A sovereign slush fund?

Why a federal investment fund is ripe for abuse

The Trump administration is planning to launch a sovereign wealth fund — a type of state-run investment entity.

Sovereign wealth funds, which often invest a government’s surplus revenues, can serve a variety of purposes, from strategically investing in infrastructure to generating savings for future generations. Trump expressed his desire to run one of his own back on the campaign trail — seeming to covet funds like Saudi Arabia’s with nearly $1 trillion in assets under management.

We don’t yet know exactly what a U.S. sovereign wealth fund would look like, such as how it would be governed or capitalized. According to Trump’s February executive order, the secretaries of treasury and commerce have until this month to draw up a plan. But early indicators suggest you should be very skeptical. At best, it would be financially risky. At worst, it’s a recipe for corruption on a very large scale.

The U.S. does not have surpluses to invest

The idea for a U.S. sovereign wealth fund has left “a lot of people… scratching their heads,” as one member of the Financial Times editorial board put it.

That’s because typically, sovereign wealth funds are used to put large pots of a government’s idle cash to work: say, state revenue from natural resources, like oil; or foreign currency reserves; or just generally large budget surpluses. Of course, the U.S. government, with a soaring budget deficit, is in the opposite position. “With $29 trillion in debt and a widening fiscal deficit, America hardly seems like a candidate for a sovereign-wealth fund,” writes The Economist. The proposal “is not a recipe for fiscal sanity.”

Even if the U.S. did have the enviable problem of being awash in cash, sovereign wealth funds can cause problems. For example, their investments can reduce opportunities for institutional and retail investors — a problem of “crowding out.” Conversely, large capital inflows can lead to artificially inflated valuations, creating speculative bubbles — a problem of “crowding in.” As with any state-directed investments, they risk allocating capital in ways that private markets otherwise would not. Such a fund, argues Romina Boccia of The Cato Institute, “would simply transfer economic activity from the private sector to the government.”

But that may be the point. Musings by administration officials provide some clues as to the motivations for establishing a state-run investment fund controlled by them — clues that should give lawmakers pause.

Trump administration officials’ dubious ideas for a fund’s investments

When the executive order was announced, David Sacks, the White House crypto czar, suggested that such a fund “could decide that they want to make Bitcoin or digital assets part of its portfolio.”

Many of the president’s largest donors, senior-most officials, and the president himself hold crypto assets. One way to boost the value of those assets would be for the U.S. government to buy them. Other investors would likely follow its lead, further driving up prices.

Trump, meanwhile, may have his sights set on using a fund to buy a stake in TikTok, together with “very wealthy people” (that is, allied co-investors). On its face, this could bring the company into compliance with a law passed last year requiring divestiture from its Chinese-based parent company to avoid a nationwide ban. But in effect, equity ownership by the federal government would hand the Trump administration extraordinary influence over a global media platform — and raise alarming conflicts with the First Amendment. (Just imagine if Barack Obama had proposed that the federal government purchase a stake in Facebook.)

TikTok is only one example. “A US sovereign wealth fund, at least as envisioned by Trump, would be enormous in size,” writes economist Tyler Cowen, with the potential to buy significant stakes in any number of domestic companies — raising "disturbing political implications.”

Autocrats use sovereign wealth funds to entrench power

As sovereign wealth funds have proliferated globally, so too have their uses for unsavory purposes — not just to make money for government officials and their allies, but also to consolidate power.

In 2020, Turkey’s sovereign wealth fund acquired a stake in Turkcell, one of the country’s largest telecommunications companies, giving it the authority to appoint a majority of Turkcell’s board — which it moved swiftly to do, installing members with close ties to the ruling party. The fund, chaired by President Recep Tayyip Erdoğan and managed by his loyalists, including his son-in-law, has been a useful instrument in Erdoğan’s ongoing campaign to sideline the country’s secular business elite. Erstwhile independent operations and strategic industries have been systematically brought under Erdoğan’s control.

Turkey, like the U.S., is not awash in idle cash, and so from the outset the fund needed to find non-obvious pots of money to manage. Its solution was to bring state-owned enterprises — public lenders, an oil company, an airline — into its portfolio. In practice, that has meant tightening Erdoğan’s grip over key sectors of the economy by controlling influential entities, nestled in the fund and beyond the oversight reach of parliament.

