"The financial market crisis of 2007 may be remembered as the beginning of the nationalization of a large part of the financial system."
"It took a government bailout to shore up UBS. Last month, it was Citigroup that got government aid to help recover from its bad investments."
So wrote Floyd Norris in The New York Times. (Dec. 14: A Worrisome New Wrinkle in Bailouts).
These two major banks were burdened with their unwise investments in billions in shaky U.S. sub-prime housing mortgages. So "sovereign wealth funds" (SWFs) came to the rescue. These foreign government-owned financial funds pumped billions into these two banks.
Temasek, Singapore's official SWF, bailed out UBS with US$11.5 billion. Abu Dhabi's SWF invested US$7.5 billion in the troubled Citibank. As a result, these foreign governments will at least partially influence both banks and their policies from now on.
The Skinny on Sovereign Wealth Funds
Sovereign wealth funds are a new name for something that's been around for a while: Government assets held in another country's currency.
All countries have foreign exchange reserves (now typically in dollars, euros, or yen). When a country accumulates more reserves than policymakers feel the country needs for immediate purposes, that country can create a sovereign fund to manage those "extra" resources.
Sovereign funds have existed at least since the 1950s, but their total size worldwide has increased markedly over the past 10 - 15 years. In 1990, sovereign funds held about US$500 billion. Today, it's estimated sovereign wealth funds account for US$2-3 trillion worldwide. And it's estimated SWFs could reach US$10-15 trillion by 2012.
Currently, more than 20 countries have these funds, and half a dozen more have expressed an interest in creating one. These state holdings are concentrated, with the top five funds holding about 70% of total assets. Over half of these assets are owned by countries that export major amounts of oil and gas. Norway has a large sovereign fund. So do places as varied as Canada, Russia, and Trinidad and Tobago. Asian and Pacific countries, like Australia, China, and Singapore hold about one-third of total assets.
Our Sovereign Society investment guru, Eric Roseman, says: "The way I see it, Western governments and investors have no choice in the matter. It's either you accept SWFs or face the highway - literally. Capital ratios for many of the largest banks in the United States, Canada and Western Europe are now falling below Tier 1 levels."
Call It What It Is
Bank bailouts may be necessary to avoid a major economic recession, but governments owning private businesses and banks smacks of fascism. Yes, I'm talking about the same fascism as Mussolini, Hitler and Peron created.
Added to all their other horrors, these fascist leaders imposed policies that put the economy under government control without wholesale expropriation of the production means.
Fascist governments nationalized key industries, managed their currencies and made massive state investments. They also introduced price and wage controls and economic planning measures. Fascist governments instituted state-regulated allocation of resources, especially in the financial and raw materials sectors. Perhaps what we are seeing now is a sort of "backdoor fascism."
How Backdoor Fascism Happens
"Oh, but that can't happen here," you protest.
Banking and other corporations are unelected bodies with an internal hierarchy. These corporations exist to make profits and control the economic life of their respective areas.
For example, steel corporations could form a cartel of all steel business leaders. They could mobilize to impose a common policy on steel prices and wages. When such groups hold a country's political and economic power, then a country turns into a corporatist system.
So what happens if Citibank directors are asked to consider financing loans or business in Israel? Will UBS be forced to favor Singapore businesses over those in rival Hong Kong?
Neither government took control of the banks in question, but they will be able to exert substantial influence. That's especially true if the banks find themselves with a need to raise more capital. Lawrence Summers, the Harvard economist and former U.S. Treasury secretary, aptly calls the phenomenon "cross-border nationalizations."
Says he: "The logic of capitalism depends on shareholders having profit maximization as their primary objective. Governments may have many interests."
Nobody's Whining Now that Foreigners Are Rushing to the Rescue
You may recall that jingoistic U.S. politicians in both parties staged months-long temper tantrums when China tried to buy a major stake in a U.S. oil company. Politicians also kicked up a fuss when Dubai bought control of a multi-national corporation that manages most American port operations.
Hugo Chavez rightfully has been denounced for using Venezuela's oil wealth (Citgo) for his leftist goals, and Putin's fascist Gasprom energy corporation is an incipient threat to much of Europe.
I guess it is too much to ask Wall Street to consider the serious implications of these SWF bailouts, beyond the immediate rescue. But those who do not learn the lessons of history indeed are condemned to relive them.
