Korea First Bank remains a money pit

3.5 trillion won. That`s massive amount of money. It is the amount that the government has decided to offer to Newbridge Capital, which has acquired Korea First Bank (KFB). So far, the Korean government has poured nearly 12 trillion won of public funds to normalize the insolvent bank. It is equivalent to more than 10% of the nation`s annual budget, which is less than 100 trillion won. The KFB was sold to a foreign financial institution. Still, the government is required to offer financial aid.

It¡¯s an unfair situation, but there is nothing the government can do because it is specified in the contract between Newbridge and the Korean government. When it sold the KFB in 1999, the government promised that it would purchase all non-performing assets arising for the next two years. At that time, the government was paid 500 billion won by selling its 51% stake in the KFB. Financial circles made sarcastic remarks that it was an easy game for Newbridge, criticizing that the bank was sold at scrap value.

The problem is that the government was required to pour more money since there will be two times of evaluation of its assets at the end of next year and the end of 2002 under the contract. Depending upon the KFB`s judgment, the government will have to provide additional funds to the bank by utilizing taxpayers¡¯ money. Some analysts said that several trillion won in additional funding would be required. It is noteworthy, although it is a report by a private economic research institute.

There are questions whether the new management at the KFB did its best and whether a moral hazard is involved that all non-performing assets would be born by the Korean government. The Deposit Insurance Corp. said that it would examine the lending classification of the KFB prior to paying the money requested by the bank, but its effectiveness is in question. The case of the KFB provided a lesson that sale of domestic companies to foreign buyers needs to be supported by an elaborate strategy regarding terms and conditions of sale. And its price was found to be so dear.