney.
    Senator Klobuchar.

 STATEMENT OF HON. AMY KLOBUCHAR, A U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. Thank you, Senator Schumer, and thank 
you for holding this hearing today. I'm looking forward to 
hearing our witnesses.
    I was thinking as Congresswoman Maloney talked about the 
relevance of the subprime mortgage crisis. We've seen it in our 
State in a big way in the urban areas, but also now a doubling 
of foreclosures in the rural areas, and I would agree with her 
that a lot of the way this was handled, and the way these were 
marketed, was hidden from a lot of people and it contributed to 
that crisis.
    As far as the subject for today, I would say that foreign 
investments in the United States can, of course, have a healthy 
impact on our economy; however, the dramatic increase that 
we've seen in the investment from these sovereign wealth funds 
raises significant and legitimate concerns that cannot be 
ignored, including those related to our national security.
    I believe that foreign governments could manage their 
investments in pursuit of political or economic power 
objectives. The lack of transparency, as was earlier discussed, 
combined with the increasing share of investment capital, could 
threaten the stability of our financial markets. Sovereign 
wealth funds could also perpetuate undesirable underlying macro 
economic and financial policies such as China's manipulation of 
its exchange rate.
    I also think that you can't talk about this without 
realizing the failed economic policies of this Administration 
and how they have exacerbated the steep rise of these sovereign 
wealth funds. The more we're dependent on foreign oil--and 
we're spending, what, $200,000, $300,000, $400,000 a minute on 
foreign oil--it's contributed to our growing trade imbalance 
and to the weakening dollar, and this has created an 
environment that is ripe for the investment by these sovereign 
wealth funds.
    As we look at solutions, I think we have to pay attention 
to concerns about the transparency and accountability of 
sovereign wealth funds; we have take steps to ensure that there 
is a level playing field for investment.
    As Senator Schumer noted, in the countries that have the 
sovereign wealth funds, they shouldn't be allowed to close off 
their markets to American investors.
    Finally, we should give careful consideration to the 
question of the appropriate level of regulation or reporting 
requirements extended to the sovereign wealth funds.
    I look forward to hearing the answers from our panelists 
along the lines of those suggestions. Thank you.
    Chairman Schumer. Well, thank you, Senator Klobuchar.
    Now, I want to introduce our first witness. Our first 
witness is David H. McCormick, the Under Secretary for 
International Affairs at the Treasury Department.
    In this capacity, he's principal advisor to the Secretary 
of Treasury on international economic issues, and also 
coordinates financial market policy with the Group of Seven 
Industrialized Countries, so he's very well versed in the 
issues we have before us.
    Before joining Treasury, Mr. McCormick was the Deputy 
National Security Advisor to the President for International 
Economic Affairs, and he also served as the Under Secretary of 
Commerce for the Export Administration.
    Prior to joining the Administration, Mr. McCormick was 
president and CEO of Free Markets and president of AREBA, both 
software and service companies. In addition, he's a graduate of 
West Point, holds a Ph.D. from the Woodrow Wilson School at 
Princeton, is a former Army officer and veteran of the first 
Gulf War.
    Thank you for being here, Mr. McCormick. Thank you for your 
service, and you may proceed.

STATEMENT OF DAVID McCORMICK, UNDER SECRETARY FOR INTERNATIONAL 
    AFFAIRS, U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, DC

