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Guest Post by Doug Rediker: More Caviar, Mr. Minister?
Share / Recommend - Comment - Print - Wednesday, Oct 24 2007, 6:03PM
Doug Rediker is Co-Director, along with Heidi Crebo-Rediker, of the New America Foundation's newly launched Global Strategic Finance Initiative
Between mouthfuls of canapes, business card exchanges and polite toasts, my prime take-aways from this past weekend's G7, IMF and World Bank meetings here in Washington were, first, how yesterday's poor third world countries have become, almost overnight, today's wealthy investment banking target clients, and second, the increased disconnect between the official and unofficial (private sector) events.
In particular, in dealing with Sovereign Wealth Funds (foreign government-controlled investment funds with assets approaching $3 trillion), this year, the divergence between the considered deliberations of the finance ministers and the goings-on in the simultaneous gatherings of the investment bankers, asset managers and their clients seemed even starker than usual.
The public face of these annual meetings is that of a group of august ministers presenting considered approaches to today's esoteric global financial issues. This year, the G7 ministers soberly pondered, among other things, how to address the rise of SWFs and the risks they may pose. Apparently, when Norway was the poster child for SWFs no one gave them a second thought. But with China, Russia and even Libya flush with cash - and looking to use it -- suddenly the issue takes on a more ominous tone.
Meanwhile, down the hall, the world's leading investment and finance professionals were wining, dining and pitching new investment ideas, structures and deals to the very same SWFs and government controlled entities. Guess which group was faster, more creative and more likely to come out on top? Not to mention more fun.
Ministers called for greater transparency, risk management and accountability. Some argued for reciprocity. The Russians -- with a straight face -- objected to anything that would restrict the free flow of capital. There was a general call for the IMF (looking to find a raison-d'etre) to create a code of conduct for SWFs (although we have no reason to believe that anyone would agree to live by it, nor would it be enforceable). Cautionary notes were raised about the need to balance knee-jerk protectionism, legitimate national security interests and the economic reality of the need for countries to attract investment. Hmmm, these are complicated matters, the ministers agreed -- let's consider these complex matters and revisit them at our next meeting.
While those considered discussions were ongoing, the real action was of a completely different nature and pace. DC hotels, meeting rooms and restaurants were overrun by investment bankers and financiers (all carrying thick binders filled with briefing notes for their back to back to back meetings) well into the night, frenetically cozying up to representatives of the newest targets on the international finance scene -- those very same SWFs. These funds are now the most important new potential clients for any investment banker worth his or her salt. In less than a decade, some of the same emerging-market governments that used to come to these meetings with hat in hand, are now being wined, dined and courted as never before. More caviar, Mr. Minister?
Courting SWFs makes perfect sense if you assume (as you should) that the financial world is motivated primarily (exclusively?) by financial considerations. Most players in the financial world take as a given Willie Sutton's famous reply when asked why he robbed banks -- "because that's where the money is". With tens, and in some cases hundreds, of billions of liquid capital to invest, SWFs are where the money is.
In noting this difference in approach, some have argued that governments have to take into account so many different interests, and so they must move at a more measured pace than financiers with a singular focus on financial returns. True. But, as SWFs and financial markets play an increasing role in capitals around the globe, there is a very real risk that governments may no longer have the luxury of the years that it usually takes to come to agreement on global trade talks. By the time governments have considered their options and hammered out consensus, the horse may well have long since fled the stable.
The rise of SWFs raise complicated issues that are beyond political. They are also financial -- with some very big numbers attached. While policy makers fret, teams of financial wizards are busily trying to address the question of how to spend all that money. It would be hard enough for governments to manage the issues that arise from newly emboldened states flush with revenues from oil and gas and holding our debt, without layering in the financial incentives that will entice every clever banker and deal maker to pitch their ideas to the SWFs -- generally without regard for the political implications they may raise. (For our own views, see here)
Individual governments, including that of the US, and multilateral institutions just aren't structured to keep pace with today's market dynamics, much less to keep ahead of them. International finance is increasingly important for governments from both developed and developing markets -- in ways that few would have foreseen, even a few years ago. This weekend's meetings demonstrated that these huge pools of capital are now getting the attention they rightly deserve -- from both the private (financial) and public (government) sectors. Let's see who's up to the task.
