As 2008 begins its run, the U.S. economy is looking for some help. The once high-flying housing market has crashed and continues to burn and the heat is so intense that it's evaporating much more than just home sales. Lenders are shell-shocked and credit is tight, unemployment is increasing and economists keep talking “recession.” Add to the mix the weak dollar, and the U.S. is holding its door wide open to foreign investors looking for an inroad to the world's largest market.

Enter sovereign wealth funds—investment entities set up by governments to manage their surplus savings—which, according to the research firm Thomson Financial, invested $21.5 billion in American companies last year.

Anders Åslund, a senior fellow at the Peterson Institute for International Economics in Washington, DC said sovereign wealth funds are nothing new, but they are growing larger. “They emerged in the 1970s in oil-producing emirates, such as Kuwait and Abu Dhabi, as a way to accumulate current account and budget surpluses during the oil boom,” explained Åslund. “Now, Abu Dhabi boasts the largest fund, sized at $600-700 billion, and other countries have followed its lead.

“Norway established a fund for its excess oil incomes in 1990. Singapore has accumulated two large funds that, unusually, are not based on oil income. And more recently, China and Russia have instituted large sovereign wealth funds of their own,” Åslund added.

Simon Johnson, Economic Counsellor and Director of the IMF's Research Department, also points to the dramatic growth of these funds over the past 10 - 15 years. “In 1990, sovereign funds probably held, at most, $500 billion. The current total is an estimated $2 - 3 trillion and, based on the likely trajectory of current accounts, could reach $10 trillion by 2012, said Johnson. To put things in perspective, U.S. GDP is $12 trillion.

In just the past two months, some of the U.S.'s largest financial institutions have been on the receiving end of cash infusions from such funds. On Jan. 15, 2008, Citigroup announced that it will receive $6.9 billion from the Government of Singapore Investment Corp. for a 4 percent stake. Merrill Lynch & Co. Inc. meanwhile said two state-run funds (the Kuwait Investment Authority and the Korean Investment Corp.), as well as a Japanese investment bank would invest $6.6 billion in the company. And back on Dec. 24, Merrill announced its intent to sell a stake in itself of at least $4.4 billion, and up to $5 billion, to Singapore's state-run Temasek Holdings.

Morgan Stanley also took advantage of foreign funds, making a deal with China Investment Corp., an investment arm of the Chinese government, who bought $5 billion of securities that will convert to a 9.9 percent stake in the bank by 2010.

Whether or not billions of dollars of foreign cash should worry the U.S. is up for debate. As Johnson points out, there's a lot we don't know about sovereign funds. “Very few of them publish information about their assets, liabilities, or investment strategies,” he said.

At the forefront of the debate is national security, especially when speculation grows about the purpose of a sovereign wealth fund's investment, which might be to secure control of strategically-important industries for political rather than financial gain.

The U.S. economy could certainly use the cash. But our government needs to create some accountability for these state-owned funds; insist that they're less transparent and encourage them to disclose their objectives and investment strategy without discouraging their financial interest in the U.S.

John O'Brien can be reached at: jobrien@paperage.com

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