As per initial reports, LMB’s advisor David Eldon (El-don) has “advised Korea to significantly change its practices and attitudes to foreign investors.“ This is appropriate given that foreign investment in Korea has seen a decline for the third year in a row. Oddly enough, El-don seems to be practicing magic since his press conference included the magical words of power “Du-bai” and even the most awful of curses “SAEMANGEUM”. It seems that LMB has a plan for the failed Saemangeum project so that, some how, not only do we now have a fanciful canal project — which El-don knows nothing about (according to him) — but now this environmental and legal debacle that has been Saemangeum is now going to be a “Dubai-like financial hub”!
Just how many flavors do hub dreams come in I wonder?
It is not certain if LMB thinks he is Kal-El (Superman) but one must wonder if El-don is going to be a sock puppet or a shaman for LMB.
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Boy, did we even read the same articles, Elgin? Looks to me like Eldon diplomatically refused to comment on Saemangeum. His attributed quotes do not even contain the word hub. He stuck to some predictable points that pretty much any financial policy advisor would recommend: transparency, reasonable return, repatriation of profits, and level legal playing field.
I’m sure he would roll his eyes, and has privately done so, at many of the ‘hub’ ideas. For his own reasons, he’s not attacking those ideas directly now, just setting forth his agenda, announcing to the media the bullet points he’ll be pushing as he works on the transition team.
Note that “Korea should copy Dubai’s best practices” came in the same breath as “recognize that there are significant differences” between the two. That means: Korea can get some good ideas from Dubai, but needs to adapt them to local realities.
Yes, Linkd, Eldon did mention taxation and an independent regulation, regarding local realities, but the Saemangeum plan comes from the LMB side. I appreciate Eldon’s comment:
which is a very Lone-star sort of reference.
Though Eldon undoubtedly has the experience LMB will need to set forth a Dubai-like plan, the confluence of magical buzz words and obvious disasters in planning, such as “Saemanguem”, “Dubai”, “canal” and “hub”, have me really wondering just what is going to go under the bulldozer’s treads in this rush to prosperity.
It’s the old rule of political interviews at work: answer the question you wish had been asked.
The reporters wanted to know about canals and hubs, Eldon wanted to talk about transparency and regulatory issues.
He’s on the right track. You’ll have noticed that the biz and economic news for the past couple of weeks has been full of grand ideas. Today’s Joongang has many interesting stories. One shows 2MB promising to allow greater cross-shareholding by the chaebol, a couple days ago letting them own banks. Neither are good ideas.
But rather than oppose the individual policy decisions that have strong support among Korea’s business leaders, Eldon knows that simply legislating greater transparency will, in time, reveal the weakness of these reforms, should they come to pass. If investors, whether foreign or Korean, could actually see and understand who owns what (and controls what) in Korea, and how the companies use the money, then the investors themselves will force the needed changes. This is a much more powerful and lasting force for change than government tinkering with regulations while the real workings of Korean business stay hidden from view.
“One shows 2MB promising to allow greater cross-shareholding by the chaebol, a couple days ago letting them own banks. Neither are good ideas.”
I’m not sure about the pros and cons about the cross-shareholding, but I think letting the conglomerates own the banks is a good idea.
As far as I know, there isn’t such a regulation prohibiting conglomerates from owning certain businesses in any major Western economy. I think the reason why Korea has had it over the years is mainly because the governments in the past have feared that the conglomerates might have too much power for them to control, which I think is rather unfounded. I think Korea at least should give it a try, with the assumptoin that more economic freedom is usually good for the economy, and it can be reversed anyhow if it doesn’t produce positive outcome.
For just $100 mil Lee MB could have beaten Dubai to the draw and parked the QE2 cruise liner now on its last voyage across the Atlantic….and fitted it out as a 5-star bird sanctuary for all the migratory birds that have neen deprived of their refuge there.
If you want to dive into a Google session to dig up figures, I’m sure you’ll find that virtually every economy has serious restrictions on bank ownership. They’re usually of the form “no entity may own more than 10% of a bank”, or some such.
