[Viewpoint] Spread the blame for the downturn

The writer is a senior economic news reporter and editorial writer of the Joong-Ang Ilbo.
President Lee Myung-bak pointed out recently that the responsibility for the global financial crisis lies with the management groups of international financial institutes and global companies. The president said that they had let ethics lapse and managed the economy and their companies in an irresponsible manner.

I beg to differ. I think that the United States also has a responsibility: It was the U.S. government that encouraged management to be more greedy and put pressure on them. To achieve the American dream of homeownership for every family, the government pushed financial institutes to issue loans to low-income earners. But the president didn’t mention this aspect.

Is it through President Lee’s influence that domestic financial authorities attempt to hold the private sector accountable, particularly one individual? That person is KB Financial Group Chairman Hwang Young-key, who used to be the chairman of Woori Bank. The authorities blame Hwang for Woori Bank’s huge losses, saying he was too greedy. They say when he led Woori Bank he invested a great deal in collateral debt obligation among other deals and lost most of the money.

They also accuse Woori Bank of leading competition among banks to grow in scale, putting the entire banking industry into great danger.

The Korea Deposit Insurance Corporation has completed its investigation and the Financial Supervisory Service, the financial watchdog, has also reportedly finished its investigation. A report says that they will certainly hold him accountable and only the degree of punishment is left to decide.

Before going further, I’d like to make this clear to prevent any misunderstanding or suspicion: I have never met Chairman Hwang. There is only one reason for writing this column. I firmly believe that the financial authorities’ behavior is truly wrong.

Let’s travel back in time to last year. Korea’s economy was in a very risky situation. The supply and demand of the dollar had collapsed and worries over a second financial crisis were widespread. The credit crunch was so serious that many companies feared bankruptcy. The crisis started in the United States, but Korea was hit harder. Banks should shoulder a lot of the responsibility for that. Their loan-deposit ratio was as high as 130 percent. As they blindly competed with each other, loans were 30 percent higher than deposits. Rumors swirled that even the banks would go bankrupt.

So, you see, Hwang alone should not take responsibility. The entire banking community must share the responsibility, but somehow the chairmen of other banks have dropped off the radar of blame, which is obviously not fair.

So what have the supervisory authorities been doing while banks’ business has gone bad? In 2005 and 2006, long before the crisis broke out, some people were worried about the surging loan-deposit ratio. If the supervisory service had delivered a warning, the crisis might have been averted.

The story is the same for the sale of funds. Financial houses sold funds to investors without informing them of the potential dangers, but the authorities did not seem to care. They did not do anything when it was revealed that Mirae Asset Group’s Insight Fund violated regulations and made all its investments in a single country. But the authorities do not think about their own wrongdoing, and instead try to put the blame on others. One must try to find out one’s own flaws before finding them in others.

As for the collateralized debt obligations issue, it is true that Woori Bank bought them when Hwang served as the head, but they did not cause a loss at that time. He stepped down as the chairman in March 2007, a long time before the crisis broke out. That means his successor had plenty of chances to sell them. So it is wrong to ask Hwang to take a larger slice of the responsibility. Besides, what was the KDIC doing then? The corporation was briefed regularly by Woori Bank and it looked into the bank’s management. The corporation did not do anything at that time, and now it is asking him to take responsibility only after the bank made a loss.

Of course, Hwang bears some responsibility, but not all. We saw the same hunt for a scapegoat during the financial crisis 11 years ago. The deputy prime minster for economic affairs and the presidential secretary for economic affairs were both sacrificed. Civil servants who reported to them protested strongly, calling the whole procedure of accusation and punishment a witch hunt.

The government first must take responsibility. After that, chairmen of other banks and Hwang must be held accountable. That is the right order. But it seems unlikely to happen since the one who led the supervisory service at that time now serves as the minister of strategy and finance.

*The writer is a senior economic news reporter and editorial writer of the Joong-Ang Ilbo.

by Kim Young-wook