George Will

WASHINGTON -- Although Americans are alarmed by the credit crisis currently convulsing the economy, they are sensibly placid about one consequence of the crisis. It is the substantial investment by sovereign wealth funds -- government owned and run investment funds -- in financial institutions needing infusions of cash.

Remember the patriotic ruckus in 1989 when private Japanese investors bought Rockefeller Center? Remember the frenzied opposition two years ago to the attempt by a company owned by the government of Dubai to become the operator of some U.S. ports? Last month, there was no comparable anxiety when the sovereign wealth funds of Kuwait, Singapore and South Korea bought an estimated $40 billion of equity in Citigroup, Merrill Lynch, Morgan Stanley and the Swiss bank UBS.

Calmness, combined with vigilance, is sensible. Calmness, because the funds are a small fraction of the world's wealth and are performing necessary services. Vigilance, because they pose potential problems concerning transparency and possible political purposes.

Such funds are not new: Kuwait launched one in 1953. Matthew Higgins, an economist with the Federal Reserve Bank of New York, estimates that the total assets of sovereign wealth funds are now $2.5 trillion, much less than the $16 trillion, $18 trillion and $22 trillion managed by insurance companies, pension funds and mutual funds, respectively. The $2.5 trillion is larger than the combined assets of all hedge funds but is equal to just 1.2 percent of the $201.6 trillion combined market capitalization of global bond and equity markets and commercial banks. Higgins' high-end estimate is that the funds could be 4 percent of global financial markets by 2015.

Many countries exporting oil, toys or underwear to America are running trade surpluses. These countries need to do something with their dollars -- it is better that they invest them than buy weapons with them -- and want something with a higher return than U.S. Treasury bonds offer. By buying minority interests in U.S. financial institutions or other companies, sovereign wealth funds are gaining money-management expertise.

George Will

George F. Will is a 1976 Pulitzer Prize winner whose columns are syndicated in more than 400 magazines and newspapers worldwide.
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