    Under Secretary McCormick. Thank you, Chairman Schumer, 
Vice Chair Maloney, and other Members of the Committee. Good 
afternoon.
    I very much appreciate the opportunity to appear before you 
today to discuss sovereign wealth funds.
    At Treasury, we have been increasingly focused on sovereign 
wealth funds for more than a year now, and I'm pleased to have 
the opportunity to share with this Committee some of our views.
    As many of you have just acknowledged, sovereign wealth 
funds are not new. The oldest funds date back to the 1950s in 
Kuwait and Kiribati.
    Over the next four decades, their numbers slowly grew. By 
the year 2000, there were about 20 sovereign wealth funds 
worldwide managing total assets of several hundred billion 
dollars.
    Now today, what is new is the rapid increase in both the 
number and the size of sovereign wealth funds. Fueled by high 
commodity prices and the rapid accumulation of official 
reserves, 20 new funds have been created since 2000, more than 
half of these since 2005.
    Today there are nearly 40 funds managing total assets in a 
range of $1.9 to $2.9 trillion. At the Department of Treasury, 
we define a sovereign wealth fund as a Government investment 
vehicle funded by foreign exchange assets managed separately 
from foreign official reserves.
    Sovereign wealth funds generally fall into two categories 
based on the source of the foreign assets: Commodity funds, 
which are funded through commodity exports or it is owned or 
taxed by the Government. Commodity funds serve several 
different purposes, including stabilization of fiscal revenues, 
intergenerational saving, and the balance of payment 
sterilization.
    Non-commodity funds are the second type, and these are 
established through the transfer of assets from official 
foreign exchange reserves. Large balance-of-payment surpluses 
have enabled non-commodity exporting countries to transfer 
excess foreign exchange reserves to stand-alone funds.
    Now, within the group of countries with non-commodity 
funds, foreign exchange reserves are now sufficient by all 
standards of reserve adequacy, and it is our view that greater 
exchange rate flexibility is needed, and we are actively 
engaged on many fronts, calling for increased flexibility in 
these countries.
    In contrast, 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 their 
investments can take the form of stakes in U.S. companies, as 
we have witnessed in recent months.
    Sovereign wealth funds' assets are currently fairly 
concentrated. By some market estimates, only a handful of funds 
account for the majority of total sovereign wealth fund assets.
    Roughly two-thirds of sovereign wealth fund assets are 
commodity funds, assets between $1.3 and $1.9 trillion, while 
the remaining one-third are non-commodity funds transferred 
from official reserves in the neighborhood of $0.6 to $1 
trillion.
    Sovereign wealth funds' assets may be small, relative to 
the $190 trillion stock of global financial assets, with a 
roughly $62 million managed by institutional investors, but 
they are larger than the total assets under management by 
either hedge funds or private equity funds, and they are set to 
grow at a much faster pace.
    The rise of sovereign wealth funds clearly has implications 
for the international financial system. They bring benefits, 
but they also raise potential concerns.
    On the benefit side, as the President reaffirmed in his May 
10 statement, the United States is committed to open investment 
and advancing open markets at home and abroad.
    The depth, liquidity, and efficiency of our capital markets 
make the United States the most attractive country in the world 
in which to invest.
    And the U.S. economy benefits from that open investment 
including investment from sovereign wealth funds.
    These benefits come in the form of jobs, R&D spending, and 
higher wages. Over 5 million Americans, 4.6 percent of the U.S. 
private sector, are employed by foreign-owned firms with U.S. 
operations. These 5 million jobs pay 25 percent higher 
compensation on average than other jobs in other U.S. firms.
    Additionally, foreign-owned firms contributed almost 6 
percent of U.S. output and 14 percent of U.S. R&D in 2006. 
Foreign-owned firms reinvested over half of their U.S. income, 
about $71 billion, back into the U.S. economy in 2006.
    As many observers have pointed out, sovereign wealth funds 
have the potential to promote financial stability.
    They are, in principle, long-term, stable investors that 
provide significant capital to the system. They are not highly 
leveraged, and they cannot be forced by capital requirements or 
investor withdrawals to liquidate positions quickly.
    Yet, sovereign wealth funds also raise potential concerns. 
Investments in U.S. companies or other firms by sovereign 
wealth funds, as with other types of foreign investment, may 
create legitimate national security concerns.
    Also, sovereign wealth funds could provoke a new wave of 
investment protectionism which raises risk for the United 
States as well as the global economy.
    Sovereign wealth funds raise non-national security issues 
related to the larger role of foreign governments in markets. 
For example, through the inefficient allocation of capital, 
perceived unfair competition with private firms for their 
pursuit of strategic over return-oriented investments, 
sovereign wealth funds could potentially distort markets.
    Finally, sovereign wealth funds may raise financial 
stability issues as actual or perceived shifts in their asset 
allocations could cause market volatility.
    At the Treasury Department, we have been working on a 
number of steps to ensure the United States continues to 
benefit from investment, while addressing these concerns. 
First, we are aggressively implementing the reforms that 
strengthen the CFIUS process required by FINSA, and Executive 
Order 11858, signed by the President on January 23rd.
    I want to be clear that CFIUS reviews the investment 
transactions of sovereign wealth funds based on considerations 
of genuine national security concerns just as it would for any 
other foreign-government-controlled investment.
    FINSA protects our national security while keeping 
investment barriers low and reaffirming investor confidence and 
the longstanding U.S. open investment policy.
    Second, we have proposed, in concert with other members of 
the G-7, the creation of a multilateral framework for best 
practices. The International Monetary Fund should develop best 
practices for sovereign wealth funds, building on existing best 
practices for foreign exchange reserve management.
    These would provide guidance to new funds on how to 
structure themselves; it would reduce any potential systemic 
risks and would help demonstrate to critics that sovereign 
wealth funds can be responsible, constructive participants in 
the international financial system.
    Third, we have proposed that the Organization of Economic 
Cooperation and Development, the OECD, identify best practices 
for countries that receive foreign government-controlled 
investment. These practices should focus on avoiding 
protectionism and should be guided by the well-established 
principles established by the OECD and its members on the 
treatment of foreign investment.
    Meaningful and timely progress has been made. In May of 
last year Treasury hosted a G-20 meeting of finance ministry 
and central bank officials that included the first multilateral 
discussion of sovereign wealth funds.
    On October 19th of last year Secretary Paulson hosted a 
meeting with the G-7 finance ministers and the heads of 
sovereign wealth funds from eight countries--China, Korea, 
Kuwait, Norway, Russia, Saudi Arabia, and Singapore, as well as 
the United Arab Emirates--to build support for this idea of 
best practices.
    The next day, the IMFC, a ministerial-level advisory 
committee to the IMF, called on the IMF to begin a dialogue to 
identify best practices for sovereign wealth funds.
    In November, in response to this statement, a first 
discussion on policy and operational issues relating to 
sovereign wealth funds took place among official-sector 
delegates at a roundtable that was hosted by the IMF, and a 
separate dialogue is well underway in the OECD on investment 
policy with regard to sovereign wealth funds.
    At Treasury, we have also taken a number of steps 
internally and within the U.S. Government to enhance our 
understanding of sovereign wealth funds. Treasury has created a 
working group on sovereign wealth funds that draws on the 
expertise of both our International Affairs Division, where I 
work, and our Domestic Finance Division.
    Treasury's new market room is ensuring vigilant ongoing 
monitoring of sovereign wealth fund trends as well as 
transactions.
    Through the President's Working Group on Financial Markets, 
chaired by Secretary Paulson, we continue to discuss and review 
sovereign wealth funds on a regular basis.
    We have also initiated outreach to ensure an ongoing and 
candid dialogue with countries that have sovereign wealth 
funds.
    We are also coordinating actively with Congress, through 
staff briefings and committee hearings. As you may know, I 
testified before some of you on these issues, for the Senate 
Banking Committee, in November.
    And in June and December of last year, we provided Congress 
with updates on our sovereign wealth fund-related work in an 
appendix to our Report on International Exchange Rate Policies, 
and we'll continue to provide those updates on a semiannual 
basis.
    The Treasury Department will continue its work on sovereign 
wealth funds--analytically, bilaterally, and multilaterally--so 
the United States can shape an international response to ensure 
that these legitimate areas of concern are addressed, while 
also ensuring that the United States remains open to and 
welcoming of investment. Thank you.
    [The prepared statement of David McCormick appears in the 
Submissions for the Record on page 32.]
    Chairman Schumer. Thank you, Secretary McCormick, for your 
testimony. Now we'll go to questions. We'll try to limit them 
to 5 minutes each, to each of the witnesses.
    First, mine is on CFIUS. As you know, we have a CFIUS 
process to review certain types of foreign investment 
transactions that might raise national security concerns.
    And, as you also know, in the wake of the Dubai Ports deal, 
I was very much involved in helping Congress beef up the CFIUS 
review process.
    CFIUS has the responsibility to review certain types of 
foreign investment deals that might raise national security 
concerns.
    Now, we didn't know much about CFIUS before all of this, 
but today we don't know much more about it and the review 
process than we did 2 years ago.
    The fact is that this is still a very opaque government 
panel chaired by Treasury. It doesn't have open deliberations 
or clear guidelines which deal with the views--which show us 
which deals it reviews and which deals it does not.
    Obviously, sovereign wealth funds present different types 
of concerns than those raised by other types of foreign 
investment, particularly in regards to crossing the line 
between economic and non-economic motivations that I mentioned.
    So, here are my questions: First, do you believe that CFIUS 
and its review process can or should be made more open to the 
public?
    Second, do you believe that there is too much or too little 
political pressure based on which deals are or are not reviewed 
by CFIUS?
    And, third, do you believe that CFIUS is adequately 
equipped to address the unique issues presented by sovereign 
wealth funds?
    Under Secretary McCormick. Thank you, Senator. We, as you 
noted in your prepared remarks, are in the process of 
implementing the FINSA legislation through a new set of 
regulations that are already very consistent in our operation 
with the law.
    We believe that that legislation was a great step forward 
in bringing improvements to our process that allows us to 
maintain the open investment posture, but also, first and 
foremost, to address national security issues that arise with 
any investment.
    We think the process that's been established to date and 
required by the legislation in terms of the disclosure and the 
additional reporting after the fact on these cases to Congress 
is appropriate, and we think that the ongoing dialogue that 
we've had with Congress and many of your staffs on our 
implementation of CFIUS is also a very important step forward 
and a very important dialogue.
    In terms of political pressure our view is that we are able 
to implement our decisions on CFIUS cases, as we have been 
mandated to do, with our focus exclusively on national 
security, and I believe that I can say to you today that I 
think we have operated in that spirit, both before and after 
the passage of the legislation.
    We think that the legislation does allow us to 
appropriately deal with cases that involve sovereign wealth 
funds in the event that there is an issue of national security, 
and we also believe that the added rigor required by the 
statute in terms of the higher level of sign-off is 
appropriate, and we are executing as has been mandated by----
    Chairman Schumer. How about on openness? I mean, we still--
it's still an opaque process. Are your regulations going to 
require it to be more open, allow us to know more about which 
firms and which deals are reviewed, which are not, and why?
    Under Secretary McCormick. Well, Senator, we have new 
reporting requirements, after the fact, to Congress, as you 
know.
    I think it's a very sensitive issue to offer more 
transparency in the midst of a case, to explicitly get to the 
second question you raised, because I think the more that those 
deliberations are open, the more there's a risk of the 
potential decisions being politicized which, I know, is not the 
intent of the legislation and certainly not our intent within 
the Treasury Department.
    We come at our implementation of the legislation and each 
specific case with a very clear sense of our mandate from you 
which is to start, first and foremost, with the issue of 
national security and make a determination of whether there is 
in fact a national security issue, and that is the way we've 
implemented it.
    Chairman Schumer. Now, the other question with sovereign 
wealth funds of course is: Are decisions being made on an 
economic basis or an non-economic basis--which you really 
didn't address that much in your testimony.
    So, let me ask you this: Why should we be confident that 
these funds won't pursue other goals, now if not in the future, 
because they are owned by governments--and run by governments 
which are not solely economic entities, and they are not even 
primarily economic entities; isn't greater transparency exactly 
the sort of thing that could give both the Congress and the 
American people more confidence in the motivation of sovereign 
wealth funds?
    Under Secretary McCormick. Yes, Senator, I think your point 
is a very fair one. So, I think our starting point in all of 
this is that we do have a history of sovereign wealth fund 
investment, and that sovereign wealth fund investment has been 
long-term, stable, and commercially driven up to this point.
    But I don't think we should just accept with blind faith 
that the investment would be that way in the future, and that's 
why there is a legitimate policy issue here.
    We think that a set of best practices that includes greater 
transparency on the things you mentioned, on objectives of the 
fund, how decisions are made ultimately, how risk is managed, 
how we ensure a degree of separation between the government and 
the investment committees of these funds is critical.
    We think the IMF, through a multilateral effort, is the 
best way to achieve that and also to achieve the buy-in of the 
sovereign wealth funds who would actually implement these best 
practices.
    Chairman Schumer. You think legislation might be necessary, 
if the IMF process doesn't work?
    Under Secretary McCormick. Well, Senator, I'm hopeful that 
the process we're undertaking will work.
    Chairman Schumer. But if it doesn't?
    Under Secretary McCormick. Well, I hope that's not the 
case, Senator. The reason I say that is I think we have an 
alignment of interests here between the sovereign wealth funds, 
between the countries that are the recipients of that 
investment, and that alignment is to keep our markets open 
because that's in their interest as well as ours, and to give 
confidence to investment recipients that those investments 
truly are commercially driven.
    Chairman Schumer. Thank you.
    Vice Chair Maloney.
    Vice Chair Maloney. Thank you. I would like to ask you 
about the legislation that gave the Treasury Department the 
power to define ``foreign control,'' and how are you planning 
to define ``control'' in the new regulations for 
implementation?
    Under Secretary McCormick. Congresswoman, we have defined 
``control'' as the power to determine important matters 
affecting the U.S. company in which the foreign company is 
invested.
    That definition is a functional one rather than a bright 
line. And by that, I mean that we look at a number of factors 
in terms of determining whether control does, in fact, exist.
    The current regulations assume a presumption that a share-
holding of 10 percent or less--or of less than 10 percent--is 
not control.
    But we actually look at a whole series of factors and, in a 
number of cases, have determined that control does, in fact, 
exist with investment lower than 10 percent.
    Those other factors include: Board participation; they 
include committees; they include minority rights, so we look at 
that whole set of factors in determining whether the investment 
is indeed passive or whether control exists.
    We have not published the new regulations, as you 
mentioned. They will come out later this spring. I would expect 
that our general approach to control would remain very 
consistent with that.
    Vice Chair Maloney. And when will you publish them?
    Under Secretary McCormick. Ma'am, they're due later this 
spring.
    Vice Chair Maloney. Later this spring. Now, the 
Administration has come out and said that they support 
voluntary guidelines and a voluntary code of conduct. How soon 
will such guidelines be available, and even assuming that 
they're successful negotiations of these guidelines, how in the 
world are we going to enforce them? Your comments on that, and 
why should we put our faith in an as-yet-to-be-written 
voluntary code of conduct that has no enforcement?
    Under Secretary McCormick. Well, I think, Congresswoman, it 
starts with the premise that I made earlier which is we believe 
it's in the best interests of the investors and the investment 
recipients to create more clarity around best investment 
practices and transparency around the process.
    We think getting the sovereign wealth funds to be active 
participants in that is a very important part of striking the 
right balance in this whole thing.
    Vice Chair Maloney. But the news reports that I've been 
reading there they're pushing back; they think they're 
unnecessary; they're saying they're not going to adhere to 
them, and they're just brushing them off.
    But I'd like to ask you about a comment from former 
Secretary Larry Summers. He's suggested that one way to avoid 
these sovereign wealth funds from exerting control or 
influencing management would be to have them invest through an 
intermediary. Do you think that's workable? What's your comment 
on that idea?
    Under Secretary McCormick. Well, I think, as Larry Summers 
has spoken out about this a number of times and, as I 
understand his remarks, is supportive of the voluntary best 
practices idea, whether the funds invest through an 
intermediary or whether they invest directly, the investments 
could be passive or have control.
    So, through the CFIUS implementation we can look through 
the structure of the investment to ensure that if control is in 
place that we do an active national security review to ensure 
that no national security interests are at stake.
    Vice Chair Maloney. Do you think it's possible to prohibit 
sovereign wealth funds from participating in or influencing 
management decisions once they own a stake in a company? And do 
you think you should continue with the 10-percent passive 
ownership? Are you going to put that into regulation? Or how do 
you stand on that?
    But many people are concerned. My constituents raise--once 
they are stakeholders and they have a voice at the table, they 
can influence management; they can influence direction.
    Under Secretary McCormick. Congresswoman, the definition, 
again, that we use is the ability to determine key decisions 
around the direction of the company. The 10-percent rule, as 
you referred to it, is a general guideline, and if there are 
other factors that give the acquiring company or the investing 
company greater ability to determine decisions, then that may 
in fact constitute control, and we've acted in that way in 
previous cases.
    Vice Chair Maloney. Are you concerned that these emerging 
sovereign wealth funds could deliberately or inadvertently 
cause market disruptions?
    Under Secretary McCormick. Congresswoman, as I said in my 
prepared remarks, I think that's a legitimate issue for us to 
ask. I think that conversation and many of the points you raise 
need to begin with the fact that we've looked at this very 
carefully and that has not been the case up until this point.
    And so our challenge as policymakers is to ensure that we 
guard against that possibility in the future, but understanding 
that we do not have evidence that sovereign wealth funds have 
invested for anything other than commercial purposes.
    Chairman Schumer. Thank you, Vice Chair Maloney.
    Senator Klobuchar.
    Senator Klobuchar. Thank you. Mr. McCormick, earlier you 
talked about national security as a guide. Ambassador 
Eizenstat, who is here with us, has stated that our definition 
of national security as far as it is used when discussing the 
impact of sovereign wealth funds remains largely undefined.
    To what extent could we develop a more clear definition of 
what investments impact national security so that we wouldn't 
have murky transactions like the one in 2006 when Dubai was 
looking at the U.S. port investments?
    Under Secretary McCormick. Senator, we think that the 
definition we use in the CFIUS process is the appropriate 
starting point for how we think about a particular transaction.
    And I think there is a case to be made that we need to take 
care not to broaden that definition to the point where we 
expand it and ultimately risk sending a message that we're not 
open to investment.
    Right now, the definition we have is questioning whether 
indeed the transaction can jeopardize national security.
    It's not specific in terms of the types of sectors or the 
types of categories because the CFIUS Committee needs to have 
the liberty to look at each transaction on a case-by-case basis 
and ask themselves the fundamental question on whether in fact 
national security is at risk.
    As I mentioned in my remarks, sovereign wealth funds do 
raise issues that go outside that definition of national 
security in terms of non-commercial investment behavior which 
we need to guard against, but in our view, CFIUS is not the 
best way to do that.
    Senator Klobuchar. It just seems to me--as we have seen 
such a change in our national security and the kinds of threats 
to our national security, do you think that CFIUS has changed 
with the times?
    Under Secretary McCormick. Congresswoman, given a lot of 
interest and input from Congress and a lot of good work that I 
think has happened over the last couple of years, I do think 
CFIUS has evolved dramatically, and I think that if you talk 
about national security or national interest in the broader 
sense of the words I think we need to take care not to forget 
that, ultimately, remaining open to investment and ensuring 
that investment comes into the United States is a critical 
component of our national prosperity.
    Senator Klobuchar. And I think it can do very good things, 
but my concern is--I was just thinking of our recent stimulus 
package where, you know, we pumped $150 billion into the 
economy in order to ward off a recession and sovereign wealth 
funds now account for almost $3 trillion of investment in the 
United States and we're looking at that number growing to, I 
think it's $10 to $15 trillion in the next 5 years.
    Abu Dhabi's fund alone is almost five times the size of our 
recent stimulus package. Do you think that there is ever a 
point at which we would not only oversee and investigate these 
investments, but we would also look at capping the overall 
amount of sovereign wealth funds in our economy?
    Under Secretary McCormick. Congresswoman, I start with, I 
think, a recognition as I know you do that the global economy 
has changed dramatically and that a continued flow of 
investment from country to country is an important driver of 
our economic prosperity. That capital that comes from sovereign 
wealth funds within the overall scheme of the global economy--
as I said, there's $190 trillion of financial assets--is still 
a relatively small mark, and even if the projections that we 
see, which one might question, because they are very 
significant growth rates over the next 4 or 5 years, even if 
those are true, sovereign wealth funds would still be a very 
small percentage of financial assets.
    Now, those assets will flow to places that are open and 
attractive for investment, so one of the challenges is that we 
have those sovereign wealth funds invested in the United States 
and have some of the issues I have raised as concerns.
    Another issue is that they don't invest in the United 
States, and we don't have a climate that continues to attract 
investment from that asset class as well as lots of others. So 
that's the balancing act that we collectively need to strike.
    Senator Klobuchar. Well, you know, we have some sovereign 
wealth funds that have been around forever--Kuwait, Norway--and 
they have decades of investment experience. But then you have 
all these startup funds. I think there's one in Saudi Arabia 
and also a startup of a fund with at least $6 billion in 
assets.
    As these funds gain popularity as a higher-risk investment 
vehicle, do you think there should be anything done to oversee 
the startup of these new funds?
    Under Secretary McCormick. Well, you've touched on what I 
think is one of the real challenges. There are some 40 
sovereign wealth funds, and you have some that have been around 
for 30 years, are very sophisticated in terms of their 
investment practices, very sophisticated in terms of how they 
think about the market, a long track record of commercial 
investment, and then you have some that are brand new with 
enormous chunks of money.
    And so as we collectively think about how we address that, 
what we're really trying to do is move some of those new funds 
up the continuum in terms of how they think about best 
practices, and help solidify and clarify some of the best 
practices that are already existing in some of the more mature 
funds, also impose new best practices where there's just things 
that aren't where they need to be.
    So, you've hit on something that's very clear which is that 
we need to help some of those new funds in terms of how they 
think about their investment practices.
    Senator Klobuchar. Thank you.
    Chairman Schumer. Senator Webb.
    Senator Webb. Thank you, Mr. Chairman.
    Mr. McCormick, I assume you would agree with the notion 
that irrespective of the size of the investment, investment 
from different countries with different political systems 
potentially make us more vulnerable as a nation?
    Under Secretary McCormick. Senator, I think the answer to 
that would be yes, and even to be more precise, some of the 
connections between the investor and the government in some of 
those countries raise legitimate questions.
    Senator Webb. With respect to governments, for instance, 
you mentioned in your testimony Kiribati and Kuwait. I've been 
to Kiribati and I've been to Kuwait, and it's not exactly China 
in terms of the vulnerability of this country to the strong 
investment patterns of their governments.
    That would seem to me to be inarguable.
    Under Secretary McCormick. I think different countries do 
raise different investment questions.
    Senator Webb. Right. And so one of the concerns that I and 
a number of other people have, which Senator Bayh, I think, 
addressed very well in a piece recently in the Wall Street 
Journal, is that this isn't simply a snapshot process in the 
way that we are dealing with one investment or another, but it 
is potentially a cumulative process that could affect the 
freedom of the U.S. Government to act in certain situations 
down the road. Wouldn't you agree that that's a potential 
danger here?
    Under Secretary McCormick. Our CFIUS mandate is to look at 
each case in a very clear way and ask the question, as you just 
zeroed in on, on whether there is indeed a national security 
issue associated with that transaction.
    But I do think it's a legitimate question or need to 
periodically step back and look at the broader investment 
patterns which we do on a periodic report to Congress that 
addresses some of the more fundamental questions of how all 
this fits together.
    Senator Webb. Particularly with respect to countries that 
may have different viewpoints on issues that relate to the 
national strategy of the United States.
    Could you describe the conditions under which the U.S. 
Government directly invests in American corporations?
    Under Secretary McCormick. Senator, to my knowledge the 
Federal Government, with, I think, some rare exceptions in 
history, does not typically----
    Senator Webb. Because it would be a conflict of interest, 
it would be assumed to be a conflict of interest. How about the 
U.S. Government directly investing in foreign corporations?
    Under Secretary McCormick. Not typically the case.
    Senator Webb. So you would agree, I would think, that this 
is something of an anomaly when we're inviting foreign 
governments to do something that our Government itself does not 
do?
    Under Secretary McCormick. Senator, I think we went back 
and forth in the last hearing, and I did call out that there 
are some exceptions at the State level.
    Senator Webb. But that's not what we're talking about here.
    Under Secretary McCormick. The Alaska Permanent Fund, for 
example, is characterized by most analysts as a sovereign 
wealth fund, but as a general rule of thumb, I think your 
assessment is correct.
    Senator Webb. OK, thank you, Mr. Chairman.
    Chairman Schumer. OK, thank you, Mr. McCormick, for your 
testimony. We're going to continue to pursue this issue.
    Vice Chair Maloney. May I ask him about one thing?
    Chairman Schumer. Please go ahead, Ms. Vice Chair.
    Vice Chair Maloney. May I ask just one question about a 
company? There's been several press reports on the Hu-Wai 
Technologies buying 3M Corp, 3C Corp, and I know that it was 
under CFIUS review.
    Has that been completed, or is it still under CFIUS review?
    Under Secretary McCormick. Congresswoman, if you'll forgive 
me, I really am not able to comment on a specific case.
    Vice Chair Maloney. But is it still under review? That's my 
question?
    Under Secretary McCormick. What I can confirm there is that 
both parties have acknowledged publicly that the case is in 
review.
    Vice Chair Maloney. OK, thank you.
    Under Secretary McCormick. Thank you.
    Chairman Schumer. Thank you, Mr. McCormick.
    Now let's call our next two witnesses, Stuart Eizenstat, as 
well as Douglas Rediker.
    Chairman Schumer. Our first witness is Stuart Eizenstat. He 
is a partner at the law firm of Covington & Burling. He has had 
a lengthy and distinguished career in public service as Deputy 
Secretary of the Treasury under the Clinton administration; 
Ambassador to the European Union; Under Secretary of Commerce 
for International Trade; and as Chief White House Domestic 
Policy Advisor to Jimmy Carter. In his role as Special 
Representative of the President and Secretary of State on 
Holocaust-Era Issues he successfully negotiated major 
agreements with many of the European countries covering 
restitution payments.
    He regularly writes on issues regarding international trade 
and international law and economics, and is a graduate of the 
University of North Carolina and Harvard Law School.
    Douglas Rediker is currently co-director at the Global 
Strategic Finance Initiative at the New America Foundation, an 
initiative that addresses the fast-changing relationship 
between global capital flows, financial markets, foreign 
policy, and national security.
    Before joining the foundation, Mr. Rediker spent over 16 
years in Europe where he served as senior investment banker and 
private equity investor for some of the world's leading 
financial institutions including Salomon Brothers, Merrill 
Lynch, and Lehman Brothers.
    More recently he was a London-based partner in a private 
equity firm where he was jointly responsible for establishing 
and managing the group's European operations. In addition, he 
has served on the board of directors of several companies, and 
written regularly on issues regarding international trade and 
economics.
    We are going to ask each of you to limit your statements to 
5 minutes because we have a vote coming up at 4:30--I believe 
it is at 3:30--and then we will ask questions. So Ambassador 
Eizenstat, your entire statement will be included in the 
record.

