As Governments Invest, Motives Blur

By Steven Pearlstein
Wednesday, July 25, 2007

For weeks now, Britain's Barclays Bank and three European banks have been locked in hand-to-hand financial combat to see which will prevail in bidding for the Dutch bank ABN Amro, the biggest bank takeover ever.

On Sunday night, Barclays got a big boost from a couple of new, deep-pocketed investors, which agreed to put up as much as $18.5 billion to help it finance the proposed $93 billion deal.

And who were these investors with the deep pockets? None other than the governments of China and Singapore.

Welcome to the new world of global finance, in which capital not only moves freely around the world, but the old distinction between what is public and what is private is also quickly blurring.

We're well beyond the days when people worried about the influence of public pension funds over private companies. Today, trillions of dollars in investment capital are under the direct control of central banks, state-owned corporations, state-designated monopolies and royal families. And more and more countries are following the lead of Singapore, Norway and Kuwait in setting up "stabilization funds" and "sovereign wealth funds" that are capitalized with state assets, run by government-friendly officials and charged not only with earning a competitive return on investment, but also with leveraging newfound financial wealth to long-term economic advantage.

The size of these state holdings now dwarfs almost anything in the private sector.

The Abu Dhabi Investment Authority, for example, controls assets worth more than all the companies listed on the stock markets of Austria, Belgium, Denmark, Finland, Greece and Ireland combined, according to a calculation by Morgan Stanley.

At $430 billion, Singapore's two investment funds have twice the market value of Bank of America.

And if you were to combine the roughly $2 trillion in assets of all the sovereign wealth funds, they would easily exceed the assets of the global hedge fund industry.

As Clay Lowery, an acting undersecretary of the Treasury, noted in a speech last month, these pools of government-controlled funds are now so big that their annual growth alone would have allowed them to buy up every one of the $461 billion worth of bonds issued last year by the governments of Europe and the United States -- and still have $720 billion left to invest in other assets.

This week's Barclays deal is only the latest example of how government-controlled funds are making their way into the private-sector economy.

Recently, the investment arm of the Dubai government and Russia's largest government-owned bank each bought a stake (3 percent and 5 percent, respectively) in the parent of Airbus.

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