The U.S. Would Benefit From a Sovereign Wealth Fund

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(Bloomberg Opinion) -- To support businesses and individuals through the coronavirus lockdown, the U.S. could use a sovereign wealth fund, and there’s no better time to get started.   

A sovereign wealth fund is essentially an investment portfolio owned by the government. Scores of countries, and even some U.S. states, have one. They’re used for various purposes, such as stabilizing government revenue or saving for the future. Norway’s sovereign wealth fund, which is technically two separate funds, is the largest and best known, with assets of roughly $1.1 trillion.  

For the U.S. government, a sovereign wealth fund would ease two persistent problems that have been highlighted by Covid-19. The first is that big business occasionally needs help through a crisis. Indeed, corporate bailouts have become a regular feature of crisis management in the U.S. Just in the last two decades, airlines needed rescuing in 2001 after the Sept. 11 terrorist attacks. Then came banks and carmakers during the 2008 financial crisis. Now, broad swaths of the U.S. economy are teetering, including travel, leisure, transportation and energy.

Bailouts raise some thorny issues, however. For starters, big corporations aren’t the only ones who need help during crises, but they routinely receive most of the money. Salil Mehta ran the analytics department for the Troubled Asset Relief Program, or TARP, the 2008 bailout of the financial sector. “By dollar amount, it was a 3-to-1 ratio between Wall Street and Main Street,” Mehta said in an e-mail. “Between monetary and fiscal stimulus, the coronavirus bailouts are also likely to be in the neighborhood of 3- or even 4-to-1.”  

Small businesses and individuals are just as deserving, of course, and perhaps more so. Their taxes help pay for bailouts. They also have fewer resources to prepare for downturns. Big companies raked in record profits during the just-ended boom, while many workers struggled to eke out a living.

There’s also the issue of moral hazard. It’s one thing to help companies that stumble through no fault of their own; it’s yet another to rescue those that flout risk. But it’s not always easy to tell the difference. Many companies distributed profits to shareholders through share buybacks in recent years. Some of them are now short of cash. While they couldn’t have seen the lockdown coming, should they have retained more of their profits for a rainy day, and are they now less deserving of help?  

And let’s not forget the opportunity cost. Bailouts have generally been poor investments, particularly given the risk around distressed companies. For example, the U.S. Treasury invested $426 billion in TARP and ultimately recovered $441 billion when the program ended in December 2014, generating a return of less than 1% a year. That money would have been better invested almost anywhere else. Even the S&P 500 Financials Index — the epicenter of the financial crisis — produced an annual return of 5.3% a year during the period, including dividends. 

A sovereign wealth fund would address many of those issues. Like any private investor, the fund would buy the equity or debt of struggling companies at deeply discounted prices, handing the losses to owners or creditors of those companies and imposing the same onerous terms one would encounter in private-sector deals. That would remove questions about whether and which companies deserve to be bailed out because investment would be motivated by profit rather than charity. It would also allow the government, and all Americans by extension, to fully participate in the gains when companies turn around. 

Which raises the second problem highlighted by coronavirus: Working Americans bear the brunt of crises. A sovereign wealth fund could help with that, too, by distributing some of its profits to individuals and small businesses that are hardest hit during downturns. Think of it as a national Robin Hood, extracting value from big business and passing it on to the little guy. 

The benefits of a sovereign wealth fund would endure well beyond the occasional crisis. The fund could retain the equity stakes it acquires during downturns and make additional investments as opportunities arise. If such a fund had been created two decades ago, it would already own a broad assortment of U.S. companies, not unlike an index fund. The dividends it generates could be used for education or research or even a universal basic income.  

All of this raises some obvious questions, but none that ought to be obstacles. One is funding. The U.S. will spend more than enough on bailouts during this crisis to seed a sovereign wealth fund. That money could be invested by a newly created fund rather than handed directly to companies. The fund could also be seeded with new debt. With interest rates near zero, it should have little trouble generating a return higher than the cost of borrowing if managed competently. 

That’s another question — can the government run such a fund? Working for a federal sovereign wealth fund would be prestigious and well-paying, so it shouldn’t have any trouble attracting talent. And rather than starting over with each crisis, it would have the advantage of accumulating institutional expertise over time. The fund’s prestige would also attach to companies in which it invests, which may translate into better deals and terms relative to private-sector investors. Internal controls would have to be put in place to thwart corruption or self-dealing, but those risks are present any time the government doles out money.

Recent efforts to provide emergency aid haven’t exactly gone according to plan. There’s a better way to help businesses and individuals through a downturn than ad hoc bailouts. Like all crises, this one presents opportunities for bold changes. One of them should be a federal sovereign wealth fund. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.

©2020 Bloomberg L.P.

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