ed Lesson from Lone Star case

Regulators slammed for hasty order to sell KEB

The Financial Services Commission (FSC) has paved the way for Lone Star’s exit from the local market by ordering the U.S. buyout fund to sell its majority stake in Korea Exchange Bank (KEB) within six months. The measure follows an Oct. 6 verdict that found Lone Star guilty of stock price manipulation related to the bank’s merger with its card unit in 2003.

The instruction may be seen as an inevitable step to end the prolonged debate over the legitimacy of the Dallas-based equity fund’s eligibility as the biggest shareholder of KEB. It is not the end but a new beginning of a dispute about whether the FSC has made a right decision.

First of all, the regulator cannot deflect criticism for taking hasty action against Lone Star without paying heed to politicians and civil activists’ demand for punishment for the fund’s stock price manipulation. On Friday, the FSC ordered Lone Star to reduce its 51.02 percent stake in KEB to below 10 percent by May 18 next year with no strings attached.

The unconditional order is causing a backlash from the public who harbors sentiment against foreign capital firms for their predatory nature. Lone Star’s overly profit-oriented policy has apparently caused Koreans to develop a xenophobic attitude toward its 2.1 trillion won ($1.8 billion) purchase of KEB. The fund has already recovered more than it invested in the bank by selling part of its stake and collecting high dividends.

The FSC defended its order, citing a lack of legal grounds for punitive action against Lone Star. It seems to fear that the authorities might be thrown into a legal battle with the fund if they recklessly take punitive steps. Such a legal dispute could deal a setback to the nation’s efforts to attract more foreign direct investment (FDI). It could also damage the nation’s international credibility.

But the FSC’s inability to hold Lone Star accountable for the fund’s illegal activity may do more harm than good. The regulator should take the blame for only helping Lone Star cash out of the Korean market after making a handsome profit of up to 5 trillion won. In a nutshell, the order is what the fund really wanted to maximize its profit.

KEB unionists and civil activists are calling for the FSC to force Lone Star to dispose of its stake in the Seoul stock market to prevent it from receiving a managerial premium from Hana Financial Group. In November last year, the group signed a deal with Lone Star to buy KEB for 4.4 trillion won. Since then the deal has been on hold, waiting for a court ruling and subsequent action by the FSC. Under the agreement, the premium was set at about 1.3 trillion won.

The Lone Star case is feared to set a bad precedent for allowing foreign capital firms to maximizing their profit despite a grave violation of the law. It would also raise the problem of a national wealth drain. It is urgent to establish a regulatory mechanism to prevent this.

What’s also regrettable is that the FSC issued the order without making a decision on whether the equity fund was qualified to acquire KEB eight years ago. If Lone Star were found to be a non-financial investor, its KEB purchase deal could become null and void. The FSC appears unwilling to shed light on rampant speculation that the financial authorities mistakenly sold the nation’s fifth-largest bank to Lone Star too hastily and too cheaply without scrutinizing the fund’s eligibility.

If there is any lesson to be learnt from the episode, it is that the nation should prevent speculative capital, foreign or local, from taking over any local bank. It can never undo KEB sale without paying a tremendous price. It is important to stop such a mistake from happening again. For this, the nation should form a fact-finding mission to lay bare all the truth about how Lone Star came to acquire KEB.