2.26.08

Ave, Jeffrey Robinson!

The bunny has been working the phones, trying to assuage the nagging suspicion that's been buzzing around his brain like a noisy gnat. He would much rather be getting familiar with his Tibetan cousin (Ochotona himalayana), but once again, humanity has driven him to distraction.

What's been driving the bunny batty lately is the rapid insinuation of sovereign wealth funds' capital into large financial institutions. It's not that SWFs are anything new (indeed, one early bird wormed out the fact that this vehicle's make dates at least to 1956), but the speed with which they have amassed container ships of cash for immediate injection into badly battered banks (can you stand all the alliteration?) without much need (nor, indeed, requirement) for oversight sets the bunny's incisors on edge. In fact, it's worrisome enough that Bob Davis at the Wall Street Journal got a front-page above-the-fold slot today for putting his finger on the swollen, throbbing problem at the heart of the matter:

"Executives from the world's largest SWF--the Abui Dhabi Investment Authority--and from the Government Investment Corp. of Singapore met Thursday with a US Treasury delegation led by the assistant secretary for international affairs, Clay Lowery. The talks are part of delicate global negotiations to draft rules to oversee the behavior of such funds, without discouraging them from investing in the US, Canada and Europe at a time of global financial turmoil."

The bunny would like to thank Mr. Davis for his deep visceral grasp of such a thorny obstruction. How does a UBS or a Citigroup, both of which have received massive capital transfusions from SWFs recently, respond when a simple request for transparency is met with a resounding "Hell, no" in various languages?

Mr. Davis is not alone in such sentiment. In the New York Times on 2/9, Steven Weisman wrote that "leaders of funds in Russia, the Middle East, China and other parts of Asia say that the West's demand for regulations is hypocritical in light of the failure to regulate European and American banks and hedge funds."

To be fair, some SWF captains have read the entrails and are acting accordingly. The China Investment Company (CIC) has gone out of its way to rise above the veil of secrecy for which SWFs are widely known, according to an article in the Financial Times by Andrew Wood on 2/4. Morgan Stanley, which rates CIC the sixth-largest SWF by assets (~$200 billion), was quoted in the same piece as predicting CIC would be the largest SWF by 2009.

Also, to be fair, the growth of SWFs can be tied directly to two factors--the astounding spike in oil and gas prices, and the massive accrual of savings, particularly in nations hardest hit by the Asian financial crisis of 1998. Neither one of these factors is illegal. And, in fact, the reversal of fortune displayed in the flow of capital from emerging back into established economies is, in the words of an Economist editorial from 1/19, "proof that capitalism works."

Ah, but is it? This is what bothers the bunny, and where the aforementioned Mr. Robinson comes in. This gentleman is the author of THE MERGER and THE LAUNDRYMEN, which chronicle (respectively) the mechanisms by which criminals optimize old-fashioned illegal moneymaking schemes in the modern age, and how they "wash" the proceeds through the digital economy to make "black" money "white". If 2% of assets traded worldwide are controlled by SWFs (this according to the Economist), Mr. Robinson notes that it is worth remembering that 2% of global GDP is black money. It therefore stands to reason that at least some of this black money would wash up in SWFs, though how much would be very difficult to quantify, not least because the fund managers probably cannot effectively document the origins of the money in their coffers themselves. So if some of the funds going into a UBS or Credit Suisse come from illegal drugs, or from the bodies of teenage prostitutes hooked on said drugs, or from the sales of guns sold to their pimps by rogue militas, what then? Mr. Robinson points out that while the US government claims jurisdiction over all financial crimes committed in US dollars (through the Treasury Department's Financial Crimes Enforcement Network, or FinCEN), it is in fact extremely difficult to enforce its own regulations across borders (case in point--BCCI).

Moreover, he points out that beyond the difficulties of auditing a foreign government, quantifying and qualifying its assets, and if necessary trying to impose a different government's set of rules...would you really want to? There is an estimated $7.5 trillion in offshore money today, he says, a good 10% of which is likely to be black money, mostly from drugs. If this kind of wealth were wiped out by a magic wand of uber-legislation, the ensuing wave of bankruptcies would likely usher in a new dark age.

This issue isn't going away anytime soon. The bunny will keep on digging, as is his nature.

(Emails to FinCEN at the US Treasury Department were not returned as of this writing.)


Begin at the beguining, bunny:

"The Invasion of the Sovereign Wealth Funds" (p.11) and "Asset-Backed Insecurity" (pp.78-80), The Economist, 1/19/08

"Asia Is Opening Up and Welcoming External Help" by Andrew Wood, Financial Times, 2/4/08

"Overseas Funds Resist Calls for a Code of Conduct" by Steven R. Weisman, New York Times, 2/9/08

"US Pushes Sovereign Funds to Open to Outside Scrutiny" by Bob Davis, Wall Street Journal, 2/26/08