New in Print: Rose on Foreign Investment and National Security Act of 2007 – An Assessment of its impact on sovereign wealth funds and state-owned enterprise

The abstract from my recently published article:

In 2007, the U.S. Congress passed the Foreign Investment in the United States Act (FINSA), the most recent in a series of calibrations to a basic regulatory framework that is now nearly 40 years old. FINSA has particularly significant effects on investment by sovereign wealth funds (SWFs) and state-owned enterprises (SOEs). Indeed, FINSA is properly understood as a response to SWF and SOE investment activity, and is designed to provide a framework in which U.S. regulators can weigh the particular risks presented with investment by state-controlled entities. Although in general FINSA has performed ably and as intended in its first five years of implementation, balancing the risks associated with SOE and SWF investment in a competitively neutral way has historically been a challenge, and now may be even more challenging after the passage of FINSA. The chapter outlines several difficulties for state-controlled firms in interpreting and complying with FINSA, and argues that regulators could make regulatory compliance more simple and predictable for these firms by creating reliable signposts that will help guide firms through the regulatory straits imposed by the legislation. At the same time, the need for an experienced pilot – usually in the form of sophisticated legal counsel – is more important than ever. However, the need for such assistance functions as a kind of tax on deals involving SOEs and SWFs, and, in some cases, these state-controlled entities may determine that the benefits are not worth the risks and costs, and so will seek to invest elsewhere.


The Article appears in the Research Handbook on Sovereign Wealth Funds and International Investment Law (edited by Fabio Bassan), and is available for purchase from Elgar, Amazon, and Barnes & Noble.  You can preview the book here.

Meng: Sovereign wealth fund investments and policy implications – a survey


This article addresses a research gap by providing a comprehensive survey of SWFs as international institutional investors and clarifying the definition of SWFs. By doing so, this paper aims to provide a balanced set of policy prescriptions towards SWFs.

This paper conducted a comprehensive survey of world major 24 SWFs with assets under management of 500 million USD between 2008 and 2012. Key dimensions include objectives, funding and governance, asset allocation and investment activities.

SWFs are planning institutions with management direction. They present great variety in terms of funding mechanism, governance, asset allocation and investment strategies, but they in essence pursue financial returns. It is not evident that SWFs are primarily motivated by political objectives and distinctively different from other international institutional investors. Difficulty in interpreting SWFs should not lead to the imposition of constraints on SWFs.

More in-depth and dynamic analysis of SWFs requires better data access. For such a purpose, case studies and longitudinal studies should be adopted, with particular emphasis on comparing SWFs with different types of financial institutional investors as well as typical SOEs and multinational enterprises.

This study is trying to demystify SWFs based on a comprehensive survey. As a result, this article may assist investors, policy makers and regulators to gain a better understanding of SWFs, their investment behaviours and rationales behind.

The contribution of this paper is that we provide a deeper understanding of the strategy and empirics of SWF operations. First, after a clearer definition of the phenomenon of SWFs, we can explain their investment strategies and behaviour as firms. Second, we can derive rational policy prescriptions and third we can propose a research agenda that will further deepen our understanding of SWFs and the appropriate policy prescriptions.


Available for download here.

Mehrpouya: Instituting a transnational accountability regime – The case of Sovereign Wealth Funds and “GAPP”


This paper analyses the development of a transnational accountability regime, – the Generally Accepted Principles and Practices (GAPP), introduced in 2008 for sovereign wealth funds. Facilitated by the International Monetary Fund, the regime aimed to improve the transparency, governance and accountability of these government-owned investment funds that originate primarily from the Middle East and Asia. I focus here on the struggles leading to the establishment of the boundaries of the GAPP accountability regime by diagnosing the accountability problem, determining the providers and the imagined users of the accounts and defining the appropriate course of action. I then analyse the struggles involved in negotiating the process and technologies used to establish the accountability relationship including the role of standards in accounting, audit and risk management, as well as transparency and compliance pressures. In each case I identify the different ideas or templates that emerged during the negotiations and how consensus was achieved through careful steering by a core coalition comprising the US Treasury and the largest, most legitimate funds. I highlight the need to go beyond typical fault lines in debates surrounding the origins of global governance regimes (e.g. local vs. global, western vs. non-western, core vs. peripheral) by focusing on emerging coalitions of local/global and western/non-western actors that increasingly drive such regimes. I show how the disproportionate representation of financial actors in such coalitions leads to less attention to questions of public accountability, and instead focusing such regimes on financial accountability. I further elaborate on the implications of the fall-back to transparency in transnational accountability regimes as a last resort and the types of resistance emerging against it.


Available for download here.

Catching Up on Libya’s Case Against Goldman & SocGen

Note to readers: as a new feature to the blog, student researchers at the Moritz College of Law will periodically write and comment on important cases and legislation involving public investors.  This first piece comes from Sheri Kindel, research assistant, rising 3L, and incoming president of the Business Law Society.


