Firms colluded on ‘baby bond’ prices

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Firms colluded on ‘baby bond’ prices

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Major securities companies were found to have colluded via online messenger services to buy government bonds with a smaller face value at cheaper prices to reap higher returns when they mature, the nation’s anti-trust body said yesterday.

The Fair Trade Commission (FTC) imposed a combined fine of 19.2 billion won ($17.6 million) on 20 companies that collaborated to engineer higher yield rates from 2004 to 2010.

Samsung Securities was slapped with the largest fine of 2.1 billion won, while Woori Investment and Securities and Daewoo Securities were ordered to pay 2 billion won and 1.8 billion won, respectively.

Tong Yang Securities, Korea Investment & Securities, and Hyundai Securities were fined 1.8 billion won, 1.6 billion won, and 1.5 billion won.

From 2004 to 2010, the group of companies fabricated the expected yield rate of five types of national bonds that have relatively small face values after the government forced them to buy the bonds despite their typically low returns.

To help cover possible losses, the government gave each company the freedom to decide the purchasing price of the so-called “baby bonds” - within reason.

“Collusion was possible as each securities company was granted the power to decide the yield rate for themselves for these lower-value bonds,” said Shin Dong-gwon, managing director of the FTC’s cartel investigation bureau. “So it must have been easy for them to succumb to the temptation to collude [to maximize their returns].”

Baby bonds usually mature in five years or more. The government requires some of these be purchased when individuals buy new homes or cars, or start new businesses, in order to stock its coffers to provide financing for social infrastructure.

“These bonds can be seen as a kind of tax - taxes you lend to the government but get back after at least five years,” said Kim Jae-shin, another official at the FTC’s cartel division.

However, as most retail investors are not prepared to wait this long, the majority sell them off straight away for a lower amount.

“They don’t want to miss out on opportunities to invest the money elsewhere,” said Kim, adding that most of the bonds only offer yields of around 3 percent when they mature.

The 20 securities companies set the yield rates on a daily basis and these are used as a benchmark for the following business day to decide the immediate sale price of the bonds.

According to the FTC, they met online at a chat room everyday at around 3:30 p.m. to decide what number to report to the Korea Exchange.

“Let’s just decide on one number, either 4.87 or 4.95,” one trader was recorded as posting in a chat room in 2004. Others responded that they would all put 4.87. The FTC provided snapshots of their online conversation as evidence.

To set its daily rate, the Korea Exchange collects all the reported yield rates, excludes the top 20 percent and lowest 10 percent, and takes the average from the remaining 70 percent.

The FTC started its investigation last year after the Board of Audit and Inspection tipped it off about the possibility of collusion taking place in May. Officials from the commission say the practice may still be rampant.

“We don’t know if it’s still happening, or whether it will again in the future [as we only checked until 2010],” said Kim. “Therefore, it’s important we fix the system so that securities companies have less power to control the bond yields.”

Industry experts say the FTC’s investigation went smoothly because securities companies cooperated to receive leniency. Daishin Securities is known to have even supplied hard copies of its officials’ online chats.

“One of the companies cooperated extensively during the investigation and it was exempted from being prosecuted,” said Shin.

In its defense, Samsung Securities said it had only discussed expected bonds yields with other securities firms because it was advised to do so by the government.

“The government wanted us to minimize our profits and keep low margins, so we had to have advance talks,” said Kim Jin-ho, director of Samsung Securities’ communications team.

But the company added in a release that it had forbidden such exchanges since December 2010.

“We made this decision because outsiders may have seen our ‘discussions’ as being part of something more nefarious, like collusion,” said Kim.

Kim refused to comment on how the company will proceed until after it is officially indicted.

Woori Investment & Securities also declined to comment on the FTC’s move.

Four other securities companies that currently trade baby bonds, including IBK Investment & Securities and Dongbu Securities, have been excluded from the investigation as they were only allowed to trade such bonds after 2010.

By Lee Sun-min [summerlee@joongang.co.kr]

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