Commentary: Korea's Cliff-Hanger du Jour

LG Card's bailout was no surprise. How many others will there be?

Over the course of a chilly fall weekend last month, South Korea's Finance Minister held urgent consultations with Woori Bank President Lee Duk Hoon. The crisis: A troubled lender that Woori served as primary creditor was on the verge of insolvency. By Nov. 23, Lee had persuaded the country's seven other leading banks to back a $1.7 billion bailout consisting of emergency loans and a one-year rollover of maturing debts. The company teetering on the edge? LG Card Co., the once-high-flying credit-card arm of South Korea's second-largest conglomerate, LG, better known to the outside world as a maker of cell phones and appliances. This drama followed an all-too-familiar formula in South Korea -- featuring a chaebol financial company as the damsel in distress. In this case, Finance Minister Kim Jin Pyo played the hero, untying LG Card from the railroad tracks.

This scenario has been reenacted half a dozen times since the 1997 Asian financial crisis shocked an overleveraged South Korea Inc. Reformers say the plot line should have been ditched long ago. Better to have put LG Card under the control of its creditors or in court-ordered receivership, critics say, than throw a lifeline to its management. It's hard to argue with that logic. For what makes this rescue particularly egregious is that everybody saw the credit-card bubble forming. As long ago as last spring, it was clear that the lending practices of the credit-card issuers were leading to trouble. Yet company execs, bankers, and government officials did little. "It's simply pathetic that regulators haven't ordered corrective measures against LG or other troubled card companies since April," says Choi Gong Pil, chief economist at Korea Institute of Finance, a bank-financed think tank.

Indeed, the bubble in credit-card debt has been forming for two years. In April, Seoul engineered a $4.2 billion repackaged loan deal to tide over the entire credit-card industry, including LG Card. But delinquencies continued to rise, nearly doubling in the past 18 months (chart). Industry leader LG Card, representing about a third of the sector's business, was the most aggressive of all when it came to handing out plastic; its outstanding credit jumped fivefold from 1999 to 2002, although it dropped 25% in the first nine months of this year.

LG Card blames the weak economy for its troubles. "Delinquency rates simply didn't fall [fast enough] because of a slower than expected recovery," says LG Card Senior Manager Yeo Eun Joo.

But senior management also felt protected: The government would bail them out -- no matter how bad business got -- to avert a crisis. Part of the reason Finance Minister Kim felt obliged to save the credit-card companies was to prevent more damage to the investment trusts that gobbled up large chunks of securitized debt issued by credit-card companies. The trusts, which operate like mutual funds, hold $126 billion of Koreans' savings. South Korean officials acknowledge that the reason they "sought cooperation" from the banks was that if LG Card had gone under, it might have destabilized the whole financial system. "It's like juggling a set of bombs instead of trying to defuse them," says Hongik University economist Jun Sung In.

In the end, even $1.7 billion may not be enough to save LG Card, which lost $858 million in the first nine months of this year and still holds $6.7 billion in questionable credit-card debt and cash loans. LG Card CEO Lee Chong Suk said on Nov. 25 that he's considering selling a controlling stake to foreign investors. GE Consumer Finance is among those thought to be interested. A takeover of LG Card on the cheap may be the best that critics of the status quo can hope for. The loss of management control to outside players could serve as a lesson to other companies -- and to a government that can't say no.

By Moon Ihlwan

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