At the time of the Asian financial crisis, Korea’s banking sector was a mess because the government directed the banks to lend to the chaebol. There was no risk management. The reason it’s a bad idea now to allow a conglomerate to own a bank is that they would use it as their own piggy bank, passing large loans wholesale to whatever subsidiary in the group was losing money.
It’s the same problem with cross-shareholding. You can look at the news reports, PR and such financial information as is available for, say, LG Petrochemical, and decide to buy a share in it. That should entitle you to one share’s worth of its profits at the end of the year (dividends). You would think that the risk you took on buying that share should be confined to the performance of that company. But it’s not. The parent company, LG Corp, makes all financing decisions throughout the group, and will transfer money across the group to finance the losers. And they’ll rob your dividends to do it. And I shouldn’t even say “they”, because ultimately, LG Corp is one man.
Since banks are able to basically ‘create’ money by writing loans amounting to 10x more money than they have on deposit, a chaebol with its own bank would be quite a party for a short time. They wouldn’t even suffer the hangover, since the governement would assume the losses, as all governments eventually do when banks get into trouble.
“They’re usually of the form “no entity may own more than 10% of a bank”, or some such.”
OK, then Korea can have such restrictions without having to bar the conglomerates to own small portions of the banks. I don’t think they need to be barred completely.
“At the time of the Asian financial crisis, Korea’s banking sector was a mess because the government directed the banks to lend to the chaebol. There was no risk management.”
Then the problem is that the government gives the directions to the banks, rather than the big businesses own parts of them. Then they can make a law banning government interventions in banking affairs, except in extreme circumstances such as insolvency.
“The reason it’s a bad idea now to allow a conglomerate to own a bank is that they would use it as their own piggy bank, passing large loans wholesale to whatever subsidiary in the group was losing money.”
Then they can make restrictions, such as the banks owned by entities with the ownership of above certain proportion cannot lend money to those entities.
“It’s the same problem with cross-shareholding. You ………..decide to buy a share in it. …………………..You would think that the risk you took on buying that share should be confined to the performance of that company. But it’s not. The parent company, LG Corp, makes all financing decisions throughout the group, and will transfer money across the group to finance the losers. And they’ll rob your dividends to do it.”
Yes, but equally the opposite can happen and you can be winners too, although unexpectedly. In a sense that would provide you a kind of insurance when you buy shares in the conglomerates: if you pick companies you think would be winners, they may not bring as much return you believe justified; if you pick losers they may bring you more than you believe justified.
Judging from your arguments, I would say you have a valid point in cross-shareholding, but I still think allowing conglomerates to own banks with safeguards would be desirable.
Regarding turning Saemangeum into a “free economic zone” as per LMB’s plan, I note that though the parallel JoongAng Ilbo article on the Eldon news conference does not mention Saemangeum, an earlier article on LMB’s transition team reads:
though an earlier article from the JoongAng Ilbo states:
The area of Saemangeum is only one-tenth of Dubai, thus I wonder how LMB’s team will turn this into an “free economic zone” unless it involves a lot of slot machines and roulette wheels. This part of the story I will want to hear.
That botched Saemangeum project continually seems to bring out the worst in politics and planning.
That’s cool. One thing for sure is your ideas how to run the economy can’t be any worse than the team’s that been doing it the past 5 years.
Oh, damn. Was this where I was supposed to start cursing and swearing at you?
I don’t know about the rest of you, but I fucking hate those yellow things. What’s wrong with a good old-fashioned comma-bracket?
What’s the matter, Linkd?
Linkd,
“For what shall it profit a man, if he shall gain the whole world, and lose his own soul?
I am sure the mighty Chinese Communist Party shall reflect upon this thought much as their country stews in the contamination and filth of their economic splendor.
Also, try using an alternative emoticon that can not be corrupted.
)
Does it give blowjobs?
Please state your complaint clearly, instead of beating around the bush.