The Libyan Investment Authority, a $60bn fund is suing Goldman Sachs and Societe Generale in the high court in London for profiting on the LIA’s investment losses. Goldman Sachs Group Inc., according to the Libyan Investment Authority, exploited the sovereign wealth fund’s inexperience in 2008 when it sold the LIA risky derivatives and caused investment losses of more than $1bn. LIA claims its employees were lavished with wild nights abroad, including heavy drinking and girls in Morocco, to induce trades they did not fully understand. Goldman argues that the trained staff knew the risks of the trade as they are “highly experienced banking professionals.”

The fund argues that Goldman made approximately $350m in upfront profits, which is substantial and unusually high for deals involving the LIA. When Goldman refused to admit or deny the profits, Judge Vivian Rose in the high court’s chancery division ordered Goldman to disclose how much it made on the deal and provide documentation proving the profits and how they were calculated. Goldman also effectively lost 98% of the LIA’s investment in option contracts involving multiple currencies and six stocks.

In 2010, Goldman offered Libya various investment and stock options in an attempt to fix the relationship and make up for these losses. Additional offers of preferred shares, unsecured debt, investments in credit default swaps, and a special purpose vehicle in the Cayman Islands were also proposed in meetings, but no deal was ever formed.

The LIA also claims that Societe Generale, France’s second largest bank, lost half of the $1.8bn entrusted to it by the fund when it smoothed over trades in 2007-2009. According to the LIA, SocGen paid approximately $58m to a Panama-based company named Leinada to secure investments. The payments to the company, owned by Walid Giahmi, a friend of Muammar Qaddafi’s son, were claimed to be for advisory services, but no advisory fees were reported. The LIA claims the payments were bribes to influence the LIA’s decision to enter into certain trades. However, SocGen called the lawsuit “groundless.”

Under Libyan ruler Muammar Qadaffi, the LIA was established to invest Libya’s oil wealth in 2006 and grew to be Africa’s second- largest sovereign wealth fund in 2011. In the same year, civil war erupted in Libya and Qadaffi refused to step down. The U.S. government seized approximately $37m in Libyan funds and the Department of the Treasury blocked Qadaffi’s holdings in the United States. Swiss and British governments also froze Qadaffi’s assets, loosening his control in Libya until he was deposed and killed in 2011.

Enyo Law, a London-based firm acting on behalf of the LIA in London court, recently walked away from the Goldman case, causing a major setback and questions as to whether the case will continue. No new lawyers have yet been appointed, but the Libyan fund hopes to set a trial for summer 2016. The LIA claims it will pursue the litigations against Goldman Sachs and is finalizing arrangements for a new firm to take on the case. However, Goldman continues to dismiss the claim as a “paradigm of buyer’s remorse” brought about by the global financial crisis in 2008.

The LIA seeks to have the Societe Generale trades voided to recover the money paid to Leinada and to be awarded damages for the alleged fraud. SocGen underwent a thorough investigation by Swiss, British, and American regulators, but the investigations were closed when no corruption was found. The SEC is currently investigating SocGen.

Meanwhile, the LIA has hired law firms and advisers to handle an internal investigation into corruption. It will also undergo a restructuring plan in which $11bn of its assets will be managed by external companies. In the U.S., based on an SEC investigation of payments to sovereign wealth funds, the U.S. Justice Department is investigating financial firms, including Goldman Sachs, which sought business from LIA to ensure proper payments were made to secure investments.

If these cases go further, it will be interesting to see how the court responds. A decision in favor of LIA might cause other companies to bring suit of lost investments or the legislature to impose additional regulation to ensure acceptance of risks or knowledge of trades. Alternatively, payment of LIA’s investments could significantly impact the operations of Goldman Sachs and Societe Generale in the future.

The cases are: The Libyan Investment Authority v. Goldman Sachs International, case no. 14-310, High Court of Justice, Chancery Division and The Libyan Investment Authority v Societe Generale SA, High Court of Justice, Queen’s Bench Division Commercial Court, 14-260.

Elyakova, Morozov & Fedorova: The Mechanisms of Effective Use of State Sovereign Funds for the Purpose of Investment Development of Regions


The relevance of development and improvement of sovereign wealth funds of a state consists in the necessity of defining strategy and development of mechanisms of effective increase and application of money of National Wealth Fund aimed not only at maintenance of capital and achievement of long-term profitability, but also at provision of steady growth of economy of the Russian Federation. The goal of improvement of Wealth Fund of Russia is development of strategy and mechanisms for effective increase and use of its funds. The present study suggests the author’s mechanisms for increase and application of National Wealth Fund of Russia with use of experience of leading sovereign investment funds of foreign states and with due consideration of current Russian economic conditions. The realization of mechanism of suggested strategy for effective increase and use of money of National Wealth Fund of the Russian Federation implies gradual transition from today’s conservative strategy characterized with the “below average” level of risk to average- and high-risk strategy with expansion of areas of using funds.


Available for download here.