STATEMENT OF AMBASSADOR STUART EIZENSTAT, PARTNER, COVINGTON & 
     BURLING; FORMER DEPUTY SECRETARY OF THE TREASURY, AND 
        AMBASSADOR TO THE EUROPEAN UNION, WASHINGTON, DC

    Ambassador Eizenstat. Thank you, Mr. Chairman, and 
colleagues for holding this important hearing.
    Permit me to say at the outset that the challenges provided 
by the some $3 trillion in sovereign wealth funds from China 
and Russia to the Gulf States and Saudi Arabia are as much a 
reflection of our own economic problems as they are about 
sovereign wealth funds themselves.
    Their remarkable growth and their decision to invest more 
broadly in a portfolio beyond the investments by their central 
banks and treasury bills is a reflection of our own growing 
dependence on expensive foreign oil and our massive Current 
Account deficit.
    All of us need to be spending as much time and energy, if 
not more, on dealing with these structural economic problems as 
on the consequences of the problem. In effect, we should look 
at sovereign wealth funds as recycling the U.S. petro dollars 
and our appetite for products from China and emerging markets.
    I am a strong believer in the importance of the free flow 
of capital around the world and the value of foreign direct 
investment in creating jobs and adding to creativity and 
innovation in our economy.
    For sure there is a difference between private foreign 
investment and that of sovereign wealth funds and their close 
cousins State-owned enterprises. But even there the distinction 
is not always as clear as it may seem.
    For example, many European companies have some government 
ownership through Golden Shares, and many European governments 
now are trying to create so-called national champions to better 
compete in the global marketplace.
    We need to be careful that in dealing with sovereign wealth 
funds we don't deter the free flow of international capital. I 
believe that sovereign wealth funds do bolster the U.S. economy 
and that on balance they are a significant net plus for our 
economy.
    If we take the ``welcome'' sign off, they will invest their 
growing wealth elsewhere in the world. At the same time, there 
are legitimate concerns that need to be addressed heavily 
revolving around the need for transparency and good governance.
    This in my opinion does not mean that they must divulge all 
their holdings and investments, but rather that they need to be 
transparent in their governance, their relationship to their 
governments, their processes, their goals, and determining 
whether they obtain subsidized government financing on 
individual deals which would create an unfair advantage over 
U.S. or other private foreign corporations who have to rely on 
private credit markets for competing for the same acquisitions.
    We have a legitimate interest in assuring that sovereign 
wealth funds have a purely commercial, not political or 
national security, interest in their investments in our 
country.
    Beyond transparency and good governance, there are 
certainly a limited number of matters in which national 
security is implicated by sovereign wealth funds or State-owned 
enterprise acquisitions. But in a globalized world economy in 
which we no longer have a monopoly on hardly any product, it is 
important that national security not be defined so broadly that 
it is used as a pretext to deter foreign investment.
    Mr. Chairman and Members of the Committee, I would urge 
Congress at this point not to legislate or to pressure 
regulators to heavily impose regulations on sovereign wealth 
funds. The reason is that Congress has reasonably and recently 
provided the executive branch with the means to deal with 
genuine national security threats from sovereign wealth funds 
or state-owned enterprises in the form of last year's 
bipartisan Foreign Investment and National Security Act, FINSA, 
which Chairman Schumer was clearly a leader in developing.
    We should give the CFIUS process under this new legislation 
time to work through these sovereign wealth investments before 
we come to any further conclusions.
    Moreover, it is critically important that Congress not take 
unilateral action. It is vital that we try to develop 
multilateral principles.
    For example, Europe has similar concerns as we do with 
sovereign wealth funds and State-owned enterprises. As just one 
example is Russia's Gazprom expressing interest in acquiring 
energy assets in the UK and elsewhere in Europe, eliciting a 
strong response from government leaders and from EU officials.
    The Bush administration has wisely agreed to a multilateral 
approach. The IMF, as we've said, is directly working now with 
major sovereign wealth funds on developing a set of Best 
Practices which they hope to have completed by April.
    The OECD is doing the same with host countries and their 
report will be ready at roughly the same time. In addition, the 
Government Accounting Office is examining sovereign wealth 
funds and, as we've noted, Treasury will have its regulations 
out in the spring on the new FINSA law.
    We should let these activities play out, and in particular 
see how sovereign wealth funds react to the IMF effort to 
develop a set of principles focused on transparency before we 
consider anything beyond voluntary principles.
    In short, as I've stated in more detail in my testimony, I 
firmly believe we can both protect our national security and 
remain open to the vast majority of sovereign wealth funds 
investments in the United States, most of which do not 
implicate national security.
    One example: The purchase, for example, by Dubai of 
Barney's hardly touches on national security. For sure there 
are going to be some highlight cases which do, but by and large 
most of these investments really do not touch national security 
interests, and we have to be very careful that we distinguish 
those that do not from those that might.
    [The prepared statement of Mr. Eizenstat appears in the 
Submissions for the Record on page 36.]
    Chairman Schumer. Thank you, Ambassador.
    Mr. Rediker.

  STATEMENT OF DOUGLAS REDIKER, CO-DIRECTOR, GLOBAL STRATEGIC 
 FINANCIAL INITIATIVE, THE NEW AMERICA FOUNDATION, WASHINGTON, 
                              D.C.

