[F]rom what I can detect from the activity of so-called indirect bidders in Treasury auctions—indirect bidders submit competitive bids through others rather than directly; central banks are among those who commonly bid indirectly—there continues to be strong demand for longer duration Treasuries—again, contrary to rumors and press reports. Thus, to date, our actions have not given rise to concern that we will violate Paul's Dictum.

There has been a fair amount of handwringing recently about sovereign wealth funds accumulating U.S. assets. I believe our posture has to be realistic—one country's trade deficit (ours, in this case) is another country's investment surplus.

Sovereign wealth funds have recently made significant investments in U.S. financial institutions, thereby improving the capital position of these firms and demonstrating confidence in the viability of these U.S. firms.  These investments have also attracted much attention and there is no doubt that sovereign wealth funds are growing in size and number and are making increasingly significant investments in financial services organizations worldwide.  But foreign government-owned entities, including sovereign wealth funds, have owned foreign banks with U.S. operations for many years.  The Board has long taken the position that while foreign governments themselves are not companies subject to the BHC Act, foreign government-owned corporations such as sovereign wealth funds are companies.  Thus any proposed controlling investment in a U.S. bank or bank holding company by a sovereign wealth fund would be subject to Federal Reserve approval.

Sovereign wealth funds, like private investment funds, U.S. state investment vehicles, hedge funds, private equity firms, and many other investors, have generally made investments at levels that are not large enough to trigger the thresholds for review and approval by the federal banking agencies under the federal banking laws. 

With respect to the sovereign wealth funds, I think that's just another indication of the fact that foreigners have not lost confidence in the U.S. economy in that there's been a good bit of inflow. In particular, about something close to half of the capital that the financial institutions have raised in the last few months has come from sovereign wealth funds from other countries.

I think that, in general, that's quite constructive. If we are confident, as I think we are in this case, that the investments are made for economic reasons and not for political reasons or other non- economic reasons, and there's no issue of national defense, which the CFIUS process takes care of, then that inflow of investment is good for our economy and certainly is helping, in this case, the financial system.  At the same time, allowing inflows of foreign capital through reciprocity gives us more opportunities to invest abroad.

 I know that Congress is very interested in sovereign wealth funds, and you should certainly take a close look at it. International agencies, like the International Monetary Fund and the OECD, are developing codes of conduct. The basic idea there is that sovereign wealth funds should be as transparent as possible. We should understand their governance and their motivations. And, in particular, we should be confident that they are investing, again, for economic, rather than political or other purposes.

If we are confident in that, then we ourselves, it's in our interest to keep our borders open and to allow that capital to flow in. And I think it will continue to flow in.

 From the Q&A session

Kohn also addressed the question of sovereign wealth funds and the risks associated with their investments. 

In general, he said, the U.S. benefits from the "recycling" of U.S. dollars back into the U.S. economy, through these funds and other mechanisms. However, the process would benefit from more transparency, he said, adding that the U.S. Treasury and the International Monetary Fund are studying the issue. 

"We should welcome that recycling," Kohn said.

From audience Q&A as reported by Market News International

I think concerns about sovereign wealth funds can be overwrought. To the extent that trade and capital-account imbalances are the source of potential instability, the answer is to address the fundamental causes.