[OUTLOOK]In defense of Newbridge’s moveEveryone in Korea knows that Newbridge Capital, by selling its shares in Korea First Bank, has garnered $1.1 billion in profits not subject to Korean taxation (but subject to taxation in Malaysia). Most Koreans react with ire: Newbridge is termed a “vulture fund,” a speculator that bought assets when the Korean economy was on its knees in 1998 and then sold them for a huge profit after Korea had lifted itself up. But there is a case to be made in favor of Newbridge. (And, no, I have received no money whatsoever from Newbridge for writing this.)
To begin, one should recall that Korea First was probably in the worst shape of any Korean bank in 1998; indeed, the International Monetary Fund sought to have Korea First liquidated. Under the circumstances, there was little alternative to sale of equity to foreign investors.
But any foreign investor buying a large interest in Korea First at that time was taking a major risk. In 1998, it was not clear that the Korean economy would soon undergo a rapid recovery. Some analysts were predicting that Korea might, like Japan, undergo a long period of recession or stagnation.
Given this, it was not clear that Korea First could survive, let alone be turned around. Newbridge accepted this risk, and it paid off handsomely only six years after buying into Korea.
First, Newbridge struck a deal to sell its approximately 1 million shares for about 17,000 won ($16.70) per share to Standard Chartered, a bank based in the United Kingdom. The Korean government is also selling its shares to Standard Chartered, yielding the government almost $1.2 billion in revenue. Thus, Newbridge took an asset that was nearly worthless and converted it into one of great value ― with some help from (and benefit to) the government of Korea.
Some Korean analysts nonetheless fault Newbridge for taking a short-run approach and not building the long-term future of the bank. For example, Newbridge arguably did not do much to advance the internal banking skills of Korea First; indeed, it is questioned whether Newbridge even possessed such skills. But by enabling this bank to survive, Newbridge enabled its sale to Standard Chartered, a banking organization that can impart advanced skills to Korea First.
Newbridge is also criticized for reducing corporate lending and increasing consumer lending. But in 1998, Korean banks were over-lent to the corporate sector ― reckless corporate borrowing was, after all, one of the reasons why the 1997 crisis happened in the first place ― while the consumer loan market was underdeveloped.
Although there have been difficulties in this market (as exemplified by the problems of LG Card two years ago), better consumer banking surely will bolster Korea’s economy in the long run.
Thus, while Newbridge’s record is maybe not as good as one might have hoped, it is arguably better than many analysts might have expected when it first acquired Korea First. Maybe the capital gains achieved by Newbridge were excessive, but arguably they also reflect a job reasonably well done.
The controversy over Newbridge reflects the fact that Korea today is in the midst of a major debate on foreign investment. In the United States, there was also a major debate on this issue during the late 1980s, when foreign direct investment started coming into the United States in large amounts. Many Americans wanted to restrict this investment.
Fortunately, they did not; today, the stock of foreign direct investment in the United States stands at more than $1.4 trillion on a historic cost basis (the market value is higher), and foreign-owned firms in the United States clearly are one major factor behind the continued dynamism of the U.S. economy. I would think that the same benefits could now be captured by the Korean economy as the result of foreign investment.
Sophisticated Koreans worry about too much foreign investment in Korea being of a rather short-term nature, rather than long-term direct investment. It is arguable that Korea made a significant mistake when it joined the Organization for Economic Cooperation and Development in 1996 and opened short-term international capital accounts but not long-term accounts. But President Kim Dae-jung opened most long-term accounts two years later, and significant amounts of direct investment have since flowed to Korea in addition to short-term investment.
The sale of Korea First to Standard Chartered converts a short-term foreign investment to a long-term one, and I hope that this works out well. And if it does, Newbridge might be remembered in Korea more favorably in the future than public sentiment now suggests.
* The writer is a senior fellow at the Institute for International Economics in Washington, D.C. He is co-author, with Paul R. Krugman, of the book “Foreign Direct Investment in the United States” (Institute for International Economics, 3rd Edition, 1995) as well as of recent books and several articles on Korea.
by Edward M. Graham