Farewell to Lone Star
Seoul needs to ease concerns of foreign investors
Lone Star will soon make an exit after finalizing the selling of their shares of KEB. The departing U.S. hedge fund taught costly lessons to Korean policymakers and left a lingering bad taste in Korean mouths. In the future, Seoul should not repeat the same folly in dealing with hedge funds.
Lone Star was initially unqualified to run a bank under Korean law. In 2003 it was inevitable that KEB on the verge of bankruptcy had to be sold to whoever wanted to buy. When the Texas-based fund landed here, the economy was in a fragile situation following the unprecedented currency crisis.
The Lone Star case has taught policymakers how ineffective administrative arm-twisting is in dealing with foreign companies and entities.
The fund legally exploited all possible loopholes of local laws, regulations and tax codes. Although, at least so far, it has won legal battles, meaning that it did not violate local laws and rules.
This prompted policymakers to review the existing regulations. The fund drew the ire of administrators as it trampled on the spirit of banking and tax rules. This is a Korea-specific phenomenon. In the U.S. those breaking the letters of law face punishment. In Korea, infringing upon the spirit of law is a crime. This cultural difference triggered frequent clashes between regulators and taxmen, and the fund.
Lone Star took advantage of the tax-haven rule, effectively paying nothing for its capital gains. This unduly inflamed the public who are expected to pay tax on any sort of income. For Lone Star, it was not a happy marriage in Korea. The Roh Moo-hyun government had adopted all administrative tools to sensationalize its alleged tax evasion and possible violations of rules. Its emotion-laden approach produced almost nothing, only scaring away foreign investors and tarnishing the national image.
Its exploitation of tax and banking codes hurt the pride of Koreans. The fund is ugly, at least in the eyes of angry citizens. Lone Star is also a PR disaster as it cared little about the Korea-specific public sentiment.
Its annual gain of 15 percent on investment here is unattractive by the yardstick of global hedge funds. It netted about $5 billion in capital gains.
Regulators will review next week whether Hana Financial Group’s takeover of KEB is legally clean and the Hana-KEB merger will be subject to the fair trade rule.
Lone Star is getting ready for a battle with the tax office over the capital gains tax. The fund had pledged to donate 100 billion won to society.
The Lone Star incident should be a textbook case for policymakers, regulators and tax administrators. The government must ponder what Seoul has gained or lost through the case. Lone Star invested to earn money. Earning money through legal means must be guaranteed. Amateurish handling of the case only scared away potential foreign investors. Now is the time for a graceful exit. Lone Star must honor its respect for Korean laws and public pledge till its final departure.