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FOREIGN GOVERNMENT INVESTMENT

IN THE U.S. ECONOMY AND

FINANCIAL SECTOR

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON

DOMESTIC AND INTERNATIONAL

MONETARY POLICY, TRADE, AND TECHNOLOGY

AND THE

SUBCOMMITTEE ON

CAPITAL MARKETS, INSURANCE, AND

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MARCH 5, 2008

Printed for the use of the Committee on Financial Services

Serial No. 110–94

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL MONETARY POLICY, TRADE, AND

TECHNOLOGY

LUIS V. GUTIERREZ, Illinois, Chairman

CAROLYN B. MALONEY, New York 

MAXINE WATERS, California 

PAUL E. KANJORSKI, Pennsylvania 

BRAD SHERMAN, California 

GWEN MOORE, Wisconsin 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

WM. LACY CLAY, Missouri 

KEITH ELLISON, Minnesota 

CHARLES A. WILSON, Ohio 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

RON PAUL, Texas 

MICHAEL N. CASTLE, Delaware 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JEB HENSARLING, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

DEAN HELLER, Nevada 

(IV)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

DEBORAH PRYCE, Ohio 

JEB HENSARLING, Texas 

CHRISTOPHER SHAYS, Connecticut 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SHELLEY MOORE CAPITO, West Virginia 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

SCOTT GARRETT, New Jersey 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

(V)

C O N T E N T S 

Page 

Hearing held on: 

March 5, 2008 ................................................................................................... 1

Appendix: 

March 5, 2008 ................................................................................................... 43

WITNESSES 

WEDNESDAY, MARCH 5, 2008

Alvarez, Scott G., General Counsel, Board of Governors of the Federal Reserve System ......................................................................................................... 12

Denison, David, President and CEO, Canada Pension Plan Investment Board 28

Israel, Simon Claude, Executive Director, Temasek Holdings (Private) Limited ......................................................................................................................... 25

McCormick, David H., Under Secretary for International Affairs, U.S. Department of the Treasury ........................................................................................... 8

Skancke, Martin, Director General, Asset Management Department, Norwegian Ministry of Finance ................................................................................. 24

Slaughter, Matthew J., Professor, Tuck School of Business, Dartmouth College ........................................................................................................................ 29

Tafara, Ethiopis, Director, Office of International Affairs, U.S. Securities and 

Exchange Commission ......................................................................................... 10

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 44

Brown-Waite, Hon. Ginny ................................................................................ 47

Kanjorski, Hon. Paul E. ................................................................................... 49

Manzullo, Hon. Donald A. ................................................................................ 51

Meeks, Hon. Gregory ........................................................................................ 56

Pryce, Hon. Deborah ........................................................................................ 58

Alvarez, Scott G. ............................................................................................... 61

Denison, David .................................................................................................. 75

Israel, Simon ..................................................................................................... 120

McCormick, David H. ....................................................................................... 134

Skancke, Martin ............................................................................................... 139

Slaughter, Matthew J. ..................................................................................... 152

Tafara, Ethiopis ................................................................................................ 155

(1)

FOREIGN GOVERNMENT INVESTMENT 

IN THE U.S. ECONOMY AND 

FINANCIAL SECTOR 

Wednesday, March 5, 2008

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON DOMESTIC AND

INTERNATIONAL MONETARY POLICY, 

TRADE, AND TECHNOLOGY, AND

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittees met, pursuant to notice, at 2:47 p.m., in room 

2128, Rayburn House Office Building, Hon. Luis V. Gutierrez 

[chairman of the Subcommittee on Domestic and International 

Monetary Policy, Trade, and Technology Subcommittee] presiding. 

Members present: Representatives Kanjorski, Maloney, Gutierrez, Meeks, Capuano, Scott, Hodes, Perlmutter; Pryce, Royce, Paul, 

Manzullo, Jones, Shays, Roskam, McCotter, and Heller. 

Ex officio: Representatives Frank and Bachus. 

Also present: Representative Moran. 

Chairman GUTIERREZ. This joint hearing of the Subcommittee on 

Domestic and International Monetary Policy, Trade, and Technology and the Subcommittee on Capital Markets, Insurance, and 

Government Sponsored Enterprises will come to order. 

The subject of today’s hearing is foreign government investment 

in the U.S. economy and financial sector. 

First, I wanted to say good afternoon and thank you to all the 

witnesses for agreeing to appear before our subcommittees. 

Our first panel includes the Federal regulators with primary jurisdiction over this complex subject matter and our second panel 

includes two sovereign wealth funds and a foreign pension fund. I 

should note that this is the first time these kinds of funds have testified before a congressional committee. 

We will be limiting opening statements to the chairs and ranking 

members of the two subcommittees. Without objection, all members’ opening statements will be made a part of the record. 

At this point, I also want to give general leave if there are other 

statements from any interested parties that Members would like to 

enter into the record, without objection, that will be granted. 

I yield myself 5 minutes. 

2

Too often these days when most Americans, Members of Congress included, hear the term ‘‘sovereign wealth fund’’ or ‘‘foreign 

investment,’’ they are likely to conjure images of unfriendly foreign 

governments attempting to take control of U.S. companies. This vision is easily propagated through one-sided media reports, and in 

some cases, overreaction by many, including Members of Congress. 

We tend to focus our attention on more controversial deals, such 

as the defunct 2005 Dubai Ports’ deal or the China National Offshore Oil Corporation’s attempt to acquire Unocal. 

We do not hear much about the run-of-the-mill, relatively small 

dollar sovereign fund investment in companies like Motorola and 

Home Depot that take place on a daily basis and provide muchneeded capital for the American economy. 

In 2007, foreign investors invested $414 billion into purchasing 

stakes in U.S. companies, a 90 percent increase over 2006, which 

represented one-fourth of all the announced deals for 2007. 

Where would our economy be right now without these deals? 

Where would our economy go if these investments were taken 

away? 

As we know, the subprime mortgage crisis has caused a significant strain on U.S. financial institutions, and it has led a number 

of large banks to seek injections of foreign capital. 

In November of 2007, the Abu Dhabi Investment Authority announced a $7.5 billion investment in Citigroup, and in December 

of last year, Temasek announced a $4.4 billion investment in Merrill Lynch. 

These are the kinds of high profile investments that raise questions, especially when we see several of them occurring over a couple of months, and our questions become more punctuated by the 

many misconceptions about foreign wealth funds, what they are, 

what they do, and how they are monitored. 

Our primary goal today is to answer these questions, to educate 

members, and to begin a factual substantive dialogue on the issues 

surrounding foreign investment in the United States and sovereign 

wealth funds in particular. 

For these purposes, I think we have two outstanding panels and 

an opportunity to learn from some of the best players in international investment. I look forward to a vigorous discussion. 

I will now recognize the ranking member of the Subcommittee on 

Domestic and International Monetary Policy, Trade, and Technology, Mr. Paul, for 5 minutes. 

Dr. PAUL. Thank you, Mr. Chairman. Mr. Chairman, many 

Americans have expressed concern over the growing role played by 

sovereign wealth funds in the U.S. economy. Such fears are to a 

large extent misplaced, as we should be more concerned with the 

underlying causes that have allowed sovereign wealth funds to accumulate as much capital as they have. 

The two major types of sovereign wealth funds are those which 

are funded by proceeds from natural resources sales and those 

funded by accumulation of foreign exchange. 

The former category includes sovereign wealth funds in Saudi 

Arabia, Kuwait, and the UAE. Flush with dollars due to the high 

price of oil, they are looking for opportunities to make that money 

3

work for them. The high price of oil is due in large part to our inflationary monetary policy. 

We have literally exported inflation across the globe, spurring 

malinvestment and a subsequent commodities boom. 

The second major category of sovereign wealth funds includes 

China’s sovereign wealth fund, which has the potential to draw on 

China’s more than $1 trillion in foreign exchange reserves. Because 

of China’s current account surplus, it continues to accumulate foreign exchange. Much of this is due to the United States’ persistent 

current account deficit. 

Inflationary monetary policy and a desire to stimulate the economy at all costs has led us to become the world’s largest debtor, 

and this debt must be eventually repaid. 

The current account deficit has come about because our economy 

does not produce enough capital goods to satisfy the wants of our 

foreign creditors. Tired of holding increasingly worthless dollars, it 

is only natural that our creditors would want to purchase 

tangibles, which in the present case are stakes in American companies. 

Rather than bemoaning the fact that foreign governments are 

using their dollars to purchase stakes in American companies, we 

should welcome the stability that such investment is bringing to 

our economy. 

While I am as reluctant as anyone in this room to involve any 

government in any sort of intervention in the market, the fact remains that without injections of capital from foreign wealth funds, 

the results of the subprime crisis would have been far worse for 

many financial firms. 

Even now we read that Citicorp, despite the massive funding it 

has received from sovereign wealth funds, is in danger of collapse 

until it receives additional funding. 

I have always been a staunch advocate of abandoning our loose 

monetary policy and facing the consequences now, rather than continuing easy money in the hopes of never having to face a recession. 

Now that it is clear that decades of Federal Reserve monetary 

manipulation have led to a severe recession, the thought of sovereign wealth funds investing in the financial sector holds far more 

appeal than that of a complete collapse of major industry players 

which would cause catastrophic effects throughout the economy. 

Sovereign wealth funds are a necessary consequence of fiscal and 

monetary policies which have left us overextended. Actions to stifle 

the operations of sovereign wealth funds and corresponding retaliatory actions by foreign countries could have the same detrimental 

effect on the economy as the trade wars begun after the passage 

of the Smoot-Hawley Tariff Act of 1930. 

Rather than take actions to limit or prohibit the actions of sovereign wealth funds, I would urge my colleagues to take action to 

end our inflationary monetary policy. 

I yield back. 

Chairman GUTIERREZ. I now recognize, for 5 minutes, the chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, Chairman Kanjorski. 

4

Chairman KANJORSKI. Mr. Chairman, good afternoon. We meet 

today at this joint hearing to learn more about foreign government 

investment in the United States. We will in particular focus on the 

tremendous growth of foreign wealth funds’ investment in our economy. 

This hearing also represents the first time that sovereign wealth 

funds have appeared before a congressional committee. Sovereign 

wealth funds currently maintain anywhere from $2- to $3.2 trillion 

in assets globally. By 2015, some estimate that this figure will reach $12- to $15 

trillion. Since 2005, 12 sovereign wealth funds have been created 

and approximately 40 such funds exist today. 

Over the last 11 months, sovereign wealth funds have addition- ally invested more than $69 billion in U.S. financial institutions. 

Because these funds are growing so rapidly, both in number and 

in size, today’s hearing comes not a moment too soon. 

Currency reserves and profits from commodities are the two primary sources of revenue for foreign wealth funds. The trade imbalances we have created, particularly with China, all but guarantee 

that the growth of these funds will continue. Couple that reality 

with the record high price of oil and the picture becomes even 

clearer; continued foreign investment in the U.S. economy is here 

for some time to come. 

As we begin, I want to welcome our panelists who represent foreign government investors, including funds from Norway and 

Singapore, as well as Canada’s Pension Board. 

We are pleased that you have stepped forward. Today, we can 

begin a dialogue with you and hopefully other sovereign wealth 

funds will step forward in the future to do the same. 

As we proceed today, everyone should understand how our actions have contributed to the growth of sovereign wealth fund investment in the United States. We created the huge trade imbalances that bolster other governments’ currency reserves and enable 

them to invest in our economy. 

Similarly, our dependence on foreign oil and our resistance to 

adopting a sustainable energy policy has made other governments 

rich with our dollars and allowed them to purchase shares in our 

companies. 

Finally, our national savings rate has been negative in recent 

years. Although we created these market conditions, we must now 

take an active role in seeing to it that foreign governments invest 

with a fair degree of transparency, predictability, and good governance, and do so with an eye toward promoting economic interest as 

opposed to strategic or political goals. 

Without question, we now live in a global economy, but the national security and the national interest of the United States must 

always remain paramount. Governments generally act in their own 

best interest. In considering our best interest, we cannot afford to 

assume that all foreign governments are merely rational economic 

actors seeking to maximize profits. 

This principle may be true in many or even most cases. Governments have strategic interests, too. It is a geopolitical reality. The 

question becomes: Are they really acting on those strategic interests when investing in American companies? 

5

Merely asking questions here today does not make one a protectionist or an alarmist. Seeking to understand the operations of sovereign wealth funds does not make us fearful of or hostile to foreign governments. 

We are not overreacting by conducting this hearing, as some 

might want to suggest. Rather, we are opening an important conversation and fulfilling our constitutional duty to regulate foreign 

commerce. 

Ultimately, we may decide that developments in this sector warrant the adoption of new laws or regulations. I want all of the witnesses to know that I have an open mind on these matters. Your 

comments today will help us to determine the best course of action 

going forward. 

