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February 22, 2008
Sovereign Wealth Funds - ERM & OpRisk Caveats
The US$20 billion in fresh raised by distressed financial institutions post Credit Crunch, with plenty from Sovereign Wealth Funds (SWF), has generated some interesting Operational Risk challenges for the institutions involved.
Executive Culture
"Revolutionaries do not make revolutions. The revolutionaries are those who know when power is lying in the street and then they can pick it up." Hannah Arendt
Although SWFs are being billed to the U.S. Treasury and Congress as "passive", the second law of thermodynamics tells us that the walls barring influence by SWFs will naturally decay over time. For those with short memories, it was only back in 2002 when Slate and others were profiling Sandy Weill´s "cage match" against such Chinese walls. (N.B. Weill is now amongst the latest sources of fresh capital for Citi. Who says history can´t repeat itself?) These walls between SWFs and the executive suite could come down rather quickly.
SWF Home Turf: Culture Drag / Lift
"We control fifty percent of a relationship. We influence one hundred percent of it." Barbara Colorose
How you read this quote depends on where you sit.
As suggested above, I believe that it is reasonable to expect that SWFs will at least influence the operations of the Institutions on their home turf (especially if the bailouts lead to to strategic alliances and joint ventures with these SWFs). This influence can be positive or negative. Politics aside, there are clear OpRisk hotspots: from employee relations; to product design and client selection; systems continuity, and process management.
Here it is worthwhile referencing the 2007 Globalization Index Rankings prepared by AT Kearney for Foreign Policy (higher numbers denote less economic integration, personal contact, technological connectivity, and political engagement, and the USA is currently ranked 7th):
Bear Stearns China (66)
Citi Abu Dhabi (NR)
Kuwait (NR)
Saudi Arabia (52)
Singapore (1)
Merrill Lynch Japan (28)
Kuwait (NR)
Singapore (1)
South Korea (34)
Morgan Stanley China (66)
UBS Oman (NR)
Singapore (1)
Deal Flow
www.slate.com/id/2074372
http://www.foreignpolicy.com/story/cms.php?story_id=4030#rankings
"No science is immune to the infection of politics and the corruption of power." Jacob Bronowski
Apart from providing much needed capital, SWFs certainly create new opportunities for deal flow. We see plenty of positive statements made by firms to the media about these opportunities already. But is all deal flow created equal, and how will SWFs alter firm strategy – especially concerning investment of an institution´s resources?
The country rankings on Transparency International´s Corruption Perception Index (higher numbers denote more perceived corruption, and the USA is currently ranked 20th) suggest that there are different exposures to corruption (fraud) risk in deal flow:
Bear Stearns China (72)
Citi Abu Dhabi (34)
Kuwait (60)
Saudi Arabia (79)
Singapore (4)
Merrill Lynch Japan (17)
Kuwait (60)
Singapore (4)
South Korea (43)
Morgan Stanley China (72)
UBS Oman (53)
Singapore (4)
Corporate Travel Security
It will be necessary for Moses to go to the Mountain, and for executives to pay homage to their new SWF investors.
Some countries are more secure than others. Here is a ranking of countries based on the likelihood of a "macro–terrorism" (car bomb or bigger) attack occurring, provided by Risk Management Solutions (RMS). Again a higher number is an increased likelihood.
Bear Stearns China (30)
Citi Abu Dhabi (76)
Kuwait (72)
Saudi Arabia (13)
Singapore (50)
Merrill Lynch Japan (53)
Kuwait (60)
Singapore (50)
South Korea (64)
Morgan Stanley China (30)
UBS Oman (81)
Singapore (50)
Patronage & Political Risks
"I would argue that one of the issues which the public should be much more emphatic about with all politicians... is patronage, appointing people to high positions because they supported your campaign or helped you raise money." John Hickenlooper
http://www.transparency.org/policy_research/surveys_indices/cpi/2007
As a coda: SWFs are managed by professionals appointed by national rulers. They are therefore subject to changes of political fortune. One can imagine a range of scenarios that would threaten the constituencies that support various SWF managers.
Posted by jtunkey at February 22, 2008 05:30 AM
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