A Financial Services joint subcommittee hearing on Wednesday sought to investigate the impact of sovereign wealth funds—foreign government owned investment funds—on the U.S. economy. The event marked the first time a sovereign wealth fund has appeared before a congressional committee.

More than twenty sovereign wealth funds are known to exist today. Due to their general lack of transparency and accountability, it is impossible to determine exactly how much is being invested in the United States alone. However, in the next three years their combined assets are expected to reach into the trillions of dollars.

Led by Reps. Luis V. Gutierrez (D-IL) and Paul E. Kanjorski (D-PA), the hearing featured statements and testimony from two panels of witnesses. The first panel consisted of representatives from the U.S. Treasury Department, the Securities and Exchange Commission and the Federal Reserve Board.

"It is forecasted by Morgan Stanley...that sovereign wealth funds will increase five-fold by the middle of the next decade," said Ethiopis Tafara, International Affairs Director for the SEC, reading from a prepared statement. "That could make these funds, collectively and perhaps individually, the largest shareholders in many of the world's biggest companies that are today privately owned."

Sovereign wealth funds manage and invest state earnings from exports and commodity sales. They typically consist of financial assets like stocks, bonds and property. Many countries, like France and Australia, invest funds garnered from pension, social security and revenue surpluses, and then inject their gains back into these same programs.

It is estimated that over the last year sovereign wealth funds have invested billions of dollars in property, banks, equity funds and private companies within the Untied States. Concern is growing that these funds may be used as diplomatic tools by foreign governments and that they are allowed to operate with little or no transparency.

While addressing the concern attached to these funds, the panel's members also lauded their benefits and legitimacy.

"Many sovereign wealth funds were created as legitimate stewards of national economic welfare," said Matthew Slaughter, Professor at Dartmouth College's Tuck School of Business. "Many of today's most prominent funds hail from countries with surging fiscal revenues from production of oil and other national resources [and] aim to manage these revenues for sound goals such as intergenerational transfers."

"It is important to remember that the United States itself is home to such funds [like] the Alaska Permanent Reserve Fund," he continued. "The overall U.S. economy benefits from their investments into the United States."

The Alaska Permanent Fund was created in 1976 as an investment tool for the state's revenues from oil and natural gas sales. Since then, the fund's returns have grown to more than $40 billion, including $6.3 billion in non-U.S. stocks and bonds. It is currently the only such fund owned by a U.S. government entity.

By far one of the biggest funds today is that of Norway, represented at the hearing by Asset Management Director General Martin Skancke, of the Norwegian Ministry of Finance. Norway's sovereign wealth fund reports total assets of more than $350 billion. The fund was established in 1990 as The Government Petroleum Fund and aimed to manage the country's oil revenues.

Skancke claimed gains from the fund help Norway manage the financial burden of dealing with an aging population and "shield the non-oil economy from the effects of a volatile flow of foreign currency earnings from the oil sector."

According to Rep. Gutierrez, many sovereign wealth funds have stepped up their investment in American companies like Motorola and Home Depot. Investments from 2007 totaled $414 billion, an increase of 90% from 2006. 

Foreign investment funds located in Abu Dhabi, Kuwait, and Singapore have recently invested as much as $30 billion in firms like Citigroup and Merrill-Lynch, which have been adversely affected by the mortgage lending crisis.

Funds from these countries have come under much scrutiny, since they are considered to have the least transparency. Last year, Congress passed the Foreign Investment and National Security Act, which gives the government a broader mandate to investigate foreign investment funds. The International Monetary Fund is also currently leading efforts abroad to create a voluntary code of conduct for sovereign wealth funds.

"Temasek understands and fully respects that the United States must take the measures necessary to protect its national security," said Simon Israel, executive director of Singapore-based Temasek Holdings, one of Asia's largest investment firms. He added that his company "fully appreciates and supports the Congress's goal to maintain the right balance...in ways that continue the traditional welcoming attitude of the United States toward foreign investment."

Most of today's sovereign wealth funds were created within the last few years, mainly by oil exporting countries like Abu Dhabi that have seen large surges in revenue due to the rise in oil prices. Abu Dhabi owns the largest sovereign wealth fund in the world and is the richest of the United Arab Emirates. The fund, known as the Abu Dhabi Investment Authority, is also considered to be the world's most secretive sovereign wealth fund.  Congress seems intent on eliminating this secrecy; only time will tell if their efforts are warranted or successful.