25th Handoksoo Hearing... What is the Key Issue 'Lone Star' Incident? [Song Seungseop's Financial Light]

Finance is difficult. It is entangled with confusing terms and complex backstories. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, a foundation of financial knowledge is essential. Accordingly, Asia Economy selects one financial issue each week and explains it in very simple terms. Even those with no financial knowledge can immediately understand these ‘light’ stories that illuminate the ‘light’ of finance.

Prime Minister nominee Han Duck-soo is leaving the Presidential Transition Committee office in Tongui-dong, Jongno-gu, Seoul, on the afternoon of the 14th. Photo by Transition Committee Press Corps

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[Asia Economy Reporter Song Seung-seop] President-elect Yoon Suk-yeol has nominated former Prime Minister Han Duck-soo as the first Prime Minister candidate of the government. As the National Assembly’s rigorous personnel screening is scheduled for tomorrow (the 25th), the ‘Lone Star’ incident from over 20 years ago is being mentioned again. Why is the Lone Star incident, which caused such a huge scandal that it was even made into a movie, drawing renewed attention in connection with the Prime Minister candidate?

Lone Star is the name of a private equity fund established in 1989 in Dallas, Texas, USA. A private equity fund gathers a small number of investors privately and invests in various assets. Its typical business model is to acquire companies at low prices, then increase their value through management efficiency and corporate restructuring to generate profits.

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Lone Star became famous in Korea in connection with the 1997 International Monetary Fund (IMF) crisis. At that time, many companies in Korea went through bankruptcy procedures and became insolvent. Prices of real estate such as office buildings, corporate bonds, and stocks fell sharply, and private equity funds like Lone Star bought such assets at low prices and made large profits. The five major banks at the time?Cho, Sang, Jeil, Hanil, and Seoul (Choheung Bank, Commercial Bank, Jeil Bank, Hanil Bank, Seoul Bank)?had to receive public funds due to bad loans to large corporations.

Unlike these banks, Korea Exchange Bank attracted $200 million in capital from Commerzbank, a German bank. However, due to the 2002 credit card crisis, Korea Exchange Card became insolvent, and Korea Exchange Bank had to merge with Korea Exchange Card. Commerzbank, the second-largest shareholder, was negative about additional capital injection, so the government decided to sell Korea Exchange Bank. The government wanted to avoid additional public fund injections as much as possible.

The problem was ‘who would buy it.’ Domestic commercial banks were given priority requests, but all were reluctant because rescuing a failing bank required enormous funds. While no buyer was found, Lone Star appeared in 2003, offering to buy Korea Exchange Bank.

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The controversies that arose during this process can be broadly divided into three categories. The first is the ‘low-price sale controversy.’ It questions whether Korea Exchange Bank was sold to Lone Star at too low a price. Lone Star purchased 51% of Korea Exchange Bank’s shares for 1.3858 trillion won (around 4,250 won per share). Although this was higher than the bank’s stock price at the time, after three months, the stock price rose, and the value of Lone Star’s investment exceeded 2 trillion won, generating an appraisal gain of 1 trillion won, sparking the ‘low-price sale’ controversy.

The second is the ‘qualification controversy.’ At that time, under the Banking Act, industrial capital was restricted from acquiring commercial banks. Lone Star, which owned golf courses and hotels in Japan, was said to be unqualified to acquire Korea Exchange Bank. However, exceptions were made for insolvent financial institutions (with a BIS capital adequacy ratio below 8%), and the Audit Board reported that Korea Exchange Bank’s BIS ratio (6.16%) was underestimated.

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The last is the ‘eat-and-run lawsuit.’ Lone Star attempted to sell Korea Exchange Bank to KB Kookmin Bank in 2006 and HSBC from 2007 to 2008 but failed. It was only in February 2012 that Lone Star was able to sell it to Hana Financial Group for 3.9156 trillion won. Including dividends, it is estimated that Lone Star earned over 5 trillion won. However, Lone Star has filed an Investor-State Dispute Settlement (ISDS) against the Korean government. They claim that the Korean government delayed approval of the Korea Exchange Bank sale due to public opinion concerns, causing them losses, and have filed a lawsuit seeking over $4.68 billion (approximately 5.77 trillion won).

Han Duck-soo is drawing attention regarding the Lone Star incident because he was active at the major law firm Kim & Chang when Lone Star acquired Korea Exchange Bank. At that time, Kim & Chang was Lone Star’s domestic legal representative. Han worked as an advisor from November 2002 to July 2003, receiving 150 million won in compensation. Since the period when Lone Star sold Korea Exchange Bank overlaps with Han’s activity at Kim & Chang, suspicions have been raised that he may have exerted influence. The Center for Financial Capital Market Watchdog also claims that Han is “responsible for concealing Lone Star’s illegal sale of Korea Exchange Bank.”

[Image source=Yonhap News]

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In response to the controversy, Han stated, “As an executor of the national government, I was involved, but I was never involved in my private capacity at the Kim & Chang law firm.”

Meanwhile, starting on the 25th, personnel hearings to verify the next government’s cabinet members will be held. Han’s personnel hearing will be held over two days from that date.

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