    Mr. Rediker. Thank you, Mr. Chairman, Madam Vice Chair, and 
Members of this Committee for the honor of addressing you.
    I am particularly pleased to be invited to speak before you 
because I was born and raised in New York City which I believe 
puts me in very good company here today.
    Chairman Schumer. What high school did you go to, Mr. 
Rediker?
    Mr. Rediker. Fieldston.
    Chairman Schumer. Fieldston? Hmm, very nice.
    Mr. Rediker. Thank you.
    [Laughter.]
    Mr. Rediker. As a general matter, I believe that both U.S. 
and global economies are strengthened by the free flow of 
investment capital and increased liquidity that open markets 
provide.
    As significant providers of capital to these markets, 
sovereign wealth funds have thus far been a positive influence 
in U.S. and global markets.
    Recently, significant capital injections by sovereign 
wealth funds in several major financial institutions have been 
a stabilizing force at a time of market uncertainty and 
volatility.
    Capital flows from sovereign wealth funds benefit U.S. 
investors, companies, and workers not only in the financial 
services sector but more broadly, as increased liquidity 
results in higher stock and asset prices and lower risk 
premiums.
    It is indisputable that funds from foreign governments, 
whether in the form of central bank reserves or through 
sovereign wealth funds, have contributed to more benign 
financing conditions in this country than would have otherwise 
been the case.
    While I believe that continued investment by sovereign 
wealth funds is positive and should be encouraged, I also 
believe that the nature and scale of these investment funds 
warrants continued vigilance and oversight by Congress.
    Especially when compared with other industrialized nations, 
I believe that this country's national interests are relatively 
well protected and well regulated.
    National security and market integrity are already 
protected, not only by CFIUS and FINSA legislation, but also 
through existing laws which prohibit, restrict, or require 
disclosure from foreign investors in areas as diverse as 
securities trading, export controls, ownership of media and 
communications assets, and the broad protections afforded by 
our antitrust laws.
    There are of course some areas that warrant particular 
attention. I believe the U.S. Government should continue to 
support calls for increased sovereign wealth fund disclosure. 
Transparency would benefit the markets by calming suspicions 
aroused by lack of information and would increase the 
likelihood that markets would be alert to concentration issues 
and potential contagion risks.
    Transparency should be part of a broader code of Best 
Practices adopted in a collaborative effort by sovereign wealth 
funds. I do not support calls to impose mandatory disclosure 
obligations as a prerequisite for investing in U.S. markets as 
I believe these would be ineffective and potentially 
counterproductive.
    These funds should recognize the benefits of smooth, 
functioning markets and financial stability and may also 
embrace the opportunity to judge their own returns against 
relevant indices, and even their peer group, as well as to 
demonstrate that they are investing in a manner consistent with 
the best interests of the people of the countries that they 
govern.
    Within the United States, I believe that the investment 
environment for sovereign wealth funds should be as clear and 
predictable as possible. In particular I suggest that specific 
guidance be provided regarding the interpretation of control 
which would require a formal CFIUS review.
    One of the most compelling lessons I learned during my 
career in finance was that investors abhor uncertainty which 
discourages investment by injecting unquantifiable risk into an 
investment decision.
    If a sovereign wealth fund complies with all relevant laws 
and regulations and is later subject to unforeseen scrutiny and 
delay, it is likely that that investment decision will be 
negatively impacted.
    Over the past decade, international capital markets have 
transitioned away from U.S. domination to being truly global in 
scope and leadership. Sovereign wealth funds are but one 
manifestation of the past decade's shift towards a truly multi-
polar global financial marketplace, a marketplace where the 
sources, intermediation, and destinations of capital outside of 
the United States have grown at a tremendous pace.
    Those who seek alternatives to invest in and trade through 
U.S. financial markets now have multiple options to choose 
from.
    When addressing sovereign wealth funds it is imperative 
that this Committee take into account the crucial issues of 
this country's national and economic security, financial market 
integrity, and the continued competitiveness of our capital 
markets.
    As part of that effort, I believe that professionally 
managed sovereign wealth funds with some $3 trillion of capital 
to invest, who agree to abide by the rules that we set for 
investing in this country, should be encouraged to do so.
    Thank you.
    [The prepared statement of Mr. Rediker appears in the 
Submissions for the Record on page 40.]
    Chairman Schumer. Well, thank you both for your excellent 
testimony.
    I guess my first question is to both of you. You heard my 
opening remarks where I stressed both the benefit that these 
investments have in the United States, particularly given our 
economic situation where we don't have a wealth of capital and 
we have a need for it, but also the call for transparency in a 
variety of ways.
    The reason for transparency is just to make sure we are not 
crossing the economic line and getting into political 
involvement, which a government-owned fund might naturally have 
the inclination to do.
    First, I laid out a number of things that were measures of 
transparency. Do you generally agree with those? Disagree? Tell 
me what you think.
    And do you think the funds now are transparent enough is, I 
guess the second question I would ask in relation to that: 
Ambassador?
    Ambassador Eizenstat. I generally agree. I think 
transparency is absolutely crucial because transparency also 
gets to the issue of governance. We want to know the 
relationship that these funds have to their governments, to 
ministries. We want to know whether the boards of directors and 
the management of sovereign wealth funds are in fact as they 
are; for example, with Gazprom, which is really a State-owned 
enterprise, are really government ministers or are they private 
individuals? All the issues of governance can get--we can get 
to through the issue of transparency.
    I really hope that sovereign wealth funds understand that 
transparency is also in their interest as well. That is because 
it will cool tempers here. It will increase their own levels of 
governance. And this is also important.
    Now one other thing on transparency, Mr. Chairman. When you 
come to an individual transaction the question is--and 
transparency is a way to find it out--is the government 
subsidizing the particular acquisition in question?
    Is it providing below-market financing? Which if it does is 
unfair competition with private foreign corporations or with 
U.S. companies trying to acquire the same asset. That is a very 
important issue.
    Now in terms of models, Temasek is a sovereign wealth fund 
that publishes annual reports. They have since 2004. And you 
know, they have a good track record. Others do not. So I think 
that this exercise with the IMF is terribly important, and it 
should be as much in their interest as it is in ours.
    Chairman Schumer. Mr. Rediker.
    Mr. Rediker. Thank you, Mr. Chairman.
    First of all in terms of the question: Are they transparent 
enough now? Well, obviously many are not. In the case of the 
Norway they are. Temasek does a very good job. But I think that 
if there is a malicious motivation on the part of a sovereign 
wealth fund or State-owned enterprise, there is no level of 
transparency either we on a bilateral basis or the IMF could 
impose on them that would actually cause them to disclose 
something that they were not willing to disclose if they really 
have a motivation to hide it.
    So even a fund like that of Norway, which does an excellent 
job, almost too much information, does not disclose its 
derivative positions. If a country, like Russia for example, 
that we did not believe was looking out for our best interests 
wanted to comply with a code of best practices, but still 
wanted to hide something, they could do it.
    So I think we should not get--I certainly agree that we 
should be pushing them for increased transparency and 
disclosure, but let's not make believe that that is going to 
solve all of our ills.
    Chairman Schumer. It would certainly be a lot better to 
have it than not.
    Mr. Rediker. One hundred percent. And I would encourage it.
    Chairman Schumer. I could understand if there were a 
nefarious purpose, but if there's a nefarious purpose I suppose 
the foreign government could disguise its investment with an 
individual and not do it through a sovereign wealth fund.
    Mr. Rediker. Absolutely. But I encourage increased 
disclosure and transparency. But I would echo my colleague's 
comment here which is that it is far more effective if they 
believe it is in their interests as well. And I think that that 
is entirely consistent with the undertakings of the IMF----
    Chairman Schumer. I think you may find that I generally 
believe most of the countries have purely economic purposes. 
You take a small gulf oil state which has tons of money and no 
place to invest it on its own, obviously they want to have a 
good rate of return.
    There are other countries--I mean Russia would be the most 
obvious--where the government relishes using economic threat 
and has. China is a little further over. And you know, you 
get--I can have the luxury, which say Mr. McCormick does not, 
of sort of speculating about these countries, but obviously it 
goes into the decision.
    My final question to each of you is:
    Since the IMF guidelines will be voluntary, what do we do 
if there are nations that do not wish to abide by them? I think 
most will, because as I agree with both of you it is in their 
interests, particularly if their motivations are good, but what 
do you do if a country says no?
    Ambassador?
    Ambassador Eizenstat. This is a very difficult question. 
First, I hope that most will. But if hypothetically some do 
not, it seems to me then you get into two types of investments.
    One is that I would be less concerned even for a sovereign 
wealth fund that does not abide by voluntary guidelines if they 
are investing in real estate, and a hotel, and a retailer, 
where there is really no national security interests.
    However, if they decide to invest in anything that 
implicates the CFIUS process, then CFIUS could have a 
presumption against acceptance and make it clear, because I 
think as Mr. Rediker said, and Dave McCormick, certainty is 
very important. They should have the knowledge that if they do 
not abide by these rules, if they are not good international 
citizens--and we talk about a globalized economy. A globalized 
economy also means accountability and responsibility by 
emerging markets and developing markets to play by 
international rules. That is what WTO rules are all about.
    So I think that in those circumstances they should know 
that there is at least a presumption when they're in the CFIUS 
process and touch on national security interests that would be 
a presumption against such investments.
    Mr. Rediker. I would certainly agree with everything that 
Ambassador Eizenstat said. I would point out, though, that in 
general if an investor sovereign wealth fund is investing 
solely in a passive capacity, then it does not trip into many 
of these whether it's CFIUS or the other disclosure or approval 
processes.
    ADIA, for example, out of Abu Dhabi has been a model 
investor for many decades and has not been the most forthcoming 
in the area of transparency, but has not raised its investment 
in any area that has caused us any national security or market 
concerns.
    So I think that the existing process, as Ambassador 
Eizenstat said, should take into account whether they are being 
forthcoming, and whether they are being transparent if it falls 
into a CFIUS review process, but otherwise I think the market 
has functioned reasonably well in nonvoting passive stakes and 
we should not be terribly concerned about it.
    Ambassador Eizenstat. Let's remember, if I may say, Mr. 
Chairman, there really are two things that trigger CFIUS, and I 
was involved on the government side and sometimes now on the 
private side. There are two things.
    One is the issue of control which, as David McCormick said, 
is not mechanical. There is a presumption on 10 percent, but 
the real issue is you could have 1 percent and if you control 
the board, if you control management, if you have a say-so over 
the budget, if you have say-so over acquisitions or 
divestments, then you move from passive to control. So control 
is one.
    And then the national security link is the second. If you 
don't touch either of those, which is the case in most of these 
investments, then the issue of opaqueness becomes less of a 
problem.
    It would be desirable, but I would not say it should create 
a necessary presumption against the investment.
    Chairman Schumer. Thank you both for what you're proposing. 
Aside from the national security, which is separate and apart, 
there is sort of a scale of push and pull between control and 
transparency, or ``influence'' is a better way to put it, based 
on what the Ambassador said, influence and transparency.
    The more influence you have, the more transparency you 
need; the less, the less. It is interesting.
    Vice Chair Maloney.
    Vice Chair Maloney. Thank you, Mr. Chairman.
    The CFIUS process is voluntary, as you know, and its main 
thrust--as you both said--is national security, homeland 
security. But Ambassador Eizenstat, you raised another issue 
that is incredibly important. And that is, competitiveness, 
market and financial security for our own firms to be able to 
compete against government-subsidized entities.
    I know since I've read many CFIUS cases it is very hard to 
determine what percentage is influenced by a government. 
Oftentimes they incorporate in different countries, all over 
the place. One right on top of the other. And you really have 
to have a subpoena to figure out who really owns it.
    But even in the cases where foreign governments were buying 
stakes in our own American firms, I was wondering were American 
investors given the same opportunity to buy in at the same 
terms? I never saw that discussed in detail.
    But I think that something that you raised is: If a foreign 
government is subsidizing a shell company to compete and buy 
properties that are not related to national security, they have 
a tremendous advantage that can undercut the competitiveness of 
American businesses. And my question is:
    Aside from the national security--CFIUS is taking care of 
that--this competitive advantage that they have, and what kind 
of safeguards should we put there? I believe this is a separate 
question from CFIUS which is primarily national security and 
security concerns.
    But buying Barney's for example, that is obviously not a 
national security concern, but if the government is subsidizing 
it then an American cannot in any way compete in buying it. 
What protections do you think we should have for American 
commerce just in the competitive atmosphere of government 
subsidy, government-sponsored enterprises buying up real estate 
and companies in America? Or stakes, important stakes, passive 
stakes in companies in America?
    Ambassador Eizenstat. This is a very difficult and 
appropriate question. Again, within the CFIUS domain, CFIUS can 
and does have a great capacity to bore into the governance of 
companies, to look at shell companies and so forth.
    Vice Chair Maloney. I am very aware of that. I have 
followed that, and they can get to the shell companies. But 
those that are not part of national security, that is the 
concern in my question.
    Ambassador Eizenstat. I understand, and it is an 
appropriate question. I think that there really is not a 
vehicle for dealing with that other than perhaps putting some 
oversight or public pressure when such a transaction occurs.
    To the extent that there is competition between a State-
owned enterprise that is subsidizing that transaction, or a 
European national champion that is making that acquisition on a 
private company, then the private company would probably have 
to go to the Congress and urge that Congress look at that and 
insist on some kind of a level playing field.
    But there is currently no structure to deal with that. In 
terms of whether legislation should be necessary, I would 
prefer to see if there are not some other ways to deal with 
that. But it certainly is a very vital question and one that we 
should look at more closely.
    Vice Chair Maloney. But it is not something that a business 
person or company can go to Congress with, because it usually 
happens very quickly. You pick up the paper and find out that a 
foreign entity, a sovereign entity has bought a major company 
or a major stake, and it is not clear whether Americans were 
given an opportunity to compete for it, and certainly they 
cannot compete if it is government subsidized.
    Ambassador Eizenstat. But there the market is taking care 
of it in a sense if--and again hypothetically let's say 
Barney's--decides that they do not want to auction themselves 
and get a better price, and turn down a foreign acquirer, even 
one that is subsidized, that is their market decision.
    If they were wise, perhaps, and again I am using this only 
hypothetically, they would say, well, let's see what better 
deal I can get in the market from another company. And then you 
would have a more transparent process.
    So if a company is willing to sell itself even to a foreign 
entity that is subsidized, that is its decision and the 
marketplace will basically bear that out that no national 
security implications. They might be wise again to have a more 
transparent process where they give other bidders the 
opportunity, but I would be prepared by and large to let the 
market take care of that.
    Vice Chair Maloney. But obviously American companies cannot 
compete if it is government-sponsored and government-
subsidized.
    Mr. Rediker, would you like to respond?
    Mr. Rediker. Yes, please, Madam Vice Chair. I think I am 
not sure I understand the concept of ``subsidy'' here. Because 
my focus on this general issue would be when we have a Barney's 
transaction, for example, a competing bidder from the United 
States would likely look to its bankers and to the capital 
markets to provide leverage in the credit markets to enhance 
its return on its equity.
    The real issue here is that sovereign wealth funds with 
several trillions of dollars under management do not need to 
access those credit markets. So I am not sure that it is the 
subsidy that would be my concern; rather, it would be the fact 
that sovereign wealth funds have a lot of liquid capital to 
invest in equity right now without regard to the market turmoil 
which would affect those in the private sector that are usually 
more subject to the volatility of those capital markets to 
finance the returns on those investments.
    Vice Chair Maloney. Well, I think that you have raised an 
important point, Ambassador Eizenstat, and I do not think that 
there is anything out there to really level the playing field 
for American firms.
    I note that under the CFIUS process, which only kicks in 
when it is a national security concern, they can spend a year 
looking at the shell company and finally figure out that the 
shell company is owned by the government and then turn it down.
    You do not have anything like that in the regular commerce 
that is not part of national security. So what do you think we 
should do about it, if anything? If you leave it to market 
forces, then our businesses that are not subsidized would just 
be beaten out of the market.
    Ambassador Eizenstat. Well, I mean at this point, with the 
exception of very few cases, I have not really heard of U.S. 
companies who are complaining that they are being beaten by 
these kinds of subsidies, outside of a CFIUS context.
    If it became more of an issue, it is something Congress 
could look at, but I think at this point I am prepared to let 
the market take care of itself and let the company to be 
acquired make the decision about whether it is getting a better 
deal.
    Also, there are many other factors beyond the question of 
sovereign wealth funds. For example, a U.S. company may wish to 
be acquired by another U.S. company in terms of technology, 
management teams, expertise. Most of these sovereign wealth 
funds are not in a position to be able to control any kind of a 
sophisticated U.S. company, at least without being passive 
investors and allowing U.S. management to participate.
    So I think the market by and large will sort that out.
    Vice Chair Maloney. Well, my time has expired.
    Chairman Schumer. Well, I want to thank both witnesses. 
This hearing has explored the issue, I think, in a careful and 
thoughtful way. We have a ways to go, obviously. This is a new 
area. There are dangers, but there are dangers to doing 
nothing; there are also dangers to doing too much, as you both 
pointed out; and we are going to have to thread that needle. 
And so far I think we are off to a pretty good start.
    So I thank both of you, as well as Secretary McCormick and 
my colleague, Congresswoman Maloney, as well as Senators Webb 
and Klobuchar. The hearing is adjourned.
    [Whereupon, at 3:28 p.m., Wednesday, February 13, 2008, the 
hearing was adjourned.]
                       Submissions for the Record

