Rein in Investment Trust Companies!Two weeks after the government vowed to keep their hands off troubled investment trust companies, namely Korea Investment Trust (KITC) and Daehan Investment Trust (DITC), the administration has decided to do an about-face.
"We will aid trust companies on the condition that they implement restructuring programs," said a government official. The government's announcement comes as no surprise, as stock prices continue to plummet on the local bourse.
There were several reasons for the government's initial hesitation, faced with criticism from all sides. The opposition GNP saw an injection of public funds in private companies as an adjunct to mounting national debt, while the public saw government aid as the result of careless management at Korea's financial institutions.
However, there is a hidden reason for the administration's passive stance on the issue of financial support for the trust companies: lax supervision in the industry.
Investment trust companies, governed by largely ineffective regulations, were exempt from government-led restructuring following the foreign exchange crisis in Korea.
"Investment trust companies come under our jurisdiction, but we do not enforce regulations strictly, as we do with banks, because the trust companies are not lending organizations," said an official at the Financial Supervisory Service (FSS).
The problem is that trust companies in Korea do not deal with clearly defined products or services. An industry analyst pointed out, "In the past, Korean trust companies exchanged assets between companies and clients, and returned the book value of any losses, as in the case of Daewoo. Recent attempts to 'clean up' clients' accounts are against the principle of selling and buying."
It has become obvious that investment trust companies managed their funds illegally and the FSS was powerless to stop them.
The only solution is to regulate trust companies in the same manner as banks. The supervisory group should have the right to restructure and institutionalize regulations with appropriate aid from the government. A government-enforced standard within the industry would avert a similar debacle in the future.
by Kim Jong-su