Assembly audit must reveal those responsible for leveraged ETF fiasco
Seoul stocks have been tanking since mid-June, when the bullish market took a sharp turn as investors rushed to dump shares of Samsung Electronics and SK hynix amid growing concerns over the sustainability of Big Tech companies’ unprecedented investments in artificial intelligence (AI).
After surging to as high as 9,385.59 points on June 19, the benchmark KOSPI tumbled to as low as 5,262.77 points on July 29. Although some market correction was inevitable following KOSPI’s unprecedented rally, driven by the two Korean chip giants amid the global AI investment boom over the past year, single-stock leveraged exchange-traded funds (ETFs) tied to the two companies have been widely blamed for amplifying market volatility.
Unlike conventional leveraged ETFs, which track broader indexes such as the KOSPI 200 or the S&P 500, the controversial products, launched on May 27, provide leveraged exposure to individual stocks, allowing investors to gain or lose twice the daily return of the underlying shares.
Fueled by the AI-driven chip rally, the products rapidly gained popularity among investors. But trouble began when market sentiment turned downward soon after their launch. While gains are amplified during rallies, losses are likewise magnified during downturns.
Because Samsung Electronics and SK hynix account for more than half of KOSPI’s market capitalization and trading value, sharp movements in the two stocks have had an outsized impact on the broader market.
Many retail investors who saw their losses magnified are now demanding to know why such risky investment products were introduced in the first place, whether they went through the proper approval process and who was behind their launch.
In particular, the rollout has drawn criticism over the speed with which the products were approved. Critics have questioned whether the ETFs were rushed to market after receiving strong backing from Kim Yong-beom, who was presidential chief of staff for policy at the time.
Kim, who resigned on Sept. 1 amid mounting public backlash over a series of policy blunders by the Lee Jae Myung administration, has been portrayed as a key figure responsible for losses suffered by leveraged ETF investors.
Multiple media outlets reported that Kim, who first proposed the idea of single-stock leveraged ETFs earlier this year, pushed ahead with the plan despite reservations among officials at the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS).
At the time, Cheong Wa Dae was eager to take measures to curb the soaring won-dollar exchange rate, hoping that the launch of leveraged ETFs would encourage Korean investors to bring money back from U.S. markets and help support the struggling won.
Some critics have also argued that the ETFs were “hastily launched without due process” just a week before the June 3 local elections in an attempt to appeal to younger voters and bolster support for Democratic Party of Korea candidates.
FSC Chairman Lee Eog-weon is another senior policymaker involved in the introduction of the risky investment products.
Lee has been accused by the main opposition People Power Party and other critics of approving the high-risk products without sufficient due diligence, including stress tests designed to assess how they would perform under extreme market conditions.
In early August, Lee Jong-bae, a former Seoul Metropolitan Council member from the opposition party, filed a complaint with prosecutors accusing the FSC chief and the former presidential aide of dereliction of duty and abuse of authority.
FSS Gov. Lee Chan-jin is another high-profile figure involved in the rollout of the leveraged ETFs.
As head of the financial watchdog, Lee has been criticized for failing to do enough to stop the launch of the risky investment products.
At a June 22 news conference, he expressed unusually strong remorse over the products’ launch. “I feel like I should have thrown myself in front of it if that was what it took to stop the launch," he said.
His remarks suggested that he was aware of the potential risks associated with the leveraged ETFs but failed to take sufficient action to prevent their introduction.
Given these circumstances, the upcoming National Assembly audit must shed light on what really happened and who was responsible for the introduction of single-stock leveraged ETFs. The public deserves to know the truth.
If any criminal conduct is uncovered, those responsible should be referred to prosecutors for investigation.
Only through such accountability can policymakers be encouraged to follow due process and implement policies only after carefully weighing their potential risks and benefits.
Against this backdrop, it is disappointing that the ruling party has refused to put former presidential policy chief Kim on the witness stand.
Even without Kim’s testimony, the National Assembly’s National Policy Committee should rigorously question the FSC chairman and FSS governor, as well as the heads of brokerages and asset managers that introduced and sold the controversial products to investors.
Lawmakers should establish who first proposed the products, how the approval process unfolded and whether regulators adequately assessed the risks before allowing them to enter the market.
Only through stringent oversight and a thorough review of policy failures can we prevent similar fiascos from happening again.
Regardless of their political affiliations, lawmakers must get to the bottom of what happened and hold those responsible accountable.
The writer is the finance editor at The Korea Times.