Guest Blog: Paul Rose

We’ve invited Paul Rose to contribute a guest post for the blog, as Ashby is taking a few days vacation. Paul teaches Business Associations, Comparative Corporate Law, Corporate Finance and Securities Regulation at the Ohio State University’s Moritz College of Law. His scholarship focuses on issues relating to sovereign wealth funds, corporate governance and securities regulation. Without further ado, over to Paul!

Thanks very much to Ashby for inviting me to post a few thoughts. I tend to approach SWF issues by considering the transactional and corporate governance issues presented by SWF investment, so I was very interested to see on Wednesday a Financial Times report that the Qatar Investment Authority had expressed interest in purchasing a portion of the U.S. Treasury’s 27% stake in Citigroup. The FT’s sources warn, however, that “any deal would depend on the price, market conditions and the government’s willingness to sell Citi shares to a sovereign wealth fund at a discount.”

A potential deal between the Treasury and the QIA would be very interesting for many reasons, but I’d like to focus on just two issues in the deal that would be particularly compelling:

  1. The first issue is that the potential deal is not a primary market transaction like Citi’s sales of stock to other SWFS, including the KIA, GIC and ADIA. Here we have a secondary transaction between two sovereign entities, which raises a second layer of the kind of political issues that have hung over primary SWF transactions. So, instead of simply wondering whether we should expect a smooth Committee on Foreign Investment in the Unites States (CFIUS) review of a QIA investment in Citi, we might also wonder how it is that Treasury is going to deal with another sovereign entity, and how Treasury, seated at the head of the CFIUS table, is going to manage a review of a transaction in which it is a participant. To at least partially address these concerns, a senior Treasury official states that “We have to outsource the process to Morgan Stanley so the sale isn’t tainted.” That is probably the best Treasury can do in such a situation, although Treasury (and by extension, the Obama Administration) will likely come under criticism no matter how the deal comes out; it is no simple thing to please political constituents, market counterparties, and foreign governments at once.
  2. A second interesting aspect to the transaction is that the sale would involve the Treasury’s common stock holdings, rather than the sale of its preferred securities. With the SWF investments in US financial firms in late 2007 and early 2008, SWFs typically invested through purchases of preferred securities rather than common stock. SWFs and the banks had a number of good reasons for transacting through preferred stock. Primarily, investments through non-voting preferred stock helped alleviate the concern that SWFs would use share voting power to influence the banks for political or other non-economic purposes. From a governance perspective, this reduces risk for the bank and its other shareholders and stakeholders. The passivity commitment created by the preferred stock investment also helps focus the SWF on economic concerns, and so may also insulate the SWF from domestic pressures. An investment in common stock, on the other hand, may increase transaction costs by inviting more stringent CFIUS review, and potentially increases firm and SWF governance risks that would otherwise be mitigated in a preferred stock investment.

I look forward to seeing how this all plays out. A Treasury-QIA deal would undoubtedly provide valuable lessons on secondary market transactions between sovereign investors.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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