'If I Die, You Die Too?'... Legoland Hits the Financial Market, 'Trap of the Financial Mafia'

Securities Firms' 'Direct Investment in Real Estate PF' Overheated... Concerns Raised Over Default Risks
Debate Intensifies Over Responsibility of Current and Former Gangwon Province Governors... Spreads to Political Circles
Government Strives to Prevent Spread of ABCP Investment Losses from Legoland Incident

'Legoland' established in the Jungdo area of Chuncheon City [Gangwon-do]

[Asia Economy Reporter Ra Young-cheol] "The Yoon Seok-yeol administration has been left to bear the brunt as a result of the 'real estate price inflation phenomenon' that occurred during the Moon Jae-in government."

"When real estate prices rose during the Moon Jae-in administration, financial mafias, led by securities firms and including capital companies and other financial sectors, actively engaged in real estate PF loans."

This is the view expressed by current and former financial investment industry insiders who requested anonymity regarding the 'Legoland incident.'

As the capital market rapidly tightened due to the Legoland incident, the government announced a liquidity supply plan of '50 trillion won + α,' but market anxiety remains.

The intensified political blame game has further exacerbated confusion among households, companies, and financial markets, putting the government's crisis management capabilities to the test.

Meanwhile, Gangwon Province announced on the 27th its plan to repay early the entire 205 billion won guarantee debt of Gangwon Jungdo Development Corporation (GJC) by December 15.

The financial sector, which focused solely on real estate PF (project financing) and faced this crisis, is not viewed favorably.

In particular, BNK Investment & Securities has been criticized for worsening the situation by declaring the ABCP of 'I-One Jeilcha' as default after Gangwon Province announced GJC's corporate rehabilitation application.

BNK Investment & Securities is the lead underwriter of ABCP issued by SPC 'I-One Jeilcha,' established by GJC to raise necessary funds.

According to the financial investment industry, real estate PF loans at the stage where construction companies provide payment guarantees or during the construction phase carry low risk.

'PF (Project Financing)' is a financial technique that raises necessary funds by securing future profits generated from construction or large-scale projects as collateral.

To use an analogy with Legoland, GJC, funded by Gangwon Province, borrowed funds from the financial sector for Legoland infrastructure development, secured by future profits from operating Legoland, with Gangwon Province providing debt guarantees.

In the early PF stages, such as land acquisition or entering the implementation phase, various permits and approvals must be obtained from authorities, making the risk very high at that time.

In the past, loan sharks lent money at high interest rates in high-risk situations and reaped huge profits.

During the Roh Moo-hyun administration, when real estate prices soared, savings banks significantly lowered the loan thresholds for ordinary people at the initial land purchase or permit approval stages.

Many victims deposited their hard-earned money in savings banks offering higher interest rates, only to lose everything. This led to the 'Savings Bank Crisis' that erupted in 2010.

During the Moon Jae-in administration, securities companies, not savings banks, earned huge sums from real estate rather than stocks over recent years. Hence, the term 'Real Estate IB (Investment Banking) Golden Age' emerged.

Securities men and firms, attracted by the prospect of high salaries, plunged headlong into land speculation.

Legoland 'Lego City' [Gangwon-do]

Securities firms earn commissions from stock trading and selling securities products and receive bonuses based on performance. Even when investing in real estate, it is common sense to operate through products like 'REITs' rather than direct investment.

'REITs (Real Estate Investment Trusts)' are a type of indirect real estate investment product. They raise funds from general investors through public offerings and invest in real estate and related securities, distributing operating profits as dividends to investors.

However, employees of large securities firms and real estate finance departments were more obsessed with real estate speculation than with new business or stock operations. Most were busy managing PF loan lists and blocking maturing short-term bonds.

When interest rates soared and they could no longer prevent defaults, real estate PF turned into a massive ticking time bomb.

At one time, securities firms that celebrated receiving high bonuses had to buy short-term bonds maturing among PF loan amounts but faced great difficulties in cashing out due to soaring interest rates.

Interest rates rose sharply this year: 0.25% in March, 0.5% in May, and 0.75% in June.

However, Lee Chang-yong, Governor of the Bank of Korea appointed at the end of President Moon Jae-in's term, said in July, amid concerns that the exchange rate would soar, that "it is desirable to gradually raise interest rates by 0.25 percentage points for the time being."

In August, the Monetary Policy Committee maintained the stance of a 0.25 percentage point rate hike, stating that "the situation has not changed from the previous month."

Although the causes are complex, South Korea ultimately yielded to the U.S. decision and decided on a 0.5% interest rate hike.

Financial institutions such as securities firms, which first lent to struggling ordinary people due to soaring real estate prices and then tried to recover loans to make profits, were hit hard by the sudden U.S. interest rate hikes.