In closing, I look forward to hearing the panelists’ thoughts on 

these matters. I want to thank each of you for appearing. Your 

views will help us to understand where we are and where we are 

going. We must find a way to promote efficient and viable capital 

markets in a global world while safeguarding American sovereignty. 

Thank you, Mr. Chairman. 

Chairman GUTIERREZ. You are welcome, and thank you. 

We will now recognize for 5 minutes Congressman Royce, representing Subcommittee Chairwoman Pryce. 

Mr. ROYCE. Thank you. I will be very short, Mr. Chairman, but 

I appreciate your holding this hearing. 

We have all seen the media coverage of the recent infusions of 

cash into some of our struggling financial institutions. Citigroup, 

UBS, Morgan Stanley, and Merrill Lynch have all been on the receiving end of much-needed support from sovereign wealth funds, 

and this has been over the last 6 months. 

I think it is worth noting the impact that these investments have 

had on these cash strapped financial institutions during this tumultuous period in our capital markets. 

This afternoon’s oversight hearing gives us an opportunity to explore the issue further. I welcome that opportunity. 

Considering the attention garnered by these funds, I believe it 

would be beneficial for all parties if these funds consider the adoption of the best practice standards currently being devised by the 

IMF, and I would like to commend Mr. Skancke and Norway’s willingness to openly operate their Fund in a transparent and publicly 

accountable manner. 

However, I would caution against legislative proposals which 

may lead us down the road towards investment protectionism. I believe such a move has the potential to hinder U.S. economic growth 

and could hinder job creation in this country. 

It is critical that we convey a consistent message of openness to 

foreign investment. Additionally, we presently have a system in 

place to investigate potential national security threats resulting 

from foreign investment transactions. CFIUS allows us to fully 

scrutinize these deals without unnecessarily limiting the benefits of 

an open society. 

In a global economy, capital will and should flow freely. Unnecessary constraints on foreign capital will only serve to increase the 

6

cost of existing capital and may in fact discourage future foreign 

investment in our economy throughout the years ahead. 

I again thank you, Chairman Gutierrez and Chairman Kanjorski, 

and I look forward to hearing from our two panels of witnesses. 

Chairman GUTIERREZ. Thank you very much. We will now yield 

5 minutes to Full Committee Chairman Barney Frank. 

The CHAIRMAN. Thank you, Mr. Chairman. I am very pleased we 

are having this joint subcommittee hearing on this important issue. 

I have been asked from time to time what I think about sovereign wealth funds. To some extent, that is like asking me what 

I think about countries. Some I like a lot, some not so much. The 

fact is that sovereign wealth funds are reflections of their countries; some are fine and some make me nervous. 

Let me begin by expressing some agreement with the gentleman 

from Texas on the issue that the reason we are here is primarily 

problems in the American economy. We would differ about what 

caused them. We are here because of problems in the American 

economy because decisions made in America, particularly in the financial community, created needs that sovereign wealth funds 

have filled. 

The best defense against sovereign wealth funds having undue 

influence is for American financial companies not to screw up, so 

they do not need the money. 

Given that they need the money, I am glad that it came. We 

would be worse off if there had not been those injections of funds. 

Having said that, that does not mean there are not reasons for 

us to be careful. Again, it varies. There are different countries with 

different motives. 

On the whole, the evidence has been that people have invested 

to try to make money. One of the things we need to avoid doing 

is making the assumption that when foreigners invest, they are allwise, all-knowing, and are going to outfox us. 

The last time we had this round of concern over foreign investment was when the Japanese, about 20 years ago, decided to go 

and buy trophy properties in the United States and it became the 

best foreign aid for the United States that we had in a very long 

time. They bought Rockefeller Center, Pebble Beach, and a whole 

range of other properties, and paid way too much for them. That 

was a mistake. 

Of course, the most recent current example is the brilliant move 

by the Chinese in buying into Blackstone at exactly the wrong moment. We should not assume that these clever foreigners are always going to outfox us. 

It is clearly something we want to look at. I do have one suggestion and one other point, which is that I think this committee can 

take credit on a bipartisan basis, because this is a bill that passed 

the House under the Republican leadership of the committee 2 

years ago, passed it again in a bipartisan way, and that is the establishment on a statutory basis of the Committee on Foreign Investment in the United States. It has already proven its worth in 

the 3M case. 

We are often told, oh, you guys always come in after the fact. 

Here, the Congress anticipated the problem. We reacted because 

we did not want to see the Dubai Ports’ thing be a signal that we 

7

did not want money. We did not want it to have that negative effect. 

We put through legislation which I think works very well and 

has worked very well. 

I do have one proposal that has to be considered. There has been 

some confusion. I got it wrong myself, about this 10 percent figure. 

There are people who think the CFIUS statute sets 10 percent as 

the trigger. As I have since been reminded by staff that I was misremembering this bill that I sponsored, the 10 percent number is 

not in the bill; 10 percent is in the regulations, and even there, not 

as a hard and fast figure, but as an indicator. 

Given that, however, I think we need to clarify it. As my colleague from Virginia who has been working on this points out, people get suspicious with 9.9 and 9.8 percent. In fact, the way the law 

is written and even the way the regulations are written, that does 

not get you out from under, but perception is a big part of this. I 

think we need to clarify that in the regulations, and one of the 

things we have to consider is should we be more explicit that if it 

is a government owned purchase, if it is a government purchase, 

will that automatically trigger a higher degree of scrutiny? 

I think that is not going to be rejectionist, but it does seem to 

me that would reassure people that yes, we do understand the difference between a country buying this and a purely private set of 

investors. It does not mean that one is always allowed and one is 

always prohibited. I think we should be explicit, rather than the 

10 percent, and if you do that, maybe it is ‘‘X’’ percent lower for 

the private sector people. 

With those things, I think we can go forward and do it. 

My friend from Virginia is here. We have talked about this. He 

has formed this taskforce. We have designated a member to stand 

there, and I do not think he will be offended. We did get some 

questions. What is this taskforce, and what is happening, and are 

you people going to sort of fracture this? 

Jurisdiction over this issue remains fully with this committee. 

We have a cooperative relationship with the gentleman from Virginia. I welcome his input and the other members. This does not 

mean that we are going to be dealing with this in a split-up fashion. 

We will continue to do this in a reasonable way. I do urge, however, that with regard to that 10 percent, we do some clarification 

and we make it clear that it is not as firm as people think it is, 

and particularly, that you do not avoid scrutiny by going slightly 

under 10 percent, and also that we make it clear as we look at it, 

the fact that it is owned by a government is reason to be more 

skeptical at the outset or at least to take more of a look than if 

it was owned by a purely private entity. 

Thank you, Mr. Chairman. 

Chairman GUTIERREZ. Thank you, Mr. Chairman. Given those 

very kind, generous, and warm remarks about the taskforce headed 

by Congressman Moran, I ask unanimous consent that Congressman Moran be permitted to participate in today’s hearing. Hearing 

no objection, it is so ordered. 

8

First, on our panel is Mr. David McCormick. Mr. McCormick is 

the Under Secretary for International Affairs at the U.S. Department of the Treasury. 

Next, we have Mr. Ethiopis Tafara. Mr. Tafara is the Director of 

the Office of International Affairs at the Securities and Exchange 

Commission. 

And finally, we have Mr. Scott Alvarez. Mr. Alvarez is General 

Counsel at the Federal Reserve Board. 

Welcome to you all. Mr. McCormick, you may proceed. 

STATEMENT OF DAVID H. McCORMICK, UNDER SECRETARY 

FOR INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE 

TREASURY 

Mr. MCCORMICK. Thank you, Chairman Gutierrez, Chairman 

Kanjorski, Ranking Member Paul, and Congressman Royce, and 

also Chairman Frank. It is great to be here today. Thank you for 

the invitation. 

I very much appreciate the opportunity to be able to speak to 

this committee about sovereign wealth funds. At Treasury, we have 

been focused on this issue for more than a year now. I am pleased 

to be able to share some of our views with this committee. 

While the term ‘‘sovereign wealth fund’’ was coined a few years 

ago, the funds it describes are not new. Sovereign wealth funds 

have existed in various forms for decades, in places as diverse as 

the Central Pacific, Southeast Asia, Europe, and the Persian Gulf. 

At the turn of the century, just 8 years ago, there were about 20 

sovereign wealth funds with worldwide assets in the area of several 

hundred billion dollars. 

Since that time, there has been a rapid increase in both the number and the size of sovereign wealth funds. This has been fueled 

by high commodity prices and the rapid accumulation of official reserves, and 20 new funds have been created since 2000, more than 

half of those, as mentioned, since 2005. Today, there are nearly 40 

funds with total assets between $2- and $3 trillion. 

In contrast to traditional reserves, which are typically invested 

for liquidity and safety, sovereign wealth funds seek a higher rate 

of return and are invested in a wider range of assets. They emphasize expected returns over liquidity and can take the form of stakes 

in U.S. companies as has been witnessed in recent months. 

Sovereign wealth fund assets are currently fairly concentrated. 

By some market estimates, only a handful of funds account for the 

majority of total sovereign wealth assets, and roughly two-thirds of 

sovereign wealth fund assets are commodity fund assets, as was 

mentioned earlier, while the remaining one-third are non-commodity funds transferred from official reserves. 

While sovereign wealth fund assets may be small relative to the 

$190 trillion of stock in global financial assets, with roughly $62 

million held by private institutional investors, they are larger than 

the total assets under management in hedge funds or private equity funds. They are growing at a much faster rate. 

The rise of sovereign wealth funds clearly has implications for 

the international financial system. They bring both benefits as well 

as some potential concerns. 

9

As the President reaffirmed in his May 10, 2007, statement on 

open economies, the United States is committed to open investment 

and advancing open markets at home and abroad. 

The U.S. economy benefits enormously from open investment, including the investment from sovereign wealth funds. Those benefits 

come in the forms of jobs, R&D spending, and higher wages. 

Over 5 million Americans, 4.6 percent of the private sector, are 

directly employed by foreign owned firms with U.S. operations. 

These 5 million jobs pay 25 percent higher compensation on average than U.S. firms and another roughly 5 million jobs are indirectly supported by this foreign investment. 

Foreign firms contributed about 6 percent of U.S. output, and 14 

percent of U.S. R&D spending in 2006, and in that same year, foreign owned firms reinvested over half of their income, that is $71 

billion, back into the U.S. economy. 

The case for open investment is strong. 

Sovereign wealth funds are an important part of this investment 

flow. The United States can continue to benefit from sovereign 

wealth funds to the extent that this investment is economically and 

not politically driven. 

As many observers have pointed out, sovereign wealth funds 

have the potential to promote financial stability and they generally, 

over that 50-year period, have had a track record of stable longterm investment and they provided significant capital to the system. 

Their long-term investment horizon should enable them to maintain their strategic asset allocations in periods of short-term volatility. 

None of this is meant to say that there are not some potential 

issues to consider. Sovereign wealth funds represent large concentrated and sometimes non-transparent positions in financial 

markets, with the potential to actually move markets. Actual or 

perceived shifts in their asset allocations could cause market volatility. 

There are two specific sets of issues to consider. First, as is the 

case with other types of foreign investment in U.S. companies, a 

small number of sovereign wealth investments in U.S. companies 

may raise legitimate national security concerns. 

Second, sovereign wealth funds raise a number of non-national 

security related issues about the larger role of foreign governments 

in markets. 

For example, through the inefficient allocation of capital, the perceived unfair competition with private firms, or the pursuit of strategic over return oriented investments, sovereign wealth funds 

could potentially distort markets. 

These investment policy concerns also have the potential to provoke protectionist responses from recipient governments. 

It is my view that this protectionist sentiment stems partly from 

a lack of information and understanding about sovereign wealth 

funds, which is partly due to the lack of transparency and clear 

communication on the part of the Funds themselves. 

Clearly, better information sharing and understanding on both 

sides of the investment relationship is therefore needed. 

10

Chairman GUTIERREZ. Will the gentleman please wrap up? Your 

5 minutes have expired. 

Mr. MCCORMICK. Yes, I will. Thank you. 

Let me just say briefly, there are a number of policy responses 

to this issue. One is the implementation of the law, the CFIUS law, 

that the chairman mentioned. A second is a set of multilateral efforts through the IMF and the OECD, and then third is a set of 

actions within the government monitoring among the different 

agencies to improve our understanding and continually be able to 

report to Congress on the development of sovereign wealth funds. 

Thank you. 

[The prepared statement of Mr. McCormick can be found on page 

134 of the appendix.] 

Chairman GUTIERREZ. Thank you. Let me advise the witnesses 

that there is a little light up there. Green means to start, yellow 

means that you have 30 seconds left, and red means to stop. You 

have 5 minutes. I will tap very lightly up here as an extra reminder. We want you to finish your thought, and not be in a rush. 

