Sovereign wealth funds have emerged in recent months as the world’s power brokers. They have used their tremendous wealth to make big cross-border investments and prop up some of Wall Street’s best-known firms…

The Government of Singapore Investment Corporation has been the most active among the world’s sovereign funds, making its deputy chairman, Tony Tan, a major center of gravity. Wall Street veterans always follow the money, so many of the big-name advisers in New York and London have found themselves traveling the globe playing international matchmaker to these funds.

But sovereign funds have also learned the downside of deal-making: some of their blockbuster transactions have been big money losers so far. The question is where all that money will go next.

- Andrew Ross Sorkin, New York Times blogs

Via tomorrow.sg, I discovered this fascinating graph of the top 20 international purchases from the New York Times by sovereign wealth funds in the last 3 years, and mini-profiles of the various fat cats involved.

Interest in the actions of sovereign wealth funds, which include Singapore’s Temasek Holdings and the Government Investment Corporation, has been waxing as their contributions to stave off imminent backruptcy of major banks has gained prominence. The New York Times even has a special section dedicated to this very topic.

The immediate impact of this graph is rather shocking, probably to Singaporeans and non-Singaporeans alike. I’ve always known that Singapore has been really active in buying stakes in international companies, but to be by far and away the most active dealmaker? Wow.

Unlike many other people, who are freaking out over the massive investment losses via Citigroup, Merrill and UBS, I actually feel rather calm about it. It takes guts to buy in a tanking market, and nobody can really predict when the bottom will come.1 Buying in a bear market is basically the only way to buy good stocks at a discount.

Also, sovereign wealth funds are essentially backed by the authority of the state that owns it, which can and sometimes does exceed the stability of even the richest corporations. They also have a far longer time window of investment that is not slaved to the obligatory cycles of regulatory disclosure that publicly listed companies are obliged to undergo. States, in contrast to individuals concerned with dividends and growth rates at the quarterly or annual time scale, can hold on to their investments for far longer timeframes that are only matched by the patience of the most steeled investors. Thus sovereign wealth funds can and do think in much longer terms than the vast majority of other investments, and don’t really care for the flimflam fluctuations inevitable in stock markets.

With such a long-term view, what sovereign wealth funds really fear is not significant losses on a two-year time scale, but having a stock collapse entirely by a corporation being driven into bankruptcy, thus wiping out completely all investments made in said shares. It is therefore in the enlightened self-interest of sovereign wealth funds to do whatever is necessary, even buying in the face of short-term losses, in order to save the entire investment altogether. Considering also how a collapse in several major banks would amplify itself in marginal reserve banking systems to the point of triggering destabilization in other banks, and possibly result in a complete collapse in the flow of money, it makes sense to prop up a bank to avoid financial catastrophe. And if you can do so by owning parts of famous brand names, why not?

Such actions are not altruism, then, but more like enlightened self-interest. This, naturally, scares policitians in the countries that are receiving the bulk of the buyout investments. Just as the Thais were skeptical about Temasek’s stakebuying in Shin Corp, and the Aussies were upset about SingTel’s purchase of Optus, so are the Americans worried about the implications of stakebuying on the influence of sovereignty beyond the borders of the state.

But there is another factor, perhaps the least well-understood one, that explains the recent actions of sovereign wealth funds. My friend expressed this succintly thus:

It’s a sure buy, because if these companies go bust, we’ll be in much deeper shit than just
losing the investment.

Globalization means that we live in a highly coupled world, the nonlinear dynamics of which we are experiencing in a very tangible manner in the financial world, and in at least two ways. First, the collapse of even a very few large corporations could very well trigger a domino effect that will cause many more large banks to collapse. This correlated dynamics, of course, is exacerbated by the marginal nature of current banking systems, where banks can circulate more money than they actually have in their hands. Second, sovereign wealth funds represent a new and unexplored frontier along which the worlds of geopolitics and international finance intersect. Just what exactly are the implications for sovereignty and statehood when nations are essentially allowed to snap up juicy chunks of other nations?

In a world that is increasingly strongly correlated, actions in one arena have profound, often subtle, effects in seemingly unrelated areas. We are only just beginning to see how a butterfly flapping its wings can not just trigger tornadoes, but also economic busts, geopolitical tension, ecological instability and sociological upheaval, possibly all of them simultaneously.

Indeed, we are living in interesting times.

Reference

  1. Andrew Ross Sorkin, New York Times blogs, “Follow the wealth“, 2008-04-02.
Footnotes
  1. My gut feeling is that we’re at the end of the beginning, not, as others in Singapore apparently feel, that we’re at the beginning of the end. The US market fundamentals simply don’t seem to add up in the way things did at the end of the Great Depression, being AFAIK the last major depression that was driven by debt.↩