[Congressional Record Volume 154, Number 14 (Tuesday, January 29, 2008)]
[House]
[Pages H541-H544]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
SOVEREIGN WEALTH FUNDS
The SPEAKER pro tempore. Under a previous order of the House, the
gentlewoman from Ohio (Ms. Kaptur) is recognized for 5 minutes.
Ms. KAPTUR. Mr. Speaker, the recent shocks to the global economy and
U.S. financial institutions have revealed a major new source of
investment in the U.S. economy called Sovereign Wealth Funds. These
funds are the surplus savings of our trading competitors from foreign
countries and have been key in bailing out major U.S. corporations like
CitiGroup, Merrill Lynch, Blackstone, and so many others that have made
terrible decisions and played with the people's money to abandon. Three
billion dollars was invested by the Chinese, for example, just in the
Blackstone Group.
Put into perspective, the Chinese Government, and I underline
``government,'' is projected to have more than $3 trillion by 2010 that
can be used to buy our stocks, bonds, real estate, and entire
corporations. They're just getting started. Put into context, the
Government of China will soon have enough investment monies to buy 51
percent; that is absolute control of more than 40 percent of all the
U.S.-based corporations whose stock is listed on the New York Stock
Exchange. Think about that. The Government of China literally could buy
half of all the stock listed on the New York Stock Exchange. And that's
only China.
Many people in this Nation and in this Congress would strongly oppose
having the United States Government buy control of two out of every
five companies listed there. It would be called socialism. But how will
we react if the Chinese Government buys those same companies, which is,
my friends, underway?
Already we see China, Kuwait, Norway, and other nations buying major
stakes in our banks and in investment houses, institutions that exert
enormous political and economic influence in our Nation and world. Can
we trust that those investments are purely for economic returns?
Secretary of the Treasury Paulson has repeatedly stated that this
administration has no interest in knowing the details of such
investments by sovereign wealth funds. The present panic in our banks
and financial institutions to secure capital to offset their mortgage
and credit card debacles may induce the heads of those corporations to
take bailouts on virtually any terms. But we must be wiser. A head-in-
the-sand ostrich policy by the United States Government is simply not
acceptable. Indeed, it is reckless, and it threatens national security.
[[Page H542]]
At a minimum, Congress and the American people need to know the
details of those transactions. Thus, foreign governments investing in
U.S. companies through these funds should be required to make public
their activities here, just as we require of public companies in the
United States. Sunshine, as always, is good public policy. And if
disclosure turns away investment, then the obvious question is what was
the real goal of those funds.
Simultaneously, Congress needs to seriously consider whether limits
should be placed on foreign investments in critical U.S. industries.
Germany, Japan, Korea, and China all do. They understand that foreign
economic control brings with it foreign political involvement in
internal affairs.
In sum, sovereign wealth funds are a large and growing influence in
the global economy and inside the United States. They have the
potential to buy absolute control of a significant portion of the
United States' economy, and that is under way. For the present, we need
full disclosure about their U.S. holdings and intentions.
Simultaneously, we need to quickly and seriously think about what
limits and controls the American people, through their government,
should place on such investments.
Strangely, last week, President Bush signed an executive order
transferring his power to the Treasury Department to authorize or
reject such foreign takeovers of American companies. But officials from
the Department of Defense, Department of Justice, and Department of
Homeland Security objected to the order over the past few months saying
it served business interests over national security interests. It
allows Wall Street to gain an edge at the expense of national security.
This Congress should not allow that. Economic and national security
should go hand in hand. We cannot allow lax regulation of foreign
involvement in our economy, and we cannot allow our indebtedness to
foreign interests to continue to mount.
I would like to place two articles in the Record tonight, one from
the Washington Times on January 24, entitled, ``Treasury Gets New CFIUS
Authority.''
This is the entity at Treasury that reviews these deals. And it talks
about how CFIUS is reviewing a proposed merger between the
telecommunications equipment manufacturer 3Com and China's Huawei
Technology Corporation, a company linked in the past to illegal
international activities including violations of U.N. sanctions on Iraq
and industrial espionage against the United States and Japanese firms.
The Boston-based Bain Capital Partners would undermine U.S. national
security, and this is one of the groups that's handling this.
Interestingly, Treasury Secretary Henry Paulson recused himself from
this particular review because his former company, Goldman Sachs, is a
paid advisor to 3Com.