As a result, the short-term bond market, among the bond markets, suffered significant damage. Most of the bonds held were related to Chuncheon’s 'Legoland.'

The scale of Legoland ABCP investments includes Shinhan Investment & Securities 55 billion won, IBK Investment & Securities 25 billion won, Daishin Securities 20 billion won, Mirae Asset Securities 20 billion won, Samsung Securities 20 billion won, NH Investment & Securities 15 billion won, Korea Investment & Securities 15 billion won, DB Securities 15 billion won, Yuanta Securities 5 billion won, KB Securities 5 billion won, and Multi-Asset Asset Management 10 billion won.

A financial investment industry insider criticized, "Financial mafias make money by taking pocket money and meals from investors, collecting high interest when making money, and then shifting responsibility to the government when things go bad."

He added, "Since they have already invested everything, they will quietly enjoy and wait, but eventually, government intervention will cause taxpayers' money to leak out continuously."

Another financial official said, "If I die, you die too, what will you do?" and pointed out, "During the Roh Moo-hyun administration, savings banks ruined everything, and now securities firms are ruining things."

He also criticized, "They should just focus on their core duties, but they jumped into the real estate market to make money and are now on the brink of collapse, yet they are throwing tantrums at the government."

■ Heated Responsibility Debate

Choi Moon-soon, former Governor of Gangwon Province [Photo by Yoon Dong-ju]

Former Gangwon Province Governor Choi Moon-soon is at the center of various allegations of preferential treatment, from Alpensia to the Legoland project.

During his tenure as governor, despite allegations of unfair contracts and various preferential treatments to Legoland, as well as criticisms that the project had low feasibility due to poor accessibility and substandard content, he supported Legoland and provided guarantees for bonds.

Moreover, frequent safety accidents before and after Legoland's opening sharply diminished trust and expectations for Legoland.

Nevertheless, former Governor Choi stated through media, "That company is the Jungdo Development Corporation, and if you look at the financial statements, it is a profitable company, so it should have been left alone."

A banner criticizing the 'Legoland' project by a civic group is hung in front of the Gangwon Provincial Government Office. [Civic Group]

However, criticism has arisen mainly in Gangwon Province that "former Governor Choi bears considerable responsibility for pushing the project recklessly."

Criticism against former Governor Choi is spreading due to Gangwon Province increasing the payment guarantee amount for GJC, the Legoland operator, from the original 21 billion won to about 205 billion won, a tenfold increase.

In particular, voices of self-reflection from the province have already emerged, stating, "The Legoland project has been conducted as a 'black box' structure known only to a few insiders for 11 years, and most members considered it abnormal," and "It was a malignant part that needed to be cut out someday."

Therefore, calls for legal accountability for former Governor Choi have been continuously raised.

Jin-tae Kim, Governor of Gangwon Province [Photo by Young-chul Ra]

Current Gangwon Province Governor Kim Jin-tae, who succeeded the Gangwon provincial government, chose to file for 'rehabilitation' of GJC to minimize the burden on residents.

Governor Kim stated on the 28th of last month, "We decided to apply for rehabilitation of the Jungdo Development Corporation to escape the 205 billion won guarantee burden," and "If the court-appointed manager sells the corporation's assets properly at fair value, the loans can be repaid."

Although Governor Kim emphasized that "the province's obligation to fulfill guarantee debts is separate from the rehabilitation application," responsibility debates against the current governor are also intense. The direct responsibility for the Legoland incident, which caused great turmoil in the capital market, lies with Governor Kim Jin-tae.

There are also criticisms that sufficient discussions with the central government should have been held considering domestic and international economic conditions before deciding on the 'rehabilitation application.'

Na Cheol-seong, director of the Gangwon Peace Economy Research Institute, criticized through the media, "The reckless operation of the Choi Moon-soon administration is shocking, and Governor Kim Jin-tae caused a disaster with an unexpected corporate rehabilitation application," calling for a comprehensive audit.

Meanwhile, the government has also launched an emergency response to the seriousness of the situation.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho [Yonhap News]

On the 23rd, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho held an emergency macroeconomic and financial meeting, stating, "We will actively respond to instability in the real estate project fund (PF) market," and "All local governments will pledge purchase guarantees."

However, the financial sector reacted angrily, saying, "The bond market froze because local governments declared defaults on guaranteed bonds," and the media collectively reported it as the 'Kim Jin-tae-originated bond bank storm' day after day.

The political sphere appears to be using the incident for political gain rather than focusing on resolving it.

Presidential candidates of the People Power Party raised responsibility issues against Governor Kim Jin-tae of Gangwon Province, joining public criticism.

The Democratic Party of Korea demanded that Governor Kim apologize to the public and resign if he failed to foresee such a situation, accusing him of ignorance and irresponsibility.

This content was produced with the assistance of AI translation services.