=======================================================================

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       Prepared Statement of Senator Charles E. Schumer, Chairman
    Good afternoon and thank you all for coming. Today the Joint 
Economic Committee is having the first hearing of 2008 on the rise of 
foreign government-controlled funds investing large sums of money in 
our economy.
    The question of the day is whether these huge pools of investment 
dollars, known as sovereign wealth funds, make the U.S. economy 
stronger or pose serious national security risks. I'm not sure that we 
will answer that question to anyone's satisfaction today, but at the 
very least, this Committee and the federal government needs to spend a 
great deal of time thinking about it.
    To help us do some of that thinking today, we're honored to have an 
outstanding panel including: the current Treasury Undersecretary, David 
McCormick, a former Treasury Deputy Secretary under President Clinton 
and former Ambassador to the European Union, Stuart Eizenstat, and 
prominent foreign investment expert, Douglas Rediker.
    The initial focus of Congress is correctly on the transparency of 
these funds and whether that is best achieved voluntarily working 
through the IMF, or if that doesn't work, through legislation. My 
preference would be for the former, but we may have to consider the 
latter.
    I would like to take a few minutes to discuss the broader economy 
and why I believe we are faced with such an increase in investment by 
sovereign wealth funds in U.S. companies.
    It is no secret that our economy is in bad shape now. There is 
increasing evidence that a recession will be deeper than this 
administration is willing to admit:

     We have spent too much and saved too little as a country and as 
consumers (our national savings rate is just above zero).
     Commercial and consumer credit markets have seized.
     Home foreclosures are rising in both subprime and prime markets.
     The value of the dollar has fallen in relation to other world 
currencies.
     Job growth is at historic lows since January 2001.
     And trade deficits are ballooning to historic highs.

    But we also have long-term structural problems in the economy. The 
U.S. debt-to-GDP ratio is steeply rising, which is a reflection of bad 
fiscal policy putting tax cuts before everything else, even during 
wartime.
    Our current account deficit is at historic highs, approaching one 
trillion dollars, and this highlights massive borrowing by the federal 
government to pay for rising defense and domestic spending.
    So it shouldn't surprise us that, as Larry Summers said last year, 
``the world's greatest power has become the world's greatest 
borrower.''
    Even when the economy was going well, there wasn't enough of our 
own capital because we spend more than we save, we import more than we 
export, and we consume more than we produce. So when the economy 
slowed, we didn't have the resources to keep it moving.
    Creating a perfect sovereign wealth storm, foreign countries have 
benefited from our unwitting largess. Thanks to the Bush 
Administration's failure to control the trade deficit, address currency 
market manipulation, and bring down oil prices--foreign governments 
have a lot of extra money, and we do not.
    These governments are using their sovereign wealth funds to go on a 
buying spree in the United States.
    The bottom line is that we're overextended and there may only two 
options--neither of which is very attractive.

    1. We can allow a dramatic contraction of our economy;
    2. Or we can allow foreign investment, in a measured way, to stave 
off further job loss and keep the economy humming.

    It shouldn't surprise us that international bargain hunters have 
descended on the U.S. economy.
    The acquisition of multibillion dollar stakes in Wall Street firms 
like Merrill Lynch, Citigroup and Morgan Stanley by Asian and Middle 
Eastern sovereign wealth funds, quite naturally, has sparked increasing 
interest and concern about their impact on the U.S. economy. With 
domestic credit markets locked up, U.S. businesses seem to have little 
choice but to turn to sovereign wealth funds as a source of much-needed 
capital.
    Much of the criticism until recently has been when money is sent 
out of the United States, taking American jobs and moving them abroad. 
It is contradictory to complain about similar investments when they are 
now being made in the U.S.
    In general, foreign investment has a healthy impact on the U.S. 
economy, and I've supported it. It augments domestic sources of capital 
and provides much-needed capital and liquidity. It can also create jobs 
and improve productivity.
    However, where the foreign investor is a government or a 
government-controlled fund, I have concerns about their motivations. We 
have seen plenty of private foreign investors put money into U.S. 
companies without much evidence that they are investing for non-
economic purposes. But it would be perfectly rational to expect a 
foreign government-controlled fund to have noneconomic motivations.
    For instance, foreign governments might have an interest in 
controlling strategic assets, securing access to sensitive information 
or technology, promoting a political agenda, or cornering a market on 
raw materials. The closer foreign governments come to exercising 
control and influence, the greater my concerns.
    When Dubai Ports World attempted to purchase major U.S. seaports in 
2006, alarm bells went off. When it comes to a vital security asset 
like a port or even a basic infrastructure like a utility, we are right 
to be very concerned. If a Russian sovereign wealth fund bought a 
natural gas utility here, alarm bells would be going off again because 
serious questions and concerns would be raised.
    In this regard, sovereign wealth funds are their own worst enemies. 
Most are not transparent or publicly accountable, and we know little 
about their governance structures or fiduciary controls. So the bottom 
line is that we don't know if their decisions are made exclusively on 
an economic basis.
    We invited some of the largest sovereign wealth funds to testify 
before us today, but they directly declined or their government 
embassies in the U.S. declined for them.
    While managing directors of these funds won't appear in front of 
Congress, a number of them have been quoted recently in the press 
attempting to assure lawmakers and the public that their motivations 
are purely financial and that they do not take direction from their 
government.
    I am not yet persuaded. They need to do much more to make their 
case.
    I met recently with the head of China's sovereign wealth fund. I 
asked him about the fund's investment policies and its interaction with 
government officials, but got no real answers. I did get this nice 
glossy brochure, but it does not really tell me anything.
    It is clear we need to find out more about sovereign wealth funds--
how they are run, what drives their investment decisions. Sovereign 
wealth funds should voluntarily provide information and agree to 
guidelines that promote good governance, accountability, and 
transparency. Here are some questions they should answer:

     Do sovereign wealth fund officials report to an independent board 
of directors or directly to the government?
     Do they disclose their investment goals? If those goals change, 
is that made public?
     Are directors and the investment management team selected on the 
basis of business qualifications and not political affiliation? Are 
their professional qualifications and experience made public?
     Is there a stringent code of conduct that compels members of the 
board of directors and management to report any attempts by the 
government to influence investment decisions?
     Do they publicly disclose quarterly and annual audited financial 
statements?
     Do they publicly disclose all their portfolio holdings?

    I also want to review whether the reforms to the CFIUS process made 
by the Foreign Investment and National Security Act of 2007 (FINSA) are 
sufficient to address the unique risks associated with investments by 
sovereign wealth funds--and if not, propose additional legislation to 
close any loopholes. I will also take a hard look at the new FINSA 
regulations due to be published in the spring.
    Finally, it is important to point out that many of the countries 
with the largest sovereign wealth funds still maintain high levels of 
protection against investment in their domestic industries. I hope that 
Treasury and the U.S. Trade Representative do better to ensure 
reciprocal market access for U.S. investors.
    Ultimately, we need to maintain a careful balance between welcoming 
foreign investment and protecting national and financial security, as 
well as market stability. Sovereign wealth funds need to assuage 
concerns that they will manage their investments in terms of political 
or economic power objectives. The alternative I fear--already proposed 
by a number of lawmakers and other critics--is restrictions on 
sovereign wealth fund investments in the United States.
    My hope is that sovereign wealth funds can assure us that they will 
behave like other economic actors, and if they do so that's all to the 
good. But until they do so, they shouldn't get carte blanche.
                               __________

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  Prepared Statement of Representative Carolyn B. Maloney, Vice Chair
    Good afternoon. I would like to thank Chairman Schumer for holding 
this hearing to examine the benefits and risks of sovereign wealth 
funds investing in the United States. I want to welcome our witnesses 
and thank them for testifying here today.
    The term sovereign wealth fund has only recently entered our 
lexicon, but these government-controlled investment vehicles have been 
around and operating without incident for decades. At the moment, these 
funds are providing much needed capital to U.S. banks trying to regain 
their footing in the wake of the mortgage crisis. However, the growing 
market clout of these funds and the steep rise of their investments in 
the United States require that they receive greater scrutiny by 
Congress.
    Bush Administration policies have fostered a large amount of 
federal borrowing from overseas, a greater reliance on foreign oil and 
a weak dollar--all of which have created an environment that is ripe 
for sovereign wealth funds with extraordinary oil profits or excess 
foreign exchange reserves to gobble up American assets at bargain 
prices.
    Governments can have very different motivations than financial 
investors, so we would be remiss not to carefully examine the potential 
risks from these state-owned investment funds. Reform of the Committee 
on Foreign Investment in the United States (CFIUS) was triggered by the 
revelation that the committee gave the green light to a deal that sold 
operation of major U.S. ports to a company owned by the government of 
Dubai without any senior level review.
    With proper implementation by the Administration, the new reforms 
will strengthen the system by which foreign investment in businesses in 
the United States is vetted for security concerns, and provide 
certainty and predictability to the CFIUS process in order to expand 
economic activity, create jobs, and encourage safe foreign direct 
investment. I will continue to maintain a watchful eye over the ongoing 
implementation process, but I am confident that the Treasury Department 
intends to follow the law as I wrote it, and have received assurances 
that the department is already adhering to the new reforms.
    I welcome the Administration's efforts to work through the 
International Monetary Fund to create an international code of conduct 
that would include greater disclosure of sovereign wealth fund 
activities and governance. An important lesson of this summer's 
mortgage crisis is that when capital markets become too opaque and risk 
exposure is not well understood, the consequences can be devastating 
for institutions and individuals. Greater transparency of sovereign 
wealth funds would be a welcome development, but it may not be enough.
    Our challenge is to balance the potential risks to our economic and 
national security interests with our desire to maintain an open 
investment environment.
    Mr. Chairman, thank you for holding this hearing and I look forward 
to gaining some insights from our witnesses about the appropriate 
oversight of sovereign wealth funds.
                               __________