And also I wish to place in the Record and will end, Mr. Speaker,
with a January 25 Wall Street Journal article, ``Lobbyists Smoothed the
Way for a Spate of Foreign Deals,'' which goes into heavy analysis of
the $37 billion of stakes in Wall Street financial institutions, the
bedrock of our financial system, by selling these growing sovereign
wealth funds.
[From the Washington Times, Jan. 24, 2008]
Treasury Gets New CFIUS Authority
(By Bill Gertz)
President Bush yesterday signed a new executive order on
foreign investment that gives the Treasury secretary, instead
of the president, key power to authorize or reject purchases
of U.S. companies by foreign buyers.
The president said the order bolsters recently passed
legislation by ensuring the Treasury-led Committee on Foreign
Investment in the United States (CFIUS) ``will review
carefully the national security concerns, if any, raised by
certain foreign investments into the United States.''
At the same time, Mr. Bush said, the order recognizes
``that our openness is vital to our prosperity and
security.''
Homeland Security Secretary Michael Chertoff said his
agency is ``happy with the final order.''
``I think it creates a process that will achieve the dual
objectives of promoting investment but making sure we don't
compromise our national security,'' Mr. Chertoff said from
Switzerland.
The legislation and order are a result of a bid in 2006 by
United Arabs Emirates-based Dubai Ports World to take over
operation of six U.S. ports.
CFIUS approved the purchase but it later was canceled under
pressure from Congress over concerns that terrorists might
infiltrate U.S. ports through the company. Critics questioned
the deal because two of the September 11, 2001, hijackers
were UAE nationals, and the Persian Gulf state was used as a
financial base for al Qaeda.
Rep. Carolyn B. Maloney, New York Democrat and a key
sponsor of the CFIUS-reform law, called the new order a
positive step.
``I remain 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,''
she said.
The order outlines more clearly the role of the director of
national intelligence (DNI) in providing CFIUS with threat
assessments posed by a foreign purchase and adds a
requirement for the DNI to assess ``potential consequences''
of a foreign deal involving a U.S. company.
However, a comparison of the new order with a draft order
from October--which was opposed by U.S. national security
officials--shows that CFIUS will continue to be dominated by
pro-business elements of the government.
As late as last month, national security officials from the
Homeland Security, Justice and Defense departments expressed
concern the order was being co-opted by pro-business
officials at Treasury, Commerce and other trade agencies.
A memorandum from the three national security agencies
obtained by The Washington Times called for tightening the
draft order's national security provisions to ``accurately
reflect pro-security interests.''
The final order released by the White House yesterday
removed a provision that would have required the committee to
``monitor the effects of foreign investment in the United
States.''
One new authority in the order is a provision strengthening
so-called ``mitigation agreements'' between companies. The
agreements are designed to reduce the national security risks
as a condition for committee or presidential approval.
The order states that companies involved in a U.S.-foreign
transaction ``in extraordinary circumstances'' can be
required to state they will comply with a mitigation
agreement.
CFIUS currently is reviewing a proposed merger between the
telecommunications equipment manufacturer 3Com and China's
Huawei Technology, a company linked in the past to illegal
international activities, including violations of U.N.
sanctions on Iraq and industrial espionage against U.S. and
Japanese firms.
U.S. officials said a review by the DNI's office determined
the Huawei purchase, through the Boston-based Bain Capital
Partners, would undermine U.S. national security.
3Com manufacturers computer intrusion-detection equipment
used by the Pentagon, whose networks are a frequent target of
Chinese military computer attacks.
Treasury Secretary Henry M. Paulson Jr. recused himself
from CFIUS' 3Com-Huawei review because his former company,
Goldman Sachs, is a paid adviser to 3Com.
____
[From the Wall Street Journal, Jan. 25, 2008]
Lobbyists Smoothed the Way for a Spate of Foreign Deals
(By Bob Davis and Dennis K. Berman)
Washington.--Two years ago, the U.S. Congress pressured the
Arab emirate of Dubai to back out of a deal to manage U.S.
ports. Today, governments in the Persian Gulf, China and
Singapore have snapped up $37 billion of stakes in Wall
Street, the bedrock of the U.S. financial system. Lawmakers
and the White House are welcoming the cash, and there is
hardly a peep from the public.
This is no accident. The warm reception reflects millions
of dollars in shrewd lobbying by both overseas governments
and their Wall Street targets--aided by Washington veterans
from both parties, including big-time Republican fund-raiser
and lobbyist Wayne Berman. Also easing the way: The
investments have been carefully designed to avoid triggering
close U.S. government oversight.