Fucking silly fellow! What’s there to be so fucking upset about? Get a fucking life!
Jeez, this is funny. Only 3 of us on this thread and just 14 posts, and already a misunderstanding. No wonder there’re so many scraps around here.
babarian, I said chaebol shouldn’t own banks. You said it’s OK if they do. I expanded. You replied. It’s obvious our positions are pretty close together. I said your ideas are OK, too, cuz I don’t think I have all the answers. My comment about cursing was a reference to the recent goings-on in other threads. Midnite here now, g’nite migooks!
I guess you wrote 15 while I was typing. Please just ignore the emoticon thing. Perhaps Elgin will explain it to you in the morning. And really, have a nice day.
Thanks for clearing it up. Good night.
“Barbarian”, “Linkd” was teasing you in a good natured way and complaining about the smiley face picture that the blog substitutes for the standard emoticon:
: – ) — which I stretched out so that it would not end up like this:
I like many Japanese emoticons better.
Thanks for the explanation, Elgin.
And pardon my misunderstanding, Linkd.
Linkd-
You forgot to mention how most of the largest chaebol already own NBFI’s (non-bank financial institutions), such as life insurance companies, 신탁은행 or ‘investment/credit banks’ and other such financial companies, which they can use to prop up ailing affiliates. I suppose official bank ownership allows them to do it on a larger scale. But, they’re already heavily involved in finance. And, then Chaebol also complain – hey Korean govt you let Lone Star, and the two other foreign NBFIs prior to Lone Star (Cheil take over and maybe Seoul Bank?) take over Korean banks, but you don’t allow us to. A change in this law would make the whole Lone Star controversy a moot point, by the way. If there truly exists an open market for hostile takeovers in the finance industry, and foreigners can come in and gobble up poorly run Korean banks, then that should prevent problems of moral hazard. But, I’m not sure if that is really the case.
I hope they can get their shit together here economically. Whether the Korean people will be able to see past their xenophobia and allow it to happen is another story.
It’s hard to believe that doing business in a communist country would be easier than a democratic one. Hopefully that’ll change.
The NBFI’s have indeed been sucking money out of the banking system and into their money market accts by offering better interest rates. The MMA money is available for lending at the discretion of the NBFI, but cannot be magnified 10X the way a bank can.
The rise of hostile takeovers would indicate that a lot of things have changed. Sovereign tried to oust Chey Tae Won (a convicted criminal ) as CEO of SK Telecom. I think they had about 15% of SKT shares under control. They failed.
So what happended? With digging, you can confirm that most chaebol subsidiaries are about 1/3 owned within the group, 1/3 institutional (includes foreign ownership), and 1/3 individual. More digging shows that cross-shareholding isn’t just within individual chaebol, it’s also AMONG chaebol. They all own about 5% of each other. So when a nasty foreigner comes along and tries to stir up shit (meaning, the foreigner tries to get the foreign institutional investors, plus individual Korean investors to vote with him in taking over the Board), the CEO of the company under attack just phones up the CEOs of the companies that each own 5%, along with the Korean institutional investors. Smackdown. End part 1.
A single hostile M&A in Korea would be momentous, whether foreign or Korean. For one thing, you don’t lauch a takeover bid without knowing what your target is worth, which is very difficult in Korea, but I’ve already said lots about transparency earlier. (OK, one more thing- if suddenly, at a stroke, the KOSPI companies had to publish SEC-quality audit reports, their valuations would plunge unbelievably. All their values are overstated. But there are many good companies, which then only foreingers would have the money to buy, in this hypothetical thought-experiment).
Second, a successful takeover bid would mean that the aggressor managed to break the ranks of the big chaebol families, and convince them not to vote their 5% in favor of their peer. Now THAT would be something. Carl Icahn tried with KT&G. In that case, he could demonstrate clearly with publicly available records that KT&G was sitting on billions worth of real estate that it wasn’t using. Sell it and give your shareholders the money, he said. This ain’t rocket science. He failed, too.
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