[Viewpoint]Rumors cloud sale of KEB

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[Viewpoint]Rumors cloud sale of KEB

The wild misinformation about mad cow disease has subsided, but another destructive rumor lingers.

It deals with the price at which Lone Star Funds bought Korea Exchange Bank.

The rumor is so deeply rooted that it is around years after the transaction.

The beginning of this rumor was jealousy. In the aftermath of the 2003 credit crisis, the bank suffered a serious shortage of capital due to the insolvency of its affiliate, the KEB credit card unit.

The government injected enormous public funds to help the nation recover from the crisis, and it was in no position to rescue the bank.

The lender was put up for sale, but domestic banks, which barely survived the crisis themselves, had no ability to purchase KEB. Many overseas financial firms were not interested.

It was the U.S. buyout firm Lone Star that stepped up to purchase the bank, despite its enormous losses, because of KEB’s potential. At the time, Lone Star’s plan to buy KEB was an issue to no one.

The bank revived after three years. Lone Star spent 1.3 trillion won ($1.3 billion) to buy it, and the bank grew in value to 4.5 trillion won, triple the seed investment.

In March 2006, Lone Star decided to sell KEB to Kookmin Bank, and jealousy arose. Many criticized the deal as foreigners’ attempt for a quick gain.

Everyone was focused on the profit that Lone Star would make, paying no attention that a domestic bank was the purchaser. Fueled by the inflammatory argument that Koreans must not let the enormous amount of wealth leave the country, the jealousy led to groundless rumors.

They started with the argument that Lone Star, which had taken over KEB, was not qualified to make such a purchase under the nation’s financial laws because it was not technically a financial company.

Strictly speaking, the private equity fund is not a financial company.

However, there were precedents. The Carlyle Fund, which once owned shares of KorAm Bank, and New Bridge Capital, which purchased Korea First Bank and gained enormous profit from selling it later, were allowed to do so.

The government stretched its interpretation of the law and recognized private equity funds as financial institutions out of desperation in the aftermath of the financial crisis. It is unfair to belatedly make an issue of this with Lone Star’s deal.

As the argument about qualifications did not work, the rumors then changed direction to the sale price. A rumor charged that Lone Star colluded with public servants and inflated KEB’s financial difficulty to drive down its price. Insiders disclosed that the bank’s BIS capital adequacy ratio had been manipulated, and the rumor became more and more convincing. The plan to sell KEB to Kookmin Bank was voided.

The Board of Audit and Inspection launched a special investigation and the prosecution also looked into the matter. The rumor was powerful enough to stall Lone Star’s plan to sell KEB and to prompt investigations by the nation’s law enforcement authorities.

The audit board’s investigation outcome, however, was insubstantial. Prosecutors filed indictments against a few officials, but trials are ongoing with little evidence to prove the charges.

Lone Star, then, found a new buyer and signed a deal to sell KEB to HSBC, a British bank, in September last year.

However, the Financial Supervisory Committee, failing to move beyond the rumors, said it will not approve the deal until the pending legal battles end.

A new administration was launched, and the newly-formed Financial Services Commission has recently changed its position and began a review of HSBC’s purchase of KEB.

While the financial regulator said it will wait and see the outcome of the trials, it has practically approved the deal.

What happened? Did the rumor disappear?

The answer can be found in the changed attitude of KEB’s labor union. The union fiercely objected to Kookmin Bank’s planned takeover, but it welcomed HSBC’s plan to purchase the bank because the British bank promised to guarantee KEB’s independent survival.

From the beginning, the matter was not about Lone Star and jealousy. It was about the buyer.

If we search for the source that fed the rumor, we can find the motive.

If the buyer is the real issue, there is no need to continue the trials. It feels empty and pointless to have wasted our energy chasing groundless rumors.

*The writer is an editorial writer of the JoongAng Ilbo.

by Kim Jong-soo
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