Friday, November 26, 2010

Korea's Embarrassing Behavior Regarding the KEB Sale is Now Finally Over

Today, Reuters reported that Hana Bank, with potential financial backing from Goldman Sachs, Carlyle Group, and KKR, will purchase KEB from the the U.S.-based private equity firm Lone Star.  This potentially removes the black eye that has scarred Korea's reputation on the global financial stage.

The positive?  The courts ultimately used proper law and economics principles to uphold the lawful sale.  It was refreshing to see that the Korean legal system actually used financial principles in denying the appeals to the eventual sale of KEB to Lone Star.  As The Lost Seoul has stated here, the fact is that there were NO other buyers for KEB's assets at that time.  As a result, the concept of "fair value," especially when a company is under extreme financial distress, was almost impossible to ascertain. It doesn't really matter if you believe that your used car is worth $5000 if the only willing buyer is willing to pay $2000.  The "fair price" is...$2000.  For the appeal to suggest that there was manipulation of what the "fair price" was is totally irrelevant.  The Korean legal system has upheld this basic economic principle. 

The negative?  This entire process exposed the relative infantile nature of Korean corporate and societal behavior to the world.  If KEB failed in 2005, after KEB had been sold to a foreign buyer, would Lone Star have a case if it tried to negate the sale after the fact?  No.  In the U.S., private equity firms tried to buy very large stakes in Washington Mutual during the financial crisis.  There was no public uproar which sympathized with the buyers.  It is especially the case after the deal had been completed, and approved by governmental officials.  If Korea wishes to jon the first world at the level equivalent to the world-class products that it produces, then it must follow internationally-accepted (and logical) rules of international trade.  Financial transactions are different than when a person buys a new car.  In that case, the car may have production defects.  Those defects are guaranteed to be fixed by the manufacturer.  However, the price of the car is up to the buyer to determine, i.e. if the buyer believes the car is too expensive, he/she buys a different model.  In the future, Korean governmental officials must make sure that it has the appropriate measures to approve financial transactions, and the government must uphold its own decisions, even if politically unpopular.  Not doing so has made Korea look silly on the international stage.  Let's hope that this does not occur in the future as Korea continues its march to the upper echelon of the global economy.


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