[Outlook]Lone Star justiceThe controversy surrounding Lone Star and its ownership of Korea Exchange Bank (KEB) has been going on for too long. Korea should put the matter behind it now, as this case is harming the interests of everyone involved, in particular those of Korea.
The controversy began with Lone Star’s purchase of KEB.
After the purchase, Lone Star was accused of conspiring with bank and government officials to inflate the bank’s financial woes in order to buy it for a lower price. These accusations resonated with the Korean public.
However, the acquisition has since been investigated by multiple Korean authorities who found no wrongdoing by Lone Star. Hence, contrary to popular belief, Lone Star has never been and currently is not on trial in the KEB acquisition case.
However, the related trials of ex-bank and government officials are ongoing. Also, shortly after the KEB acquisition, allegations of stock price manipulation were levied against Lone Star relating to KEB’s rescue of its failing credit card affiliate. That case is also ongoing.
Because of these pending cases, Lone Star’s efforts to sell KEB have been stymied.
First, the sale of KEB to Kookmin Bank was hindered to the point that the deal was cancelled. Next, when Lone Star recently announced its intention to sell KEB to HSBC, it drew an immediate negative response from the government. The Financial Supervisory Commission (FSC) said that until the legal cases are closed, the agency cannot approve the sale of KEB to HSBC, or to anyone else.
On the surface, the FSC’s stance, which is blocking the HSBC sale, appears reasonable. After all, Lone Star is an interested party in the KEB case although, as mentioned, Lone Star itself is not on trial. Also, in the credit card case, Lone Star is a defendant in an ongoing trial.
But if you probe this logic beyond a superficial level, you quickly begin to question the FSC’s position. For example, for the purposes of the KEB sale, the outcome of the credit-card case is academic; even if Lone Star were to lose the case, at most it could be forced to sell KEB, which is exactly what the buyout firm is trying to do. In short, the end result ― selling the bank ― would be the same.
In assessing the impact of other ongoing trials relating to the approval of Lone Star’s sale of KEB to HSBC, it is important to understand that the FSC’s role is simply: 1) to verify whether HSBC is a banking entity and 2) to determine the competence of HSBC in successfully managing KEB as the bank’s potential new owner. HSBC will easily meet those requirements. It is the fourth-largest, and one of the most venerable, banks in the world with over 100 million customers. So unless the FSC finds some defect in HSBC’s qualifications as a buyer, which in all likelihood will not be the case, the sale should be approved without further delay.
The controversy surrounding Lone Star is undermining Korea’s interests. It has given credence to long-standing perceptions that Korea is hostile toward foreign investors and is an inhospitable place to conduct business.
Also, many foreign observers believe that with the financial crisis a distant memory, Korea now wants to return to business as usual, viewing foreign investors with contempt and exposing them to a selective enforcement policy. These perceptions hurt Korea.
Coincidental or not, overall foreign direct investment (FDI) in Korea has diminished in recent years. Korea’s FDI peaked in 2004 at $9.2 billion, but fell in 2005 by almost one third to $6.3 billion. In 2006, it dropped by more than 40 percent to $3.6 billion.
Korea’s decline is at odds with global trends. During the same period, the collective FDI of 30 OECD countries grew by 22 percent. Recently, the OECD blamed Korea’s FDI problems on a hostile attitude toward foreign investment and a lack of transparency with respect to tax and regulatory policies. These challenges do not bode well for a country that seeks to become a financial hub in Asia.
The Lone Star case is essentially a political one, fueled by intense negative public sentiment against Lone Star.
But we must again recall how serious the problems Korea faced in the late 1990s were. At that time, the country was suffering from its worst economic crisis since 1953. More than 600 financial companies went out of business, and Korea sought a $57-billion bailout from the IMF. To stabilize the financial sector, the government formed the Korea Asset Management Corporation (Kamco) to take over non-performing loans (NPLs) from troubled or failing financial institutions and sell or otherwise resolve them. Lone Star was one of the buyers in the first NPL auction conducted by Kamco in 1998. In the few years following that first investment, Lone Star had become the largest and most active foreign financial investor in Korea.
Mirroring the overall Korean economy, KEB, too, was in a desperate situation, bordering on insolvency and in serious need of capital. But no one other than Lone Star was willing to risk investing over 1 trillion won ($1.1 billion) in KEB to try to save it. Other major financial institutions, such as Bank One, Citigroup, Credit Suisse, JP Morgan and others, all reportedly declined the chance to invest in KEB. In 2003, with the government’s unconditional approval, Lone Star acquired 50.5 percent of KEB for $1.16 billion ― even though KEB lost 1.4 trillion won that year. In short, Lone Star, taking considerable risk, not only came to Korea to do business at a time of great uncertainty while others stayed away, but also contributed meaningfully to the impressive recovery Korea has made following the 1997 financial crisis. Korea should not forget that.
To be sure, Lone Star has made mistakes. In dealing with this controversy, it has at times been aggressive and heavy-handed, appearing to be disrespectful of Korea’s culture and sensitivities.
But Korea should not let its public sentiment and emotion stand in the way of doing what is right and just. Many foreign observers say that in Korea, public sentiment is higher than the rule of law. There is unfortunately much truth to that. This is very worrisome because as long as this reality remains, or even if only the perception persists, it will hinder Korea’s efforts to be recognized as a fully developed country and a reliable member of the global finance community.
It is critically important, therefore, that Korea unequivocally demonstrates that its laws and regulations cannot be swayed by public emotion and that nothing has greater authority than the rule of law in the country.
I believe that one important step in this direction is to put this thorny issue behind Korea by resolving the Lone Star issue now.
*The writer is a senior partner at the Washington, D.C. law firm of Akin Gump Strauss Hauer & Feld.
by Sukhan Kim