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Going Once, Going Twice, Sold!

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There something distinctly fishy about the Treasury Department’s lightning fast and allegedly “surprise” discovery of over $30 billion in Libyan Government assets stored in U.S. banks. The Obama administration has lauded this as a major and unexpected victory in its effort to dislodge the Gaddafi regime. That may be so, but the implications of such a large deposit by Libya have deeper and far more disturbing implications. Could Libya have been in the process of purchasing a major stake in America’s critical infrastructure?

First, it is strange that Libya -- a Government that has traditionally been wary of storing its’ assets in a place where they could be confiscated by the U.S. government -- would keep almost half of its estimated $70 billion sovereign wealth fund (Libyan Investment Authority or ‘LIA’) in U.S. banks. After all, Libyan assets had been frozen before, most notably in 1986. In fact, most Arab nations, even those friendly to the U.S. had been reluctant to keep their assets within U.S. jurisdiction after the U.S. froze Iranian government assets in 1979. Admittedly, relations with Libya have warmed in recent years since it was removed from the U.S. list of official state sponsors of terrorism in 2005. Still, the old wounds run deep, and Qaddafi is, if nothing else, a shrewd operator. Clearly, if he were taking such a big risk he must have had assurances from on high.

The Treasury official interviewed by the Post, Stuart Levy – an obscure bureaucrat who recently left the Treasury to assume a post at the Council on Foreign Relations – indicated that the holdings were concentrated primarily in one bank. Levy declined to disclose the name of the bank, but others -- notably Ted Truman of the Peterson Institute for International Economics – have suggested that the funds were held at the Federal Reserve Bank of New York. If that is the case, someone knew about it.

The second strange aspect problem is the speed with which the Treasury department identified and froze the assets. According to the Washington Post, treasury officials expected to find somewhere in the neighborhood of $100 million in Libyan assets, and were surprised when they pulled in a record haul for U.S. assets freezes. It’s strange, not just because the disparity between what was expected and what was eventually found – but because of information recently disclosed in the Wiki leaks cables. The cables revealed that Libyan officials revealed in a discussion with the U.S. Ambassador in January that LIA had roughly “$32 billion in liquidity, mostly in bank deposits that will give us good long-term returns.” A 2009 annual report suggested that the company held roughly 78% of its investments in “short term financial instruments abroad.”

From all accounts, it seems the Libyan authorities were open about their investments, and were carefully contemplating major investments in the U.S. A series of meetings with high level diplomatic officials and U.S.-government agencies such as the U.S. Import Export Bank over the past few months, seem to confirm that the United States was actively courting Libyan government investment when the conflict broke out. If it is true that most of Libya’s overseas investments were being held in short term securities, it seems it was poised on the verge of a major buying spree.

But yet another disturbing fact emerges. Libyan officials quoted by Wiki leaks suggested that Libya was using several U.S. banks to manage its’ money, usually in increments of up to $500 million. Some of the Banks, Blackrock, Goldman Sachs and Lehman Brothers, were identified. However, such a large holding in one bank suggests that Libya was not longer relying purely on intermediaries to make its investments, and was investing directly in U.S assets.

This is troubling. In the past, such direct investments by foreign powers in U.S. infrastructure assets have met with intense criticism. In 2005, Chinese government-controlled CNOOC Petroleum was forced to withdraw its bid for U.S. Oil Producer Unocal after intense criticism from lawmakers who suggested that China would use proprietary knowledge it gained from Unocal to harm the United States. More recently, the state-owned Dubai Company DP World raised a storm of controversy when it attempted to purchase a British-owned company that managed some American ports.

The concern with direct sovereign investments in critical infrastructure, raised directly by lawmakers and others, is that these investments could be motivated by noneconomic – that is political – factors. In fact, Larry Summers, former Harvard President and member of President Obama’s Council of Economic Advisors, argued in an article published in the Financial Times in 2007, that direct investment by foreign governments in the U.S. could pose national security issues. He urged a closer look at some of the noneconomic motives of sovereign funds.

Significantly, at the same time that Summers wrote the article, big banks were scrambling to find capital in the face of a looming financial crisis – and sought it from the only sources a major capital that had not yet been tapped: sovereign wealth funds. Consequently the Sovereign Wealth funds of Singapore, Kuwait and Abu Dhabi made significant investments in the major U.S. investment banks, including JP Morgan, Merrill Lynch and Morgan Stanley. Because there was not change in control, the investments were seen as indirect investments.

Some have even implied that one of the major reasons that the Treasury Secretary and others insisted upon a bailout of the financial institutions was to protect the investments of the Sovereign wealth funds – who had come to the party late and would be left holding the bag should they collapse. Interestingly, amid the chaos of the past two years, such investments have largely escaped scrutiny.

But these funds have grown dramatically in terms of their size and their importance in the capital formation of major international companies – particularly banks. The total wealth in such funds has been reported to exceed $4 trillion as of 2011 -- roughly twice the size of entire hedge fund industry.

So rather than feel particularly elated about finding $30 billion of Libyan Government funds conveniently parked in a U.S. bank, the news makes one wonder. Is America up for sale? Or worse yet, has it already been sold, and to whom?

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