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     Prepared Statement of David H. McCormick, Under Secretary for 
         International Affairs, U.S. Department of the Treasury
    Chairman Schumer, Vice-Chair Maloney, Ranking Member Saxton, 
Senator Brownback and Members of the Committee, good afternoon. I very 
much appreciate the opportunity to appear before you today to discuss 
sovereign wealth funds. This is a timely hearing on a very important 
topic. At Treasury, we have been increasingly focused on sovereign 
wealth funds for more than a year now. I am pleased to be able to share 
with the Committee some of our views.
                          history and context
    First, some history: sovereign wealth funds are not new. The oldest 
of these funds date back to the 1950s in Kuwait and Kiribati. Over the 
next four decades, their numbers slowly grew. Three of the largest and 
most respected funds--the Abu Dhabi Investment Authority, Singapore's 
Government Investment Corporation, and Norway's Government Pension 
Fund-Global--were founded in 1976, 1981, and 1990, respectively. By the 
year 2000, there were about 20 sovereign wealth funds worldwide 
managing total assets of several hundred billion dollars.
    Today, what is new is the rapid increase in both the number and 
size of sovereign wealth funds. Twenty new funds have been created 
since 2000, more than half of these since 2005, which brings the total 
number to nearly 40 funds that now manage total assets in a range of 
$1.9-2.9 trillion. Private sector analysts have projected that 
sovereign wealth fund assets could grow to $10-15 trillion by 2015. Two 
trends have contributed to this ongoing growth. The first is sustained 
high commodity prices. The second is the accumulation of official 
reserves and the transfers from official reserves to investment funds 
in non-commodity exporters. Within this group of countries, foreign 
exchange reserves are now sufficient by all standard metrics of reserve 
adequacy. For these non-commodity exporters, more flexible exchange 
rates are often necessary, and Treasury actively pushes for increased 
flexibility.\1\
---------------------------------------------------------------------------
    \1\ Russell Green and Tom Torgerson, ``Are High Foreign Exchange 
Reserves in Emerging Markets a Blessing or a Burden?'' Office of 
International Affairs Occasional Paper No. 6, U.S. Department of the 
Treasury, March 2007.
---------------------------------------------------------------------------
    So what are sovereign wealth funds? At the Department of the 
Treasury, we have defined them as government investment vehicles funded 
by foreign exchange assets, which manage those assets separately from 
official reserves.\2\ Sovereign wealth funds generally fall into two 
categories based on the source of the foreign exchange assets:
---------------------------------------------------------------------------
    \2\ U.S. Department of the Treasury, ``Sovereign Wealth Funds,'' 
Appendix 3 of the Semi-Annual Report to Congress on International 
Economic and Exchange Rate Policies, June 2007.

     Commodity funds are established through commodity exports, either 
owned or taxed by the government. They serve different purposes, 
including stabilization of fiscal revenues, intergenerational saving, 
and balance of payments sterilization. Given the recent extended sharp 
rise in commodity prices, many funds initially established for fiscal 
stabilization purposes have evolved into savings funds. In the case of 
commodity funds, foreign currency typically accrues to the government 
and does not increase the money supply and create unwanted inflationary 
pressure.
     Non-commodity funds are typically established through transfers 
of assets from official foreign exchange reserves. Large balance of 
payments surpluses have enabled non-commodity exporting countries to 
transfer ``excess'' foreign exchange reserves to stand-alone funds. In 
the case of non-commodity funds, foreign exchange assets often derive 
from exchange rate intervention, which then increases a country's money 
supply. Monetary authorities take additional steps to lower the money 
supply and stave off inflation by issuing new debt, but there may be a 
cost associated with this if the cost of the new debt is more than the 
returns that the government earns on its foreign exchange assets.

