Trust but verify

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: massively in value by the subprime mortgage crisis in the US, the origin of the money didn’t matter much as long as it bails them out. The less-edifying lesson here: business needs often neutralise politics.

When the writedown trickle turned into a torrent, those who saved the skin of these supposedly stable banks were SWFs. CIC injected $5 billion into Merrill Lynch to shore up its capital base. The ADIA, of Dubai’s sister emirate, took a $7.5 billion stake in Citigroup. The Qatar Investment Authority ploughed $3.3 billion into Barclays. Singapore Investment Corp of invested $11 billion into UBS, while Tamasek Holdings poured $5 billion into Morgan Stanley’s coffers.

There is no agreed definition of SWFs, but they are generally referred to as the investment arms of foreign governments. Their scale is staggering. According to the IMF, they are worth $3 trillion now, a figure that may top $12 trillion by 2015.

Though some of them were set up in early 1950s, it was not until the 2000s that their clout and spread increased manifold. Across the Middle East, the dizzying rise in oil prices has fuelled a windfall of surplus money while in East Asia, export-led growth has reaped a bonanza of foreign currency reserves. What better way to maximise the returns on surplus money than channel a portion of it to invest in free markets?

To be sure, SWFs are a valuable source of international credit. However, since government and moneymaking doesn’t mix well, doubts have arisen that their investment comes with strings attached to strategic national interests. These concerns are heightened when countries like Russia, which has a record of manipulating natural gas supplies to Europe to promote its political interests, launch, as it did in February this year, an SWF. And what about funds from the Chinese government, which has no compunction to support some of the odious regimes in the world? If the idea that state-backed funds should buy equity in listed private companies, for instance, disconcerts economic liberals, the thought of these many secretive, opaquely-run funds buying into vital national assets increasingly worry regulators.