Mr. Tafara, please, you are recognized for 5 minutes. 

STATEMENT OF ETHIOPIS TAFARA, DIRECTOR, OFFICE OF 

INTERNATIONAL AFFAIRS, U.S. SECURITIES AND EXCHANGE 

COMMISSION 

Mr. TAFARA. Mr. Chairman, thank you for inviting me to testify 

on behalf of the Securities and Exchange Commission on the subject of foreign government investment in the U.S. economy and financial sector. 

I am going to say a few words about the impact of sovereign 

wealth funds on the U.S. capital market and SEC regulations regarding these entities. 

Today, sovereign wealth funds hold by some estimates more than $2.5 trillion in assets. Some projections estimate that their size will 

increase fivefold by the middle of the next decade, quite possibly 

making these funds collectively and individually the largest shareholders in many of the world’s biggest companies. 

Sovereign wealth fund investment in the United States is not 

new. Sovereign wealth funds based on foreign exchange reserves 

have always tended to invest abroad since their capital was based 

on foreign currency. 

One thing that is new, however, is the size of their investment 

in the equity markets for public companies and their concomitant 

focus away from bond markets. 

Sovereign wealth investment in the U.S. capital market offers 

definite benefits. Foreign investors, including sovereign wealth 

funds, that invest in the United States can offer U.S. companies a 

lower cost of capital and a more liquid market for their securities 

than might otherwise be available. 

However, sovereign wealth funds raise a number of concerns for 

regulators and other market participants. Some of these concerns 

mirror those raised by large funds, generally. 

In particular, by combining the foreign exchange reserves 

brought about by thousands or millions of international transactions, an investment fund can wield enormous clout on a market. 

This creates opportunities for market manipulation and where the 

11

entity owns enough shares of an issuer to control it, it possibly 

raises issues with respect to insider trading as well. 

It also raises classic corporate governance issues particularly in 

the case of creeping takeovers where minority shareholders are unaware of a pending takeover and suddenly find the value of the 

shares reduced once the takeover is complete. 

Sovereign wealth funds also raise other issues. Because the fund 

manager is the government, it may have different and more complex incentives than those that normally drive private market participants to make decisions. 

This is an issue that Chairman Cox has touched on in the past, 

the concern that sovereign wealth funds, because they are national 

entities, may not necessarily act like ordinary market participants, 

and therefore may have a distorting effect on a market. 

Sovereign wealth funds are not necessarily transparent in their 

motivations or operations. This is particularly true when sovereign 

wealth funds are linked to a nation’s foreign exchange reserves. 

As you are all aware, exchange rate policies traditionally are 

closely tied to matters relating to national sovereignty, trade policy, 

and a nation’s economy. 

The point here is that sovereigns are not just concerned about 

making a profit. They have other national objectives as well. 

The SEC’s mandate is focused on investor protection, maintaining fair and orderly markets, and capital formation. Consequently, 

the SEC has in place several rules that require disclosure of sovereign wealth activities that address many of the concerns we hear 

voiced here and in other markets. 

For example, the SEC requires that any beneficial owner holding 

10 percent or more of an issuer’s equity securities disclose their 

ownership and any change in this interest. 

Likewise, the SEC requires beneficial owners of 5 percent or 

more of an issuer’s equity securities to disclose the ownership, the 

source and amount of funds being used to purchase the securities, 

and their future intentions with regard to this ownership interest. 

Finally, the SEC requires fund managers to exercise investment 

discretion over $100 million or more of SEC registered securities to 

file a quarterly disclosure of the fund’s long holdings of these securities, as well as whether they have exercised voting authority over 

these shares. 

Of course, such requirements are only as strong as the mechanisms we have in place to enforce compliance. In this regard, the 

Commission has the power to pursue sovereign wealth funds that 

violate U.S. securities laws. 

Neither the United States nor international law shields foreign 

countries’ commercial activities in the United States from the jurisdiction of the U.S. courts. The SEC has a strong track record investigating cross border violations of our securities laws, which we do 

working closely with our foreign counterparts. 

The issue that arises with sovereign wealth funds is the possibility that the same government from whom we seek assistance 

might also be the controlling person behind the entity under investigation. 

12

I should note that the concerns about sovereign wealth funds are 

not just concerns in the United States, but they are concerns in 

other jurisdictions as well. 

Currently, the IMF, the OECD, and the European Commission 

are discussing best practices for sovereign wealth funds that in 

many ways mirror our own disclosure requirements. 

I find these international developments comforting because I believe that at least with regard to the disclosures that sovereign 

wealth funds should make, there appears to be widespread consensus that we are on the right track. 

Indeed, I would argue that we here in the United States are 

ahead of the curve on this, given that these disclosures are not voluntary but mandatory, at least for a sovereign wealth fund of any 

size. 

Finally, sovereign wealth funds historically have been long-term 

investors, and many of their recent investments in troubled industries seem to follow this trend. 

We should be aware that if we prohibit sovereign wealth funds 

from investing in our market for fear they might introduce market 

distortions, we might actually end up doing precisely this ourselves 

through the prohibition, that a better approach is to address the 

underlying issues of transparency, independent regulation, de-politicizing of investment decisions, and conflicts of interest. 

Thank you for inviting me to appear today and I would be happy 

to answer any questions. 

[The prepared statement of Mr. Tafara can be found on page 155 

of the appendix.] 

Chairman GUTIERREZ. Thank you very much. 

Mr. Alvarez, you are recognized for 5 minutes. 

STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. ALVAREZ. Chairman Gutierrez, Ranking Member Paul, and 

members of the subcommittee, I am pleased to be here today. 

I will focus my remarks on a narrow issue, the thresholds that 

trigger review by the Federal Reserve and the other Federal banking agencies of investments by sovereign wealth funds in U.S. 

banking organizations. 

As a general matter, investments by sovereign wealth funds are 

subject to the same statutory and regulatory thresholds and requirements for review by the Federal banking agencies as apply to 

investments by other domestic and foreign investors in U.S. banking organizations. These requirements are established primarily in 

two Federal statutes, the Bank Holding Company Act and the 

Change In Bank Control Act. 

The Bank Holding Company Act requires any company to obtain 

approval from the Federal Reserve before making an investment in 

a U.S. bank or bank holding company, if the investment meets certain thresholds. 

In particular, the Bank Holding Company Act requires Board review when a company acquires ownership or control of 25 percent 

or more of any class of voting securities of a bank or bank holding 

company, control of the election of a majority of the board of directors of the banking organization, or the ability to exercise a controlVerDate 0ct 09 2002 18:06 May 12, 2008 Jkt 041725 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\41725.TXT TERRIE
13

ling influence over the management or policies of the bank or bank 

holding company. 

In determining whether an investor may exercise a controlling 

influence over the management or policies of a U.S. banking organization and thereby trigger formal review of the investment, the 

Board considers the size of the investment, the involvement of the 

investor in the management of the banking organization, any business relationships between the investor and the banking organization, and a number of other relevant factors. 

The Bank Holding Company Act itself presumes that an investor 

that controls less than 5 percent of the voting shares of a banking 

organization does not have a controlling influence over that organization, and based on its experience, the Board generally has not 

found that a controlling influence exists if the investment represents less than 10 percent of the organization’s voting shares. 

The Bank Holding Company Act sets forth the standards that 

the Board must consider in acting on an application by a company 

to acquire a bank or bank holding company. Those standards require review of the competitive, supervisory, convenience and 

needs, financial and managerial effects of the transaction. 

The managerial standard includes consideration of the competence, experience, and integrity of the investor. 

Upon the acquisition of control of a U.S. bank or bank holding 

company, the investing company would by statute become subject 

to supervision by the Federal Reserve, including examination, reporting, and capital requirements, as well as to the Act’s restrictions on the mixing of banking and commerce. 

Importantly, the restrictions of Sections 23A and 23B of the Federal Reserve Act, which impose quantitative and qualitative limitations on transactions between U.S. banks and their affiliates, 

would apply to transactions between the U.S. bank and any company, including a sovereign wealth fund, that controls a U.S. banking organization. 

These restrictions help assure that the U.S. bank does not engage in unsafe or unsound practices for the benefit of the parent 

company or any other affiliate. 

Investments by sovereign wealth funds that do not trigger the 

prior approval requirement under the Bank Holding Company Act 

may nevertheless require review by a Federal banking agency 

under the Change in Bank Control Act. Prior review under that 

Act is generally required for any acquisition of 10 percent or more 

of the voting securities of a U.S. banking organization. 

The Change in Bank Control Act also establishes specific standards that must be considered, and those standards focus on the 

competitive effects of the proposal, the managerial competence, experience, integrity, and financial strength of the acquirer, certain 

informational requirements, and whether the transaction would result in an adverse effect on the Deposit Insurance Fund. 

Unlike the Bank Holding Company Act, however, the Change in 

Bank Control Act does not impose any activity limitations or any 

ongoing supervisory requirements on the owners of banks. 

The recent investments by sovereign wealth funds in U.S. financial institutions have remained below 10 percent, and often below 

5 percent, of the voting equity of the banking organization. 

14

Consequently, these investments have not triggered the formal 

review requirements of either the Bank Holding Company Act or 

the Change in Bank Control Act. 

Sovereign wealth funds have been a beneficial source of capital 

for U.S. financial institutions. Over the past several months, sovereign wealth funds have provided equity capital to U.S. financial 

firms that accounts for a significant portion of the total additional 

capital raised by these companies during this recent period of 

stress. 

All of these investments, as well as similar investments made by 

U.S. private equity firms, have been structured as passive investments that do not trigger the thresholds that require review. 

If, however, the investment were structured to represent control, 

it would be reviewed by the Federal banking agencies in accordance with the statutes that Congress has enacted. 

Thank you very much. I would be happy to answer any questions 

you might have. 

[The prepared statement of Mr. Alvarez can be found on page 61 

of the appendix.] 

Chairman GUTIERREZ. I thank the witnesses for their presentations. 

Mr. Tafara, in your testimony, you referred to ‘‘significant policy 

issues that are raised by foreign government ownership of a U.S. 

bank.’’ How are those issues different or mitigated by a separate 

corporate structure like a sovereign wealth fund owning a U.S. 

bank? 

I am sorry. I mean that for Mr. Alvarez. 

Mr. ALVAREZ. If the investment is made through a sovereign 

wealth fund, a corporation owned by the government and it is 

made in a banking organization, that would be subject to review 

by the Federal Reserve or one of the other banking agencies if it 

reached various thresholds. 

Those investments made directly by a foreign government generally are not subject to review under the banking laws. There is 

an extra level of transparency and review potential for investments 

made through sovereign wealth funds. 

Chairman GUTIERREZ. You think it is more? 

Mr. ALVAREZ. I think there is more protection when the investments are made through a sovereign wealth fund. 

Chairman GUTIERREZ. What is the difference for you? 

Mr. ALVAREZ. The difference for me is that the Bank Holding 

Company Act only gives us authority to review transactions made 

by a company. A foreign government is not a company, so it is not 

subject to the Bank Holding Company Act. 

Sovereign wealth funds are all incorporated or a partnership or— 

Chairman GUTIERREZ. Do you think there should be such a distinction? 

Mr. ALVAREZ. I am not quite sure if we want to effect foreign policy through the Bank Holding Company Act. I understand the sensitivity in crafting the definition as Congress has crafted it so far. 

Chairman GUTIERREZ. Interesting. Thank you. 

Mr. McCormick, by now, we are all aware of the major sovereign 

wealth fund investments that were made in U.S. financial institutions in late 2007. After that surge we saw in December, reports 

15

indicate that the value of U.S. acquisition of foreign buyers dropped 

to $25.4 billion in the first 2 months of 2008, and that is down 50 

percent from a year ago. 

Foreign buyers dropped to $11.1 billion in transactions in the 

United States in January, the lowest monthly total since May 

2006. 

As a percentage of overall U.S. deal volume, acquisition by overseas buyers has shrunk. In January and February, the value of 

U.S. acquisition by foreign buyers accounted for 15.8 and 15.3 percent of U.S. deal volume, respectively. This compares to last year 

when it constituted 23 percent. 

In light of these numbers, are you concerned that we actually 

may be facing a substantial drop-off in foreign direct investment, 

and if a drop-off is taking place, what do you think is the cost? 

Mr. MCCORMICK. Mr. Chairman, I think if you look at the broader U.S. investment numbers into the United States over the past— 

Chairman GUTIERREZ. Mr. McCormick, could you pull the microphone just a little bit closer? Thank you. 

Mr. MCCORMICK. If you look at the data over the last year in 

terms of the investment numbers, in all asset classes and in all foreign investment, I think you would see that there has been a pretty 

healthy investment throughout the 12-month period. 

