Commentary: Is This Any Way to Tame the Chaebol?

By Moon Ihlwan

Three years ago, South Korean President Kim Dae Jung set out to tame the chaebol, those family-run, politically connected conglomerates that figured mightily in bringing the country to its knees in the 1997-98 Asian crisis. He made a bold decision to cut off new loans to heavily indebted Daewoo Group, declaring that "corporate restructuring can succeed only when the financial sector is free from the influence of industrial capital." Daewoo, deprived at last of the cheap credit that kept it going, collapsed.

Now, President Kim has only a few months left in a presidency that in many ways reinvented South Korea. However, he may be forgetting his reformist lines just as he's about to leave the stage. In several instances, the government has decided to bend the rules that Kim put in place to sever the incestuous ties between South Korea's industrial giants and its financial institutions. Nowhere is this more obvious than in the case of Korea Life Insurance Co., which was nationalized four years ago and is the country's third-biggest insurer. The government is expected to sell 51% to a consortium led by Hanwha Group, the 10th-largest chaebol, for about $600 million.

But Hanwha is hardly the most worthy steward for such a large insurer. The group hasn't reported a profit in five years, and its debt equals 232% of its equity, disqualifying it from starting an insurance company but not from buying one. Earlier this year, regulators caught Hanwha manipulating the books of three of its units, and ordered a stiff punishment. To top it off, Hanwha's track record of running financial affiliates is dismal. Two of them went bankrupt in the wake of the Asian crisis. And its money-lending company is drowning in red ink. "There are too many shortfalls for Hanwha to qualify to be a major shareholder of an important insurance company," reckons Chung Jae Wook, a research fellow at the Korea Institute of Finance. Indeed, an advisory committee of private-sector experts evaluated the sale and recommended against it.

Nevertheless, the Hanwha consortium is close to clinching the deal, partly because Hanwha is offering a good price, and the government is facing huge pressure to recover at least part of the $2.9 billion of taxpayers' money it spent to rescue the insurer. Korea Life finally earned a profit--of $724 million--in the year ended Mar. 31, after piling up $3.2 billion in losses the three previous years. Policymakers say the Hanwha consortium, which includes Orix Corp. of Japan and Macquarie of Australia, is the only serious bidder. And Hanwha has vowed to get its debt-to-equity ratio below 200% by 2005 and not to borrow money from Korea Life for three years.

The regulators should pause before approving this sale, though. Just look at the dynamics of South Korea's life insurance market, the world's sixth-largest. A Samsung Group unit, Samsung Life Insurance Co., controls 40% of the market. If Korea Life, with an 18% market share, ends up in the arms of Hanwha, well over half of the market will be controlled by two big chaebol. Analysts worry that they could be used as in-house banks for their parents, just as in the bad old days. The government rescued Korea Life, in fact, after it had to write off massive loans to its failed parent chaebol, Shindongah.

The proposed sale of Korea Life is not the only sign of backsliding by the Kim regime. In April, the government began letting nonbank financial arms of the chaebol vote their shares held in affiliate companies. "This lets chaebol families use clients' money to further their own interests, often directly against the clients' interests," says Kim Sang Jo, a Hansung University economist who heads a shareholder activist group.

It's laudable that President Kim wants to recover the money taxpayers spent to stabilize the financial system. But he's forgetting another goal: establishing the independence of South Korea's financial sector once and for all. That would be the greater achievement.

Bureau Chief Moon covers Korean finance from Seoul.

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