The state-run Korea Development Bank's presumed rescue of Lehman Brothers runs into opposition from South Korea's top financial regulator
South Korea's government-run bank is unlikely to pursue a takeover of Lehman Brothers (LEH) after a top financial regulator on Aug. 25 expressed opposition to such an idea. Speculation that the beleaguered U.S. investment bank will be sold and rescued, probably by Korea Development Bank (KDB), pushed Lehman shares higher by more than 15% at one point on Aug. 22 before they ended the day 5% higher on the New York Stock Exchange (NYX).
Jun Kwang Woo, chairman of the government Financial Services Commission, which oversees all private and state-owned financial institutions in Korea, called an acquisition by a Korean government bank of a big and beleaguered investment bank such as Lehman "improper." Jun acknowledged that KDB had considered the option of taking over Lehman or another troubled investment bank as a means to improve its investment banking expertise but made clear state-owned banks must avoid taking "excessive risks" that could accompany any purchase of questionable assets.
Industry watchers say with the outlook for the global financial industry uncertain, the Korean government won't approve a deal that could potentially lead to capital injections requiring taxpayers' money. "The probability of KDB seeking to be a major shareholder of Lehman is less than 1%," says Park Kyung Min, chief executive at fund manager Hangaram Investment Management.
A plan to gradually privatize KDB also makes it difficult for the bank to embark on an expansion plan. Although part of the reason to privatize KDB is to transform it into an international investment bank, the government has yet to finalize exactly how the privatization will take place. "The priority right now is privatizing KDB and an aggressive investment such as a takeover of Lehman will only complicate the privatization process," says Kim Hyeon Wook, a capital market specialist at Korea Development Institute, a government think tank.
The government has said it aims to sell 49% of KDB by 2010.
The speculation that KDB could emerge as a rescuer of Lehman partly stemmed from remarks by the Korean bank's new chief, Min Euoo Sung. Min, who was hired in June as KDB's chief executive, said last month the global credit crunch gave his bank a chance to buy distressed foreign assets on the cheap. Lehman shares have shed more than three-quarters of their value this year, trading at less than half their book value (BusinessWeek.com, 8/19/08).
Hope for a breakthrough was raised after a KDB spokesman, when asked by reporters of a possible deal with Lehman, said: "The bank is open to all options and possibilities." Yet the Financial Services Commission ruled the potential size of Wall Street banks' writedowns resulting from the collapse of the U.S. subprime mortgage market was too big to be handled by KDB.