[Editorial] Lone Star Lessons

The last remaining doubts over the sale of the Korea Exchange Bank (KEB) to Lone Star in 2003 at a price lower than its value are being dispelled. Former KEB governor Lee Gang-won has reportedly admitted that KEB’s Bank for International Settlements (BIS) ratio “seems to have been exaggerated.’”

The KEB’s BIS capital adequacy ratio was estimated at 9.14 percent, but this figure was lowered to 6.16 percent, below the minimum takeover requirement of eight percent. As a result, KEB was judged to be an insolvent financial institution, opening the way for the American equity fund Lone Star to take over the bank.

The authorities are on their way to finding out the people behind the scheme. Former KEB executive Chun Yong-jun was arrested yesterday on charges of handing over a large sum of money to his friend’s company for consultation and then receiving 300 million won. Stock options received by the KEB governor at the time and outside directors are being investigated. And the same-school relationships between officials from the KEB, the Financial Supervisory Service, and the Ministry of Finance and Economy that helped Lone Star acquire the KEB are being revealed.

After signing a takeover contract with KEB in August 2003, Lone Star broke its long-term investment promises to KEB and started to sell it this year. Lone Star made an initial investment of 1.3832 trillion won in KEB; two years later, it is estimated that the U.S. equity fund will gain about 4.5 trillion won in profits, including foreign exchange gains, from the deal.

If the company leaves Korea without paying any taxes on its margin, it will cause a considerable controversy over the outflow of the national wealth. If it becomes clear during the investigation that Lone Star must pay taxes, then suspicions about discriminatory taxation in regard to foreign capital will be allayed. Moreover, the takeover contract between Lone Star and the KEB may be nullified if it is found that Lone Star conducted illegal activities at the time of acquiring KEB.

The last reason for a thorough investigation is a need to improve the current systems to ensure that the same thing does not happen again. It should be found what roles those involved played in this case, like the KEB executive who supported the acquisition by Lone Star, the government which interpreted the related laws in a way that ultimately helped Lone Star to acquire the bank, consulting firms which worked with the KEB and the government, and former and incumbent economic vice ministers and law firms, so that there is no repeat of law evasion.