[In depth interview]Doing what it takes in a crisis

Korea Asset Management Corp. will form a 3 trillion won ($2.2 billion) fund to acquire bad assets. A major Japanese financial institution said it would invest in the fund; an investment bank from a different country is also considering investing $500 million. Kamco said it will use the fund to buy bad assets from domestic companies and financial institutions to forestall the turmoil in the financial industry and the real economy. Lee Chol-hwi, 55, chairman and chief executive officer of Kamco, told JoongAng Sunday in an interview last week: “We intend to use all means available to respond to the emergency proactively and more quickly than we did in the Asian financial crisis 10 years ago.”

Q. How can you form a fund amid a global financial crisis?

A. Japanese investors seem to be eager. Since the yen appreciated almost double against the won, for Japan, it would be like investing twice the amount. They regard nonperforming assets in Korea as superior to those in other countries.

Will Kamco invest in it, too?

Under related laws, direct investment is not possible. Kamco will form the fund and manage it. It will select where to invest and distribute the fund.

Forming a fund to invest in the country’s bad assets is upgrading what we have done in the past. After the [1997-98] financial crisis, Kamco acquired bad assets and sold them to foreign investors. We often had to sell quickly so there was controversy over selling at giveaway prices. Foreign investors bought the assets and made huge capital gains in a few years. [Lee believes that if Kamco gathers investors and forms a fund, it can be free from such controversy and allow restructuring more quickly.]

Why are you trying something new?

Because the situation is so difficult. The U.S. subprime mortgage crisis jeopardized global financial markets and the real economy. Since the shock from outside is so strong, we need to be prepared in advance. In particular, major commercial banks in Korea have been unable to borrow money from overseas for the last few months. This is where Kamco, which has a good reputation outside Korea, comes in to help. The government will help, of course, but we are looking for how we can help.

Where did the global crisis originate?

It is described as a subprime mortgage crisis but it is essentially turmoil among investment banks. The United States has had current account and trade deficits for a long time and it had to attract foreign investment through investment banks. Derivatives became popular to produce the necessary rates of return. They played a game of [in effect] creating fake money and distributing virtual profits. The bubble burst and the fake money translated into losses.

The U.S. and other countries are spending enormous amounts of money but the problems are yet to be solved.

Derivatives are like gimbap, seaweed rolls. Just as various ingredients are processed into gimbap, derivatives are created with diverse products. Then, derivatives came to have problems but it is difficult to distinguish which of the products in the derivatives are bad. It is like an entire gimbap has to be wasted because one of the ingredients has gone bad. The losses from the subprime crisis are estimated at $5 trillion. This is more than the total capital of all financial institutions in the world.

What is the key to overcoming the crisis?

The financial system needs to be normalized and enough liquidity has to be provided. Then, additional defaults need to be prevented. However, the size of deleveraging will be bigger than anyone can imagine for the bubble to be dissolved completely. If nations around the world do not respond properly, this could lead to a bigger crisis such as the steep depreciation of the dollar and American Treasuries.

[Lee recently got the nickname “prophet.” Early this year, Lee said, “It is not a crisis of a few financial institutions but it is the process of the global economic bubble going bust. Three out of four major banks could go bankrupt.” This actually came true. Now Lee is worried about a long recession similar to what Japan experienced. Lee has worked as a financial attache at the Korean embassy in Japan and a senior researcher in Japan’s Ministry of Finance. He said what is happening in Korea is similar to what Japan had experienced.]

What are you worried about?

Japan had a bigger real estate bubble than Korea. Real estate prices had never fallen in Japan since the Meiji Reform. However, real estate prices dropped to 29 percent of the peak after the 1990s. Other assets were not exempt. Golf club memberships depreciated to 7 percent of what they used to be. The financial system became weak and even healthy companies faced emergencies. Banks were reluctant to lend money. This is very similar to what is [happening] now in Korea. However, the speed of the bubble burst is faster in Korea. Real estate prices fell nearly 30 to 40 percent in a few months. They can’t be sold even for half price. There is deflation going on. Deflation caused the financial crisis in Japan, but in Korea, deflation and the financial crisis are occurring at the same time.

Should government action be stronger?

The government should concentrate on preventing deflation. It should do everything to revive the economy. It shouldn’t be afraid of a current account deficit. As seen in Japan, once deflation starts, it is impossible to stop. Japan lowered the interest rate to zero percent but the real interest rate was actually very high in deflation.

Secondly, the government should protect the middle class. If the middle class collapses, there would no way... Government needs to do everything to protect employment.

What can we learn from Japan’s experience?

A bubble burst is not necessarily bad. In the last 10 years, Japan’s manufacturing business has become stronger; so have Japan’s banks. While banks around the world are in jeopardy, Japanese banks are stable. Instead, they are providing money to American commercial and investment banks. A decline in housing prices is also good for national strength. Redeveloping the Shinagawa area in Tokyo would cost one-tenth of what it would have cost during the bubble. If bad assets can be processed quickly, we will be able to overcome the crisis quickly too.

Lee Chol-hwi majored in trade studies at Seoul National University. He has worked in financial policy for 30 years, through 2007. Lee was secretary for economic affairs at the Blue House, treasury director-general at the Finance Ministry and a board member of the Asian Development Bank. He was appointed to his current position in January.

By Rah Hyun-cheol JoongAng Sunday [jbiz91@joongang.co.kr]