In the period of August/September, we saw a pretty significant 

drop-off in the investment data, which then recovered and we had 

strong months in October and November and a little bit of a downturn in December. 

There has clearly been some shifting that has taken place between different asset classes. In other words, whether foreign firms 

are investing in other firms or equities or treasuries, the overall investment numbers in the United States remain strong year over 

year. 

Chairman GUTIERREZ. Mr. Tafara, you indicated that when a 

fund manager or business owner is a government, it may have different incentives than those that normally drive private sector participants to make decisions. 

This really goes to the heart of many concerns with foreign sovereign investments in the United States. You asked the question in 

your testimony, ‘‘If government controlled companies and investment funds increasingly direct the investment of business and capital, what will be the effect on the pricing of assets and the allocation of resources?’’ 

I would like you to answer your own question. What are the potential distorted effects of government controlled investments? 

Mr. TAFARA. For me, what becomes important in that situation 

is that there be transparency with regard to motivations of a sovereign wealth fund in making an asset purchase. 

The manner in which I would answer my question is to say that 

provisions like Section 13 of the Securities and Exchange Act become important because they require that there be disclosure as to 

what your motivations are with respect to a stake that you take 

in a company, and that transparency can provide a sense of comfort 

as to what the sovereign wealth fund intends for a particular company. 

16

Potential distortions: I think the distortions that people like to 

talk about are the worst-case scenario that they like to present, 

that a sovereign takes a stake that it holds in multiple U.S. companies and dumps them. 

If you look at the size of sovereign wealth funds against the market capitalization in the United States, it is pretty small. We are 

talking about a couple of trillion, whereas market capitalization in 

the United States is between $50- and $60 trillion. 

At the end of the day, that dumping would have some impact 

upon the market, but I think you would find there is enough liquidity there that others would come and pick up what would be a fire 

sale, because the assets that are being dumped would have value, 

despite the motivations of the sovereign wealth fund. 

Chairman GUTIERREZ. Thank you very much. Mr. Alvarez, we 

will be following up with you. Mr. Bernanke is kind of busy these 

days, so maybe we will take up some time with you. 

I think it is a serious concern in distinguishing between a government and a foreign investment entity owning an American financial institution. I think we really should take a look at that. 

Thank you, Mr. Alvarez, for the candor of your answer. 

Congressman Paul, you are recognized for 5 minutes. 

Dr. PAUL. Thank you, Mr. Chairman. 

I have just a brief question for the panel and it is a follow-up 

from my opening statement dealing with monetary policy, just wondering how the panel feels about whether or not this problem is 

much of our own making, and part of the system of money that we 

follow. 

When a country has a currency that is commodity-backed, there 

is always a limit to the current account deficit because you cannot 

keep exporting the currency. You run out of money. You have to 

go back to work. Your prices drop. Then your currency comes back 

in or real value comes back in. It is self-adjusting. 

The system that we have today is quite different, especially for 

the country that is privileged to issue the currency of the world, 

the reserve currency. We have had that privilege. We have literally 

been given license to create money out of thin air, export our 

money, and then eventually there is an accumulation, and once 

there is a sense that the value of the currency, the dollar, is going 

down, we best invest it more wisely, and that is what we are facing, and that makes a lot of people nervous. 

In one way, it is a problem for some people, but in another way, 

it is self-adjusting in a different manner, that those dollars are 

coming back in and buying up hard assets. 

The question I have is really when you think about this problem, 

do you think about it as a consequence of a monetary system or is 

it always just because we have overextended ourselves and if we 

just have more regulation—I sort of sense it is a big problem. We 

are dealing with a symptom and we think if we adjust this with 

some regulations, and say we will pick and choose, we are trying 

to do what the market could have done in a much more orderly 

fashion. 

I would like to see if I can get some comments on that issue. Mr. 

McCormick? 

17

Mr. MCCORMICK. Congressman Paul, I would first of all begin 

with the acknowledgement that sovereign wealth funds are just 

one small sliver of a set of global imbalances which are driven by 

a whole set of macroeconomic factors. 

What we try to differentiate as we think about the policy response to the fact that there are some root causes—both on the 

commodity and the non-commodity side for the funds, for example, 

on the non-commodity side, the lack of market driven currencies in 

some countries around the world, namely China, is one that is particularly noteworthy—from the fact that these sovereign wealth 

funds exist, and these investment flows exist. 

When we have thought about a policy response, recognizing there 

is a whole set of macroeconomic policies and issues, the policy response on sovereign wealth funds has been very much targeted on 

the fact that these investment flows exist and will continue to 

grow, and how do we best accommodate those, not with regulation 

from our perspective, but in terms of a set of voluntary best practices that would give some assurances around the intent of that investment being commercially driven. 

Dr. PAUL. Would anybody else care to make a comment? 

[No response] 

Dr. PAUL. I do not have any further questions. 

Chairman GUTIERREZ. Thank you very much. Chairman Kanjorski, you are recognized for 5 minutes. 

Chairman KANJORSKI. Thank you, Mr. Chairman. 

I do not see enough gray hair to maybe remember what I am 

going to refer to; do any of you remember the BCCI scandal? I see 

that Mr. Alvarez does. 

The reason I bring that up is I recall testimony some 20 years 

ago or more where Clark Clifford and Mr. Altman were involved 

in controlling certain banks that were in a line of ownership of foreign banks, and the banks that they were in charge of were American banks. 

We had before us one afternoon a former United States Senator, 

for whom I had a great deal of admiration, Matt Mathias, if you 

remember, from Maryland. He did not testify. He just sat in the 

audience and listened. 

Immediately after the hearing, he contacted me and wanted to 

go to lunch with me. I had no idea why he would want to see a 

lowly Congressman from Pennsylvania, but he did. We went to 

lunch. 

He said in a very nervous way, ‘‘Congressman, I am frightened 

to death; I do not know what to do. I am a director of an American 

bank, and I have spent a considerable amount of time, more than 

a year, and I cannot determine who owns the bank that owns my 

bank or who appointed me director of my bank or what banks my 

bank owns.’’ 

I was listening to all the regulations, Mr. Alvarez, you said the 

Federal Reserve had. The question is, how much work do they do 

to follow that line of who does what, when, and where, and under 

what circumstances? 

Or are the powers you are referring to all new powers that never 

existed 20 years ago? 

18

Mr. ALVAREZ. The Bank Holding Company Act and essentially 

what I outlined was enacted in 1956 and tightened up in 1970, and 

then the Change in Bank Control Act is 1978. 

You may recall, in BCCI, that the investors there intentionally 

hid their ownership relationship from the regulators. There was in 

fact an application filed with the Federal Reserve. The true owners 

lied about their involvement. That was not a flaw in the Act. That 

was an intentional attempt to avoid— 

Chairman KANJORSKI. How was that corrected? Why could I not 

do the same thing today? 

Mr. ALVAREZ. Fraud is always a difficult thing to prevent, and 

there is no law that can absolutely prevent fraud. We do the best 

we can to follow-up on— 

Chairman KANJORSKI. Mr. Alvarez, you gave me the impression 

when you were testifying that there was a methodology and a process here that should make us all feel very secure that we are not 

going to have a problem with sovereign wealth funds. Yet, if they 

want to be devious, just like the BCCI problem, they can be devious. They can accomplish many things. 

Let me give you an example of what I am worried about: $69 billion has been invested in the last 9 months in American financial 

institutions, forgetting other institutions. 

We know that we have certain limitations on exercise of power 

by banks. If you have more than 10 percent of the deposit accounts 

in the country, you cannot buy additional banks to gain greater 

than the 10 percent. You are limited. We do that because we do 

not want one bank dominating all of the deposits in the United 

States. I think that is good public policy. 

Recently, you are probably aware of the fact that there has been 

tremendous pressure by some large banking institutions in the 

United States that are hitting that cap, that are making the argument that they can grow, they do good business and they do, and 

they want us to raise that cap. 

Sometimes the pressures they put on us are to say well, if you 

do not allow us to raise the cap, the State of Illinois is not going 

to get economic funding for its progress, and the chairman is going 

to be responsible for the loss of employment. There is a great sympathy in the Congress to attempt to accommodate. 

What is going to stop us from seeing, when we go from $2 trillion 

in sovereign wealth funds to $15 trillion, a sevenfold growth in a 

matter of a decade? 

They are going to be so placed in the American market that they 

are going to be able to say look, you are either going to allow us 

to exercise more power, more influence, more control, more ownership, or your financial institutions are going to fail. Because, after 

all, your people have a negative savings rate of 2 percent. You are 

not going to pick it up from American citizens. You are going to 

pick it up from the foreign countries and will that not happen, or 

is there not that potential to happen? 

What are we going to do to make sure there is not an abuse of 

power, particularly from a strategic standpoint? 

We make a very classic assumption in this country: Since we are 

a capitalist nation, we believe that everybody is driven by profit. 

19

Some countries are not driven by profit. They are driven by political and national interests and security. 

Now we are dealing directly with the funds of countries that in 

some instances are adversaries of ours. If I were China, I would 

put my sovereign wealth funds highly invested in the energy field 

of the United States. I would buy as many electric utilities as I 

could, and then at my own desire, rather than sending an army 

over here some time in the future or an airplane to do damage, I 

would just issue the order as the owner of the electrical utility networks of the United States to turn off the power. 

What is going to stop them from doing that? 

Mr. ALVAREZ. I obviously cannot speak to electric power companies and how we will deal with that. I do have a lot of faith in the 

backbone of Congress to stop things when there is pressure. 

I think in the banking area, one thing we can take comfort in 

is that so far, the sovereign wealth funds have not taken significant interest in any banking organization. They have not taken positions that would allow them to shut off credit or limit— 

Chairman KANJORSKI. That is not quite true. You know that 

when we had bank failures, the FDIC went in and paid deposits 

that were way in excess of $100,000 insurance in order not to discourage foreigners from investing in American banks or depositing 

in American banks. 

What national banks failed in New York? We went in literally 

with hundreds and millions of dollars to cover Middle Eastern 

money deposits that were not covered under the Act. We had no 

obligation. As a matter of fact, there was no power except a political decision made in the United States that if we failed to honor 

those deposits with insurance, we would not get future deposits, 

and it could cause a disruption in the investments in U.S. banks. 

Is that not correct? 

Mr. ALVAREZ. Sir, if I could say two things on that. First, that 

was not the result of foreign ownership of a bank. That was because of deposits placed in the bank. 

And second, Congress did address that situation and stopped the 

FDIC from paying uninsured deposits by putting in place depositor 

preference requirements, least cost resolution, and other limitations that prevent that kind of resolution again. 

Chairman KANJORSKI. Before those protective laws were passed 

or regulations made, it was expeditiously and politically decided 

that we would act contrary to the law to satisfy the need of retaining those deposits. 

What I am saying is, do you not see the corollary, that if we are 

trying to entice private individual funds and avoid our own laws 

and regulations in the banking institutions, we sure as hell are 

going to do it with government funds, or do you not see that? 

Mr. ALVAREZ. No. I see your point. I appreciate your point. There 

are certainly costs that are associated with allowing investments 

freely. There are benefits as well. 

I think one of the things that is important for Congress to do is 

consider both the costs and the benefits and try to devise a system 

that they think is best. 

20

Chairman GUTIERREZ. Thank you, Mr. Alvarez. The time of the 

gentleman has expired. The ranking member of the full committee, 

Mr. Bachus, is recognized for 5 minutes. 

Mr. BACHUS. I thank the chairman. I do believe this is a very important hearing. There has been a lot of conversation about foreign 

government investment in the financial services industry and the 

U.S. economy as a whole. 

What Mr. Alvarez said, I actually came down here to give this 

statement because I did want at least a balanced approach to this, 

and there are benefits. 

The past few months, we have seen exceeding stress and challenging times for both the U.S. economy and for the financial services industry. During that time, we should never forget this, we 

have had extraordinary infusions of capital from sovereign investment funds and to some of our largest banks. 

What has that done? What is the result of that? The first result, 

and I am actually going to read a statement instead of ask questions, but the first result is that these banks have shored up their 

capital reserves. That is nothing but a positive. 

Second, by increasing their reserves, we really have enhanced 

the safety and soundness of our financial system. 

I am very grateful that source of funds was available. 

No one can disagree that the vitality of our financial services sector is critical to the Nation’s continued economic growth. 

These recent capital infusions given by the sovereign wealth 

funds and the countries that administer them, it has given them 

a vested interest, not only in the companies, but more importantly, 

it has given them a vested interest in the continuing health of the 

U.S. financial services industry and the U.S. economy. 

Like any investor, a sovereign wealth fund expects their investments to succeed. It is in their economic self-interest that U.S. industries in which they have invested continue to grow and prosper. 

