Fund Critics Need a Lesson in Transparency

While the past six months' financial news coverage has been dominated by the credit crunch and its implications for the world's economic and financial systems, another story has been receiving growing coverage, too. That story is the remarkable growth of sovereign wealth funds (SWFs). Hitherto mostly ignored in global financial circles, these vast pools of cash owned and controlled in the most part by governments in Asia and the Middle East had begun making increasingly bold moves to buy up predominantly Western-owned businesses at a time when many were already becoming anxious about the level of the West's indebtedness to countries such as China. In the six months that followed, SWFs have gained increasing exposure and their actions have triggered a rise in concern bordering on hysteria about their plans.

To some extent, the concern is justified. As "normal" liquidity in the world's financial markets has been rapidly drying up, the SWFs with their seemingly almost limitless access to cash, are finding themselves in a more and more powerful position. When a big US bank finds itself with a giant hole in its balance sheet, for example, it appears almost inevitable now that the white knight riding to the rescue will be a sovereign wealth fund. With banks finding ever more and bigger holes, the SWFs are executing one of the biggest financial land grabs in recent history.

Given their motivation and investment philosophies are often obscure at best and in most cases downright opaque, this rapid accumulation of financial power -- and, potentially, political leverage -- is a cause for concern. That concern has been voiced strongly by a wide range of politicians, business leaders and financial experts, mostly in the West. The latest organization to join the fray is the Washington, DC-based International Monetary Fund, which has reportedly been putting the squeeze on Singapore, Abu Dhabi and Norway to establish a code of conduct for SWFs that would ensure they disclose comprehensive details of their holdings and assets. The pressure, apparently, has been effective as Singapore's fund has said it will attempt to become more transparent.

Certainly, increasing the transparency of the world's biggest investment funds would be no bad thing. But those politicians and business leaders who are calling loudly for SWFs to act in a more transparent manner are themselves not being entirely candid about their motivation. Most likely, their core motivation is the simple fear that the West is losing its chokehold on the global financial system. Until they admit to their real concerns, these critics of SWFs are in no position to preach transparency to the sovereign funds.