Wise Asset left holding excess baggage

By Kim Da-ye

“Nothing has changed. Our operations have remained at a standstill,” an official from Wise Asset recently told The Korea Times over the phone.

The Korean asset management firm can be seen as the biggest victim of the Nov. 11, 2010 Option Shock involving Deutsche Bank or simply another casualty of a big financial bet.

Wise Asset lost nearly 89.8 billion won, which some sources say has nearly brought the firm to the brink of bankruptcy.

The firm had sold 180,000 “put” options contracts which allowed buyers to exercise their rights to cash in on the expiration date of the options. The options were based on the KOSPI 200 index which consists of 200 large firms listed on the benchmark market. The striking price of the Wise Asset’s options was 252.5 points.

As stocks worth 1.6 trillion won were sold off through the counter of Deutsche Bank’s Korean brokerage unit on Nov. 11, the KOSPI 200 plunged 7.62 points to 247.51.

The buyers of the put option contracts could now ask Wise Asset to pay them 499,000 won per contract ― it is calculated by multiplying 100,000 won by the difference between the striking price and the closing price. The liability mounted up to 89.9 billion won.

Wise Asset whose own capital is only 10 billion won did not have such the money to pay out. Hana Daetoo Securities, which sold options to the market on behalf of Wise Asset, instead had to pay a large portion of it, 76.3 billion won.

The misfortune didn’t end there. The news about the massive loss circulated in the market, triggering a sort of the “fund run.” Its clients who invested in other various funds withdrew with National Pension Service, according to a local daily, pulling out hundreds of billion won.

Several funds were still being managed and sold while derivatives-based products weren’t Wise Asset’s an Internet site shows.

Adding insult to injury, on Nov. 26, an employee embezzled 3.8 billion won and ran away. The news again spread throughout the market. Bad publicity could be fatal to asset management firms who attract investment for their reputation.

It was widely speculated that Hana Daetoo Securities, which put off fire with own money, would acquire Wise Asset to make up for its loss.

But a Hana Daetoo official says that the deal is highly unlikely to happen. “The firm is nearly closed, and we don’t know when it would recover. It would take a while to acquire it, manage it and turn it into a profit-making company.

“Even if the firm recovers, we aren’t sure how much the firm would be worth when we want to sell it in the market. There has hardly been any discussion on acquiring Wise Asset since November.”

Asked if Hana Daetoo would be able to recoup any of the loss, the official said that the brokerage doesn’t have any clear plans yet to do so. Hana wouldn’t easily bring a lawsuit against Wise Asset because it would take “not few months but at least a year or two.”

Taurus Investment Management was another firm that was hit by the “options shock” with its loss estimated at 49 billion won. A company official said on the phone that her firm is doing fine now although most of the investment has been withdrawn from their options-based funds.

And, of course, there are many unnamed individual investors known as ants here who lost money from their own pockets, not from clients.

The victims of the options shock, however, couldn’t avoid criticism as investing in such derivatives is highly like gambling. If the stock prices didn’t tumble on Nov. 11, they would have made money.

Wise Asset invested in those highly risky products far more than they were legally allowed to. The financial regulators said they were going to investigate the firm’s risk management practices.

Trading options is, at the end of the day, a zero sum game where one’s gain is another’s loss.