It is in the interest of the United States and our economy to welcome this investment. Foreign investment, whether from a private 

investor who lives abroad, a publicly listed company that trades on 

a foreign exchange, or from a sovereign wealth fund, creates jobs 

in the United States and fosters economic growth. 

I can tell you as a Member of Congress who has Honda and Mercedes in my District, and many of their workers, that foreign investment has created very high-paying jobs in my District. 

Nonetheless, I would agree there are important questions that 

we have to ask about the growth of these sovereign wealth funds. 

We must ensure that we have policies in place that prevent this 

investment, however welcome it is, from compromising our national 

security. We must ensure that these sovereign wealth funds play 

by the same rules that all large investors play by when they invest 

in U.S. companies, and we must ensure that sovereign wealth 

funds do not pursue purely nationalistic or strategic economic objectives at the expense of U.S. companies in which they invest. 

We cannot forget that capital today is more mobile than it has 

ever been in the history of the world, and that capital can and will 

travel anywhere. 

We must reserve the right to reject foreign investments that compromise our national security or place us at an economic disadvanVerDate 0ct 09 2002 18:06 May 12, 2008 Jkt 041725 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\41725.TXT TERRIE
21

tage, but we must also avoid, and it is very critical that we avoid 

creating an investment climate that is hostile to legitimate foreign 

investment. 

If we do, the world’s capital will simply flow elsewhere. Investments will be made outside the United States and jobs created, 

perhaps with far more serious and harmful long-term effects on our 

own economy. 

The key principles must be transparency and fairness. We should 

insist on equal treatment for U.S. investment, meaning that we 

should be able to invest in other countries in the same way they 

invest here. 

To address the national security concerns, you will recall Congress passed a strong bipartisan legislation last year, written by 

this committee, to reform the process followed by the Committee on 

Foreign Investment in the United States, or as most of us refer to 

it, CFIUS. 

We established a thorough mechanism to review proposed investments for threats to national security and to ensure greater government accountability in the approval process. That has already 

been done. 

Mr. Chairman, while remaining vigilant to potential threats to 

our national security and our economy, our country must act responsibly to maintain and encourage an environment that is free 

and open to international investment. Our welfare and our economy depends on it, so that all Americans can continue to benefit 

from inflows of foreign capital that create jobs and fuel economic 

growth here in the United States. 

Thank you, Mr. Chairman. 

Chairman GUTIERREZ. Thank you, Mr. Bachus. Are there any 

other members who wish to ask questions of this panel before we 

recess? 

[No response] 

Chairman GUTIERREZ. We have exactly 6 minutes. We will recess, we will take our votes, and we will immediately come back. 

We will be right back with you. Thank you. 

[Recess] 

Chairman GUTIERREZ. We will come to order. The Chair will recognize, for 5 minutes, Mr. Jones. Congressman, please. 

Mr. JONES. Mr. Chairman, thank you very much. I want to thank 

you, and I want to thank the panel for waiting as long as you have, 

and hopefully some other members wanted to ask you questions. 

This question that I would like to ask would be of Mr. McCormick or Mr. Alvarez. I represent the Third District of North Carolina, and I hear constantly from the people of my District, why in 

the world is our Nation in such a bad financial state that we continue borrow more and more money from foreign governments? 

I am looking at an article from CNNmoney.com, ‘‘Feds to Auction 

Another $60 Billion.’’ 

Just very quickly before I get to the question, the Federal Reserve announced Friday that it will auction another $60 billion in 

March as it continues to combat the effects of a severe credit crisis. 

It repeated a pledge to keep holding the auctions for as long as 

necessary. The Central Bank said it will make $30 billion available 

22

to cash strapped banks at each of two auctions on March 10th and 

24th. 

Last week, we had Mr. Zandi here, Dr. Mark Zandi, with 

Moody’s. I asked him quite frankly: How much longer can this Nation continue to borrow money? I know we are talking about foreign governments investing in banks and all this, and I realize 

that. 

The point comes to this: We owe China $447 billion and most of 

that debt that China holds is in the way of Treasury notes. There 

has to come a time that we get to a point of no return. What the 

average taxpayer wants to know and by the way, I am an average 

taxpayer, is how long do we keep going before the whole economy 

of this country will just collapse? 

I will ask Mr. Alvarez because the Federal Reserve is putting 

these bonds out there, or I will ask Mr. McCormick. 

There comes a time where I do not know how this country can 

continue to float the way it has economically without—if you let me 

use this as an example—a hole in the bottom of the float and it 

sinks. 

Mr. MCCORMICK. Congressman, maybe I can take a quick shot 

at it, giving you an answer, and then turning to my colleague if he 

has something to add. 

I think if you step back and look at the trends over the last couple of years, two things would be notable. One, the current account 

deficit has actually decreased fairly dramatically over the last 12 

to 18 months from roughly 6.8 percent of GDP to 5.1 percent of 

GDP. The deficit as a percentage of GDP has also decreased quite 

significantly. 

The projections going forward with the recent budget are that 

the deficit will go back up as a percentage of GDP, but in relative 

terms, it has decreased quite significantly. 

That is one set of issues. The second set of issues is the foreign 

investment coming into the United States, sovereign or other. 

There are a number of reasons that is occurring. 

The broader imbalances that Mr. Paul mentioned certainly is 

part of it. The attractiveness of our investment climate is another 

component of it, and Congressman, that is something that I think 

we should celebrate, that foreign investment is coming into the 

United States, it is investing in U.S. assets. That is good for us. 

It is good for our prosperity. 

Mr. JONES. Excuse me. Is the fact that China owns $447 billion 

of our Treasury notes, do you consider that an investment? 

Mr. MCCORMICK. Yes, Congressman, I do. 

Mr. JONES. What happens if China will not hold these notes for 

20 years, but instead decides in 5 years that they want to sell those 

notes, and they want to play havoc with America’s financial markets? They could do that overnight. 

Mr. MCCORMICK. Congressman, they could. I think on the list of 

owners of U.S. Treasuries, they are second or third on the list. 

Japan is number one on the list. There are a number of owners. 

That is a validation, I think, in confidence in the United States, 

and that is a very liquid market, as you know. There are many 

buyers for it. China’s interest is to invest in places where it is 

going to get maximum return. 

23

Mr. JONES. Mr. Alvarez, if you could, I have about 2 minutes. My 

time will be up. The issue is if we keep putting all these bonds out 

there to be sold, billions here and billions there, I would never 

argue with any economist or people like yourselves, you are the 

professionals, but it has been proven in the history books that 

great nations that have to borrow money from foreign governments 

to pay their bills do not long remain great nations, because what 

is going to happen is that great nation is going to sink because its 

dollar has very little value. 

Mr. ALVAREZ. This is a debate that has gone on in this country 

since Alexander Hamilton who believed that putting debt out into 

the public actually gained the respect of others who would then 

have an interest that would align with your interest, so the selfinterest of the investor and the country would be aligned and helpful. 

I would like to make one point if I could about the term ‘‘auction 

facility’’ that you referenced, the $60 billion that the Federal Reserve is lending. That is not borrowing by us; that is lending by the 

Federal Reserve to banks to help in the short-term money market. 

It is a very different kind of thing. 

I think the concerns you raised should not be directed in that direction. I would be happy to talk with you more about that at another time. 

Mr. JONES. Thank you. 

Chairman GUTIERREZ. Thank you very much. I thank the panel 

for its patience. I am happy that you waited for us to come back. 

I thank you so much. You are all excused. Thank you so much. 

We will be sitting the second panel. Thank you so much. 

This is the second panel we have this afternoon. First on our 

panel is Mr. Martin Skancke. Mr. Skancke is the director general 

of the Asset Management Department of the Ministry of Finance 

in Norway. 

Next, we have Mr. Simon Israel, the executive director of 

Temasek Holdings. Mr. Israel worked extensively in the Asian Pacific region since the early 1980’s with Sara Lee Corporation. He 

currently serves as chairman of the Singapore Tourism Board. 

Third, we have Mr. David Denison. Mr. Denison is the president 

and CEO of the Canada Pension Plan Investment Board. Mr. 

Denison has 24 years of experience in the financial services sector, 

including senior postings in the investment consulting and mutual 

fund businesses in Canada, the United States, and Europe. 

And finally, we have Professor Matthew Slaughter. Professor 

Slaughter is an associate dean of the MBA Program and Professor 

of International Economics at the Tuck School of Business at Dartmouth. He is also currently a research associate at the National 

Bureau of Economic Research and a senior fellow at the Council on 

Foreign Relations. 

I welcome you all to the hearing. Mr. Skancke, you are recognized for 5 minutes. 

24

STATEMENT OF MARTIN SKANCKE, DIRECTOR GENERAL, 

ASSET MANAGEMENT DEPARTMENT, NORWEGIAN MINISTRY 

OF FINANCE 

Mr. SKANCKE. Thank you very much, Mr. Chairman. Thank you 

for the invitation to address this distinguished committee on issues 

related to sovereign wealth funds and their investments in the 

United States. 

The Norwegian Government Pension Fund is a large global investor with assets around $380 billion. We are adding about $1 billion per week in new funds to this portfolio. 

One-third of the portfolio, about $125 billion, is invested in bonds 

and equities in the U.S. market. The United States is by far the 

largest recipient country for our investments. 

The Fund has a twofold purpose of smoothing out the spending 

of volatile revenues, and at the same time, acting as a long-term 

savings vehicle, allowing the Norwegian Government to accumulate 

financial assets in order to help cope with large future financial 

commitments associated with an aging population. 

To effectively shield the non-oil economy from the effects of a 

volatile flow of foreign currency, earnings from the oil sector, the 

Fund has only invested abroad. 

The management of the Fund is based on a few basic principles. 

First, the Fund is a pure financial investor with non-strategic holdings. The objective of the Fund is to maximize financial returns. 

There are clear lines of responsibility between the Ministry of Finance’s former owner of the Fund and the Central Bank as operational manager. There is a high degree of transparency in all aspects of its purpose and operation. 

The equity portion of the Fund is in the process of being increased to 60 percent from 40 percent previously. The rest is invested in bonds, including real estate in the Fund’s strategic benchmark that is under consideration. 

We believe that sovereign wealth funds are perhaps particularly 

suited to contribute to stability in the international financial markets. They typically have a long-term horizon for their investments. 

They are not leveraged. There are no imminent claims for withdrawal of funds in turbulent markets, as we have seen recently. 

Turning to the question of transparency, which is very topical at 

the moment, we believe that transparency has several benefits. It 

is a key tool in building trust, both domestically and internationally. It provides a disciplinary effect on fund management, and it 

may in itself contribute to stabilizing international financial markets. 

We, therefore, support the efforts of the IMF to establish a set 

of best practices for funds in this area. 

However, transparency is a very abstract concept, and we need 

to have a more granular approach if we are to make progress in 

this area. 

It may be useful to distinguish between different areas of transparency. Transparency with respect to governance structure, who 

are the ultimate owners, who makes investment decisions, and 

what are the arrangements for audit, supervision, and control. 

25

Investment objectives: What is the purpose of the Fund, the time 

horizon, the rules governing allocation of withdrawals, and the investment strategy and implementation. 

Obviously, the last category will be the most difficult to address, 

but even transparency about governance structure and investment 

objectives should go a long way towards alleviating concerns about 

sovereign wealth fund investments, and claims for increased transparency has to be balanced against legitimate business interests of 

investors. 

Transparency has to run both ways. If recipient countries set up 

screening processes to address perfectly legitimate national security concerns, there must be transparency with respect to how such 

screening decisions are made, by whom, and under what criteria. 

Lack of transparency in this area will lead to suspicions of financial protectionism, introduce an element of uncertainty to the investment process, reduce investor confidence, and may ultimately 

reduce the relative attractiveness of a non-transparent recipient 

country. 

As I have explained, the Fund is a major shareholder in the U.S. 

market and the holdings of U.S. equities will increase significantly 

in the years to come. This reflects the size and importance of the 

U.S. market but also our confidence in the long-term potential of 

this market. 

We are not running from the market in these more turbulent 

times but are building up our portfolio based on a long-term view. 

The Fund is not a strategic investor. It will not take over businesses and run them. Even as a pure financial investor, the Fund 

has to use its ownership rights as investors to protect its long-term 

financial interest. 

The Central Bank as manager has published a document outlining the priorities and principles our corporate governance work 

is built on. 

They published yesterday a full record of how they have voted on 

every single issue in every single company they have voted, almost 

40,000 individual issues, in more than 4,000 companies globally. 

There are no hidden agendas in our corporate governance work. 

The Pension Fund has a very long time horizon. It will in principle be permanently invested in global markets. It is in our interest that companies we invest in are well-run, profitable, and operate in well-functioning markets, and a sound regulatory framework 

and good corporate governance arrangements are important preconditions for this. 

Thank you very much. 

