A Sovereign Fund For The US Government?

The Dubai International Capital fund has $15 billion to invest. Temasek Holdings, Singapore’s state-owned investment company, just put $2 billion into a new investment vehicle in China. According to the IHT "the China Investment Corporation is preparing to spend roughly two-thirds of its $200 billion on deals related to Chinese banks."

Overseas funds have put money into Blackstone (BX), AMD (AMD), Citigroup (C). It may turn out that these were bad ideas and that the investments will lose money. But, foreign entities have capital to put to work, sometime for strategic purposes. With word that China steel interests, backed by the government, may buy huge metals company Rio Tinto (RTP), the trend is continuing.

The US Congress has shown concerns that it does not want foreign investors to buy US companies which could compromise the US advantage in some global industries. An investment in the Nasdaq (NDAQ) has been questioned. A deal which would give Huawei Technologies a piece of US tech company 3COM (COMS) may be killed because the US company has advanced tech for the telecom industry.

Without money to put into these companies, it becomes fairly hard for the US government to pick the pockets of investors in firms which may be attractive to foreign interests by blocking deal after deal. But, Congress can put its money where it mouth is. To do that, the US would need to have an investment fund of its own.

A sovereign US fund could not only invest in "strategic" interests in this country, it could put capital abroad just as overseas companies are doing in America.

Where would this money come from? The Treasury would have to float bonds, the same way it does to raise any other capital. It might be a very attractive investment for institutions. Ironically, investors from overseas may want to put capital into the fund as well. The government could certainly raise $100 billion or more without a great deal of difficulty.

The problem with a fund of this sort is who will decide where the money is invested, Giving it to some part of the federal government would create too great a bureaucratic problem. But, giving management to someone like Henry Paulson and a team of investors might well work. Paulson would have to leave Treasury, but a position investing for US strategic interests is probably more attractive than being in the Cabinet of an administration that is one its way out.

The US government can put up, or shut up about overseas sovereign funds putting capital into American companies.

Douglas A. McIntyre