Sovereign Wealth Funds: Hard to Regulate

Bob Davis has an excellent front-pager in today’s WSJ on the dance between sovereign investors and sovereign investees. Both the US and the EU are looking for sovereign wealth funds to become more transparent, although it’s far from obvious what kind of sanctions they have in mind if that doesn’t happen.

The IMF’s John Lipsky sounds very sensible:

Outside pressure could backfire, Mr. Lipsky says. "If there were a sense that somehow ‘best practices’ were decided by someone else and dictated [to the funds], that could be extremely counterproductive," he says. "This needs to be cooperative to be meaningful."

The EU president, less so:

During a visit yesterday to Oslo, European Commission President Jose Manuel Barroso sought to distinguish between Norway’s fund, which he praised, and those outside the Continent. "We cannot allow non-European funds to be run in an opaque manner or used as an implement of geopolitical strategy," he said.

Someone should tell this chap what the "S" in SWF stands for. "Sovereign" means it’s not up to anybody else what you are or are not allowed to do.

At the end of the article Barosso mutters darkly about introducing legislation. But it will be very, very hard to do anything with real effectiveness or teeth. Let’s say I open up a hedge fund in London or Connecticut: it’s a private fund, I need to disclose very little, and I sell a 95% stake to Abu Dhabi, which also puts in $50 billion or so for me to invest. At that point, I’m a sovereign wealth fund in all but name – but you just try to include me in any proposed legislation.

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