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.