KIC loses $1 billion from Merrill Lynch investment

By Kang Seung-woo

The Korea Investment Corp. (KIC) has been under fire for poor risk management, with its investment in Merrill Lynch halved in the wake of the global financial crisis, a lawmaker said Wednesday.

During an audit by the National Assembly, Rep. Yoo Il-ho of the governing Grand National Party (GNP) said that KIC’s stake in Merrill Lynch was valued at $1.03 billion as of September, about half of the $2 billion it paid for the stake in January 2008. Hit by the global financial crisis, Merrill was sold to the Bank of America (BoA) in September, 2008.

As of the end of September, BoA’s stock price fell to $13.11 per share from $27.52, the price at which KIC converted its Merrill preferred shares into common stocks on July 28, 2008. It agreed on the conversion to help normalize Merrill’s operation.

The KIC has claimed that it retained the stake in the belief that the shares would rebound in the long term, given the intrinsic value of BoA.

“Despite the KIC’s positive statement last year, the loss has snowballed since then,” Rep. Yoo said. “I am still wondering if it is reasonable to own shares of BoA.”

Lee Hye-hoon, another lawmaker from the same party, argued two days ago, based on documents from the Board of Audit and Inspection that the KIC did not observe the regulations on investment and disregarded the opinions of its risk management team.

This means that the KIC rushed to meet the deadline without any inspection on potentially insolvent assets and review on possible risks.

Merrill Lynch reported a loss of $9.8 billion in the fourth quarter of 2007 after being hit hard by the subprime mortgage crisis.

Minister of Strategy and Finance Yoon Jeung-hyun also questioned the KIC’s investment.

“It is questionable that it took just a week to make the investment decision and for the Ministry of Finance and Economy to approve it,” he said.

The Ministry of Finance and Economy is the predecessor of the Ministry of Strategy and Finance.

“Now, it is under the supervision of the Financial Services Commission (FSC), so I think that the FSC chairman might take action against it.”

Meanwhile, the KIC, headed by CEO Chin Young-wook, has posted an accumulated return of 7 percent over the last four years. Since November 2006, the KIC has made capital gains of $2.3 billion from its total investment of $33.32 billion.