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Strategies & Market Trends : Korea

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From: Julius Wong9/17/2008 6:48:00 AM
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South Korea Turns Tables on Wall Street After Bailout (Update2)
By Bomi Lim

Sept. 16 (Bloomberg) -- In 1999, Kim Jung Yul sat at a table negotiating the sale of Korea First Bank to San Francisco-based Newbridge Capital LLC as it sought cash to stay afloat during the Asian financial crisis. Nine years later, he's scouting for a Korean buyer for a U.S. bank.

``I was determined to squeeze one more dollar out of them,'' said Kim, recalling four months of talks in Seoul as the state- run company he worked for sold its controlling stake. ``Now, it's U.S. institutions that desperately need capital.''

Kim's new role, working as a consultant for a bank he declines to identify, underscores the resurgence of the financial industry in a nation that a decade ago was bailed out by the International Monetary Fund. As banking writedowns from the implosion of the U.S. mortgage market swelled past $510 billion, Merrill Lynch & Co. has received cash from South Korean investors and Lehman Brothers Holdings Inc. held unsuccessful talks about selling a stake to state-owned Korea Development Bank.

Korean investors are seeking to use cash and expertise amassed as they emerged from the country's debt crisis to hunt for bargains among U.S. banks. Even so, they're encountering resistance from Wall Street firms unwilling, like Kim in 1999, to sell out too cheaply.

KDB's talks with New York-based Lehman stalled last week because of disagreements over price, as did Korea Asset Management Corp.'s bid to buy bad loans from Merrill.

Lehman yesterday filed for Chapter 11 bankruptcy protection after failing to find a buyer. Bank of America Corp., the biggest U.S. consumer bank, agreed to acquire Merrill Lynch & Co., the third-biggest U.S. securities firm by market value, for about $50 billion in stock.

`Buyer's Market'

``The tables have turned, and U.S. banks have to realize that,'' said Lee Chol Hwi, chief executive officer of state-run Korea Asset Management Corp., known as Kamco, who was trying to buy $200 million of nonperforming loans from Merrill. ``It's practically a buyer's market there.''

Kamco, which helped liquidate distressed assets in South Korea after the 1997 to 1998 financial crisis, is seeking to buy as much as 1 trillion won ($904 million) of bad loans in the U.S. CEO Lee says there are plenty of U.S. companies seeking Korean money. Fund managers, companies and even state governors in the U.S. have requested a few minutes of his time during a trip he's planning there later this month, Lee said.

``That was unthinkable in the past,'' he said.

Banking Overhaul

South Korea's economy shrank 6.9 percent in 1998, during the worst recession since the Korean War ended in 1953, prompting citizens to turn over $2.2 billion of gold to the treasury as the crisis pushed the country to the brink of a sovereign default.

During the banking overhaul that followed, the government allowed more than 630 financial companies to fail and sold two of the biggest lenders to overseas investors. Korea also began building its foreign exchange holdings to prevent another crisis. Its foreign currency reserves swelled from $8.9 billion at the end of 1997 to $243.2 billion on Aug. 31, the sixth-largest in the world, as exports of ships, cars and electronic goods rose.

``Korea's financial industry has made remarkable progress over the past 10 years,'' said Chung Duck Koo, who led the South Korean delegation to talks with the IMF in late 1997, resulting in a $57 billion bailout. Today's credit market turmoil ``sets the stage for Korean financial firms to go global.''

Expansion Plans

Min Euoo Sung, the former Lehman executive who took the helm at Korea Development Bank in June, said last week that he plans to make it Asia's third-largest bank within five years. The government plans to sell its 100 percent share in the lender by 2012, with an initial public offering planned next year.

KDB's talks with Lehman started in July and collapsed on Sept. 10, Min told reporters today. The Korean bank sought to buy a controlling interest for a third the price Lehman was offering, with the investment to be made in late February, 2009, he said.

``I am certain Lehman wouldn't have been pushed to bankruptcy had the deal gone through,'' Min said. ``It would have been a win-win situation.''

South Korean firms have invested about $720 million in securities linked to Lehman, the country's financial regulator said in a statement released yesterday.

South Korea flexed its financial muscles in January when Korea Investment Corp., the $30 billion sovereign wealth fund known as KIC, invested $2 billion in New York-based Merrill. Hana Bank, Korea's fourth-biggest, bought a $50 million stake in Merrill in February.

Merrill plunged more than 60 percent in the year to Sept. 12 in New York Stock Exchange composite trading. Bank of America will pay $29 a share in stock, 70 percent more than the Sept. 12 closing price, for Merrill.

Regional Challenge

Chin Young Wook, KIC's chief executive officer, said July 29 the fund will approach future U.S. deals ``carefully.''

KIC's investment in Wall Street is smaller than Singapore's Temasek Holdings Pte, which invested more than $5 billion in Merrill, and China Investment Corp., which put $8 billion into Morgan Stanley and Blackstone Group LP during the past year. Morgan Stanley is the second-largest U.S. securities firm and Blackstone manages the biggest leveraged buyout fund. Both are based in New York.

``Korea faces challenges from other players in the region like Temasek who have much more expertise in making such cross- border investments,'' says Kim Ja Bonn, a researcher at the Korea Institute of Finance in Seoul. ``It's important to seize a chance when it comes, while accurately assessing the deal.''

Stuttering Economy

Jun Kwang Woo, chairman of the Financial Services Commission, has cautioned Korean firms about the risks of buying U.S. banks twice in the past month.

The regulator's warning comes as Korea's economy stutters. Inflation is at a 10-year high and the won has slumped 19 percent this year against the dollar, making it the worst-performing Asian currency.

That hasn't damped enthusiasm among South Korean investors, said Kim, 51, who started DW Consulting in 2004 and advised Seoul-based LIG Insurance Co. on the sale of its life insurance affiliate to Seoul-based Woori Finance Holdings Co. and London- based Aviva Plc, the U.K.'s biggest insurer, earlier this year.

``This is the chance of a lifetime for Korean companies to enter the U.S. market,'' said Kim, who was an official at state- run Korea Deposit Insurance Corp. when it sold a controlling stake in Korea First Bank to Newbridge. The buyout firm made a $1 billion profit selling its interest to London-based Standard Chartered Plc in 2005.

``We were naive back then,'' Kim said. ``We paid a high price to learn from the crisis, and it's time to put what we've learned to use.''
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