Clearly, U.S. financial firms that have been deeply
weakened by the credit crisis, including Citigroup Inc. and
Merrill Lynch & Co., need the cash. Meanwhile, investment
pools funded by foreign governments, called sovereign-wealth
funds, have trillions to invest. Some American politicians,
though suspicious of foreign governments, deem it suicidal
to oppose aid to battered financial companies.
``What would the average American say if Citigroup is faced
with the choice of 10,000 layoffs or more foreign
investments?'' asks New York Democratic Sen. Charles Schumer,
who played a central role in killing the Dubai port deal but
has applauded recent foreign investment.
But by making investment by foreign governments seem
routine, Washington may be ushering in a fundamental change
to the U.S. economy without assessing the longer-term
implications. Some economists warn that the stakes could
provide autocratic governments an important say in how U.S.
companies do business, or give them access to sensitive
information or technology. Those familiar with the deals'
governmental review processes say military officials worry
that a foreign government, especially China, may be able to
coax an executive into turning over secrets.
[[Page H543]]
Former U.S. Treasury Secretary Lawrence Summers counsels
caution. ``There should be a very strong presumption in favor
of allowing willing buyers to take noncontrolling stakes in
companies,'' Mr. Summers says. ``However, it's imaginable
that government-related entities [investing in the U.S.] will
be motivated to strengthen their national economies, make
political points, reward or punish competitors or suppliers,
or extract know-how.''
Sovereign-wealth funds, meanwhile, continue to seek
opportunities. Thursday at the World Economic Forum in Davos,
Switzerland, Qatar's prime minister said the oil-rich
sheikdom's investment arm wants to invest $15 billion in
European and U.S. banks. ``We're looking at buying stakes in
10 or 12 blue-chip banks,'' Sheikh Hamad bin Jassem Al Thani
told Zawya Dow Jones. ``But we will start small.''
In nearly every case, American financial companies are
escaping detailed U.S. government review by limiting the size
of stakes they sell to government investment funds. The
multiagency Committee on Foreign Investment in the U.S., led
by the U.S. Treasury, can recommend that the president block
foreign acquisitions on national-security grounds. Congress
also can block deals by pressuring companies or by passing
legislation.
Under CFIUS rules, a passive stake--one in which investors
don't seek to influence a company's behavior--is presumed not
to pose national-security problems. Neither is a small voting
stake, usually of less than 10%. During the recent string of
deals, financial companies whose investments have met those
requirements have notified CFIUS and haven't had to go
through 30-day initial reviews.
A backlash could still develop if the funds throw their
weight around in U.S. companies. The government reserves the
right to examine an investment even after the deal closes.
When the U.S. economy was riding high in 2004, sovereign
money was sometimes shunned. Dubai's Istithmar investment
fund was viewed warily in New York when it went hunting for
real estate. In part, that is because sellers worried that
Istithmar's government ownership would lend the company
sovereign immunity, insulating it from lawsuits if it reneged
on a contract. (As a commercial arm of the government, it
wouldn't have been immune.)
Now Wall Street is thirsting for new capital, preferably in
huge amounts and deliverable at a moment's notice. Sovereign-
wealth funds look like an oasis. These government-funded
pools have about $2.8 trillion in assets, which Morgan
Stanley estimates could grow to $12 trillion by 2015 as
Middle Eastern funds bulk up on oil receipts and Asian ones
expand from trade surpluses.
``You can't have a $9 trillion debt and huge trade deficit
and not expect at some point you'll have to square
accounts,'' says David Rubenstein, CEO of Washington-based
private-equity firm Carlyle Group. Foreign savings have to go
somewhere, he says: ``Better that it come to the U.S. than
anywhere else.'' (An Abu Dhabi fund, Mubadala Development
Corp., has a 7.5% stake in Carlyle.)
As the U.S. financial crisis deepened over the summer,
sovereign-wealth funds became a favorite of capital-short
Wall Street firms. That is because state funds presumably
have an incentive to be passive investors, to avoid raising
objections to their stakes. Domestic investors, on the
other hand, might demand a bigger say or board seats for a
similar-size stake. As it sought its most recent cash
infusion of $6.6 billion, Merrill Lynch turned away
possible investments from U.S. hedge funds in favor of
investments from government funds from South Korea and
Kuwait, say people involved with negotiations.
