KDB’s moral hazard

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KDB’s moral hazard

The state-run Korea Development Bank (KDB) has worsened the state of Daewoo Shipbuilding & Marine Engineering (DSME) because of its incompetence and immorality, according to findings by the Board of Audit and Inspection (BAI).

As its largest stakeholder and administrator of tax funds, the bank should have been overseeing the shipbuilder and ensuring management was running the company well. But it was under poor management itself and neglected, or turned a blind eye, to accounting irregularities.
Despite its analytic risk control system, the bank failed to employ it for the shipbuilder and catch 1.5 trillion won ($1.3 billion) in overstatements on its balance sheets for two years. It kept idle while the shipbuilder expanded to incur over 1 trillion won in losses. It did not stop the company from paying out bonuses worth 87.7 billion won to employees even after making an operating loss of over 3 trillion won last year.

DSME is de facto bankrupt, with deficits overwhelming capital after it incurred its single largest deficit of 5 trillion won last year. As much as 7 trillion won in public funding has been put into the company. More could be needed to keep it afloat.

The state bank administrator is largely to blame for the waste of valuable public resources. This is because political figures have dominated the bank’s key positions.

Under such a structure, we cannot expect reliable and expert administration of public funds and companies under state management.

Thanks to the bank’s delinquency, moral hazard was so rampant and discipline so lax at the shipbuilder that even a low-ranking employee was able to embezzle 18 billion won over eight years.

The BAI, as a watchdog for state entities, should also share the blame. It has audited the state bank every year. Even as dangers at shipbuilders were raised last year, the BAI failed to take any action. It only acted when the woes spilled over and translated into massive layoffs. It then proposed punishment for former and incumbent executives.

Restructuring can hardly be effective with such leniency. We need a BAI free of political influence in order to ensure that public entities are well run and public funds well spent.

JoongAng Ilbo, June 16, Page 30
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