[FORUM]Too late to stop sales processKookmin Bank has been selected as the primary negotiator in the sale of Korea Exchange Bank. If the transaction is made successfully without any particular problems, Lone Star Funds, the U.S. private equity fund that owns the Korea Exchange Bank, will earn 4.4 trillion won ($4.5 billion) in profits in just three years by selling the bank it purchased at 1.4 trillion won. Return on its investment would be more than 200 percent. This is a tremendous profit and an unprecedentedly successful investment, anywhere in the world.
There are many controversies over the transaction. Some say such an outflow of huge national wealth should not be allowed; we should not let foreign investment funds take away such a huge profit without paying tax and the sale should be suspended because, from the beginning, there were problems with the acquisition of the Korean Exchange Bank.
However, these arguments seem to have no convincing power, although they sound plausible. Once we opened our markets to foreign investment, there was no way to prevent foreigners from taking away their profits, despite talk of the outflow of our national wealth. The reason is that we cannot compensate for foreign investors’ losses if they lose from their investment.
We should wait and see how the National Tax Service will handle the tax question since the tax authorities have talked tough on finding ways to impose tax on the fund, by any means. It would be fortunate if the National Tax Service could collect tax based on the Tax Law, but if it cannot do so, we cannot help that either. Since it was a mistake from the outset to have sold the Korea Exchange Bank to Lone Star, the argument for stopping the current selling process is far-fetched. In the existing laws, there is no basis for suspending the sale. It is unreasonable to put the sale in question now, as the foreign fund is preparing to sell the bank, when we did not raise any questions in the three years since Lone Star took control of it. I wonder if we would make the same arguments if Lone Star did not earn a great profit or if the fund saw a loss from its investment. The prosecution may impose a penalty after the fact or collect additional tax if it investigates the past acquisition of the bank and finds irregularities or illegality, but it can hardly stop the ongoing sales procedure. Although the situation is regrettable, it is already too late.
What we should be concerned about is what we should do if the same situation occurs again. To get an answer, we need to recall the time when the Korea Exchange Bank was taken over by Lone Star. At that time, the Korea Exchange Bank was on the brink of bankruptcy because of its massive bad debts. As the government had a bout of difficulty injecting large amounts of public funds immediately after the foreign exchange crisis of 1997-1998, it was not in the position to rescue the bank by pouring in public funds. No company was willing to buy the bank either even if it was put up for sale. Well-known foreign financial companies did not even turn their eyes to the sale and other domestic banks could not afford to acquire the Korea Exchange Bank. Large domestic companies, which could at least afford to take over the bank, were not qualified to even bid for the sale, blocked by the regulation that large domestic companies cannot enter the financial industry. In the end, there was no other choice than Lone Star, which said it would take the risk of acquiring the bank.
The problem, if any, was whether Lone Star, a private equity fund, could be seen as a financial institute that was qualified to take over the bank according to Korea’s Bank Law. Strictly speaking, private equity funds can hardly be seen as financial companies that can engage in the banking business, but there are precedents. Although the Carlyle Group, which owned shares in the Korea-America Bank, and Newbridge Capital, which took over Korea First Bank, were both private equity funds, they were allowed to buy the banks as they were deemed financial companies in a broad sense.
The present controversy over Lone Star comes, after all, from the fact that the capital that bought the Korea Exchange Bank was from foreign private equity funds.
If the nationality of the foreign capital is the problem, we should seek ways to restrict the qualifications for the acquisition of banks to domestic capital. If it is private equity funds that eye short-term profits that are the problem, we should restrict the qualifications for their acquisition more strictly. The sale of our banks in the future is at the crossroads of choice.
* The writer is an editorial writer of the JoongAng Ilbo.
by Kim Jong-soo