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Regulating Sovereign Wealth


Is pen mightier than dollar?

The Wall Street Journal reports the U.S. Treasury is working with the International Monetary Fund to draft a set of "best practices" to guide investments made by sovereign wealth funds. Regulators are trying to prevent countries such as Singapore, the UAE and China from using investments for political ends.

Specifically, European and American officials want these funds to increase the transparency of their investment portfolios, the details of which remain largely a mystery. Abu Dhabi and Singapore's funds are being the most closely scrutinized primarily because of their size and opacity. The two funds total $900 billion and $300 billion respectively, but Abu Dhabi's ranked last and Singapore third to last with respect to openness.

As noted last week, concern over potential abuses stemming from sovereign investments isn't reserved for Washington bureaucrats. When asked whether they oppose investments in U.S. companies by various foreign governments, Americans were most worried about the influence of Saudi Arabia, Abu Dhabi, China and Russia.

The timing of this effort makes negotiations increasingly tricky. The U.K. Telegraph reports Morgan Stanley (MS) expects petrodollars in excess of $2 trillion to be invested this year. Merrill Lynch (MER), Citibank (C) and Morgan have turned to foreign capital to shore up bleeding balance sheets, adding complexity to the issue. If American banks are forced to pass the collection plate again, it's unclear whether they may face stiffer resistance from regulators. These petrodollars have the potential to prop up weakening American financial markets, but sovereign wealth funds may just as easily send their checks elsewhere.

At odds are xenophobic feelings about the potential influence of foreign investors in American companies and national security issues. And while national security is central, it's unclear whether regulation of sovereign wealth funds is the best way to protect national interests.

Washington should focus on long term solutions to the financial crisis, rather than stopgaps to get us through election season. We achieved our global position through economic might and should not now choose to wield our influence with a pen and paper.
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