Sovereign funds to the rescue, maybe

Ben Bernanke once spoke of dropping money from helicopters, if necessary, to save an economy in distress. The chairman of the Federal Reserve probably did not envisage that choppers bearing the insignia of oil-rich Gulf states and cash-rich Asian countries would hover over Wall Street. Yet just such a squadron has flown to the rescue of capitalism's finest.

Last week, the governments of Singapore, Kuwait and South Korea provided much of a $21 billion lifeline to Citigroup and Merrill Lynch, two banks that have lost fortunes in America's credit crisis.

It was not the first time either had tapped the surplus savings of developing countries, known as sovereign-wealth funds, that have proliferated in recent years thanks to bumper oil prices and surging Asian exports. Since the subprime-mortgage fiasco unfolded last year, such funds have gambled almost $69 billion on recapitalizing the rich world's biggest investment banks.

With as much as $2.9 trillion to invest, the funds' horizons go beyond finance to telecoms and technology companies, casino operators, even aerospace. But it is in banking where they have arrived most spectacularly. They have deftly played the role of savior just when Western banks have been exposed as the Achilles heel of the global financial system.

At first sight this is proof that capitalism works. Money is flowing from countries with excess savings to those that need it. Rather than blowing their reserves on gargantuan schemes, Arab and Asian governments are investing it, relatively professionally. But there are still two sets of concerns.

The first has to do with the shortcomings of sovereign-wealth funds. The second, bigger, problem is the backlash they will surely provoke from protectionists and nationalists. Already, Nicolas Sarkozy, the French president, has promised to protect innocent French managers from the "extremely aggressive" sovereign funds (even though none has shown much interest in his country).

Although sovereign-wealth funds hold a bare 2 percent of the assets traded throughout the world, they are growing fast, and are at least as big as the global hedge-fund industry. But, unlike hedge funds, sovereign-wealth funds are not necessarily driven by the pressures of profit and loss. With a few exceptions (like Norway's), most do not even bother to reveal what their goals are -- let alone their investments.

Last week, Hillary Clinton said: "We need to have a lot more control over what they [sovereign-wealth funds] do and how they do it."

In politics, appeals to fear usually sell better than those to reason. But the hypocrisy of erecting barriers to foreign investment while demanding open access to developing markets is self-evident.

Until East and West even out the surpluses and deficits in their economies, sovereign-wealth funds will not go away. In the meantime, what should be done to keep the rod of protectionism off their -- and the world's -- backs?

For a start, more transparency would go a long way toward easing concerns: An annual report that discloses the fund's motives and main holdings would be a start. Investments through third parties, such as hedge funds, help too, providing an additional layer of protection against the misdeeds of rogues. Investing across indexes provides more diversification anyway.

At a time when Western governments have at last learned to let the private sector run banks (however lousily it is sometimes done), it is far from ideal that state-owned funds from emerging economies should be buying stakes in them, even minority ones.