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Bear Stearns Seeking Sovereign Wealth Funding, Telegraph Says

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Joanne98 Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Mar-15-08 11:16 AM
Original message
Bear Stearns Seeking Sovereign Wealth Funding, Telegraph Says
Edited on Sat Mar-15-08 11:23 AM by Joanne98
By Nicholas Larkin

March 15 (Bloomberg) -- Bear Stearns Cos. is seeking long- term funding from a number of sovereign wealth funds in a bid to stay in business, the Daily Telegraph reported.

Lazard Ltd.'s Deputy Chairman Gary Parr is working with Bear Stearn's Chief Executive Officer Alan Schwartz to identify potential investors following yesterday's bailout by the Federal Reserve and JPMorgan Chase & Co., the newspaper reported today. Lazard confirmed it's advising the bank, though declined further comment, the Telegraph said.

Lazard is also approaching rival banks to sell all or part of Bear Stearns, the newspaper reported, without saying where it got the information. A full trade-sale is unlikely, though there may be interest for parts of the business such as the derivatives book, the Telegraph said, citing an unnamed senior banker with knowledge of the situation.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

Last Updated: March 15, 2008 10:02 EDT
http://www.bloomberg.com/apps/news?pid=20601087&sid=axZ...

Sovereign Wealth Funds are investment vehicles used by governments to invest their budget surpluses abroad.

Accurate figures are difficult to come by, but their global worth is estimated at between 1.5 and 2.5 trillion euros (2.3 and 3.9 trillion dollars). Morgan Stanley, an investment bank, predicted in a paper published last year that they could swell to 12 trillion dollars by 2015.

The biggest SWF is thought to be the Abu Dhabi Investment Authority, which has been operating since 1976 and is believed to be managing assets worth some 875 billion dollars.
http://www.earthtimes.org/articles/show/192351,eu%C2%A0...

Now I have a question. If the SWF's are bailing out our banks too, and they are getting equity for their bailouts. How come the US taxpaper never gets any equity for their bailout money?

If the US taxpaper just gave Bear 200 billion dollars, should'nt we get some shares in the bank. How come other countries can partially "nationalize" our banks but we can't? How come it's "communism" when we do it, but not when they do it?

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Joanne98 Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Mar-15-08 11:33 AM
Response to Original message
1. Wikipedia SWF

A sovereign wealth fund (SWF) is a state-owned fund composed of financial assets such as stocks, bonds, property or other financial instruments.

Sovereign wealth funds are entities that manage state savings for the purposes of investment. The accumulated funds may have their origin in, or may represent foreign currency deposits, gold, SDRs and IMF reserve position held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of the sovereign nations which are typically held in domestic and different reserve currencies such as the dollar, euro and yen. The names attributed to the management entities may include central banks, official investment companies, state pension funds, sovereign oil funds, among others.

There have been attempts to distinguish funds held by sovereign entities from foreign exchange reserves held by central banks. The former can be characterized as maximizing long term return, with the latter serving short term currency stabilization and liquidity management. This distinction points in the right direction, but is still unsatisfactory. Many central banks in recent years possess reserves massively in excess of needs for liquidity or foreign exchange management. Moreover it is widely believed most have diversified hugely into assets other than short term, highly liquid monetary ones, though almost no data is available however to back up this assertion. Some central banks even have begun buying equities, or derivatives of differing ilk (even if fairly safe ones, like Overnight Interest rate swaps).


History
Most of the savings of SWFs originate in accumulated foreign currency reserves. These were formerly held only in gold, as official gold reserves. But under the Bretton Woods system, the United States pegged the dollar to gold, and allowed convertibility of dollars to gold. This effectively made dollars appear as good as gold. The U.S. later abandoned the gold standard, but the dollar has remained relatively stable as a fiat currency, and it is still the most significant reserve currency. In the 1990s and early 2000s, central banks began to hold ever more vast numbers of assets in multiple currencies. Given the sizes (beginning to surpass the total outstanding of domestic bond and stock markets), these amounts have been increasingly often invested in non-traditional banking assets by entities with a specific mission, set by the public authorities.

Sovereign wealth funds as a term has been around at least since 2005. It has become increasingly popular as the spending power of global officialdom rockets upwards.