[The prepared statement of Mr. Skancke can be found on page 

139 of the appendix.] 

Chairman GUTIERREZ. Thank you very much. 

Mr. Israel? 

STATEMENT OF SIMON CLAUDE ISRAEL, EXECUTIVE 

DIRECTOR, TEMASEK HOLDINGS (PRIVATE) LIMITED 

Mr. ISRAEL. Thank you, Mr. Chairman. 

The Singapore Government founded Temasek in 1974 to hold 

and manage investments in several government firms they owned 

at the time. The objective was to separate the role of managing 

26

commercial investments from the government’s role of policymaker 

and regulator. 

Temasek’s charter is to manage these investments independent 

of the government on a purely commercial basis, in order to generate sustainable returns for the benefit of future generations. 

In order to maximize and balance portfolio risks, Temasek invests internationally within a directional framework of being invested one-third Singapore, one-third Asia, one-third the OECD, 

over time. This allocation is flexible in respect of its weighting and 

is subject to both the state of markets and investment opportunities at a given time. 

Temasek seeks to have a portfolio which is diversified by geography and sector. At this time, our portfolio is weighted towards 

Asia and towards financial services, telecommunications, and 

transportation, which are proxies for economic growth in emerging 

markets. 

On ownership and governance, Temasek is incorporated as a private company with a sole shareholder, the Ministry of Finance. 

While Temasek is state-owned, it is not state-directed. 

Temasek is governed by a Board of Directors, the majority of 

whom are independent directors from the private sector. It is the 

Board which approves Temasek’s investment strategy and investments. Independent non-executive directors chair the three key 

committees that assist the Board. 

Under the Singapore Companies Act, all directors are charged 

with the fiduciary duty of acting in the best interest of the company and its shareholders. As with all companies, the CEO reports 

solely to the Board. 

In addition, Temasek is advised by a 10-member Temasek international advisory panel, comprising international business leaders, 

including two Americans, to provide the firm with global perspectives and advice. 

Given Temasek’s independence from the government, Temasek 

does not discuss individual acquisitions or the management of such 

investments with the government. 

The government evaluates Temasek’s performance on the basis of 

the returns of the overall portfolio at the time. 

Temasek’s source of funds comes from its investment activities, 

notably dividends, proceeds from divestments, a modest level of 

debt, and occasional injections from our shareholder. 

For purposes of clarity, Temasek owns its assets. It is not a fund 

manager. 

Singapore’s constitution reinforces Temasek’s independence. The 

constitution limits the ability of the government to draw on 

Temasek’s assets or to politically influence the selection and work 

of the firm’s directors and its chief executives. 

Temasek’s charter as a private commercial investor is to maximize sustainable returns. We have done so, earning an 18 percent 

compound annual return since inception. Fundamentally, this result has only been achievable due to our engaged Board, sound governance, and professional management. 

Temasek seeks to employ the best international investment professionals; 40 percent of our senior management are nonSingaporian, including Americans. 

27

On disclosure and transparency, Temasek recognizes the importance of good corporate governance. Good governance requires adequate disclosure and transparency. 

The firm is audited by international auditing firms, and since 

2004, it has annually published its financial performance in the 

Temasek Review. 

The Review includes an overview of the firm’s governance process, investment themes, financial performance, portfolio holdings 

by geography and sector, major investments and divestments. 

It also provides an indication of the firm’s future direction. The 

firm also maintains a Web site allowing access to annual reviews 

and other information. 

The firm has made further regular disclosures since 2005 when 

we received our AAA credit ratings from Standard & Poor’s and 

Moody’s. As a condition for receiving the ratings, both agencies 

thoroughly scrutinized Temasek, and as a condition for maintaining our ratings, every major transaction since has been scrutinized 

further to ensure financial discipline. 

We also issued a maden U.S. Dollar Bond in 2005, which was 

and continues to be subject to SEC disclosure. 

As a result of these disclosures, Temasek is acknowledged as a 

well-governed and accountable firm. 

Temasek understands that there remain concerns about the role 

of state-owned entities, even if they are not state-directed, in the 

global markets. As an investor, Temasek believes that the IMF and 

the OECD are the best arenas in which to discuss this issue and 

to develop voluntary codes of conduct for state-owned entities and 

policies for investment receiving companies. 

Temasek’s recent investment in Merrill Lynch is only the latest 

linkage we have with the United States. Several Temasek portfolio 

companies have significant U.S. operations. 

As you know, the United States and Singapore enjoy close strategic and economic relations. Temasek understands and fully respects that the United States must take measures necessary to protect its national security. 

We have closely followed the enactment of the new Foreign Investment and National Security Act and the drafting of its regulations. We are aware of the vigorous debate in Europe and the 

United States with respect to sovereign wealth funds. 

We encourage Congress to maintain the right balance in protecting national security in ways that continue the traditional welcoming attitude of the United States towards foreign investment. 

Our course was set over 30 years ago when Temasek was created. As we look to increase our holdings outside Singapore and 

outside Asia, we remain committed to the commercial principles 

that have made us successful. 

In the process, the firm will maintain its 3-decade role as an 

independent, commercially-driven, long-term investor in companies 

throughout the world. 

Thank you. 

[The prepared statement of Mr. Israel can be found on page 120 

of the appendix.] 

Chairman GUTIERREZ. Thank you very much. 

Mr. Denison, you are recognized for 5 minutes. 

28

STATEMENT OF DAVID DENISON, PRESIDENT AND CEO, 

CANADA PENSION PLAN INVESTMENT BOARD 

Mr. DENISON. Mr. Chairman, thank you for inviting me to participate in this panel. 

With regard to the issue of sovereign wealth funds, we recognize 

that policymakers around the world are trying to balance the requirement of openness towards foreign investment and the need to 

preserve national security. 

Through this lens, one can readily see the challenges posed by 

some sovereign funds with billions of dollars of capital at their disposal, but little in the way of transparency, clarity of mandate, or 

public accountability. 

I am pleased to appear before you today to share the CPP Investment Board’s perspective on these matters. 

Although we have the word ‘‘Canada’’ in our name, and we were 

created by an Act of Parliament, the CPP Investment Board is not 

a sovereign organization or a sovereign wealth fund. 

You noted this, in fact, in your invitation letter which recognized 

that the CPPIB is not a sovereign wealth fund but rather an independent public pension fund that is technically owned by a foreign 

government but is also independent from government. 

This is so for a number of reasons, most simply because we do 

not manage government assets nor are we controlled by any government. Indeed, the assets we manage belong to 17 million working Canadians and are strictly segregated from government funds. 

Nonetheless, we have a perspective on the central issues of 

transparency and accountability that may be of interest to the committee. 

At the heart of the sovereign funds’ issue is the question of political control and the potential that sovereign funds may be used in 

support of national or political rather than economic goals. 

The governance model of the CPP Investment Board is instructive in this regard because it was specifically designed to protect 

against political interference, while maintaining a high degree of 

accountability. 

We have provided a written statement that expands on how 

these concepts are realized in our governance model, but for now, 

let me note the following points. 

The CPP Investment Board was created to help sustain the Canada Pension Plan by investing those funds not needed to pay current benefits. Our mandate, which is enshrined in law, is to 

achieve a maximum rate of return without undue risk of loss. 

Management of the CPP Investment Board reports not to government but to an independent board of highly qualified directors. The 

Board of Directors, not government, approves investment policies, 

determines with management the organization’s strategic direction, 

and makes critical operational decisions, such as hiring the chief 

executive officer and determining executive compensation. 

The CEO in turn hires and leads a management team including 

the investment professionals who make the portfolio decisions within investment policies that are agreed to by the Board of Directors. 

To be clear, we do not submit our investment strategy or business plans for government approval. We do not have government 

officials sitting on our Board. We do not submit our policies for govVerDate 0ct 09 2002 18:06 May 12, 2008 Jkt 041725 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\41725.TXT TERRIE
29

ernment approval, and indeed, our Code of Conduct stipulates that 

any attempt by government to influence our investment decisions, 

hiring practices, or procurement must be reported to the chairman 

or the CEO, who will take appropriate action. 

It is in short a familiar private sector model but with strong public accountability. Accountability is achieved principally through 

transparency. 

Our legislation requires a high level of transparency by audits, 

special examinations, and public meetings. Beyond that, our Board 

and management have voluntarily raised transparency to an even 

higher level. 

For example, we report our results on the same basis as most 

Canadian public companies, including the presentation of independently audited financial statements. We post our investment 

policy and objectives on our Web site as well as a full list of all our 

public and private equity, real estate, and infrastructure holdings. 

In short, we believe that it is possible to provide a very high degree of transparency without compromising our proprietary investment insights. 

We believe that elements of Canada’s blueprint could help address some of the concerns raised about sovereign wealth funds 

today. 

These concerns can be alleviated to a great degree if such funds 

clearly articulate their investment objectives and their governance 

structure, and embrace a degree of transparency sufficient to enable others to measure their actions against their stated objectives. 

In response to the emergence of sovereign wealth funds as active 

direct investors of significant scale, we are seeing calls for new protectionist legislation which could have negative consequences for 

the free flow of capital. 

It seems to us the challenge for policymakers is to properly balance the desire for foreign investment with the need for security 

and transparency, and we submit a key to success can be found by 

looking beyond labels to examine the underlying characteristics of 

these large pools of capital according to some of the criteria I have 

outlined today. 

Thank you. 

[The prepared statement of Mr. Denison can be found on page 75 

of the appendix.] 

Chairman GUTIERREZ. Thank you, Mr. Denison. 

Mr. Slaughter, you are recognized for 5 minutes. 

STATEMENT OF MATTHEW SLAUGHTER, PROFESSOR, TUCK 

SCHOOL OF BUSINESS, DARTMOUTH COLLEGE 

Mr. SLAUGHTER. Thank you. Mr. Chairman and members of the 

subcommittees, thank you for inviting me to testify on these important and timely issues. 

Let me start by making three points about the economic benefits 

of sovereign wealth funds. 

First, many sovereign wealth funds were created as legitimate 

stewards of national economic welfare, to manage fiscal surpluses 

for sound goals such as intergenerational transfers. 

30

Here, it is important to remember that the United States itself 

is home to such funds, for example, the Alaska Permanent Reserve 

Fund. 

Second, to the extent that sovereign wealth funds invest for commercial motives of high risk adjusted rates of return, the overall 

U.S. economy benefits from their investments. 

America’s commercial and investment banks are a prominent recent example of these benefits. 

Funds’ investments provided many leading banks with muchneeded capital to stabilize their near term performance and thereby support the overall economy. 

The United States has long benefitted from open global capital 

markets, of which these funds are now an important part. 

Third, to date, the magnitude of sovereign investments into the 

United States remains quite small. At year end 2006, the rest of 

the world owned $17.4 trillion of American assets. The recent surge 

of investments into the United States by sovereign funds is a lot 

of money to you and me, but it is still a fraction of one percent of 

America’s gross international investment position. 

These economic benefits aside, the ‘‘s’’ in sovereign wealth funds 

presents a legitimate policy concern. Were these funds to operate 

for non-commercial reasons, they could damage the United States. 

Some of this damage could be economic but much more importantly, some of this damage could be to national security, were 

these funds to use their investments in American companies to further their strategic interests in conflict with those of the United 

States. 

What to do about this legitimate policy concern: To answer, let 

me first list three important costs to the U.S. economy that we run 

the risk of incurring should excessive constraints be placed on 

these funds in an attempt to address this concern. 

First, we could incur economic damage to U.S. companies at 

home. American companies have historically been strengthened by 

foreign investment. A tangible example of this is jobs. In 2005, 

there were 5.1 million Americans working for U.S. affiliates of foreign multinationals, earning an average annual compensation of 

over $66,000. 

Second, we could incur economic damage to U.S. companies 

abroad. In a new Council on Foreign Relations’ report, David 

Marchick and I have documented a new protectionist drift in inward investment policies around the world. 

In this environment, new U.S. restrictions on inward investment 

here may well be met by similar restrictions abroad against U.S. 

companies, which would harm their global competitiveness. 

Third, we could incur economic damage to the overall U.S. economy by raising the risk of a disorderly adjustment to the chronic 

U.S. current account deficits of recent decades. 

To finance this excess of imports over exports caused by low U.S. 

national savings, each year the United States must on net sell an 

equivalent amount of assets to the rest of the world. The likelihood 

of a gradual orderly evolution of the U.S. current account deficit 

and of the value of the U.S. dollar will be higher the wider is the 

range of U.S. assets the rest of the world can reasonably purchase 

31

and the wider is the range of foreign investors, including sovereign 

wealth funds. 

Let me close my testimony with the second part of my reply to 

the question of what to do. For now, I would suggest two steps: 

The first step is diligent U.S. participation in ongoing multilateral dialogues with sovereign wealth funds to generate more and 

more transparent information about their governance, goals, and 

strategies. 

