Is Seoul Losing The Nerve For Financial Reform?

Recent moves are protecting chaebol by thwarting takeovers

This has been a disastrous year for Choi Soon Young. The chief of Korea Life Insurance Co. is on trial over charges that he illegally spirited millions of dollars out of the country. His company, which owes $2.5 billion, has been seized and put up for sale by the government. But Choi has one thing going for him: Korea's bureaucracy. Despite two auctions, the agency responsible for the company's fate still hasn't sold Korea Life, the country's third-largest insurer. In fact, there is growing skepticism that Choi will really lose control of the company.

The official line is that the offers have fallen short of the government's $1.5 billion asking price and other criteria. After all, Korea's economic prospects have vastly improved since the company was first put on the block. But analysts draw a more dour conclusion: Korea Inc. may be losing its resolve to open its financial-services sector to foreign investors.

The botched sale of Korea Life seems to fit a pattern. Two other high-profile deals--the sale of Korea First Bank to Newbridge Capital Ltd. and HSBC Holdings PLC's takeover of distressed Seoulbank--also have run aground. "Commitment to financial restructuring may be wavering," worries James P. Rooney, chief executive of SsangYong Templeton Investment.

SMALL STEPS. Finance Minister Kang Bong Kyun insists that Seoul still plans to sell nationalized banks to foreigners. To be sure, given Korea's traditional suspicion of foreign investment in key sectors, nobody expected the process to be problem-free. Overall, President Kim Dae Jung's government has an impressive record so far. Since agreeing to an International Monetary Fund bailout in late 1997, the government has allowed Goldman, Sachs & Co. to invest $500 million in Kookmin Bank, the country's biggest retail bank. And Germany's Commerzbank bought 30% of Korea Exchange Bank.

But these deals involved minority stakes and are unlikely to bring about the revolutionary changes that reformers, such as President Kim, are seeking. By buying outright control of Korean institutions, the theory goes, foreign competitors will usher in services and advanced lending practices that will force local companies to shape up. But total control of a Korean bank or insurer may elude Americans and Europeans. In fact, after nixing foreign bids for Korea Life, the Financial Supervisory Commission said it will accept offers from the country's five biggest conglomerates, even though the chaebol have in the past used insurance subsidiaries as piggybanks to finance other investments.

BIG SETBACK. The main resistance to selling assets to foreigners comes from vested interests, such as powerful chaebol and midlevel bureaucrats who regulate financial services. The unraveling of Newbridge's proposed takeover of Korea First Bank is a case in point. Talks broke down in May over how to value Korea First's assets and Newbridge's right to sell nonperforming loans to the government. Newbridge insists it's still in the running. "It's a good deal for Korean taxpayers, the government, banks, and for customers," says Newbridge Managing Director Wei Jian Shan. But many analysts regard the takeover as doomed.

Conglomerates, such as the $65 billion Daewoo Group, one of Korea First's biggest borrowers, helped lead opposition to the deal. Daewoo is saddled with some $50 billion in debt. If Korea First ends up in foreign hands, it could impose much tougher financial discipline on the group. Daewoo Chairman Kim Woo Choong has spoken out publicly against asset sales to foreigners. And the government has hinted that it may pump $3.5 billion into Korea First, which would relieve pressure to sell the bank. HSBC's proposed $700 million purchase of a 70% stake in Seoulbank, which looked like a done deal early this year, also has stalled. Both sides are mum on details.

Seoul's finance mandarins believe that they can at least extract better terms from suitors now that the economy is rebounding. But until a significant foreign deal is closed, suspicion will remain that Korea's financial reforms are superficial.

"Simply fixing the balance sheets of banks and chaebol only clears away the wreckage of the recent typhoon," warns Wilbur L. Ross, executive managing director of New York-based Rothschild Inc. If the old nexus between banks and chaebol survives intact, it's only a matter of time before the next storm hits.

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