Cieślik: African Sovereign Wealth Funds – Facts and Figures


This article discusses the features of sovereign wealth funds (SWFs) created from accumulated foreign reserves in African countries that export commodities. The author describes the investment targets of African SWFs, using empirical data and a research method based on a detailed analysis of available information on the investment activities of SWFs in the last 20 years.

Conclusions from the analysis indicate that, due to the poor transparency of African SWFs,
gathering the necessary statistics, general information and literature on the institutional arrangements and business strategies involved still remains a challenge.

The study uses press articles and reports that are compared against other sources of information in order to increase credibility. Due to the small size of African SWFs, their role in stimulating the economic development of the continent is limited by many institutional, economic and political factors.

African SWFs are not a homogeneous group. They can be beneficial for nations if they are used and structured properly in order to take advantage of their full potential. This implies that most of the African SWFs would have to expand their stabilization goals and move gradually to instruments intended for achieving economic development, intergenerational transfers of resources, financial sector stabilization, and promotion of regional integration.


Available for download here.

Fretwell & Regan: Divided Lands – State vs. Federal Management in the West


There is a great divide in the United States. Land in the East is mostly privately owned, while nearly half of the land in the West is owned by the federal government. In recent years, several western states have passed, introduced, or considered resolutions demanding that the federal government transfer much of this land to state ownership.1 These efforts are motivated by local concerns over federal land management, including restrictions on natural resource development, poor land stewardship, limitations on access, and low financial returns.

The resolutions reflect a sentiment in many western states that state control will result in better public land management. To date, however, there has been little research comparing the costs of state and federal land management. Most existing studies assume that the costs of federal land management would be the same under state management and do not consider the different management goals, regulatory requirements, and incentive structures that govern state and federal lands.

The purpose of this report is to compare state and federal land management in the West. In particular, we examine the revenues and expenditures associated with federal land management and compare them with state trust land management in four western states: Montana, Idaho, New Mexico, and Arizona. These states, which encompass a wide range of landscapes, natural resources, and land management agencies, allow for a robust comparison.

Our analysis will help explain why revenues and expenditures may differ between state and federal land agencies and explore some of the implications of transferring federal lands to the states. We find that state trust agencies produce far greater financial returns from land management than federal land agencies. In fact, the federal government often loses money managing valuable natural resources. States, on the other hand, consistently generate significant amounts of revenue from state trust lands. On average, states earn more revenue per dollar spent than the federal government for each of the natural resources we examined, including timber, grazing, minerals, and recreation.


Available for download here.

Hassler, Krusell, Shifa & Spiro: Sovereign wealth funds and spending constraints in resource rich developing countries – the case of Uganda


A large increase in government spending following resource discoveries often entails political risks, inefficient investments and increased volatility. Setting up a sovereign wealth fund with a clear spending constraint may decrease these risks. On the other hand, in a developing economy with limited access to international borrowing, such a spending constraint may lower welfare by reducing domestic capital accumulation and hindering consumption increases for the currently poor. These two contradicting considerations pose a dilemma for policy makers in deciding whether to set up a sovereign wealth fund. Using Uganda’s recent oil discovery as a case study, this paper presents a quantitative macroeconomic analysis and examines the potential loss of constraining spending through a sovereign wealth fund with a simple spending rule. We find that the loss is relatively low suggesting that such a spending structure seems well warranted.


Available for download here.

Bataa, Izzeldin & Osborn: Changes in the Global Oil Market


Using a new iterative algorithm that tests for possible breaks in the coefficients and residual variances of recursively identified structural equations, we examine changes in the parameters of the oil market model of Kilian (2009). Our analysis reveals breaks in the coefficients of the oil production and price equations, together with volatility shifts in all equations. In particular, the medium term response of production to aggregate demand shocks increases after 1980 and the price response to supply shocks is more persistent from the mid-1990s. All variables evidence changes in the relative contributions of individual shocks to their forecast error variances.


Available for download here.

Cole: Learning and the Effectiveness of Central Bank Forward Guidance


The unconventional monetary policy of forward guidance operates through the management of expectations about future paths of interest rates. This paper examines the link between expectations formation and the effectiveness of forward guidance. A standard New Keynesian model is extended to include forward guidance shocks in the monetary policy rule. Agents form expectations about future macroeconomic variables via either the standard rational expectations hypothesis or a more plausible theory of expectations formation called adaptive learning. The results show the efficacy of forward guidance depends on the manner in which agents form their expectations. In response to forward guidance, the paths of the output gap and inflation under adaptive learning overshoot and undershoot those implied by rational expectations. The adaptive learning impulse responses of the endogenous variables to a forward guidance shock exhibit more persistence before and after the forward guidance shock has been realized upon the economy. During an economic crisis (e.g. a recession), the assumption of rational expectations overstates the effects of forward guidance relative to adaptive learning. Specifically, the output gap is higher under rational expectations than adaptive learning. Thus, if monetary policy is based on a model with rational expectations, which is the standard assumption in the macroeconomic literature, the results of forward guidance could be potentially misleading.


Available for download here.