    In contrast to traditional reserves, which are typically invested 
for liquidity and safety, sovereign wealth funds seek a higher rate of 
return and may be invested in a wider range of asset classes. Sovereign 
wealth fund managers have a higher risk tolerance than their 
counterparts managing official reserves. They emphasize expected 
returns over liquidity, and their investments can take the form of 
stakes in U.S. companies, as has been witnessed in recent months with 
increased regularity.
    However, sovereign wealth fund assets are currently fairly 
concentrated. By some market estimates, a handful of funds account for 
the majority of total sovereign wealth fund assets. Roughly two-thirds 
of sovereign wealth fund assets are commodity fund assets ($1.3-1.9 
trillion), while the remaining one-third are non-commodity funds 
transferred from official reserves ($0.6-1.0 trillion).
    To get a better perspective of the relative importance of sovereign 
wealth funds, it is useful to consider how they measure up against 
private pools of global capital. Total sovereign wealth fund assets of 
$1.9-2.9 trillion may be small relative to a $190 trillion stock of 
global financial assets, or the roughly $62 trillion managed by private 
institutional investors. But sovereign wealth fund assets are currently 
larger than the total assets under management by either hedge funds or 
private equity funds and are set to grow at a much faster pace.
    In sum, sovereign wealth funds represent a large and rapidly 
growing stock of government-controlled assets, invested more 
aggressively than traditional reserves. Attention to sovereign wealth 
funds is inevitable given that their rise clearly has implications for 
the international financial system. Sovereign wealth funds bring 
benefits to the system but also raise potential concerns.
                                benefits
    A useful starting point when discussing the benefits of sovereign 
wealth funds is to stress that the United States remains committed to 
open investment. On May 10, 2007, President Bush publicly reaffirmed, 
in his Statement on Open Economies, the U.S. commitment to advancing 
open economies at home and abroad, including through open investment 
and trade. Lower trade and investment barriers benefit not only the 
United States, but also the global economy as a whole. The depth, 
liquidity and efficiency of our capital markets should continue to make 
the United States the most attractive country in the world in which to 
invest.
    In 2006, there was a net increase of $2.5 trillion in foreign-owned 
assets in the United States, while U.S. net international investment 
abroad increased by $2.2 trillion. International investment in the 
United States fuels U.S. economic prosperity by creating well-paid 
jobs, importing new technology and business methods, helping to finance 
U.S. priorities, and providing healthy competition that fosters 
innovation, productivity gains, lower prices, and greater variety for 
consumers. Over five million Americans--4.6 percent of the U.S. private 
sector--are employed by foreign-owned firms' U.S. operations. Over 39 
percent of these five million jobs at foreign-owned firms are in 
manufacturing, a sector that accounts for 13 percent of U.S. private 
sector jobs. These five million jobs pay 25 percent higher compensation 
on average than jobs at other U.S. firms. Additionally, foreign-owned 
firms contributed almost 6 percent of U.S. output and 14 percent of 
U.S. R&D spending in 2006. Foreign-owned firms re-invested over half of 
their U.S. income--$71 billion--back into the U.S. economy in 2006. A 
disproportionate 13 percent of U.S. tax payments and 19 percent of U.S. 
exports are made by foreign-owned firms. Without international 
investment, Americans would be faced with painful choices regarding 
taxes, spending on government programs, and their level of savings and 
consumption. Foreign investors' economic interests become more 
dependent on the health of the U.S. economy--giving the investor an 
incentive to support U.S. economic interests.
    As many observers have pointed out, sovereign wealth funds have the 
potential to promote financial stability. They are, in principle, long 
term, stable investors that provide significant capital to the system. 
They are typically not highly leveraged and cannot be forced by capital 
requirements or investor withdrawals to liquidate positions rapidly. 
Sovereign wealth funds, as public sector entities, should have an 
interest in and a responsibility for financial market stability.
                           potential concerns
    Yet, sovereign wealth funds also raise potential concerns. Primary 
among them is a risk that sovereign wealth funds could provoke a new 
wave of investment protectionism, which would be very harmful to the 
U.S. and global economies. Protectionist sentiment could be partially 
based on a lack of information and understanding of sovereign wealth 
funds, in part due to limited transparency and clear communication on 
the part of the funds themselves. Concerns about the cross-border 
activities of state-owned enterprises may also at times be misdirected 
at sovereign wealth funds as a group. Better information and 
understanding on both sides of the investment relationship are needed.
    Were protectionist pressures to lead to greater restrictions on 
international investment, this would weaken the United States. The 
United States could lose out to other countries in the competition for 
international investment and the benefits it brings. U.S. businesses' 
worldwide operations could suffer. The United States is the world's 
leading foreign investor. If the United States imposed new 
restrictions, other countries could impose restrictions on U.S. 
investors, jeopardizing the benefits generated in the United States by 
U.S. businesses that operate globally. Protectionism could raise 
questions about whether we have faith in the dynamism and productivity 
of the U.S. economy. Foreigners invest in the United States because 
they have faith in our future and believe our economy will provide them 
a good return. The United States has long welcomed international 
investment--and has used this capital to create new U.S.-owned 
businesses, expand existing businesses, and grow our economy. 
Protectionism could also damage the U.S. relationship with major allies 
such as Western Europe, Canada and Japan, which account for 90 percent 
of international investment in the U.S.
    Second, transactions involving investment by sovereign wealth 
funds, as with other types of foreign investment, may raise legitimate 
national security concerns. The Committee on Foreign Investment in the 
United States (CFIUS), which is chaired by Treasury, conducts robust 
reviews of certain investments that could result in foreign control of 
a U.S. business to identify and resolve any genuine national security 
concerns. The Foreign Investment and National Security Act (FINSA) 
became effective on October 24, 2007, and strengthened the CFIUS 
process. CFIUS is able to review investments from sovereign wealth 
funds, just as it would other foreign government-controlled 
investments, and it has and will continue to exercise this authority to 
ensure national security.
    As we take our work forward on sovereign wealth funds, Treasury is 
also considering non-national security issues related to potential 
distortions from a larger role of foreign governments in markets. For 
example, through inefficient allocation of capital, perceived unfair 
competition with private firms, or the pursuit of broader strategic 
rather than strictly economic return-oriented investments, sovereign 
wealth funds could potentially distort markets. Clearly, both sovereign 
wealth funds and the countries in which they invest will be best served 
if investment decisions are made solely on commercial grounds.
    Finally, sovereign wealth funds may raise concerns related to 
financial stability. Sovereign wealth funds can represent large, 
concentrated, and often non-transparent positions in certain markets 
and asset classes. Actual shifts in their asset allocations can cause 
market volatility. In fact, even perceived shifts or rumors can cause 
volatility as the market reacts to what it perceives sovereign wealth 
funds to be doing.
                            policy response
    Treasury has taken a number of steps to help ensure that the United 
States can continue to benefit from open investment while addressing 
these potential concerns.
    First, we are aggressively implementing reforms that strengthen the 
CFIUS process, reflected in FINSA and Executive Order 11858, issued by 
the President on January 23. We are proceeding steadily through a 
vigorous drafting process for new regulations which will become 
effective later this Spring following public notice and comment. One of 
the reforms codified by FINSA, which we have already implemented, is an 
elevated level of accountability within CFIUS for review of foreign 
government-controlled transactions. I want to be clear that CFIUS 
reviews the investment transactions of sovereign wealth funds, based on 
the consideration of genuine national security concerns, just as it 
would for any other foreign government-controlled investment. FINSA 
protects our national security while keeping investment barriers low 
and reaffirming investor confidence and the longstanding U.S. open 
investment policy.
    Second, we have proposed that the international community 
collaborate on the development of a multilateral framework for best 
practices. The International Monetary Fund, with support from the World 
Bank, should develop best practices for sovereign wealth funds, 
building on existing best practices for foreign exchange reserve 
management. These would provide guidance to new funds on how to 
structure themselves, reduce any potential systemic risk, and help 
demonstrate to critics that sovereign wealth funds can be responsible, 
constructive participants in the international financial system.
    Third, we have proposed that the Organisation for Economic Co-
operation and Development (OECD) should identify best practices for 
countries that receive foreign government-controlled investment, based 
on its extensive work on promoting open investment regimes. These 
should have a focus on avoiding protectionism and should be guided by 
the well-established principles embraced by OECD and its members for 
the treatment of foreign investment.
    We have already seen meaningful progress along these lines. On May 
12-13 of last year, Treasury hosted a G-20 meeting of Finance Ministry 
and Central Bank officials on commodity cycles and financial stability, 
which included perhaps the first multilateral discussion of sovereign 
wealth funds among countries with these funds and countries in which 
they invest. Following a period of extensive direct bilateral outreach 
with sovereign wealth funds, Secretary Paulson hosted a G-7 outreach 
meeting on October 19, 2007 with Finance Ministers and heads of 
sovereign wealth funds from eight countries (China, Korea, Kuwait, 
Norway, Russia, Saudi Arabia, Singapore, and the United Arab Emirates) 
to build support for best practices.
    On October 20, 2007, the International Monetary and Financial 
Committee--a ministerial level advisory committee to the IMF--issued a 
statement calling on the IMF to begin a dialog to identify best 
practices for sovereign wealth funds. On November 15-16, 2007, the IMF 
hosted a roundtable meeting for sovereign asset and reserve managers. 
In response to the IMFC statement, the IMF added a special session on 
policy and operational issues relating to SWFs for official sector 
delegates. This marks the beginning of an important process in the IMF. 
IMF Managing Director Dominique Strauss-Kahn opened the roundtable 
meeting and underlined that some form of agreement on best practices 
for the operations of SWFs could help maintain an open global financial 
system.\3\ A separate dialog is well underway in the OECD on investment 
policy issues with regard to SWFs, building on the discussions on 
Freedom of Investment, National Security, and ``Strategic'' Industries.
---------------------------------------------------------------------------
    \3\ IMF Convenes First Annual Roundtable of Sovereign Asset and 
Reserve Managers, IMF Press Release, November 16, 2007. http://
www.imf.org/external/np/sec/pr/2007/pr07267.htm
---------------------------------------------------------------------------
    Fourth, Treasury has taken a number of steps internally and within 
the U.S. Government to enhance our understanding of sovereign wealth 
funds. Treasury has created a working group on sovereign wealth funds 
that draws on the expertise of Treasury's offices of International 
Affairs and Domestic Finance. Treasury's new market room is ensuring 
vigilant, ongoing monitoring of sovereign wealth fund trends and 
transactions. Through the President's Working Group on Financial 
Markets, chaired by Secretary Paulson, we continue to discuss and 
review sovereign wealth funds. We also have initiated bilateral 
outreach to ensure an ongoing and candid dialog with countries with 
significant sovereign wealth funds and their management.
    Treasury is actively coordinating with Congress through staff 
briefings and committee hearings. As you may know, I testified on these 
issues before the Senate Banking Committee in November. Also, in June 
and December of last year we provided Congress with updates on our 
sovereign wealth fund-related work in an appendix to the Report on 
International Economic and Exchange Rate Policies, and we will continue 
to provide updates on a semi-annual basis.
    The Treasury Department will continue its work on sovereign wealth 
funds through sound analysis and focused bilateral and multilateral 
efforts to help ensure the United States shapes an appropriate 
international response to this issue, addresses legitimate areas of 
concern, and together with other countries, remains open to foreign 
investment.
  Prepared Statement of Stuart E. Eizenstat, Partner and Chair of the 
         International Practice Group, Covington & Burling LLP
    Chairman Schumer, Vice-Chair Maloney, Ranking Member Saxton and 
Members of the Committee, good afternoon. Thank you very much for 
holding this important and timely hearing.
    During the Clinton Administration I was fortunate to hold several 
positions that brought me into frequent contact with issues of inward 
investment into the United States: I was the US Ambassador to the 
European Union, Under Secretary of Commerce for International Trade, 
Under Secretary of State for Economic, Business and Agricultural 
Affairs, and then Deputy Secretary of the Treasury. Since my government 
service I have been the chair of the International Practice Group at 
Covington and Burling, LLP where I have engaged in this issue from the 
private sector.
    I am honored to participate in the Committee's discussions and hope 
that my experience and contributions will be helpful to the Committee's 
deliberations.
    The question posed in the title the Committee has given this 
hearing, whether Sovereign Wealth Funds (SWFs) strengthen or imperil 
the US economy, is the critical question in the SWF debate. Permit me 
to say at the outset that the challenges provided by the some $3 
trillion in SWFs, from China and Russia to the Gulf States and Saudi 
Arabia, are as much a reflection of our own economic problems as they 
are about SWFs themselves. Their remarkable growth and decisions to 
broaden their portfolio beyond the investments of their central banks 
in Treasury bills, is a reflection of our growing dependence on 
expensive foreign oil and our massive current account deficit. This 
Committee and the Congress, and all of us, should be spending as much 
time and energy on dealing with these structural economic problems as 
on the consequences of those problems. In effect, SWFs are recycling 
U.S. petro-dollars and our appetite for products from China and 
Emerging Markets.
    In addition, I am a strong believer in the importance of the free 
flow of capital around the world, and of the value of foreign direct 
investment (FDI) in creating jobs in the United States, and adding 
creativity and innovation to our economy. There is a difference, for 
sure, between private foreign investment and that of SWFs and their 
close cousins, State Owned Enterprises (SOEs). But even there, the 
distinction is not always as clear as it may seem. Many European 
companies, for example, have some government ownership through ``golden 
shares''. Moreover, many European governments are trying to create 
``national champions'' to better compete in the global marketplace. We 
need to be very careful that in dealing with SWFs, we do nothing to 
deter the free flow of international capital.
    I strongly believe that SWFs do bolster the US economy, and that on 
balance they are a significant net plus for the U.S. economy. If we 
take off the ``welcome sign'', they will invest their growing wealth 
elsewhere in the world. At the same time, there are legitimate concerns 
about SWFs that need to be addressed. These heavily revolve around the 
need for ``transparency'' and good governance. This, in my opinion, 
does not mean that they must divulge their holdings and investments, 
but rather that they should be transparent in their governance, in 
their relationships to their governments, in their processes, in their 
goals, and in determining whether they obtain subsidized government 
financing on individual deals--which would create an unfair advantage 
over U.S. or foreign corporations who must rely on the private credit 
markets for competing for the same acquisitions. We have a legitimate 
interest in assuring that SWFs have a purely commercial, not a 
political or national security, interest in their investments in the 
U.S.
    Beyond transparency, there certainly are a limited number of 
matters in which national security risks are implicated by SWFs and 
SOEs acquisition. But in a globalized world economy, in which the U.S. 
does not have a monopoly on products, it is important that national 
security not be defined so broadly that it is used as a broad basis to 
deter foreign investment.
    I urge Congress not to seek legislation or to pressure regulators 
to impose heavy regulations on SWFs at this stage. The reason for this 
is that Congress has wisely provided the executive branch--in the form 
of last year's bipartisan Foreign Investment and National Security Act 
(FINSA)--the means to deal with genuine national security threats from 
SWFs and SOEs. In my opinion we already have the legislative tools 
necessary to effectively address any national security concerns raised 
by SWF investments, and we should give the CFIUS process the time to 
work through SWF/SOE investments on a case by case basis.
    Moreover, it is critically important that Congress not take 
unilateral action. It is vital that we try to develop multilateral 
principles. Europe, for example, has similar concerns with SWFs/SOEs; 
for instance, Russia's Gazprom has expressed interest in acquiring 
energy assets in Europe. The Bush Administration has wisely agreed to 
support this multilateral approach. The IMF is now working directly 
with all the major SWFs on developing a set of ``best practices'', 
which they hope to have completed by April. The OECD is doing the same 
exercise with host countries, and their report will be ready in roughly 
the same timeframe. Moreover, the Government Accounting Office is 
examining SWFs and their report will be an important touchstone. We 
should allow these activities to play out, and, for example, see how 
the SWFs react to the IMF effort to develop a set of principles focused 
on transparency.
    the benefits and concerns of the ``new'' sovereign wealth funds
    The benefits of foreign investment into the US are well known. Such 
investments support economic growth and job creation; they help keep 
domestic industry competitive; they grease the wheels of the 
international economy by helping to right financial imbalances; and, as 
we have seen since last summer as SWFs began investing heavily in the 
US financial industry, foreign investments can be ready sources of 
assistance to distressed sectors, in this case bolstering the US 
economy while providing a needed vote of confidence in the US financial 
system at a difficult time.
    Moreover, we know that SWFs are not recent innovations The first 
versions beginning in the 1950s and 60s with states as diverse as 
Kuwait, Kiribati and Norway establishing national investment vehicles, 
many of which have long invested in the US. SWFs have a strong record 
of making long-term investments, with a generally passive involvement 
in the management of the companies in which they invest.
    Most SWF and SOE investments raise no national security risks.
    For instance, the acquisition of Barney's, the U.S. retailer, by 
Dubai, hardly impacts on national security. CFIUS approved the sale of 
IBM's PC division to Lenovo (which our firm handled), which is partly 
owned by the Chinese government. Further, SWFs' recent investments in 
U.S. and European financial institutions have been for small stakes, 
well under 10%, with no board seats or management voice. It is 
important to recognize that the control test--which can trigger CFIUS 
review--is not a mechanical test of 10% voting shares. There are a 
variety of factors to consider, such as whether the SWF/SOE has the 
right to appoint members of the board of directors; the right to 
appoint or veto members of management; the right to approve the 
corporate budget; the right to approve of new investments and 
divestitures. Generally, SWFs/SOEs have not insisted on this level of 
control.
    Even if a SWF or SOE transaction presents some risk to national 
security, CFIUS has proven well-equipped to analyze the risk and 
negotiate appropriate measures to mitigate that risk. If, for some 
reason, CFIUS determines that the risk cannot be satisfactorily 
mitigated, the President has the power to block the transaction.
    There are some different factors at work in the recent emergence of 
SWFs. The amount of money under SWF management is greater than it has 
ever been. Fueled in some cases by high commodity prices (as is the 
case for the Persian Gulf, Russian and Norwegian funds) and in others 
by trade surpluses ``unequalled as a percentage of the global economy 
since the beginning of the 20th century'' (as for East Asian SWFs) SWFs 
are thought to control as much as $3 trillion in assets--greater than 
the global stock of assets invested in either hedge funds or private 
equity. Even so, SWFs account for no more than 1.3 percent of the 
world's financial assets.
    And, the number of SWFs are increasing, with some new entries 
representing perhaps the biggest challenges for US regulatory review. 
There are now more than 40 major SWFs, with as many as a dozen 
established since 2005. Given the size and number of the new players in 
the SWF world, some measure of anxiety was expected and prudent.
    The timing of the emergence of SWFs also sharpened fears. The 2008 
Presidential campaign has begun, memories of two highly politicized 
bids by foreign government owned companies for key US assets were still 
raw (CNOOC's bid for Unocal was in 2005, the Dubai Ports World 
controversy erupted in 2006), and news of SWFs came just as Congress 
was completing its legislative overhaul of the US investment screening 
mechanism--the Committee on Foreign Investment in the United States 
(CFIUS) codified in FINSA--a task that was precipitated by the CNOOC/
Dubai Ports World events but took on new urgency once SWFs appeared.
         governance and transparency--the critical swf reforms
    If there has been an underlying theme for most of the concerns 
verbalized about SWFs it the assertion that these funds, as a whole, 
are nontransparent, and consequently policymakers cannot be sure what 
drives the funds' investments, divestments, and other behaviors. It is 
asserted that that SWFs may be political or intelligence-gathering 
tools out to harm the United States, rather than profit maximizers. 
And, it is disquiet emanating from this alleged feature of SWFs that 
has led many of those otherwise positively disposed toward free capital 
movements--including Treasury Department officials, capital markets 
regulators, and some in the think tank community--to question whether 
some regulation is needed. Senior government officials from Robert 
Kimmitt and Clay Lowery at Treasury to Chris Cox, the Chairman of the 
SEC, to experts like Ted Truman at the Peterson Institute, have raised 
a number of legitimate concerns:

     whether the governments subsidize individual transactions;
     the potential for imprudent investments to increase risks for 
market stability;
     whether they have a political agenda, such as Gazprom has 
exhibited in Ukraine, Georgia and elsewhere;
     whether there is a risk of insider trading;
     whether there is a risk for corruption, if government officials 
are directly involved from countries with a record of corrupt 
activities;
     whether there is a risk of leakage of sensitive technology to 
countries which are not allies of the U.S.

