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Barriers to Entry: Foreign Direct Investment and the Regulation of Sovereign Wealth Funds


Direct and indirect investment by Sovereign Wealth Funds in the financial services sector globally has increased exponentially since the credit crunch began last July. The investment has been accompanied by increasingly shrill rhetoric within recipient countries. This concern encompasses the governance and operational management structures adopted by diverse funds and the impact on individual corporations. More problematically, it also centres on alleged wider geo-political and economic systemic risk. The paper delineates the parameters of the debate. It evaluates the extent to which it reflects genuine pressing concerns or attempts to rewrite the rules governing financial liberalisation owing to an incremental but perceptible and perhaps irrevocable transfer of economic and political power.


The ongoing crisis in global commercial debt markets has exposed glaring deficiencies in operational and strategic risk management systems.1 Effective and efficient capital markets depend on confidence in the integrity of financial institutions, the regulatory apparatus and, ultimately, trust between market participants and financial intermediaries. Self-evidently, trust like liquidity and solvency is now in very short supply, and confidence has evaporated. The collapse of Northern Rock in the UK, Bear Stearns in the US and dubious, if not criminal, underwriting practices in both jurisdictions exacerbate a wider systemic problem.2 The decision by Washington to mount a rescue of Fannie Mae and Freddie Mac, two government-sponsored but ostensibly independent mortgage companies, leaves the US taxpayer liable to potentially billions of dollars in losses and extends the reach of the crisis dramatically. While disputation continues on what should be done, there is fundamental agreement on the severity of the crisis and its implications for regulatory design.3 The (former)

*Professor of Corporate Governance, Centre for Applied Philosophy and Public Ethics (An Australian Research Council Special Research Centre); Faculty of Business, Charles Sturt University; and Visiting Professor of Law, University of Glasgow. Tel: +61 2 6125133. Email: justin.obrien@anu.edu.au.

1 For global overviews, see Financial Stability Forum, Observations on Risk Management Practices During the Recent Market Turbulence (Basel, 6 March 2008); Financial Stability Forum, Report of Financial Stability Forum on Enhancing Market and Institutional Resilience (Basel, 12 April 2008); J Lipsky, ‘Dealing with the Financial Turmoil: Contingent Risks, Policy Challenges and the Role of the IMF’ (Speech delivered to the Peterson Institute, Washington DC, 12 March 2008); President’s Working Group on Financial Markets, Policy Statement on Financial Market Developments (Washington DC, March 2008).

2 M Philip, ‘Remarks Announcing Results of Operation Malicious Mortgage’ (Press Conference, Department of Justice, Washington DC, 19 June 2008); for UK, see J Hughes, ‘Mortgage Fraud Crackdown on Brokers’, Financial Times (London, 19 July 2008, 1. For background on lending practices, see G Dell’Ariccia, D Igan and L Laeven, ‘Credit Booms and Lending Standards: Evidence from the Sub-Prime Mortgage Market’ (International Monetary Fund, Washington, DC, WP/08/06, April 2008); C Morris, The Trillion Dollar Meltdown (2008).

3 For United States, see T Geithner, ‘The Current Financial Challenges: Policy and Regulatory Implications’ (Speech delivered at Council on Foreign Relations, New York, 6 March 2008); B Bernanke, ‘Risk Management in Financial Institutions’ (Speech delivered at Federal Reserve Bank of Chicago, Chicago, 15 May 2008); for Europe, see C McCreevy, ‘International Financial Crisis: Its


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