Lone Star: The great divide

Lone Star. What does that phrase suggest to you, dear reader? It connotes Texas, of course, whose state flag includes a single star. Or you may know “Lone Star State of Mind,” the title of a 1987 album by the Texas-born singer Nanci Griffith and a separate movie released in 2002.

In Korea, a Lone Star state of mind implies something very different. Lone Star Funds (LSF) is, as you probably knew, a global private equity (PE) firm based in Dallas, Texas. Founded in 1995, Lone Star has organized 15 PE funds totalling $60 billion in many countries.

Nowhere else is Lone Star so famous - or notorious - as South Korea. Its Korean saga began in 2003, when LSF paid 1.38 trillion won ($1.2 billion) for a controlling stake in the Korea Exchange Bank (KEB), the country’s fifth largest. Later it also invested in real estate and construction.

From 2005, LSF tried to sell KEB, but was blocked until 2012. Then Hana Bank paid 3.9 trillion won for it. With the public furious that a foreign firm stood to reap a huge profit - and would pay no tax on it - prosecutors “declared an all-out war.” Not my words, but those of Yonhap, the quasi-official South Korean news agency in a ‘News Focus’ article (More about that below).

A decade later, the war is still not over. In fact a new battle is raging as I write. On June 29, the International Center for Settlement of Investment Disputes (Icsid), a division of the World Bank in Washington D.C., began its second hearing - the first round was in May - of the first investor-state suit ever brought against the Republic of Korea. Guess who the plaintiff is.

Lone Star is seeking damages of $4.68 billion. Unfair taxes are one issue, but LSF’s main claim is that regulators’ prolonged refusal to let it sell KEB to successive willing buyers - first Kookmin Bank (KB), and then HSBC - while legal proceedings were ongoing in Seoul, caused it huge losses, especially after the 2008 financial crisis saw valuations plunge.

South Korea denies any wrongdoing, and an inter-agency team is fighting in its corner in Washington. It could take a year for the three-strong panel to reach its verdict (No appeal is allowed). Seoul media has noted that the British presiding arbitrator, the strikingly named V. V. Veeder, was on a panel which in 2011 found for Lone Star in an earlier dispute with a Korean state firm.

Which side is right? We should not prejudge matters currently sub judice. Also, the case is highly complex as well as contentious. For a balanced guide to the issues, I may recommend a June 30 article by S. Nathan Park on the Wall Street Journal’s Korea Real Time (KRT) pages, which sadly was also KRT’s swansong: the paper shut this blog down from July 1. They still publish China Real Time and Japan Real Time. Is Korea somehow less real? But I digress.

Nathan Park is rare in being not only thorough, but also fair. Almost everything else written about LSF is highly biased, with a huge and worrying perceptual gap between Koreans and others.

Does any Korean have a good word for Lone Star? Rude terms like “vulture” or “eat-and-run” are bandied about. In a phrase found in no economics text I know, firms like LSF are accused of “stealing the nation’s wealth.” You would think they had robbed a bank, rather than rescued it.

Foreign perceptions are totally different. True, PE, hedge funds and the like are rarely objects of affection, especially since 2008. Also, though not illegal, the use of subsidiaries in various countries - Belgium in LSF’s case - to minimize tax liability is increasingly viewed as wrong.

Yet foreign business saw and sees Lone Star as the victim and its prosecution as persecution. The actual lesson would-be investors drew from this interminable saga is overwhelmingly negative. The message to non-Korean firms seemed to be: You operate here on sufferance. If you dare to make a huge profit, or annoy us, woe betide you; we will throw the book at you.

That reading may be totally unfair. But in a quote I’ve used before: If people think something is real, then it is real in its consequences. Remember when “hub” was the buzzword in Korea? All that heady talk a few years ago about Seoul becoming Northeast Asia’s financial center?

If you aspire to be a hub, hounding Lone Star was a lousy idea. As Kim Seok-dong, chairman of the Financial Services Commission (FSC), admitted in 2012: “It is very unfortunate if the Lone Star case left a negative impression on … [would-be] foreign investors.” No if about it.

Yet Kim is a minority. South Korea overall has chosen to fight on. Did no one in the government consider settling with Lone Star to prevent yet more harm from all this dirty linen being aired over again? Maybe they feared the reliably shrill media would denounce them for surrendering.

Yonhap for one. Its ‘News Focus’ section usually contains careful analytical articles. Not the one I cited above. It is cursory, shoddy (exaggerating LSF’s profit) and partisan. Despite admitting that the Supreme Court rejected the claim that Lone Star’s purchase of KEB was illegal, Yonhap dubs this a “shady deal” and complains that officials involved were promoted rather than punished.

“We was robbed!” cry Koreans. “No, we was robbed!” cries Lone Star.

There is no middle ground. V. V. Veeder and his colleagues will be hard put to reach a verdict that can satisfy both sides. Whatever the result, it’s worrying if anger with Lone Star blinds Koreans to the wider harm this sorry saga has caused. FDI-friendly, or fortress Korea? You can’t have it both ways.

*The author is an honorary senior research fellow in sociology and modern Korea at Leeds University in the UK.

by Aidan Foster-Carter