Recently, in Indonesia, which also runs large deficits, a new sovereign wealth fund is similarly taking possession of public assets to invest in priority projects of the president.

The White House has suggested a similar model here, using existing state assets to capitalize a U.S. fund — or, in finance-speak, “to monetize the asset side of the U.S. balance sheet,” says Treasury Secretary Scott Bessent. Said differently by The Wall Street Journal editorial board:

Leverage federal assets to create a new investment fund for the political class to invest in whatever it pleases, including private companies. What could possibly go wrong?

Certainly, there are examples of high performance funds that are also squeaky-clean, like Norway’s, which adheres to doggedly strict transparency, oversight, and accountability standards, and with a firewall between administrators and politicians.

But then there is Malaysia’s, at the center of the largest money-laundering scheme ever prosecuted by the Justice Department; Angola’s, headed by the president’s son, whose manager had a habit of directing investments to his own businesses; Malta’s, which appears to have sold EU citizenship to members of international criminal syndicates as part of a “golden passports” financing scheme; Russia’s, referred to simply as “a slush fund for President Vladimir Putin” by the U.S. Treasury; the United Arab Emirates’, alleged to have been used by arms-dealers to circumvent UN sanctions; or China’s, or Libya's, or Nigeria’s. Sovereign wealth funds can be “founts of corruption.” But particularly in the hands of authoritarians, warns Human Rights Watch, they “are often used to centralize and entrench political power.”

The potential for misuse by political leaders has been a principal reason the U.S. has eschewed, at least to date, a sovereign wealth fund of its own. Even when the federal government enjoyed (for a brief moment in time) a budget surplus in 2001, Federal Reserve Chairman Alan Greenspan cautioned lawmakers to steer clear of the temptation — because, as he testified before the Senate, “it would be exceptionally difficult to insulate the government's investment decisions from political pressures.”

A Trump administration sovereign wealth fund could operate as a “parallel budget”

Even in the best of circumstances, there are any number of reasons to be wary of sovereign wealth funds, which have checkered investment records. That shouldn’t be surprising. “In general, governments do not have strong records as skilled investors,” wrote Edwin M. Truman, a former U.S. Treasury and Federal Reserve official, in one global study of them.

Still, some have stronger track records and some worse. As the scholars Steven Feldstein and Jodi Vittori at Carnegie find in their research, sovereign wealth funds “usually reflect the quality of governance of the states that sponsor them.” And early indications from the Trump administration are not promising.

Although a fund does not yet exist, nor has a plan for it even been released, the administration is expected to tap Michael Grimes, a Wall Street banker, to lead it, according to reporting by Reuters. Grimes is a close ally of Elon Musk — he helped Musk buy Twitter and take Tesla public — who recently led a mass purge of a new federal office created by Congress to bring semiconductor manufacturing back to the U.S. That a close Musk ally is potentially the hand-picked head is not a sign that the administration intends to model its fund on Norway’s vigorously independent one.

Even more concerning is that the administration has plunged into planning a sovereign wealth fund absent discernible congressional involvement and without a commitment to seek legislative authority to create it and to fund it — as is almost certainly required. Once stood up, the fund could function as a means to further circumvent Congress’s power of the purse: a mechanism to direct money towards projects and pockets at the administration’s discretion without having to deal with the messy business of congressional appropriations.

Read more: The purse and the sword.

At the outset, critics in Turkey warned that a sovereign wealth fund would, in effect, operate as a “parallel budget” for the regime. They were right, and then some. Cash hungry, the fund has gone on a debt-financing binge, taking out billions in loans and funneling that money according to the regime’s strategic interests, all outside the actual budgets set by lawmakers. Financially, it has widened the country’s deficits. Politically, it has strengthened Erdoğan’s hand.

From universities to law firms to the arts, President Trump and his allies are wielding executive power in an unprecedented project to bring independent institutions to heel, and to neuter constitutional checks standing in their way. A new state-run investment fund, with the potential ability to deploy large volumes of capital as they and they alone see fit, would hand them a dangerous new tool — this time, over private industry.