Lehman: Skeptics Doubt a Korean Rescue

The Seoul government may not permit state-owned KDB, which is supposed to be preparing for privatization, to make an acquisition

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Could state-owned Korean Development Bank be the rescuer Lehman Brothers (LEH) needs? KDB chief Min Euoo Sung certainly thinks so. On Sept. 2, Min confirmed that his bank is in talks with Lehman about a possible deal and said he was approaching private Korean financial institutions for funding.

That's hardly a surprise. Since taking command at KDB in June, Min, formerly Lehman's top executive in Korea, has viewed the global credit crunch as a chance to buy foreign assets at bargain prices. Lehman Chief Executive Richard Fuld badly needs cash to bail his beleaguered bank (BusinessWeek, 6/4/08) out of the current credit crisis. An investment in Min's former Wall Street employer has the potential to catapult the Korean bank into the ranks of the world's top global banks. "He is a very aggressive dealmaker," says one of Min's former colleagues, who spoke on condition of anonymity.

But analysts are skeptical that Min can pull it off. That's because Min was hired to prepare KDB for privatization—his top priority. "The name of the game now is hoarding resources to prepare for the winter," says banking analyst Chang H. Lee at Daiwa Securities. "It certainly is not a time to seek glory through expansion."

Orders from Above

KDB's privatization offers a test case for Korean President Lee Myung Bak's policy of shoring up the country's financial sector. Few Korean banks have achieved the international presence of manufacturing powerhouses Hyundai and Samsung. Lee is eager to show that Korean banks can raise their profile on the international banking scene, while leading the country through its next wave of growth.

Min will have to abide by detailed guidelines that the Korean government has drawn up for the privatization process. The guidelines effectively force KDB to seek private-sector partners willing to put up the funding to buy a stake in Lehman.

The problem is, few Korean banks have an appetite for high-risk, high-return deals now. The Korean media have named Woori Financial Holdings, Hana Bank, and Shinhan Financial Group as candidates to be KDB partners in a takeover offer for the Wall Street bank, but all of them have said they have no such plan. "Woori Financial has neither received any such proposal from KDB nor considered investment in Lehman," says Woori spokesman Lee Won Chul. Hana has sent an e-mail to banking analysts denying the local media report.

Political Angles

Korean regulators have made clear they will reject any KDB deal that requires spending taxpayers' money. Another worry, says Financial Services Commission (FSC) spokesman Yoo Jae Hoon, is that an aggressive "adventure" of this sort could possibly hurt the country's creditworthiness. "Deals deviating from government guidelines won't get a green light," says Yoo.

Last week, FSC Chairman Jun Kwang Woo ruled that KDB's role in any investment in Lehman (BusinessWeek.com, 8/25/08) must be limited to that of a "catalyst."

KDB's Min has told reporters that he will toe the government line and try to recruit from independently run banks to form a Korean consortium of investors. Some observers speculate that there's still room for Min to pull off a deal with Lehman. "It will come down to a political decision," says finance professor Kim Dae Sik at Hanyang University, pointing out that taking a stake in Lehman could be a good start on narrowing the gap in financial expertise. "Priorities could be redefined, given that the primary reason for privatization is to level up the financial industry," he says.

But even if KDB buys Lehman, the bureaucratic culture of the government-owned bank will make it tough to prevent an exodus of talent from Lehman. "Human assets are everything in an investment bank, and Korea may end up buying a shell," says Lee Dong Gull, president of the Korea Institute of Finance, a think tank set up by Korea's commercial banks. Citing state-run entities' rigid human resource management and the lack of a flexible incentive system, Lee adds: "It is another reason why the private sector should lead such a deal."

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