[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.''

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