On 5 March 2008, a joint sub-committee of the US House Financial Services Committee held a hearing on the subject of Foreign Government Investment in the U.S. Economy and Financial Sector. The hearing was attended by representatives of the U.S. Department of Treasury, the Securities and Exchange Commission, the Federal Reserve Board, Norways Ministry of Finance, Temasek Holdings and the Canada Pension Plan Investment Board.<1>

Continued>>>
http://en.wikipedia.org/wiki/Sovereign_wealth_fund



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Joanne98 Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Mar-15-08 11:38 AM
Response to Original message
2. Senate Finance Committee Will Study the Taxation of Sovereign Wealth Funds

As the assets controlled by sovereign wealth funds increase dramatically, leaders of the Senate Finance Committee have asked the Joint Committee on Taxation to analyze the current federal tax rules, and underlying policy, applicable to U.S. investment by sovereign wealth funds. The report must be provided by June 16, 2008. A letter requesting the report was signed by committee chair Max Baucus and ranking member Charles Grassley.

The federal tax code has long exempted from taxation passive income from U.S. investments made by foreign governments. The dual reasons for the exemption in Section 892 are sovereign immunity and to keep the U.S. economy open to foreign investment. The United States does not exempt a foreign governments income earned from commercial activities in the U.S. market because to do so would give them a competitive advantage over non-governmental market participants. There are also issues related to the transparency of sovereign wealth funds and the political concerns that might develop without such transparency.

Specifically, the senators asked the joint committee to provide information on trends in the level and types of U.S. investment by foreign governments, in absolute terms and relative to non-governmental pools of capital, and factors contributing to these trends. Similarly, the committee wants to know about trends in the level and types of investments (U.S. and foreign) by domestic public funds, such as state pension funds and other investment funds controlled by federal or state governments. The joint committee should also report on the techniques used by sovereign wealth funds to invest in U.S. corporations, referencing Revenue Ruling 2003-97.

More broadly, the joint committee will detail the present law and background regarding the federal taxation of U.S. income derived by sovereign wealth funds, including the history of the federal income taxation of U.S. income derived by foreign governments. Also to be examined is the scope of the Section 892 exemption; as well as the application of Section 892 to recent SWF investments in U.S. financial institutions and how income from those investments would be taxed in the absence of Section 892;

The joint committee will also compare the federal tax treatment of US income derived by foreign governments with the tax treatment of U.S. investment by non-governmental
foreign residents and tax-exempt entities. The committee wants information on any filing, third party tax reporting and withholding requirements associated with U.S. income derived by foreign governments.

Finally, the joint committee will provide information on the applicability of income tax treaties or other international agreements to U.S. income derived by foreign governments, as well as any policy considerations regarding the current tax treatment of U.S. investment by foreign governments. Finally, the tax treatment in other major OECD countries of investment by foreign governments will be examined.
http://jimhamiltonblog.blogspot.com/2008/03/senate-fina...
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Joanne98 Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Mar-15-08 11:41 AM
Response to Original message
3. Taxing Sovereign Wealth Funds

My newest research project looks at the taxation of sovereign wealth funds. The paper is still a work-in-progress, but here is where I think I am headed: Under current law, Sovereign Wealth Funds are exempt from U.S. tax. Congress should consider amending Section 892 of the code to tax these state-owned investments under certain conditions, and the Code should not favor state-owned investors over private foreign investors. As with Two and Twenty, I think this is an example where the investment world has changed since Congress wrote the rules, and it is time for an update.

Overview. Under current law, based on the principle of sovereign immunity, investments by foreign state-owned funds and controlled entities are generally exempt from tax. Commercial activities in the US may be taxed, but portfolio investing is not considered a commercial activity.

By contrast, investment returns by private foreign individuals and corporations are taxed at rates as high as 30%, although this rate is often reduced by treaty agreement, or, in the case of most capital gains, treated as foreign source income and therefore exempt from U.S. tax. Encouraging foreign investment in the United States generally increases overall welfare. But there is no sound policy reason to unconditionally exempt state-owned investment funds from U.S. taxation, and it is not at all clear that we should give state-owned funds a competitive advantage that crowds out private investment. At the same time, policymakers should proceed with caution, as raising tax rates on Sovereign Wealth Funds could be perceived as a protectionist signal that could discourage both state-owned and private foreign investment.

Regulatory arbitrage between investment regulation and tax. One policy concern is how the funds want to have it both ways. On the one hand, they present themselves to the SEC and other regulators as if they are just like any other institutional investor, investing for purely commercial purposes. And thus, they argue, they should not be subject to any additional regulatory burden of disclosure, transparency, or anything else. On the other hand, for tax purposes they are treated as sovereign states and thus entitled to sovereign immunity from taxes. The net result of our regulatory scheme, then, is to give state-owned funds a competitive edge over private investment.

Continued below the fold.