At the end of the event, the bankers I spoke with seemed pleased. In spite of complaints about too little sleep, too much champagne and the pesky issue of how to remove those caviar stains from Hermes ties, most felt that this was a small price to pay for a share of fees on several trillion dollars of SWF funds to invest. Dry cleaning bills aside, I wonder whether the official delegations came away feeling as satisfied.
--Doug Rediker
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"The Russians -- with a straight face -- objected to anything that would restrict the free flow of capital." Ah yes, the shoe is now on the other foot.
How long has the US preached the gospel of unrestricted captial flows? Answer: as long as it was US capital that was doing the buying. Now the US government won't let foreigners buy oil companies, management of ports, etc., etc.
It was only a decade ago, when Washington's IMF told countries with massive current account imbalances to sell off the crown jewels of their economy to Western investors at bargain basement prices to rectify the problem. Russia was one of the countries that endured the privatization shock. Now that the US and UK are the countries with the massive imbalances, will they practice what they used to preach? Will Exxon, Chevron, Boeing and Lockheed Martin be made available to SWFs?
It's a pity that gross economic misconduct is not an impeachable offense.
Excellent article, Doug, many thanks! Like JohnH, I appreciate the quiet, almost Gibbonesque, humor. Also, the incisive and informative approach to a tricky but meaningful topic.
My perspective owes a large debt to William Greider, especially his "One World, Ready or Not", and "Secrets of the Temple", said to be on the shelves of the Fed itself.
From that perspective, it looks like the multi-nationals have figured out how to gridlock republican governments around the world. Given their basic top-down structure, they're more agile than governments that depend on legislatures and popular consent, so they can easily outmaneuver any state. Once they become international entities more powerful yet less liable than humans, corporations adopt a Leona Helmsley attitude toward nation-states.
And, after all, their only consistent motivation is profit. I have nothing against the profit motive, it's brought a lot of good into the world. But in the US today corporations and their financial institutions are able to finess the government and socialize the costs while privatizing the profit. That is not right, and we need to change it soon.
Likewise, appreciate this article, which I just now got around to read.
From an institutional point of view, institutions wax and wane, die and become born, depending on the environment. As private multinationals control assets (natural resources, labor, capital, and money) larger than many controlled by senators, Congresspersons, Presidents (and in some cases, Vice Presidents) they challenge governments. And when the private armed forces are more powerful and numerous than those controlled by elected officials, these multinationals ARE the government by any generally accepted operational definition of what a government is - the institution that has the monopoly on the use of violence within a given geographical area. Voting becomes a mere panacea, to placate the masses into allowing the new gilded age of robber barons.
And sadly, the IMF, and to some extent the WB have facilitated the exploitation of the poor, for the benefit of the rich, by as Chuck notes, by a distribution of profits whereby the rich get the ore, and the poor get the shaft.
And it is not limited to foreign soft colonialization. Ever since Ford pardoned Nixon, we have established the precedent that the top is allowed immunity from criminal behavior (are not the proposed retroactive pardon of the criminal acts of the telecons, and the construction of NEW nuclear weapons by the US and UK to ensure ultimate destructive hegemony, while wanting to start WWIII if another country does something agreed to by formal treaty that the US doesn't like (acquire knowledge of the sub-atomic world).
Check out the 5 graphs from Dr. Robert Frank (Ben Barnanke's often co-author)that depict the drastic change before the union busting, privatization that occurred after of Ronald Reagan.
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We are neck deep in another world-wide fascist period, w/ South American and North Europe the new centers of non-fascist, were the focus is on future, rather than instant, gratification.
This is a great posting. In Russia, Western investment banks have connived with the country's confiscation and re-sale of Yukos property.
In the Rosneft purchase of Yukos assets, a group of them as we know earned more than $100 million in fees, then went over to Putin's dacha and were congratulated by him for cooperating with the transaction.
As long as investment banks and other western companies have an interest in the sovereign fund investments, they will go forward, and limit the degree of control of what the funds do.
In any case, I advertised my new book on the site last week. Thanks for the space.
Steve LeVine, author
The Oil and the Glory (Random House)
http://www.oilandglory.com
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