    Tellingly, SWFs have followed these debates and concerns and appear 
to have made recent investments with political sensitivities in mind. 
As I mentioned, the recent SWF investments in the financial sector have 
explicitly and invariably been non-controlling minority investments, 
have not included any board seats for the SWFs or powers to control 
management, budgets, or new acquisitions or divestitures, and have 
generally been below 10% voting shares.
    Further, some SWFs have already responded to calls for greater 
openness.
    I hope that SWFs will take steps to be more transparent. Even in 
the short run, increasing transparency produces benefits not just for 
the host states, but for the SWFs themselves. Real transparency 
promises to ease the acceptance of SWF investments as host states come 
to understand SWFs' investment strategies and management structures, 
and can be assured that commercial rather than political interests 
control investments, and that SWFs do not receive unfair subsidies that 
may make competitive bidding with private entities difficult. Finally, 
SWFs will very likely come to understand that adopting some measures of 
transparency and other robust regulation for themselves is the best way 
to avoid more heavy-handed regulation from both the US and other 
investment recipients.
    Across the Atlantic, Joaquin Almunia, the EU Commissioner for 
Economic and Monetary Affairs, has explicitly suggested such a quid pro 
quo, stating that there were ``good reasons'' to ask funds about their 
investment strategies and holdings, and if they do not provide such 
information ``we can find good reasons to `react' in some cases, where 
these funds try to invest . . . in strategic sector[s] or . . . 
specific industries.''
                   unilateral rules may harm the u.s.
    My contention that SWF-specific legislation is not needed at this 
juncture comes not just from my hope that over time many SWFs will 
become more transparent of their own accord. Rather the imposition of 
unilateral rules on US investment for SWFs may harm the competitive 
position of our economy. After all the United States is only one of 
many markets in which SWFs can choose to invest. As former Secretary of 
State Colin Powell noted, ``capital is a coward,'' and unilateral rules 
in the US that are not matched by similar regulations in other 
potential host states may adversely impact our ability to attract FDI 
and consequently may diminish our competitiveness. It is worth 
remembering that the majority of SWF money that has been invested into 
the US is actually recycled US dollars resulting from our oil 
dependence (for the Middle Eastern funds) and mass current account 
deficit (for the East Asian funds). It seems far better to have this 
money recycled here, than to be moved elsewhere.
     the way ahead--multilateral discussions and the ``new'' cfius
    The necessity for a global solution that evens the playing field 
between potential recipients of investments provides one of the 
guideposts to the most effective future direction for US policy on the 
SWF issue. Fortunately such a multilateral approach is underway. Last 
fall, the Treasury Department, along with finance ministries from the 
rest of G8 and those of several states owning leading SWFs asked the 
International Monetary Fund and the Organization for Economic 
Cooperation and Development to begin working on best practices.
    The IMF process, which is focused on best practices for the SWFs 
themselves, is due to issue its recommendations in April. Though the 
IMF will likely touch on several aspects of reform, it seems evident 
that a central focus of the guidelines will be on enhancing SWF 
transparency in order to increase the number of SWFs that publish 
annual accounts and provide outsiders some insight into governance and 
investment strategies. In a hopeful sign, some SWFs including 
Singapore's Temasek, are closely assisting the IMF efforts.
    Working alongside the IMF, the OECD's Investment Committee has 
begun working on best practices for host countries, and in particular 
the processes of host country review of SWF investments. The OECD 
report is due in March. The OECD's primary concern is that some 
recipient states may overreact to SWFs and erect needless procedural 
barriers to SWF investments which may chill wider FDI flows. Though 
still being drafted, the OECD rules will likely borrow from best 
practices in some of its members, including the US CFIUS process.
    The CFIUS process, newly vested with enhanced transparency and 
predictability, provides the other guidepost for effective domestic 
response to SWFs. Though as this Committee knows the CFIUS regulations 
are due to be released in April, even before the rules are finalized it 
is clear that FINSA's improvements on CFIUS are significant and 
important. Its enhancements include a greater clarity for foreign 
investors, a result of new transparency regarding the factors CFIUS 
considers in moving a transaction from a 30-day review to a 45-day 
investigations, alongside the requirements that CFIUS issue public 
guidance on the types of transactions that have been reviewed and that 
have raised national security concerns. Moreover, the law's provision 
for a ``lead agency or agencies'' for the government entity with 
greatest equities in a transaction promises to instill discipline in 
CFIUS and lead to more routinized review processes. Finally, the law 
requires the involvement of senior-level officials in major CFIUS 
actions including with respect to certifications provided to Congress 
and decisions not to investigate transactions involving foreign 
government ownership.
    We should rely on the wisdom of FINSA and take solace from the 
CFIUS process and its recent ability to quickly clear transactions--
such as the sale of IBM's personal computer business to Lenovo. That 
the review processes were transparent and efficient, simultaneously 
promoting both open investment and national security, suggests that the 
current tools--set to be improved further after the release of the 
CFIUS regulations--can effectively address SWF investments.
    I counsel Congress to withhold judgment on the necessity for 
further legislation until both the CFIUS regulations are published and 
can be assessed in practice, and the IMF and OECD have delivered their 
reports.
 history, transparency and nuance--the key to effective regulation of 
                                  swfs
    If the past is prologue, history does not suggest that most SWFs 
will engage in politically motivated investments. SWFs have been long-
term, stable and passive investors. Though they may be less risk averse 
than central banks solely investing in T-Bills, most SWFs are run with 
profit in mind. Quickly unwinding positions, or investing for political 
as opposed to financial gain, could be as damaging to SWFs (if not more 
so) as to host countries. Most SWFs have been mandated to secure 
healthy returns and many have received political and public rebuke at 
home for unsuccessful investments. Further, SWFs are aware of the 
growing political sensitivities regarding their investments and most 
would be loathe to upset host governments for fear of wearing out their 
welcome.
    Even if history and the structure of SWFs suggest that we have 
little to fear, the current approach adopted by the Bush Administration 
should be lauded. Unilateral, protectionist regulations have not been 
contemplated, neither has the Administration raised the potential for 
imposing reciprocity as a test for SWF investments. In some quarters 
this has been a commonly suggested response to the SWF influx and asks 
the reasonable question why the United States should allow unfettered 
access to its assets to state-backed SWFs when those states to not 
allow commensurate access to their assets. A successor of mine as 
Deputy Treasury Secretary, Robert Kimmitt, made the Administration's 
rejection of reciprocity clear in his recent Foreign Affairs piece: 
raising reciprocity as a barrier to SWFs ``is not on the list'' of 
policy proposals. He argues correctly that the benefits the United 
States receives from foreign investment are irrespective of whether or 
not other countries provide US investors similar rights.
    Indeed, instead of unilateral restrictions, constructive 
deliberation on a multilateral basis is critical so as to ease bona 
fide concerns regarding investors' intentions and fund transparency, 
while ensuring that host states remain open to receiving the benefits 
SWF investments can bring--benefits that include both domestic 
financial stability in distressed sectors and wider global stability as 
the world's major economies become ever more interdependent.
    To that end, transparency coupled with nuance are key. Clearly 
there should be some limits to SWF acquisitions. However, these 
prohibitions should be clear, narrowly focused and few and far between. 
Broad prohibitions are not needed, and with nuanced review that takes 
into account the transparency of a particular investor and the 
magnitude of specific investments (differentiating between controlling 
and passive stakes), there is little reason that our aim of protecting 
national security cannot be consistent with opening up the vast 
majority of the American economy to SWF funds. Relying on the CFIUS 
process makes per se rules even less needed, given that appropriate 
protections can be negotiated on a case-by-case basis, ranging from 
insisting that investors establish an arm's length proxy relationship 
to handle sensitive investments, to striking nuanced mitigation 
agreements of the kind the Government has forged with scores of foreign 
investors.
    It is my view that a chorus of support for moderated, thoughtful 
reaction to SWFs must be developed now, before SWFs become a political 
third-rail and the United States loses out in attracting both needed 
funds and in retaining the mantle of the world's most dynamic economy.
    Thank you. I will gladly respond to any questions.
                               __________

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                               
 Prepared Statement of Douglas Rediker, Co-Director, Global Strategic 
             Finance Initiative, The New America Foundation
    Thank you Mr. Chairman, Madam Vice Chair and members of this 
committee for the honor of addressing you today.
    By way of introduction, I spent most of the last seventeen years 
working as an investment banker and private equity investor based 
primarily in London, England. This experience, I believe, gives me a 
somewhat different perspective on Sovereign Wealth Funds and the role 
that they play in today's international capital markets. Currently, I 
co-direct the Global Strategic Finance Initiative at the New America 
Foundation. The New America Foundation is a non-profit, post-partisan 
public policy institute in Washington D.C.
    Over the past several months, few issues in international finance 
have generated as much discussion and comment as have Sovereign Wealth 
Funds. I commend you and your colleagues for the informed and balanced 
views that you have expressed and the questions that you have posed on 
this important subject.
    As a general matter, I believe that both the U.S. and global 
economies are strengthened through open markets. Overall, economic 
health is bolstered and fortified by the free flow of investment 
capital and increased liquidity that open markets provide. As 
significant providers of capital to these markets, Sovereign Wealth 
Funds have thus far been a positive influence in U.S. and global 
markets. Most recently, significant capital injections by Sovereign 
Wealth Funds in several major financial institutions have been a 
stabilizing force, potentially averting a significant market downturn 
at a time of high market uncertainty and volatility.
    Capital flow from Sovereign Wealth Funds benefits U.S. investors, 
companies and workers not only in those specific cases involving 
investments in our financial services sector, but more broadly, as 
increased liquidity results in higher stock and asset prices and lower 
risk premiums, especially of riskier, less liquid assets. A recent 
estimate quantified the potential gross capital inflows from Sovereign 
Wealth Funds over the next 5 years to global equities at $1 trillion 
and $1.5 trillion to global debt markets, increasing to $3.1 trillion 
and $4.6 trillion respectively over the next decade.\1\
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    \1\ Steffen Kern, Deutsche Bank, September 10, 2007.
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    While I believe that continued investment by Sovereign Wealth Funds 
should be encouraged, I also believe that the nature of this investment 
on this scale warrants continued oversight by Congress. Your vigilance 
should ensure the continued competitiveness and smooth functioning of 
our financial markets, while also protecting both our national security 
and the integrity of these markets.
    It is to this Committee's credit and to others in the U.S. Congress 
and the Administration that when compared with other industrialized 
nations, the United States' national security interests and financial 
market integrity are relatively well regulated. Last year's revised 
CFIUS/FINSA legislation, as well as existing provisions under U.S. 
Securities and Exchange, Antitrust, Export Control, and other similar 
legislation and regulation, protect and regulate both our national 
security interests and potential acquisition targets from improper 
takeover approaches or material investments from foreign state 
investors.
    There are, however, areas that could benefit from some improvement. 
In particular, I believe that the U.S. Government should continue to 
support calls for increased disclosure and transparency of asset mix, 
investment guidelines, currency composition and geographic 
diversification by Sovereign Wealth Funds. Such increased disclosure 
would benefit the markets in many ways and could calm suspicions borne 
of lack of information. Increased transparency would be more likely to 
alert the market to concentration issues and potential contagion risks.
    While increased disclosure and transparency is in everyone's 
interest, I would not recommend making disclosure a mandatory pre-
requisite for investment in our markets. To do so, would likely be 
counterproductive and ineffective. I believe that any insistence on 
transparency should be part of a broader code of best practice, adopted 
in a collaborative effort by Sovereign Wealth Funds and the IMF, 
motivated by a collective desire for financial stability and smooth 
functioning of the markets. Sovereign Wealth Funds may further welcome 
the opportunity to judge their own returns against relevant indices and 
their peer group, as well as by the opportunity to demonstrate that 
they are investing in a manner consistent with the best interests of 
the people of the countries they govern.
    Within the U.S., I believe that the investment environment for 
Sovereign Wealth Funds should be clear and predictable. Regulations 
regarding when a CFIUS review is warranted should be as express and 
explicit as possible. For example, I suggest that regulatory guidance 
be provided regarding the interpretation of control as opposed to that 
of the more amorphous concept of influence.
    In my years in investment banking and capital markets, one of the 
most compelling lessons I learned was that investors abhor uncertainty. 
Uncertainty discourages investment by injecting unquantifiable risk 
into an investment decision. I believe that it is imperative that 
Sovereign Wealth Funds and other foreign investors understand that 
their investment is welcome in the United States. Furthermore, 
investors should know precisely on what terms they are welcome.
    If a Sovereign Wealth Fund complies with all relevant laws and 
regulations and then is subject to unforeseen scrutiny or delay, their 
investment decision will be negatively affected. To ensure that the 
U.S. maintains its role as the most open, transparent and welcoming 
capital market in the world, the U.S. should not discourage any 
investment made in compliance with the law.
    Over the past several years, international capital markets have 
transitioned away from US domination to being truly global in scope and 
leadership. Sovereign Wealth Funds are but one manifestation of the 
past decade's shift toward a truly multi-polar global financial 
marketplace--a marketplace where the sources, intermediation and 
destination of capital and financial expertise outside the U.S. have 
grown at a tremendous pace.
    Competing centers of global finance and capital now exist not only 
in Europe, but also in Asia and the Middle East. Those who seek 
alternatives to invest in, and trade through, US financial markets now 
have multiple options to choose from.
    When addressing the issue of Sovereign Wealth Funds, it is 
imperative that this Committee take into account crucial issues of 
national and economic security, financial market integrity as well as 
the continued competitiveness of our capital markets.
    In that context, I believe that professionally managed Sovereign 
Wealth Funds, like other foreign investors, should be encouraged to 
invest in the U.S. in virtually all asset classes. The U.S. Treasury 
has made it a priority to ensure that the United States continues to be 
the most attractive place in the world to invest and should be 
applauded for this effort. As a complement to this effort, we should 
ensure that we spell out unambiguous ``rules of the game'' for all 
investors--domestic and international. Assuming they abide by those 
rules, Sovereign Wealth Funds, which today represent perhaps $3 
trillion of investment capital, should be welcomed as a major part of 
that effort.
    Thank you.
  

                                  
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