Recent interest in these funds has revealed that for many, there 

are some clear gaps in what we know, like in so many areas, here, 

too, sound public policy is best founded on complete and robust information. 

An increase in the quality and quantity of information about sovereign funds should help allay many concerns about the likelihood 

of these funds operating for non-commercial reasons that could 

threaten U.S. security. 

The second step is to urge support by all interested parties in the 

continued non-partisan operation of the Committee on Foreign Investment in the United States. CFIUS is well-suited to address any 

legitimate national security concerns raised by U.S. investments by 

sovereign wealth funds, or let me remind everyone, by any other 

foreign investor as well. 

One important reason for this is that CFIUS does not have any 

statute of limitations, in that any inward transaction can be 

brought to CFIUS, not just before, but also after closing, should 

any concerns arise after the fact. 

Thank you again for your time and interest, and I look forward 

to answering any questions you may have. 

[The prepared statement of Professor Slaughter can be found on 

page 152 of the appendix.] 

Chairman KANJORSKI. I have a few questions, and I am sure 

some of my colleagues will, as well. 

First of all, let me thank all of you for appearing. I note the 

make up of the panel is not necessarily the individuals or nations 

that would be raising the question with the Congress or the American people as to who should be an investor, although we are very 

worried about Sweden’s military intents against the United States. 

We are going to watch that very closely. 

That is humorous, for those reporters who do not know. 

[Laughter] 

Chairman KANJORSKI. Or Norway, I should say. That is a real 

threat, Norway. 

May I say one of the problems is this massive amount of funding 

and the idea of American corporations and international corporations. There are so many of our larger entities that have no nationality, and they happen to stop by to invest or do business. 

But I would not call them a citizen of any particular nation, and 

probably the individual international companies are driven more 

from profit motive than anything else, and least driven by national 

interest, particularly the United States’ national interest. 

What do we do about it? While it is small, while it is identifiable 

and rather limited, as it is today, that is not really my thought 

process. It is what do we do over the next decade or two as these 

numbers severely run up. 

32

Quite frankly, I am at a loss to know at what point we will lose 

control. An example I gave earlier with the last panel: What happens if we allow foreign equity to take control of our utility companies, whether it is electric utilities, gas utilities, or any form of energy, and there is a disagreement between the two nations? 

I think we have to be less than serious to think there would not 

be a tendency to utilize those economic assets toward a strategic 

end for the national interest of the nation involved with the funds 

out there. 

I remember the argument posed not too many years ago when 

the Administration was arguing to privatize Social Security. The 

question arose at that time and the argument was: Look how much 

more we could get if we invested in Wall Street. And why not instead of investing at 1.9 percent—I think that is the amount of 

transfer interest payment within the government—why not allow 

that to be invested by a trust or some entity in the market? 

Very quickly, with the amount of funds we are talking about, all 

the equities on Wall Street would be owned by the Fund. It would 

be, I guess, the ultimate end to capitalists, by encouraging the supply of money to be provided by the government, it would literally 

become a truly socialist nation, since all the interests of equity 

would be sold out to funds of the government. 

I thought it was a legitimate argument that you would not want 

Social Security funds directly used to purchase equity positions or 

control positions of American business or industry. 

What is different in your estimation from that argument not to 

use Social Security funds to be invested in our equity markets and 

banks, etc., and foreign equity funds or sovereign funds, rather 

than being just in credit instruments, now going into equity instruments that determine policy and direction of corporations? 

Let me throw that out to the panel. 

Mr. SLAUGHTER. Mr. Chairman, I would offer a couple of reflections on your thoughts. One is that your point is well-taken. Governance, I think, is one of the issues of information that is important to think about, meaning both for privately owned and operated 

corporations and for various sovereign funds, the fact that they 

may be domiciled in one particular country leaves open the question of what are the linkages with the government of those countries as well. 

There are a lot of different structures that could exist, and I 

think it is something for which information helps. 

A second comment is your point is very well taken about your example of owning equities as part of the economic damage that can 

come when governments in some broad sense are in the business 

of helping run businesses. I will point out that the market offers 

a natural check against that, which is existing shareholders, existing boards of directors of privately held corporations recognize the 

potential limitation of a government from asserting managerial 

control over a corporation, and that is a natural check above and 

beyond what legitimate national security concerns there might be 

on those potential transactions. 

Chairman KANJORSKI. When you have such things as sovereign 

funds and there is a violation of the law or regulations, who do you 

33

identify as becoming the potential punishable party? How do you 

implement that punishment? 

If you invest and commit a fraud or commit some act that violates the laws or regulations of the United States, we charge you. 

If you are found guilty, you pay the appropriate fine or incarceration. 

How do we do it when it is a sovereign body? Do we invade? 

Mr. SLAUGHTER. I am an economist, not a lawyer, so I am not 

quite sure of some of the important legal issues here, but I will 

point out that when I served on the Council of Economic Advisors, 

I served on CFIUS as one of the member agencies. 

One of the important points about CFIUS was that CFIUS was 

there on top of existing protections that we may have from our financial regulators, for example, for the financial system, for national security interests. CFIUS operates as a backstop against a 

lot of existing U.S. law for when there might be a national security 

concern for any commercial transaction. 

I will reiterate something I said in my testimony, if I may, which 

is that one of the important features of CFIUS, I think, that provides a measure of safety is the fact that CFIUS can address transactions at any time. It need not be before that transaction occurs. 

Even after the fact, if a legitimate national security concern 

arises, CFIUS has purview over that. 

Chairman KANJORSKI. I think I better recognize my friend from 

Texas. Ron? 

Dr. PAUL. Thank you, Mr. Chairman. I just have a brief question 

for the panel, especially those who represent sovereign wealth 

funds. 

From your viewpoint, how do you see our discussion? Do you 

worry about our discussion and what we might do? Is there something that we would do that would be harmful both to you and to 

us or can you quantify this problem? 

Obviously, we see it as a problem because we are having hearings and we are discussing it and there is a lot of political talk 

about it. 

Could any of you quantify it and say well, this is not as big a 

problem as you think or it is much bigger, if you do this, things 

are going to get much worse, it is going to be bad for us and bad 

for the United States? 

Does anyone want to volunteer a comment along those lines? 

Mr. ISRAEL. If I could, I believe from our perspective as an investor, we look to open markets which are well-regulated, which are 

efficient, which are competitive, and where capital can flow freely. 

The concern that we would have as an investor is seeing the 

United States, or the world, if you will, lean towards protectionism 

out of a concern for this issue. We believe that would be damaging 

to our mutual interests in such respect. 

Mr. SKANCKE. I do not think we are worried in the sense that 

we think there is a great risk that there will be restrictions on our 

investment activities as such with the profile that we have because 

we have purely financial investments, no strategic holdings. 

With the investment strategy that we have, we do not assess the 

probability of restrictions; we do not see it to be very high. 

34

However, of course, if there are restrictions put on, for instance, 

the use of voting rights in companies, even as a financial investor, 

of course, we have legitimate financial concerns, and the relationship between shareholders and boards where the managers are the 

agents and the board representing the shareholders is the principal, and of course, if you cut down that line of communication between shareholders and boards and do not have any possibility of 

making boards responsible, then we would see that this is a less 

attractive market because it would erode the confidence in the corporate governance part of the market. 

I think further progress on accountability of corporate boards will 

probably give a positive effect on the attractiveness of the U.S. 

market. 

Dr. PAUL. Mr. Denison? 

Mr. DENISON. I would say in the public markets where our activity is primarily portfolio investments, relatively small investments 

in U.S. companies, it would not have any effect. 

The potential effect is greater in the private markets, in private 

equity transactions, in private real estate, or in private infrastructure in this country, or in other countries. 

We are an investor, where public policy has established that infrastructure, for instance, can be owned privately, and we are an 

interested investor in those kinds of assets. They are a natural 

match for a long horizon investor like us. 

If there is a degree of uncertainty that has entered into how we 

will be viewed as a potential investor in those assets, that will potentially have an impact on how we view individual markets and 

where we would put our emphasis. 

Dr. PAUL. Mr. Slaughter, how serious do you think this problem 

is? I know you have had testimony and addressed it to some degree. Is this a very serious problem we are facing and we have to 

deal with it, or could we overdo things? 

Mr. SLAUGHTER. I believe the potential for overdoing things is 

there. I will come back to the point, you have talked about the ongoing U.S. current account deficits. That requires us on net every 

year to be selling several hundred billion dollars in assets to the 

rest of the world. 

The attractiveness of our sets of assets compared to those in any 

of these other countries depends in part on the perceived policy environment that we set up for these potential investors. 

I think in the near term, this is likely as long as the United 

States continues to have low national savings relative to the level 

of capital investment, we will need to continue financing that deficit through asset sales to the rest of the world. 

I think that in broad context that is important to keep in mind 

in thinking about these important issues. 

Dr. PAUL. Thank you. 

Chairman KANJORSKI. The gentleman from Illinois. 

Chairman GUTIERREZ. Thank you, Mr. Chairman. 

Mr. Skancke, let me ask you a question. The funds that you control, who are the shareholders? People in Norway? 

Mr. SKANCKE. Formally, the Fund is owned by the Ministry of Finance. 

Chairman GUTIERREZ. By the government? 

35

Mr. SKANCKE. By the government. It is managed by our Central 

Bank. 

Chairman GUTIERREZ. Its purpose is to provide what? 

Mr. SKANCKE. The purpose is really twofold. In the short term, 

the oil revenues are very volatile. We want to smooth them out. In 

the long term, we have to save—we have an aging population, and 

we have to save for the future. 

Chairman GUTIERREZ. Mr. Denison, in that sense, they are saving up for their aging population. How about your Fund? 

Mr. DENISON. Our Fund supports the pension promise behind the 

Canada Pension Plan, so it is for 17 million Canadians. 

Chairman GUTIERREZ. Canadian people would be the shareholders in your Fund? 

Mr. DENISON. The beneficiaries; yes. 

Chairman GUTIERREZ. Mr. Israel, how does your Fund work? 

Mr. ISRAEL. First, we are not a fund. We are a corporation. 

Chairman GUTIERREZ. I am sorry; corporation. 

Mr. ISRAEL. Which is an important point to us. Ultimately, if you 

will, our Ministry of Finance owns 100 percent of our corporation. 

However, I would suggest to you that the ultimate beneficiaries are 

the citizens of Singapore. 

The dividend from our Fund flows to the government and is incorporated in the government budget as part of their investment 

income, which serves the people. 

I think the greater purpose of the Fund ultimately is to build an 

endowment for the future for the citizens of Singapore. 

Chairman GUTIERREZ. Does the government use the 18 percent 

return you have had over the last 20 years? 

Mr. ISRAEL. The government historically has earned a dividend 

of 7 percent, which is a dividend recommended by the Board and 

approved by the shareholders in an annual meeting. 

Chairman GUTIERREZ. The other 11 percent? 

Mr. ISRAEL. The rest of the Fund accumulates and grows over 

the years. Today, it is $110 billion U.S. dollars. It is really an endowment for the future. I think you have to take into account our 

context. Singapore is a tiny island nation about the size of Lake 

Tahoe. We have no natural resources. We are not self-sufficient in 

water. We are not self sufficient in food. 

We live in a volatile world with uncertain global markets and 

changing political and economic forces. 

Our belief is that as a nation in such circumstances, we need to 

put something away for the future to deal with those uncertainties. 

Chairman GUTIERREZ. Yes. I think that would be good advice for 

the United States of America, to put something away. Talk about 

an aging population; we have tens of millions of baby boomers. I 

think about 40 million of them, something like half of our workforce, is going to retire in the next 20 years. 

I think we should not only look at your corporation or your 

funds, but start thinking about how strategically we are going to 

deal with tens of millions of people who are going to be retiring 

from our workforce in an unprecedented percentage, unprecedented 

in recent memory, at least economic history in the United States 

of America. 

36

I am much more concerned obviously about what you do and how 

you go about doing it to see if we might not learn and incorporate 

some of what you do, so that as we look at our own aging population, we can make some decisions about how we are going to take 

care of them. 

I thank Mr. Slaughter, an economist, for looking at that, and 

maybe in a subsequent meeting, because I only have a minute and 

16 seconds left, we might look at this. 

Actually, financial institutions in the United States do not encourage saving money. We reduce—the Fed Chairman keeps reducing the cost of money but actually the banks are charging even 

more for mortgages at a time of a mortgage crisis. 

Here is money, it is cheaper. Charge the public more. When you 

walk into a financial institution and then our taxing system taxes 

it as ordinary income, if I invest in stocks, then I have capital 

gains tax. If I put money in a financial institution, in a savings account, then they charge me 2 to 3 times the same tax rate for saving money versus investing money because of course, my colleagues 

on the other side like to think about investing money, except in 

working class neighborhoods people tend to save, not invest in 

stocks and in equities. 