A senior official at China Investment Corp., which has
about $200 billion in assets including a $3 billion stake in
private-equity firm Blackstone Group LP, says it doesn't want
to play an active role in corporate governance. ``We don't
even want to take the kind of stand of someone like
Calpers,'' which is the California state pension fund, the
official said. ``We don't have enough people, and we can't
send directors out to watch companies.
Behind Washington's acceptance of large-scale foreign
investments lies a well-funded lobbying campaign, spurred
when Congress objected to government-owned Dubai Ports
World's investment in a U.S. port operator. The United Arab
Emirates--a federation of seven ministates including Dubai
and Abu Dhabi--was seared by the accusation that an Arab
government-owned company couldn't be trusted to protect U.S.
ports against terrorists. Last year, the U.A.E. launched a
three-year, $15 million Washington lobbying campaign, the
U.S.-Emirates Alliance, to burnish its reputation.
The alliance, headed by former Hillary Clinton campaign
aide Richard Mintz, recruited about two dozen businesses to
form a support group. It contributed $140,000 to a prominent
Washington think tank, the Center for Strategic and
International Studies, to start a ``Gulf Roundtable''
discussion series. It also forged alliances with prominent
Jewish groups by persuading the U.A.E. to clear the way for
U.S. travelers whose passports had Israeli visas; such
travelers sometimes had been turned away by U.A.E. customs
agents, Jewish groups said.
Such openness has it limits, though. In June 2007, the Abu
Dhabi Investment Authority, the world's largest sovereign-
wealth fund, with an estimated $875 billion in assets, hired
public-relations firm Burson-Marsteller for $800,000 for an
initial eight-month contract to improve communications. But
it still has no press department or press kits. It forbids
its Washington representative, James Lake, to talk to the
media.
Even as the Dubai port controversy spurred sovereign
investors to engage in a charm offensive, it led lawmakers to
re-examine laws governing the Committee on Foreign Investment
in the U.S. Some proposed to vastly expand the definition of
investments that could pose a threat to national security.
Both foreign firms and U.S. banks lobbied fiercely in
response, pressing to keep the reviews narrow enough to
encourage foreign investment.
Their lobbying largely succeeded. The Financial Services
Forum, which represents the 20 largest U.S. financial firms,
focused on Sen. Schumer, a frequent Wall Street ally. In one
April 2006 session, a dozen CEOs, including then-Goldman
Sachs CEO Henry Paulson, who is now U.S. Treasury Secretary,
told the senator about the importance of open investment. A
participant says Sen. Schumer described the Dubai port
controversy as an ``anomaly.'' Since then, executives from
top financial firms have consulted with Sen. Schumer when
foreign firms seek to buy stakes and regularly win his
endorsement.
Sen. Schumer says the executives assure him that foreign
investors will have ``not just virtually no control, but
virtually no influence.''
Compared with the ports industry, the financial sector
speaks with an outsize megaphone in Congress. In the 2006
election cycle, commercial banks and securities firms, and
their employees, contributed $96.3 million to congressional
campaigns--32 times as much as the sea-transport industry,
which includes ports, according to the nonpartisan Center for
Responsive Politics. Banks and securities firms are also the
largest industry contributors to members of the Senate
Banking Committee and House Financial Services Committee,
which can review investments in Wall Street firms. Sen.
Schumer is a member of the Senate Banking Committee.
Wall Street and the U.A.E. thought they had turned the
corner by spring 2007 when another Dubai-owned company, Dubai
Aerospace Enterprise Ltd., bought two firms that owned small
U.S. airports and maintenance facilities that serviced some
navy transport-plane engines. The Dubai firm pledged to
submit to government security reviews and submit its
employees for security screening. It also thoroughly
briefed lawmakers on the deal. It ran into no obstacles on
Capital Hill.
``I call the strategy, `wearing your underwear on the
outside,' '' says one of Dubai Aerospace's Washington
lobbyists, Joel Johnson, a former Clinton White House
communications adviser. ``We have to show everybody
everything--no secrets, no surprises.''
The deal that provided a blueprint for the current wave of
foreign investments was China's $3 billion stake in
Blackstone Group's initial public offering, announced last
May. In helping to gain congressional approval for the deal,
lobbyist Mr. Berman emerged as a key strategist.
Mr. Berman, a Commerce Department official in the
administration of George H.W. Bush, has been one of the
Republican Party's most adept fund-raisers, bringing in more
than $100,000 for President George W. Bush in 2000 and more
than $300,000 in 2004. Mr. Berman cultivates a range of
contacts with salon-style dinners at his home with his wife,
Lea, who was Laura Bush's social secretary. He is now a fund-
raiser for Sen. John McCain's presidential bid.
