by Jerome Corsi, World Net Daily, March 18, 2008

The U.S. Treasury is struggling with how to handle any political or Islamic ramifications as Persian Gulf sovereign wealth funds look to make substantial investments in capital-poor American banks and securities firms.

The crisis in mortgage-backed securities has created a need for new capital to enter financial markets after major financial institutions such as Bear Stearns and Carlyle Capital Corp. failed over the weekend.

The crisis is an opportunity for sovereign wealth funds that have prospered as the price of oil has soared over $110 a barrel.

WND previously reported sovereign wealth funds in six Persian Gulf countries, including Kuwait, the United Arab Emirates and Qatar, have now amassed $1.7 trillion, positioning them for attempts to control major banks and securities firms in the U.S.

The question is whether political strings will come with the investment from the Islamic oil-rich states.

Since the beginning of the year, Dubai and Abu Dhabi, two of the largest United Arab Emirate states, have been in discussions with the U.S. Treasury, offering reassurances that their investments in U.S. banks and security firms would not impose restrictions usually dictated by Islamic law, commonly know as sharia.

The Wall Street Journal reported today that Abu Dhabi sent last week a three-page letter to U.S. Treasury Secretary Henry Paulson and other Western finance officials spelling out a set of principles that will guide Abu Dhabi’s investing philosophy.

The letter marks the first time Abu Dhabi has responded to Treasury requests for reassurance the Islamic states will not use investments in U.S. financial firms to seek political advantage.

The Wall Street Journal reported the letter was also sent to the finance ministers of the other Group of Seven industrialized nations, the International Monetary Fund, the World Bank, the Organization for Economic Cooperation and Development and the European Commission.

On Monday, Dubai announced the launch of the Investment Corporation of Dubai, a new multi-billion dollar sovereign wealth fund positioned to make investments in the global economy.

According to the Telegraph of London, the fund will be chaired by Sheik Mohammad bin Rashid Al Maktoum, the emirate’s ruler, but it will be operated separately from Dubai Holdings and Dubai International Capital.

Still, the new fund will be backed by state money, not just the personal wealth of the Maktoum family.

Paulson and Dubai are trying to avoid the repeat of a controversy that developed in 2006 when Dubai Ports World sought to acquire Peninsular & Oriental Steam Navigation, the London-based ports management firm that conducted operations at some 22 U.S. ports.

Still, despite the enthusiasm for foreign capital, the Treasury’s effort to work with the Islamic sovereign wealth funds demonstrates, savvy investors in Dubai and Abu Dhabi are likely to be cautious when venturing into the U.S. market at this time.

The problem, they say, is that no one knows for sure whether the crisis triggered initially by mortgage foreclosures in the sub-prime market has peaked.

How many more losses will be realized in mortgage-backed and other loan-based collateralized securities held in bank and investment firm asset portfolios remains to be seen.

The Telegraph noted Qatar’s 30 billion pound sovereign wealth fund just bought under 2 percent of Credit Swiss.

While the Qatar Investment Authority plans to spend between 5 billion and 7.5 billion pounds on bank investments over the next two years, the fund plans to avoid U.S. banking stocks for now, due to uncertainty over their exposure to sub-prime loans.

The publication /Business Intelligence in the Middle East reports the Dubai Financial Market’s Sharia Board issued yesterday the first Islamic standards for trading shares of DFM companies, another indication Dubai is positioning for a global investment environment dominated by Western standards.

The DFM, first opened March 26, 2000, is a public institution with a corporate body operating independently of the ruling family, organized to operate as a secondary market for the trading of listed securities issued by public shareholding companies.

Following its 2007 annual meeting, the DFM announced its intention to become the world’s first Islamic bourse.