Lastly, maybe from an economic point of view, I will write you 

a letter, and you can share some things that we might share with 

members of this committee about what we do. 

The Norwegians are here saying we have extra oil. If you do not 

play by the rules, we will just keep the oil in the ground. It is only 

worth more next year than it was worth this year probably. It is 

not as though it is something that is losing value. They will just 

keep it there. 

The Russians are doing the same thing. The comparison between 

the Euro and the dollar, why would not Germans and the rest of 

Europe want to come and buy us, especially when we are cheap, 

and the Middle East and their oil supplies, the Chinese. We just put $150 billion out there to stimulate our economy. We 

are going to buy lots of Chinese goods at K-Mart and Wal-Mart, 

and then they are going to come back and do what, continue to buy 

bonds? I would not buy our bonds, especially if I have $400-plus 

billion of them. I would buy a stake in American companies, especially when we see the Chinese going about the world acquiring 

and making relationships with governments that help facilitate 

their industrial development and their relationship to natural resources. 

Why not come to the United States of America and develop some 

of those natural resources? 

We will be writing you a letter so that we can look at that. I 

think a greater danger to our economy is what we do, not what the 

rest of the world takes advantage of as we lack any strategic planning in our economy. 

Thank you all, the panelists, for being here this afternoon. 

Chairman KANJORSKI. Mr. Meeks? 

Mr. MEEKS. Thank you, Mr. Chairman. I want to thank the panelists for being here also. It is very intriguing. 

I think as the chairman indicated, probably those who are sitting 

at the table, not the ones that initially we were worried about, but 

37

now that it is, you all are moving along quietly, nobody was bothering you or anything of that nature, and all of a sudden, because 

of the influx of money that has come in from some of the other 

areas, that quite honestly have been some of the trouble spots in 

the world and questions the integrity of what they are going to do 

or what are their purposes, is there an ulterior motive, I think that 

is what comes to bear here. 

With that, any time you have anything or any question, even if 

you have good access, you have to figure out—everybody has to fit 

within these rules and figure out how we move forward. 

I look at sovereign wealth funds probably as yet another example 

of the growth of capitalism and innovation in the global marketplace, because we are in another place than we were before, and 

we have to look at it and how we move forward. 

I do believe this Congress should engage in a careful and balanced examination of this important issue and when and if we take 

action on the issue, what we should do and how we should do it 

in a manner that encourages growth while maintaining the global 

economic stability. 

I think we are more interdependent upon one another economically whether we like it or not with countries that we may get 

along with or not now than we had ever before. 

That being said, many of those of you sitting here and we look 

at your sovereign wealth funds, there seems to be some kind of 

transparency, issues that we can put our hands on, but others, we 

cannot say the same. 

I think Mr. Slaughter, in your testimony, you state that the 

United States should continue to participate in ongoing multilateral dialogues with sovereign wealth funds to generate more and 

more transparent information from the funds. 

My question to you would be what if there are certain funds that 

just refuse to comply with the reasonable standards of transparency and good governance? 

How can we protect ourselves without running afoul of our WTO 

commitments and/or inviting retaliatory restrictions against U.S. 

investment? 

I want that transparency, but somebody refuses. What do we do? 

Mr. SLAUGHTER. That is a great question. Two things. One is my 

sense is in a lot of other international economic policy areas, discussion and deliberation tends to bring lots of parties around to 

recognizing that a set of best practices are in everybody’s interest 

to follow. 

I think there are parallels in international trade policy, for example, where some countries have had very different trade policy 

practices. They did not want to reveal certain things about how 

they settle anti-dumping rules, for example. There has been 

progress over time in many areas in international trade policy that 

I think are parallel here. 

That requires having all parties to the table and having robust 

and candid discussions and again, my sense is the International 

Monetary Fund, the OECD and other organizations supported by 

our Treasury Department and others in our government are having 

those conversations. That is one thing. 

38

I think the second thing again in that transition time as we are 

learning more about different sovereign funds, we have with 

CFIUS a sound process in the United States for addressing any legitimate national security concerns that might arise from any particular investment. 

CFIUS has flexibility on many dimensions to allow us to have 

that certainty, and especially with reforms that the good bilateral 

discussion last year in Congress in the new legislation of FINSA, 

I think, strengthened a lot of CFIUS practices, and will make that 

going forward an even better process. 

Mr. MEEKS. I see I am out of time almost already. You indicated 

in your testimony that CFIUS does not have a statute of limitations. 

I was wondering whether or not if you knew of any time or how 

often it has happened that there has been a transaction that was 

reviewed by CFIUS and after it had already been closed, where 

they reviewed it again? 

Mr. SLAUGHTER. I think that is unusual. Again, I think it speaks 

to the issue of all parties concerned having the incentive to participate in best practices. 

I think on that particular question, oftentimes acquiring parties 

or target parties recognize the value in approaching CFIUS member agencies before the transaction to start a dialogue about it, because oftentimes, to the extent that there are legitimate national 

security concerns, they are addressed through various mitigation 

agreements that allow the transaction still to go forward, to 

achieve the commercial value that is desired, and yet still address 

whatever legitimate concerns there are. 

I think there are examples in the past, but they are unusual 

after the transaction CFIUS investigation, but there is a parallel 

with the issue that you raised about the value of having robust discussion among all parties on best practices. 

Mr. MEEKS. Mr. Chairman, if I could just ask Mr. Denison one 

quick question. I am just curious. He testified that the Canadian 

Pension Plan Investment Board Act can only be amended by a consensus of our federal government and at least two-thirds, I think 

he said, of the participating provinces representing two-thirds of 

the population. 

I just want to know has an amendment ever been made or attempted? If so, what changes were made? 

Mr. DENISON. Amendments have been made. They have all been 

at the suggestion of the CCP Investment Board itself, and they 

have been to deal with investment constraints which were originally imposed upon the investment organization and at our recommendation, we have asked for those to be lifted, and in all cases, 

we have achieved not just the two-thirds, but we have achieved 

unanimous consent. 

There has not been any amendment, however, which has been 

initiated by either our federal government or any of our provincial 

governments. 

Mr. MEEKS. Thank you. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Meeks. 

We are going to wrap this up very shortly. I do want to ask the 

panel, you are individual nations. Do you have any constraints on 

39

American investment or other nations’ investment in your nations, 

any standards that they have to rise to or perform? How do you 

handle it? Are you all the same or are you different in that regard? 

Mr. ISRAEL. Speaking on behalf of Singapore, Singapore maintains a very open market, a very efficient competitive and regulated market. 

Chairman KANJORSKI. We could buy any corporation? The United 

States Government could buy any corporation in Singapore? 

Mr. ISRAEL. You can invest in any corporation in Singapore. 

Chairman KANJORSKI. We could invest. We could not have a controlling interest? 

Mr. ISRAEL. It is no different than the United States in terms of 

it is a regulated industry. It would be subject to certain tests which 

are probably very similar to the tests that would be applied in the 

United States. 

You have telecom regulators. You have banking regulators, etc. 

Insofar as one is in compliance, I believe you are free to invest. 

Chairman KANJORSKI. There are some industries that have little 

or no regulation in the United States. Are there such organizations 

in Singapore? 

Mr. ISRAEL. The parallels exist and you are free to invest. 

Chairman KANJORSKI. How about in Norway? 

Mr. SKANCKE. The situation is very much the same in Norway. 

We have had the pleasure of having a lot of American companies 

in our oil sector, for instance, over the years. 

We have some sectors where there are regulations. Those are not 

really based on the nationality but they are based, for instance, in 

the financial sector. We want to have spread ownership. We do not 

want individual shareholders to own more than 10 percent of a 

bank, either below 10 percent or above 90 percent, I think, to make 

sure it is a true mother/daughter relationship in terms of the ownership or it is spread ownership to avoid contagions in the banking 

system. 

Those are not non-discriminatory rules. They are applied equally 

to foreign and domestic investors. There are sectors where there 

are regulatory concerns and where those apply to foreign investors. 

Chairman KANJORSKI. Are there any laws that apply particularly 

to foreign investment? 

Mr. SKANCKE. No. We are a part of the European economic area 

which comprises the European Union countries, so there is a free 

movement to capital and we are not allowed to have any other 

rules than European Union countries have. 

We do not have like a CFIUS process or anything equivalent to 

that. 

Chairman KANJORSKI. In Canada? 

Mr. DENISON. Generally, Canada is a very open market for foreign ownership. It does have some regulated industries, broadcasting, telecommunications, airlines, and financial services, where 

there are restrictions on the concentration of individual ownership 

and as well in some of those cases, a restriction on cumulative foreign ownership, which generally is about 50 percent. 

Chairman KANJORSKI. I do not think your three nations are most 

representative. How about China, Russia, and some of these other 

40

nations, do they have restrictions on foreign ownership? I would 

suspect that North Korea does. 

Are there any nations in the world that have restrictions as opposed to either American, European, or other investment, sovereign 

nation fund type investments? 

Mr. SLAUGHTER. Mr. Chairman, if I may, there are many countries around the world that maintain foreign direct investment restrictions in particular industries. 

Many developing countries as part of their expansion of market 

reforms, in countries like China and India, in recent years, has 

been to pull back on many of those investment restrictions. That 

is a work in progress. Many of those developing countries still do 

maintain substantial restrictions. It is oftentimes on an industryby-industry basis. 

Chairman KANJORSKI. In your role as a professor, why would you 

not think it would be a wise thing for us to say there is a need for 

treaty arrangements to standardize and uniformize the use of capital anywhere in the world, so we are not mistreated or abused if 

we want to go into a nation, and then that nation could trade here. 

If they do not agree to that international standard, then they are 

just going to be excluded. 

Mr. SLAUGHTER. I think in principle, there are good arguments 

for multilateral discussions about investment restrictions and 

bringing those down, similar to trade barriers, multilateral trade 

discussions in the WTO. 

I think in practice, efforts have been made over the years for 

these multilateral discussions. The have been very difficult, akin to 

the difficulties we see now in the World Trade Organization. 

Chairman KANJORSKI. If we did that, would it not be highly likely that we would not have this theft of intellectual property that 

occurs, for instance, in China? 

They seem to be immune from any way of forcing them to adhere 

to standards that would be acceptable in the rest of the world. 

If they do it to intellectual property, are they not going to further 

their interest in doing other things? 

Mr. SLAUGHTER. Multilateral discussions on investment might 

compliment the efforts that are there already in our trade negotiations, so we have the TRIPS in the WTO, and when China, for example, was seated to the WTO in 2001, they signed onto the intellectual property components of the WTO in TRIPS. 

Your point is well-taken. That is a process. It is a work in 

progress. Even though in law countries like China implement those 

policies and try to enforce them, in practice, that can be difficult. 

Chairman KANJORSKI. Rather than this committee taking some 

action to legalize or change or restrict or regulate sovereign wealth 

funds’ investment in the United States, would it not be wiser for 

us to ask that a commission be established in the United States to 

determine what our best interests and national interests are, and 

then to reduce that to an international conference to determine 

whether or not we have uniformity in the world before we just 

allow this to happen? 

Mr. SLAUGHTER. I believe those sorts of discussions are ongoing 

in the United States, as Under Secretary McCormick said in his 

testimony, the President last year issued an open economy stateVerDate 0ct 09 2002 18:06 May 12, 2008 Jkt 041725 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\41725.TXT TERRIE
41

ment for the United States, reiterating our openness to international trade and investment in particular. 

I think the value of that again, especially for our American-based 

companies, one important feature of the economy that is often 

underappreciated is our key global engaged companies, they serve 

foreign markets overwhelmingly through foreign direct investment, 

through sales of their affiliates rather than through their exports 

going out of the United States. 

The most recent data we have on that is in 2005, the parents of 

U.S.-headquartered multinationals, they exported to the rest of the 

world about $450 billion in goods, but in that same year, through 

their affiliates, they sold in foreign markets almost $3 trillion 

worth of goods, through the affiliates that they have established 

through foreign direct investment. 

For the competitiveness of the U.S. economy over the longer term 

and for our companies, open investment in the rest of the world is 

very, very important. 

Chairman KANJORSKI. I think we have had our session here and 

everybody seems to have gone off to make foreign investments. 

[Laughter] 

Chairman KANJORSKI. The Chair notes that some Members may 

have additional questions for today’s witnesses, which they may 

wish to submit in writing. Without objection, the hearing record 

will remain open for 30 days for Members to submit written questions to any of today’s witnesses and to place their responses in the 

record. 

The panel is dismissed and this hearing is adjourned. 

Thank you. 

[Whereupon, at 5:36 p.m., the hearing was adjourned.] 

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A P P E N D I X

March 5, 2008

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