Financial groups still don’t get it

Jung Kyung-min

At a time when South Korea was burdened with stringent austerity measures in return for an international bailout, Wall Street celebrated a landmark deal on April 6, 1998, in the luxurious Waldorf Astoria Hotel. The occasion was the mega-merger between insurance group Travelers and Citicorp bank that resulted in the world’s largest financial behemoth. The creation of a kind of financial supermarket had been a dream of Travelers Group chief executive Sanford Weill since he started out in the industry as a stock broker.

He became the first chief executive of the enlarged Citigroup. He then rewrote the rules of the Wall Street. Banking and insurance businesses had been kept separate under the Glass-Steagall Act that barred commercial banks from investment banking activities. The federal law was enacted in 1933 following domino bankruptcies of banks that went bust during the Great Depression in 1929 due to heavy losses from underwriting securities. That made Morgan Stanley split from JP Morgan.

The deal that created Citigroup paved the way for that wall of separation to fall. It allowed consolidation and agglomeration of investment and commercial banking on American soil to compete on equal footing with European-style universal banking. Citigroup was born, composed of Citicorp (banking), Travelers (insurance), Salomon Smith Barney (brokerage) and other financial units of the Travelers Group. They were separately incorporated entities, but operated as one organ. It had a secret integrated electronic network system that allowed different units to access client information and assets of others by classifying data under large categories of retail, wholesale and management instead of industrial sections like banking, securities and insurance. The group head ran the entire operation from a computer screen, This spawned ever-sprawling and growing financial holding companies.

With flexibility to cross over and jump around financial industries and instruments added to the elephantine size, American financial holding companies became omnipotent and mighty. Asia, struggling under a financial and liquidity crisis, and Russia in the wake of a debt moratorium, became easy prey for gigantic Wall Street predators. Wall Street absorbed the smartest brains around the world, flashing lifestyles and fat paychecks as bait. No wonder the holding company template came across as a shortcut to riches and a bonanza to Korean financiers.

The fad arrived in 2001 and spread wildly across the domestic financial field. Starting with Woori, all the other banks - Shinhan, Hana, Kookmin and Korea Development Bank, as well as foreign players Citicorp and Standard Chartered - turned into holding companies.

However, Korea’s first holding company Woori Financial Group was born from an entirely different motivation. The group was forced by the government to bundle up all the weaklings and fallouts from the financial crisis - Hanvit Bank, Kyongnam and Kwangju Bank, Peace Bank and five other merchant banks. Unions of each bank violently resisted the move. The two regional banks remained as “isolated” subsidiaries until recently and were spun off to be put up for sale. Moreover, these financial groups relied on banking services for 80 percent of their revenues. Since the financial crisis, domestic financiers avoided risky investment banking and corporate financing and instead concentrated on easier mortgages and consumer loans. As a result, they became plant-eating dinosaurs. Any semblance of a synergy effect from financial consolidation was hard to find.

Because ownership was blurry, chief executives were handpicked by the government and financial regulators. Due to the equivocal role of the financial group chairman, in-house squabbles between the chiefs of the group and bank unit never ended. The recent noise over replacement of a computer network at KB Financial Group also stems from such internal power struggles.

A financial group is only meaningful when it generates synergy effects from one-stop consolidated financial services. A holding company arrangement is meaningless if there are no benefits from integration. We can hardly name one financial holding company that offers diversified services like Citigroup.

American financial groups have been blamed for the Wall Street meltdown in 2008 with their reckless ventures in subprime mortgages. As a result, companies have been chained to a new federal law preventing them from risky derivatives investment. Gone are the days when financial giants can dominate the playing field with size and money.

What we need are fast and flexible small players that can provide timely customized and diversified services for a wide range of consumers.

JoongAng Sunday, May 25, Page 30

*The author is business editor of the JoongAng Sunday.

By Jung Kyung-min