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ownership rights. 39 Two leading US academics have proposed what they term a minimalist solution. They argue that the political problem of how to ‘ensure that market-based capitalist regimes are protected against incursion by new mercantilist regimes’ can be resolved by ‘a simple corporate governance fix’ whereby ‘the equity of a US firm acquired by a foreign government controlled entity would lose its voting rights, but would regain them when transferred to non-state ownership.’40 Forcing Sovereign Wealth Funds to disengage from ownership responsibility is unlikely to solve one key dimension of the crisis. Indeed, as will be explored below, it is likely to exacerbate it. A defining feature of the contemporary crisis was the failure of institutional investors to take their ownership responsibilities seriously enough.

A second wider source of concern centres on the complex relationship between Sovereign Wealth Funds and financial engineers. While the International Monetary Fund has broadly welcomed Sovereign Wealth Funds, it has expressed concern that any tie up private equity, combined with the danger associated with ‘shorting’ particular stocks or sectors, could prove exceptionally destabilising. Its Director of Research has pointed out that ‘as sovereign funds grow in importance, they effectively become a significant unregulated set of intermediaries that may or

may not invest with hedge funds in the future.’ potential amplification of market manipulation.

41 42

An inevitable consequence is the Despite regulatory suspicion that

hedge funds may have colluded to put financial stocks into play, 43 there is no evidence that Sovereign Wealth Funds have either funded or directly engaged in such short-term asset management strategies. As with state-controlled corporations seeking to make strategic acquisitions, one further issue surrounds the risk of insider trading because Sovereign Wealth Funds may have access to and take advantage of price- sensitive information. Again, it is essential to emphasise that this risk is purely hypothetical. There is no evidence that any Sovereign Wealth Fund has engaged in such activity.

Paradoxically, the increasingly shrill rhetoric emanating from recipient countries reinforces the dynamic interplay between Sovereign Wealth Funds and private equity. Some funds have sought to head-off criticism of disguised motives by developing indirect conduits, most notably through a deepening of collaborative

39 Gilson and Milhaupt, above n 14 at 10; contra Skancke, above n 32 (‘We see no cause for regulations that would restrict the present investment activities of our Fund, or any regulation imposing restrictions on SWF over and above those applying to non-SWF investors’: at 6).

40

41

Gilson and Malhuapt, above n 14 at 10. S Johnson, ‘The Rise of Sovereign Wealth Funds’ (2007) Finance and Development (September) 1.

42 The Securities and Exchange Commission has flagged the asymmetrical informational issue and its application to Sovereign Wealth Funds and, more problematically, state-controlled funds with privileged access to market sensitive information; see Evidence to House Committee on Financial Services, United States Congress, Washington DC, 5 March 2008 (E Tafari).

43 The dissemination of totally unfounded rumours in March 2008 destabilised one of Britain’s most conservative lenders, HBOS. The ‘trash and cash’ operation prompted the Financial Services Authority to release a terse statement castigating the market manipulation and promising a thorough investigation; see R Sutherland et al, ‘Inside the Hunt for the City’s Bank Raiders’, The Observer (London), 23 March 2008, 22-23. As a consequence, the FSA has introduced rules necessitating greater disclosure of shorting strategies; see FSA, ‘Financial Services Authority Introduces Disclosure Regime for Significant Short Positions in Companies Undertaking Rights Issues’ (Press Release, 13 June 2008). The Securities and Exchange Commission has gone further, banning short selling in 19 major financial stocks; see SEC, Emergency Order (Release No. 58166, 15 July 2008).

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