The Government Bailout of AIG and Sovereign Wealth Funds
J. Robert Brown | Wednesday, September 17, 2008 at 10:00AM As we have been discussing, Secretary of the Treasury Paulson has spearheaded the government's effective acquisition of AIG, the largest insurance company in the world. The deal involved an $85 billion loan and the acquisition by the federal government in return for a 79.9% ownership interest in the form of warrants called equity participation notes.
We got to thinking whether the acquisition effectively meant that the US government has becoming a sovereign wealth fund, those pools of money maintained by foreign governments that have caused so much teeth gnashing in the United States. In that regard, we note that Paulson, the negotiator of the AIG buyout (along with his Fed counterpart) has been pushing sovereign wealth funds to adhere to a series of voluntary principles. Thus, under Paulson's tutelage, Treasury has called for adherence to a number of principles, including:
- Greater information disclosure by SWFs, in areas such as purpose, investment objectives, institutional arrangements, and financial information – particularly asset allocation, benchmarks, and rates of return over appropriate historical periods – can help reduce uncertainty in financial markets and build trust in recipient countries.
Treasury has also called for "strong governance structures" on the part of these investors. Finally, the Department has indicated the need for transparency and called on the funds to comply "with all applicable regulatory and disclosure requirements of the countries in which they invest."
While we have only seen the news reports of the acquisition of AIG, we have seen nothing indicating that Paulson has put in place a system that will ensure proper governance with respect to the government's interests or adequate transparency, including improved disclosure. We await indications that Paulson intends to comply with the standards that he has urged on other governments.
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