I have not been deaf the past few months. I have been researching a post or series on the whole Lone Star mess. The problem is a combination of my work in general, and the fact my personal reaction is “Whadda’ gonnna’ do?”. Anyway expect something weightier on the topic sooner or later.
Meanwhile in the most recent development, and perhaps the most major, Kookmin Bank and Lone Star have called off the sale of Korea Exchange Bank. My mouth was agape as I read this in the IHT this morning. I wonder who called it off? I could see reasons for both to call it off. Perhaps it was a mutual decision.
As an interesting counterpoint to all this, Korean regulators may have ultimately shot themselves in the foot. No I do not mean talk of a financial hub, or even welcoming foreign investment. I talk of one of the priorities that have dogged Lone Star for their history in Korea is the government’s insistence to merge smaller banks together in hopes of creating global financial powerhouses (stop laughing, that is actually the policy).
One would think that the government would be whole-heartedly for Korea Exchange Bank to be sold to Kookmin, another Korean Bank. However regulators have been faced with sentiments that simply a foreign investor in a bank cannot make an inordinate sum off the deal in light of the profits, and tax free at that, made in the sale of KorAm Bank and Korea First Bank. This sentiment killed the deal as Lone Star was set to make about US$3 billion of the deal.
Therefore the other foreign players in Korea, Lone Star included, may conclude that they are here to stay and that may be the worst part of this all for those anti-Lone Star crusaders. First is the simple fact that the foreign owned banks cannot be sold, nor likely could the purchase another Korean bank. This creates some pretty big immovable stalwarts among the upper echelons of Korean banks, thus making mergers to create the government dreamed “powerhouses” as about as likely as Korean becoming a “hub”.
Perhaps even more chilling to Korea is that these firms, now stuck in Korea for the foreseeable future, will actual start to run the banks rather than recapitalizing or cutting their losses, and bailing out. This would defiantly mean more western management, and lot of more of the frictions associated with foreign banks (like cutting off credit to failing Korean companies or labor rankling layoffs). They will also start anew with pesky questions about offering new products and lowering the banking barriers between Korea and the world.
This increased, and arguably more profitable management, delivers what could be the third strike to Korea’s plans to create “powerhouses”. As these stalwarts are increasingly better ran, and are more difficult to be absorbed into Korean banks, they will actually grow further. This growth is likely ultimately create real competition and a source for worry for Kookmin, Shinhan, Hana, and the others who are desperately trying to become the “powerhouses”.
To close out this, I want to share a bit snipet from the IHT article I read this morning:
Lone Star has vehemently denied the allegations, accusing prosecutors of trying to convict the fund “in the court of public opinion.” Last month, Grayken called the inquiry “a politically motivated investigation driven by anti-foreign-investor sentiment that persists in certain segments of Korean society.”
Chae Dong Wook, a senior prosecutor, said Thursday that such an accusation could be tantamount to “libel against a government agency.”
If the shoe fits Chae…if the shoe fits…
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Korean civil servants are known for making stupid decisions. So no surprises here.
Just a couple of notes, it was Lone Star that called off the deal. According to his press conference, Graykin says that given the indeterminate length of the investigation, LS would have to call off the deal and review a disposal after it was concluded. Second, LS would love nothing more than to sell KEB and get whatever profit they can, they are a buyout fund, they have no interest in managing KEB over the long term. Third, while KB is nominally a Korean bank, it is actually more than 70% owned by foreigners, so I don’t know if you can still call it one. That is why Woori Bank was going on a while ago about being the only “real domestic bank.” Finally, profits were marked around $4.5bn not three.
This seems to be a rather misleading, biased report. Of course, American firms are always correct. Tell that to millions of people screwed over during the internet debacle during the ’90’s.
Dram_man why don’t you tell us your stake in all this?
rhequest> Yeah I got the offical line as well, but I am a bit skeptical about who’s idea this actualy was (perhaps more on that line of thought once I get more research done). No dobut however LS wants to hit the “eject” button ASAP. They came in, recapitalized, shut down some zombie loans, changed management a bit, and improved profitablity. Time to get the hell out as far as they are concerned.
I always smile when I hear Woori’s campaign. I am remebered their school girl giddiness when the head of HSBC came by for a meeting when the hubbub of HSBC buying someone was at a fever pitch.
Origami> I make no claim of the guilt of Lone Star as of yet. I have yet to really look into the substance of it all. The Procecuters office may very well have a case from all I can tell at the moment. The shoe does fit, then again there are probaly stilleto heels that fit the Dram Man, but wearing them is not necessarly right choice. Same could be said about Chae’s situation.
