The US Senate has ordered an inquiry into “sovereign wealth” funds controlled by foreign governments as Citigroup and Merrill Lynch negotiate a second wave of capital injections from the funds.

The Government Accountability Office, the US equivalent of the National Audit Office, this week began investigating the sovereign wealth funds, which in recent weeks have invested about $35 billion (£17.9 billion) in UBS, Bear Stearns, Morgan Stanley, Merrill Lynch and Citigroup.

The office is charged with finding out how much money these opaque funds control, where it has been invested and how the investments have been treated. It is also examining what information the funds are required to disclose on their investments and what action can be taken to discipline them if they misuse their power.

The Senate’s committee on banking, housing and urban affairs, which ordered the review, has the power to propose and push hard new legislation to deal with any threats it perceives to be posed by the funds.

Most of the sovereign wealth funds are run by governments in Asia and the Middle East, and their recent deals with the Wall Street institutions represented their first significant investments in key American companies.

Although there were some concerns among politicians and on Wall Street, the first round of funding was largely welcomed because the banks needed new capital after suffering multibillion-dollar losses on mortgage-related investments.

Critics were reassured by the banks’ refusal to sell more than 12 per cent of their shares in the initial deals, giving the sovereign funds minority stakes.

But news that Citigroup is seeking up to $10 billion more from sovereign wealth funds in Asia and the Middle East, after selling a 4.9 per cent stake to the Abu Dhabi Government for $7.5 billion in November, has heightened concerns that governments may use their stakes for political gain.

Merrill Lynch is seeking a further $3 billion to $4 billion from a Middle Eastern sovereign wealth fund, less than three weeks after the Singapore Government’s Temasek investment vehicle bought a 10 per cent stake for about $5 billion.

Meredith Whitney, an analyst at CIBC Capital Markets, said: “We are starting to see round two of the sovereign wealth funds’ investment in Wall Street. But in many cases that won’t be enough either, and we will see rounds three, four, and five.” David Walker, who heads the Government Accountability Office, added: “The sovereign wealth funds did not initially cause too much of a stir in Washington. But as the number of these kind of transactions rises Congress is becoming interested.”

Although the holding of each sovereign fund is unlikely to exceed 10 per cent of any bank, the concern is that two or more funds could wield greater influence by coordinating their activities. Mr Walker added that the weakness of the dollar had made American companies increasingly attractive to foreign investors. The funds may look to build on their initial investments by buying stakes in companies that are not struggling, which may trigger more political resistance, Mr Walker said.

Citigroup and Merrill Lynch are understood to be finalising their latest fundraisings in time for the announcement of their full-year results next week. Both banks are expected to concede further write-downs on high-risk sub-prime investments for the fourth quarter.

Capital One, America’s largest independent credit card issuer, lowered its full-year profit forecast yesterday by 21 per cent on the back of mounting consumer loan losses in a weakening economy and higher legal reserves. Its shares fell as much as 10 per cent to their lowest level in nearly five years. The financial company now expects 2007 profit of $3.97 per share, down from its prior forecast of about $5.00. Capital One set aside $1.9 billion for bad loans in the fourth quarter, citing higher losses on credit card and car loans.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts