[NOTEBOOK]A market-manipulation taleThe history of the failure of three of Korea’s major financial companies ― Korea Investment Trust Co., Daehan Investment Trust Co. and Kookmin Investment Trust Co. ― can be traced to 1987 and the companies’ success at the time. The presidential campaign at the end of the year was the origin of all the subsequent fortunes and misfortunes of the government-run companies.
The year 1987 was the midway point of a five-year bull market and the greatest rise in Korea’s stock market. The main market’s index, the Kospi, stood at around 150 in 1985, and by 1989 it had risen sixfold to more than 1,000. But in 1987, the market was showing some instability. The long run-up appeared ready for a downturn. At the time, President Chun Doo Hwan’s regime was facing growing opposition from the public. Then Wall Street had one of the greatest one-day setbacks in its history on Oct. 19.
In line with events in the New York financial markets, the three Korea investment companies, the leading institutional investors at that time, began selling stocks. But that did not last long because the government intervened.
Government officials stepped in to help President Chun’s heir, Roh Tae-woo. If stock prices fell, then individual investors, who owned 80 percent of the total value of Korea’s market, would turn their backs on Mr. Roh. As the campaign heated up, the officials were not satisfied with just stopping the sales. They forced the companies to buy stocks. The companies risked all their assets to buoy up the market and defend the index. With the election nearing, the investment companies drove up prices of hundreds of relatively small companies each day.
Analysts and dealers at the companies complained privately about what was the biggest and most well-organized and publicly operated price manipulation in the history of the Korean stock market. The effort actually paid off for a while.
After the election, the market began another rally, and the index doubled in a few months. The three institutions took the lessons to heart: In a government-led economy like Korea’s, there is no better policy than following the government’s guidance. But when they tried it again, they met their doom.
Before the legislative elections in 1990, the government confidently repeated the old strategy. The three companies followed the government’s guidance aggressively. Market volume surged with another buying spree. Because the companies did not have enough money to keep the buying frenzy going, they borrowed money from the banks.
But after the election, the market did not move as the companies had bet. Instead, it plunged. Investors were badly hit. Shares in commercial banks, for instance, which were selling for more than 20,000 won each ($24 at that time) fell by more than half in a year. The three companies’ debt grew from 3 trillion won to 13 trillion won by 1999.
The government was forced to step in and bail out the companies with taxpayers’ money. In assuming responsibility for the companies, the government poured in more than 10 trillion won, including 2.5 trillion won in Hyundai Investment and Trust Co., which last year was sold to U.S.-based Prudential Financial. Hyundai was the successor of Kookmin Trust and Investment Co, which was sold to the Hyundai Group in 1997.
It is expected that another 4 trillion won was spent to cover the bad debts of Korean Investment Securities Co. and Daehan Investment and Securities Co.
Within the last few weeks, negotiators for the sale of the two companies were picked. The disastrous road to their failure resulted from arrogance and irresponsible government decision-making, but no one is taking the blame.
* The writer is the business news editor of the JoongAng Daily.
by Wang Hee-soo