(Speaking of looking foolish, Chae should have kept his mouth shut. Grayken made a statement in public and any first year law student could tell you that is technicaly slander not libel.)
For the record I have no real stake in this, save my KEB accounts and secured credit card.
Dram - I think this was completely Lone Star’s decision. With the investigation dragging on for so long, the value of KEB had increased, not significantly, but enough for them to have made noise about this. However, KB said that it would not raise its offer. This way, LS might be able to absorb as much cash as possible via dividends and then still sell the bank, possibly even to KB, at a decent price and make an even better profit. The funny things is because of the investigation, LS might end up taking out even more profit than if the government hadn’t raised a ruckus.
this is not the case. lonestar called it off as it was getting dragged beyond their sale date. in fact, the sales price is now in flux-could be more, could be less. i believe that the odds of it being more are greater than it being less. it would be in the investigation team’s interest to think deeply about who they’re playin’ ball with.
Off topic, and I don’t mean to be a dick, but this is really one of my pet peeves: ‘Loose’ and ‘lose’ are two different words. ‘Loose’ is usually used as an adjective, meaning ‘not tight.’ It is occasionally used as a verb to mean ‘to let go.’ ‘Lose,’ what you meant to say here, is only used as a verb, and means ‘to be defeated’ (as here) or ‘to misplace or be dispossessed of.’
Sorry, but this is my one-man Internet crusade, to end the misuse of these words.
I blame the spell checker
OK. Financial issues are a mega weakness on my part. I hardly read about the stuff. And I haven’t paid attention to this Lone Star thing at all….
But, I can read English.
Can someone clarify this for me:
http://www.forbes.com/markets/.....85429.html
Since it was a “double taxation” treaty, I am taking it the Lone Star affiliate was taxed in Belgium for the sale of the building and that money went into the Belgium coffers.
So, now, with yesterday’s ruling by the Korea panel, Korea’s law has upheld the idea that —
Since Lone Star is nothing but a big fund (read - American money machine raping and pillaging the world - especially South Korea), it cannot stand behind the Belgian-based firm that is a part of it to avoid - due taxation inside Korea.
So, basically, Korea is getting its cut of the sale by milking an easy target - a (Texas-based even!!) money mammoth…
I wonder what foreign holdings the major Korean chaebol have?
The prosecutor’s office has no case. The Lone Star matter is as shameful as it looks, and Korea is rightfully being bypassed by foreign investors — FDI has plunged 30% from last year’s doleful level, itself down by a similar proportion from the year before.
Today’s news did not concern the prosecution’s case(s) against Lonestar, but the National Tax Authority’s assessment of taxes on the sale of Star Tower and the NTA’s internal tribunal’s affirmation of the NTA’s assessment. I also doubt that the NTA has a viable case, but there may be even more smoke - and maybe even some potentially dispositive evidence — here than in the various criminal cases. As you probably know, it all depends on whether the facts would sustain a finding that LS had a “permanent establishment” in Korea (in respect of whatever subsidiary Belgian entity directly or indirectly actually owned Star Tower)that would result in such entity’s disqualification for the benefits available under Korea/Belgium tax treaty to an investor that has no substantive contacts with Korea other than a passive stock holding. Not, of course, that any of actual facts matter to the NTA, or will matter to the Korean courts, to which LS will now repair. It’s already evident that the relevant Korean authorities are intent on willfully twisting the record, such as it is, and engaging in all sorts of obscurantist misrepresentation and misinterpretation of the internal tax treaty regime generally and the Korean/Belgian pact in particular designed to justify the pre-ordained result. Korea has effectively shut the door again to new FDI, which will continue to decline precipitously because as this case - which as you know is just the tip of the iceberg - demonstrates, Korea’s legal system is an elaborate hoax. Another of the boxes to be ticked off on the checklist of “Why Korea Will Fail” (TM).
I know nothing when it comes to economics beyond reading English and you guys talk your own language…
So, if LS was a substantive corporation inside Korea, even if the Star Tower was owned officially by a Belgian-based company (that is part of LS), the sale of the tower would be considered a LS-Korea transaction and thus subject to Korea’s taxation.
At which point, I guess, somebody would have to sue the Belgian government for a refund on the chunk it took, right?
Since it seems loopholes are part of the life-blood of international conglomerates and others - like shipping companies…..I can’t make heads or tails of anything…..
But it sounds like Korea decided LS was ripe for the sucking….