"It took a government bailout to shore up UBS. Last month, it was Citigroup that got government aid to help recover from its bad investments."
So wrote Floyd Norris in The New York Times. (Dec. 14: A Worrisome New Wrinkle in Bailouts).
These two major banks were burdened with their unwise investments in billions in shaky U.S. sub-prime housing mortgages. So "sovereign wealth funds" (SWFs) came to the rescue. These foreign government-owned financial funds pumped billions into these two banks.
Temasek, Singapore's official SWF, bailed out UBS with US$11.5 billion. Abu Dhabi's SWF invested US$7.5 billion in the troubled Citibank. As a result, these foreign governments will at least partially influence both banks and their policies from now on.
The Skinny on Sovereign Wealth Funds
Sovereign wealth funds are a new name for something that's been around for a while: Government assets held in another country's currency.
All countries have foreign exchange reserves (now typically in dollars, euros, or yen). When a country accumulates more reserves than policymakers feel the country needs for immediate purposes, that country can create a sovereign fund to manage those "extra" resources.
Sovereign funds have existed at least since the 1950s, but their total size worldwide has increased markedly over the past 10 - 15 years. In 1990, sovereign funds held about US$500 billion. Today, it's estimated sovereign wealth funds account for US$2-3 trillion worldwide. And it's estimated SWFs could reach US$10-15 trillion by 2012.
Currently, more than 20 countries have these funds, and half a dozen more have expressed an interest in creating one. These state holdings are concentrated, with the top five funds holding about 70% of total assets. Over half of these assets are owned by countries that export major amounts of oil and gas. Norway has a large sovereign fund. So do places as varied as Canada, Russia, and Trinidad and Tobago. Asian and Pacific countries, like Australia, China, and Singapore hold about one-third of total assets.
Our Sovereign Society investment guru, Eric Roseman, says: "The way I see it, Western governments and investors have no choice in the matter. It's either you accept SWFs or face the highway - literally. Capital ratios for many of the largest banks in the United States, Canada and Western Europe are now falling below Tier 1 levels."
Call It What It Is
Bank bailouts may be necessary to avoid a major economic recession, but governments owning private businesses and banks smacks of fascism. Yes, I'm talking about the same fascism as Mussolini, Hitler and Peron created.
Added to all their other horrors, these fascist leaders imposed policies that put the economy under government control without wholesale expropriation of the production means.
Fascist governments nationalized key industries, managed their currencies and made massive state investments. They also introduced price and wage controls and economic planning measures. Fascist governments instituted state-regulated allocation of resources, especially in the financial and raw materials sectors. Perhaps what we are seeing now is a sort of "backdoor fascism."
How Backdoor Fascism Happens
"Oh, but that can't happen here," you protest.
Banking and other corporations are unelected bodies with an internal hierarchy. These corporations exist to make profits and control the economic life of their respective areas.
For example, steel corporations could form a cartel of all steel business leaders. They could mobilize to impose a common policy on steel prices and wages. When such groups hold a country's political and economic power, then a country turns into a corporatist system.
So what happens if Citibank directors are asked to consider financing loans or business in Israel? Will UBS be forced to favor Singapore businesses over those in rival Hong Kong?
Neither government took control of the banks in question, but they will be able to exert substantial influence. That's especially true if the banks find themselves with a need to raise more capital. Lawrence Summers, the Harvard economist and former U.S. Treasury secretary, aptly calls the phenomenon "cross-border nationalizations."
Says he: "The logic of capitalism depends on shareholders having profit maximization as their primary objective. Governments may have many interests."
Nobody's Whining Now that Foreigners Are Rushing to the Rescue
You may recall that jingoistic U.S. politicians in both parties staged months-long temper tantrums when China tried to buy a major stake in a U.S. oil company. Politicians also kicked up a fuss when Dubai bought control of a multi-national corporation that manages most American port operations.
Hugo Chavez rightfully has been denounced for using Venezuela's oil wealth (Citgo) for his leftist goals, and Putin's fascist Gasprom energy corporation is an incipient threat to much of Europe.
I guess it is too much to ask Wall Street to consider the serious implications of these SWF bailouts, beyond the immediate rescue. But those who do not learn the lessons of history indeed are condemned to relive them.
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