Letting go of Lone StarThe Lone Star specter hangs over the financial authority as the Dallas-based buyout fund is engaged in a $4.6 billion arbitration lawsuit with the Korean government in Washington under the auspices of the World Bank. I met several former and serving officials who were summoned to testify in the damages suit the U.S. private equity company is claiming against the Korean government for losses due to government interference in the process of selling its stake in the Korea Exchange Bank (KEB) in 2008. They all shook their heads when asked about the government’s odds in the case. There is little chance that the government will completely win. Even a slight penalty could deal a heavy blow to the government.
A former minister sighed. “We have to let it go … not for Lone Star’s stake, but for our sake.”
The never-ending drama involving Lone Star goes back to 2003 when it acquired Korea Exchange Bank. The fund was accused of illegality and favoritism, for making a huge profit through the bargain-priced purchase and having little interest in the bank’s future. But at the time, there were no better options for the Korea Exchange Bank. Kookmin Bank and other local banks resisted the financial authority’s pressure to acquire KEB, which was teetering on the brink of bankruptcy due to troubles with its biggest corporate debtors, Hynix Semiconductor and Daewoo Construction. Those two companies, however, turned around nicely and Lone Star benefited.
The showdown with Lone Star has had major repercussions. Lone Star became the ghost at the banquet, a cautionary tale about the predatory nature of foreign capital in mergers and acquisitions. When it sold off its stake in KEB to KB Financial in 2006, it was estimated it would double its initial investment. Civic groups and politicians were enraged at the so-called “eat and flee” behavior of Lone Star. Korea never recovered from the bargain sales of assets - from banks to mining fields - following the 1997 financial crisis. It had to endure humiliation at the time and follow the restructuring orders of the International Monetary Fund in return for a multibillion-dollar bailout.
But the country has paid off its debt and no longer wants to play the fool. The opposition Grand National Party led the charge. It accused President Roh Moo-hyun of having received money from Lone Star to win the election and demanded a probe. Prosecutors spent two years scrutinizing government account books but could not find anything suspicious. Korea ended up looking more foolish for the much-ado-about-nothing moment.
The case also generated the so-called Byeong Yang-ho syndrome, named after the senior finance ministry official who was pilloried for selling KEB at a yard-sale price. Byeong was summoned to courts more than a hundred times and jailed for 300 days for merely doing his job. Since then, public officials shied away from taking risky assignments to avoid any unwanted accountability. The bureaucracy lost some of its will and vivacity since then.
The high-profile face-off with Lone Star raised fears over a cascade of lawsuits from U.S. companies through the arbitration clause in U.S.-Korea Free Trade Agreement. Lone Star was the first to capitalize on the clause. The repercussions could be big and lasting. Officials who have agreed to the lawsuit could be punished.
But if we calmly examine the affair, we would see that we let emotions govern us in what is obviously a straightforward business transaction. In that way, we are no better than China, which has been criticized for blocking capital leaving its country and demanding returns for subsidies and benefits when foreign investors pull out. It courted foreign companies with various incentives to attract investment and then demanded money back when the companies wanted to leave. Korean companies have to sneak out in order to avoid heavy taxes. We cannot criticize companies for trying to profit as much as possible and lose as little as possible, regardless of whether the company is foreign or one of ours. That is what companies are supposed to do. Lone Star took its case to an international court when it lost in Korea. It made a huge amount of money but it is not content. But we cannot let it go on haunting us forever. Korea has more free trade pacts than anyone. It is fully open. It must offer something to get something in return. Whatever outcome the case brings about, we must walk out of the courtroom leaving the Lone Star specter behind once and for all.
JoongAng Ilbo, May 21, Page 30
*The author is an editorial writer of the JoongAng Ilbo.
by Yi Jung-jae