Blackstone asked Mr. Berman, a longtime lobbyist for
companies in the financial industry, to help smooth the way
in Congress for China to buy a piece of the private-equity
firm. A minority stake made sense to both sides: Blackstone
wanted to boost its presence in China. China, which was in
the process of setting up China Investment Corp., wanted to
show it could become a trusted investor in top U.S. firms.
Mr. Berman pointed out that offering a board seat, or a
stake of more than 10%, would invite government review.
Ultimately, the two sides agreed on a stake of as much as
9.9% and passive investment. ``Our intention was not to
arouse too much sensation in any way,'' says the senior China
Investment Corp. executive.
Mr. Berman says the goal wasn't to get around the rules but
to work within them. ``Policy considerations didn't drive the
specifics of the deal,'' says Mr. Berman. ``Policy
considerations informed the deal.''
Blackstone executives briefed several dozen lawmakers, with
the firm's chief executive, Stephen Schwarzman, sitting in on
some sessions. Stiff opposition came from Sen. James Webb, a
first-term Virginia Democrat. Sen. Webb wrote a novel
published in 1991, ``Something to Die For,'' in which Japan
uses its financial muscle to gain influence in Washington.
The senator worries Beijing could do the same.
Mr. Webb wanted the China investment deal delayed so
regulators could examine whether Blackstone's stake in a
semiconductor company posed national-security problems. One
of Mr. Berman's partners pointed out that the firm produced
off-the-shelf chips. Sen. Webb withdrew his objections to the
deal, though he remains skeptical of sovereign investors.
Mr. Berman's firm, Ogilvy Government Relations, a unit of
WPP Group PLC, billed Blackstone $3.9 million in 2007 for the
work on the investment, tax and other issues.
[[Page H544]]
Other deals followed, similarly structured to avoid raising
congressional uproar. Two other Berman clients, Carlyle Group
and Citigroup, negotiated investments with sovereign-wealth
funds--both marked by passive stakes and no board seats--and
faced no resistance. Mr. Berman says he didn't lead
strategizing in either deal.
Citigroup and Merrill Lynch, in their most recent round of
capital-raising, included U.S. investors, including New
Jersey's Division of Investment, giving politicians even more
reason to support the deals. ``The principality of New
Jersey'' is now buying stakes in Citigroup and Merrill Lynch,
jokes Democratic Rep. Barney Frank of Massachusetts, who
heads the House Financial Services Committee.
Other sovereign-wealth funds have turned to Washington
experts for advice. Former New York Fed Chairman William
McDonough, a vice chairman of Merrill Lynch, is also a member
of the international board of advisers of Temasek Holdings
Pte. Ltd. of Singapore. Temasek has stakes in Merrill Lynch
as well as British banks Barclays PLC and Standard
Chartered PLC. Former Senate Banking Committee Chairman
Phil Gramm, now an adviser to Sen. McCain, is vice
chairman of investment banking at UBS AG of Switzerland,
which sold a stake to another Singapore government
investment fund. He says he talks regularly with
sovereign-wealth funds who seek his advice on dealing with
Washington.
U.S. financial firms say the welcoming attitude of the U.S.
Treasury has also helped. Essentially, the Treasury and other
industrialized nations have subcontracted some of the most
difficult questions concerning sovereign-wealth funds to the
International Monetary Fund. In particular, the IMF is trying
to persuade the funds to adopt voluntary codes to act for
commercial, rather than political, reasons.
Presidential candidates have widely ignored sovereign-
wealth funds' investments. Democrat Hillary Clinton, alone
among top contenders for the White House, has addressed their
downsides. ``Globalization was supposed to mean declining
state ownership,'' she said in an interview. ``But these
sovereign-wealth funds point in the opposite direction.'' She
wants to go beyond the IMF efforts and look into a
``regulatory framework'' for the investments.
Banking Committee Chairman Christopher Dodd said on
Wednesday that his committee would be ``examining''
sovereign-wealth-fund investments. So far, the only
congressional hearing on the funds was held by Indiana
Democratic Sen. Evan Bayh. ``No one wants to rock the boat,''
Sen. Bayh says, because flagship financial institutions need
the cash.
Still, he is skeptical of the sovereign money. ``If you had
unfettered U.S. government investments in markets, you'd have
people throwing around words like socialism,'' says Sen.
Bayh. ``With foreign government investments, the silence is
deafening on all sides.''
____________________