Larrry Summers Wants IMF To Behave like Hedge Fund

[C Ruiz <Cseniornyc@xxxxxxx>]

Why just help the hedges funds? Better to   become one and enjoy the
advantages of the dealing house.
Summers Wants IMF  to Run $500 Bln Hedge Fund: Andy Mukherjee March 28
(Bloomberg) -- Larry Summers  has a radical idea.

The way I interpret it, the former U.S. treasury  secretary and the outgoing
president of Harvard University, is suggesting that  the International
Monetary Fund should stop being just a lender of last resort  and become the world's
biggest hedge fund administrator.

It's no secret  that developing nations -- especially those in Asia -- have
foreign-exchange  reserves far in excess of what may be required to repay
overseas creditors and  dispel currency speculation.

What if, as Summers asked in a speech in  Mumbai last week, they could turn
over a part of this surplus -- he used a  figure of $500 billion -- to a
``facility'' managed by the IMF and the World  Bank?

With professional managers going to work on this pool of funds, it  may be
possible to generate at least a 6 percent real return on investment, as  opposed
to nil now, Summers said.

Most of the profits can be distributed  to the investors, with the fund
retaining 1 percent of the capital as a  management fee -- hedge funds charge their
investors between 1 percent and 2  percent. This $5 billion can be ploughed
back into the global economy annually  as public goods, grants or debt relief.

``Perhaps it is time for the IMF  and World Bank to think about how they can
contribute to deploying the funds of  major emerging markets rather than
lending to major emerging markets,'' Summers  said.

The significance of Summers's proposal lies in what it can do to  alleviate
global poverty.

Poor People's Hedge Fund

Unless their  governments divert the gains to unproductive state spending,
poor people in  developing economies will be the ultimate beneficiaries of a
pool of assets that  is two-thirds bigger than what CITCO Fund Services, the
world's biggest hedge-  fund administrator, has under its supervision. Can there
be a more ambitious  plan to make financial markets work for the needy?

There are 1 billion  people in developing countries who earn less than $1 a
day. Imagine the welfare  gain if each of them received a $30 annuity in real,
inflation-adjusted terms.

The $500 billion in capital required to produce this return already  exists
with the developing nations, which hold $1.5 trillion in surplus foreign
exchange reserves. All that's needed is someone who has the moral authority to
unlock just a third of this treasure chest.

And who else can fill that  role if not the IMF?

The case for the IMF's involvement is quite  clear-cut.

According to a rule of thumb named after Pablo Guidotti, a  former treasury
secretary of Argentina, and Alan Greenspan, the recently retired  U.S. Federal
Reserve chairman, countries should hold reserves equal to foreign  liabilities
coming due within a year.

Excess Reserves

Between  1990 and 1996, emerging-market economies were following the
Guidotti-Greenspan  rule quite closely. However, after the Asian financial crisis of
1997-98, they  became much more conservative. In the third quarter of 2005,
developing  countries had foreign exchange reserves that exceeded their
short-term overseas  borrowings by as much as $1.5 trillion.

This money, as Summers noted,  probably is earning a zero real return
measured in domestic terms.

``If  the wealth tied up in reserves were invested either domestically in
infrastructure or in a fully diversified long- term way in global capital
markets, 6 percent would not be an ambitious estimate of what could be earned,''
Summers said.

``Indeed the average large higher education U.S. endowment  fund has earned a
real return approaching 10 percent over the last decade or  two,'' Summers
elaborated. ``It is natural to ask whether the excess national  reserves of
emerging markets should not be invested with an aspiration in this  direction.''

Singapore, Korea, China

The idea isn't entirely  new. Government of Singapore Investment Corp., which
has managed the Asian  country's reserves for 25 years, has a wide range of
assets, including equities,  real estate, commodities and private equity.

In July last year, South  Korea set up Korea Investment Corp. to manage $20
billion in foreign exchange  reserves with a mandate to achieve sustainable
returns.

In January,  China's State Administration of Foreign Exchange said it wants
``to actively  explore ways of investing foreign exchange more efficiently.''

In  general, however, when it comes to central banks investing their
reserves,  liquidity and safety considerations trump returns. Thus they lose money on
``safe and liquid'' investments in U.S. Treasuries, even as private investors
 make a killing in equities.

To counter their misplaced apprehension of  risky assets, so they could earn
a better return on reserves, developing nations  require ``some form of
legitimated international scrutiny and monitoring of  central bank reserve
investments,'' Summers said.

Rethinking IMF's Role

That opens a whole new opportunity for the IMF and the World Bank. They
could create ``an international facility in which countries could invest their
excess reserves without taking domestic political responsibility for the process
 of investment decision and ultimate result,'' Summers said.

It would  require enormous resolve on the part of the global financial
community to  implement a proposal as radical as this.

It is, however, eminently  worthy of consideration. Recent research has shown
that hedge funds aren't  vulnerable to a financial contagion. With sound
administration, they could thus  become a useful -- and safe -- tool to serve the
world's poor.

As  Summers put it, ``It is an irony of our times that the majority of the
world's  poorest people live in countries with vast international financial
reserves.''

It's more than an irony. It's a tragedy, and an utterly needless one at
that.