What Are SWFs? Sovereign Wealth Funds are investment vehicles funded and controlled by foreign governments. The largest funds are controlled by Abu Dhabi (UAE), Saudi Arabia, Norway, Singapore and China. These funds have grown rapidly in recent years. Together these funds control perhaps $2-$3 trillion in capital, an amount which exceeds the size of the US private equity industry. Fueled by oil profits and/or trade surplus, SWFs are expected to grow to as much as $10 trillion or more over the next ten years. Historically, foreign governments would often recycle trade surplus back into the United States by buying Treasury bonds. More recently, these governments are taking a more active investment role, seeking a higher yield than what Treasury bonds offer. SWFs are the investment vehicles they use to do that. Their portfolio investments include a mix of corporate debt, governmental obligations, and corporate equity stakes.


Sovereign Wealth Funds have a complex relationship with the private equity industry. For the last 20 years or so, SWFs have often been limited partners in private equity funds. At times, SWFs make direct investments in target companies, competing with PE funds for deal flow. Most recently, SWFs have purchased direct equity stakes in private equity sponsors and other US financial institutions such as Blackstone, Citigroup, and Merrill Lynch. One way to think about SWFs is as a low-cost (and tax-subsidized) provider of capital to the PE industry.


Why This Matters. The big worry is that these sovereign wealth funds are Trojan horses which will allow foreign governments to shape and influence American enterprise in a manner inconsistent with our economic and national security interests. Even if funds are currently acting in a manner consistent with other, non-governmental institutional investors--and by most accounts they are--there's no guarantee that they will continue to do so in the future in circumstances where the financial interests of the fund and the political interests of the government that controls the fund diverge. Giving foreign governments partial ownership of companies like Citigroup and Merrill Lynch gives those countries new leverage in foreign policy discussions; sudden withdrawal of foreign state-owned investment could harm the financial services sector of the U.S. economy. Of course, one can also view these investments in a more positive light; China's investment in Blackstone might help it learn to modernize its own financial infrastructure, a development which would benefit the U.S. and China alike.

How They Are Taxed Currently. Section 892 of the Internal Revenue Code exempts foreign sovereigns from income tax on their passive investment activities. Foreign individuals and corporations, by contrast, pay taxes on most passive investment activities at rates ranging from 0% to 30%, depending on treaty agreements and the nature of the investment. With the exception of certain real estate investments, foreign investors generally don't pay tax on capital gains from portfolio investments. The tax code thus has the unintended effect of subsidizing state-owned capital over private capital, particularly on debt investments.


What To Do About It. The policy objective is to tax Sovereign Wealth Funds as we tax private foreign investors, and perhaps only on the condition that they are investing in a manner consistent with commercial portfolio investment.

The most far-reaching option would be to raise the baseline tax rate on all returns from sovereign wealth portfolio investments, including capital gains, at a 30% rate. Like the flat 30% rate on passive "FDAP" income to foreign individuals and corporations, this tax rate would be reduced by treaty agreement. This approach would raise significant amounts of tax revenue, and it would give the U.S. a new policy lever to achieve nontax objectives, such as encouraging SWFs to comply with best practices of transparency, disclosure, and accountability. Because capital gains cannot be withheld at a US source, however, this approach would be very difficult to administer.

An intermediate option would simply put SWFs on equal footing with other foreign investors. As such, most capital gains would be exempt from tax, but passive FDAP income (interest, dividends, etc.) would be taxed at a 30% rate (withheld at the source), unless a lower rate were negotiated by treaty. This option would be easier to administer and enforce, and it would still help achieve some of the nontax policy objectives noted above.

I'll discuss other reform alternatives--and the many complexities of the proposals--in future postings.

Prior Related Research:

http://www.theconglomerate.org/2008/03/taxing-sovereig....
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Hannah Bell Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Mar-15-08 11:45 AM
Response to Reply #3
4. Am I understaning this right? SWF is a stash of "gov't" money
managed/invested by a "private" entity?
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Joanne98 Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Mar-15-08 12:14 PM
Response to Reply #4
5. Here...
Edited on Sat Mar-15-08 12:15 PM by Joanne98
Sovereign Wealth Funds are investment vehicles used by governments to invest their budget surpluses abroad.

A sovereign wealth fund (SWF) is a state-owned fund composed of financial assets such as stocks, bonds, property or other financial instruments.

Sovereign wealth funds are entities that manage state savings for the purposes of investment. The accumulated funds may have their origin in, or may represent foreign currency deposits, gold, SDRs and IMF reserve position held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of the sovereign nations which are typically held in domestic and different reserve currencies such as the dollar, euro and yen. The names attributed to the management entities may include central banks, official investment companies, state pension funds, sovereign oil funds, among others.

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