[Outlook]KDB’s missed chance

One person has come under severe criticism because he tried to buy bad stocks. “Bad stocks” means those of Lehman Brothers, the fourth-biggest investment bank in the United State that has gone bankrupt. The person is Min Euoo-sung, chairman of Korea Development Bank. More than criticism, the treatment Min is receiving more resembles a group beating.

Not only governing party members but also opposition party lawmakers have joined the condemnation. Hong Joon-pyo, a floor leader for the Grand National Party, said, “It was purely absurd to attempt to take over Lehman Brothers.”

He meant that the CEO of the state-owned bank could have damaged the economy by taking over a bank that was soon to go bankrupt. GNP lawmaker Koh Seung-duk also blamed Min, assuming that he made the attempt because of stock options he received when he served as chairman of Lehman Brothers’ Korean office. Koh said Min pursued the deal for his own interests.

But that is wrong. Min had already submitted a document to the bank’s board of directors saying he would give up the stock options.

Even those who claim they know about finance are making a fuss. It is understandable why they are making a big deal out of this. They believe that the Korean bank could have been in deep trouble if it had taken over Lehman Brothers without knowing how serious the situation was. However, it is still unfair to criticize Min’s attempt.

There are no permanently bad stocks. There are no permanently good stocks, either. There are only prices. Prices separate bad stocks from good. Even if everybody says this is a good stock, it can soon become a bad one if the price goes down after one buys it. A good stock is something that is terrible now but will likely go up in the future. The stocks Min wanted to buy weren’t bad stocks; they were good ones.

To Korean financial institutions, large-scale investment banks on Wall Street were too great and pompous to even look at. Their self-confidence was as high as their stock prices. But the 158-year-old American investment bank saw enormous losses from transactions involving derivatives as bubbles in the real estate market burst. Lehman Brothers fell into a coma and accordingly, the stock prices plummeted. At last, even a Korean bank had a chance to think about taking it over.

The management of Lehman Brothers was pushed into a corner and called for help from foreign financial institutes, including Korea Development Bank.

As Min is familiar with the situation at Lehman Brothers, he flew to New York. He thought it could be a profitable deal if he could buy the bank at a good price. He didn’t mean to buy an unhealthy bank.

When meeting the CEO of Lehman Brothers, Min demanded that bad assets be cut away. Min said he would categorize bad assets in a bad bank and buy only the good bank that remained.

He also made a condition that the payment would not be delivered until late February of next year. He thought that there could be assets that look alright now but that turn out to be bad later. He judged that six months would be long enough for most of Lehman Brothers’ bad businesses to be unveiled.

Lehman Brothers said it would accept all his conditions. The two CEOs then sat down to negotiate price. But the difference of opinions was too big. Lehman Brothers wanted $17.50 per share and Min offered $6.40. As they failed to narrow the difference, the negotiation fell apart.

As the CEO of the Korean state bank left the negotiation table, Wall Street jolted. Clients poured in and wanted to take out their money. The bank couldn’t stand the withdrawal of tens of billions of dollars per day. It had no choice but to file for bankruptcy.

One of the basics of mergers and acquisitions is to take over a company in trouble and raise its value. In this sense, the case of KDB is truly regrettable because it has missed a good chance to own an American investment bank that has a global network that can collect information for its affiliated companies.

After KDB gave up, the British financial institute Barclays took over Lehman Brothers’ U.S. business. Barclays also wanted to take over Lehman Brothers’ Asian business but Japan’s Nomura Holdings got it instead. It is said that Nomura Holdings is pursuing the takeover of Lehman Brothers’ European and Korean businesses as well.

Before Lehman Brothers was taken over differently in different regions, London-based Standard Chartered and China’s Citic Group also wanted the U.S. bank. Would they have competed so fiercely over the bank if its stocks were bad?

Goldman Sachs and Morgan Stanley, the first and second investment banks in the United States, have also been damaged in the crisis and have been looking for new shareholders.

The legendary investor Warren Buffett is to invest $5 billion in Goldman Sachs. Japan’s mega bank Mitsubishi UFJ will take a 20 percent stake in Morgan Stanley. But no one in their countries criticizes them for making an absurd deal that will eventually damage the economy.

Is it best to do nothing in order to avoid potential losses? “No risk, no return” is a universal law that is applied to all transactions in the world. It is a dereliction of duty if one doesn’t grab a good chance because of fear of potential problems.

*The writer is the economic news editor of the JoongAng Ilbo.

by Shim Shang-bok