Deal or No Deal?

A state-owned Korean bank nurtures a longing for Lehman Brothers.
Economist StaffSeptember 9, 2008

There is something of the scrappy outsider about both South Korea and Lehman Brothers, a Wall Street firm desperately in need of capital to strengthen a balance sheet battered by mortgage losses. So when Min Euoo-sung, chairman of the Korean Development Bank (KDB) said on September 2nd that his state-owned firm was trying to lead a group of Korean banks into taking a stake in Lehman, it had a ring of truth.

KDB, like other Korean banks, dreams of turning itself into a force in global banking. Lehman may be that once-in-a-lifetime opportunity to buy into the big league. It is cheap. It does not appear to have suffered large client and counterparty defections. And unlike Bear Stearns, its erstwhile rival, it can access liquidity at the Federal Reserve’s discount window. If Lehman survives, it could be a profitable—and strategic—investment.

But the whole idea is also a big gamble. Mr Min’s earlier offer for a majority stake was rebuffed by Dick Fuld, Lehman’s boss, who wanted a premium. KDB now wants a stake of around 20% at a discount to Lehman’s current share price. KDB’s potential allies in South Korea have expressed little interest in the deal, fearing huge additional write-downs when Lehman reports its third-quarter earnings this month. Their enthusiasm will be further dampened by news that Lehman held a stake in Ospraie Management, a New York-based investment firm. Ospraie has been forced to close down its biggest hedge fund, which managed $2.8 billion at the start of August, because of a bad bet on commodities.

Lehman is not alone in having its fundamentals questioned. South Korea’s newspapers are full of the country’s own “liquidity crisis” (even with $243 billion in foreign-exchange reserves). Despite the government’s efforts to calm the markets, against the dollar the won has sunk to its lowest level in almost four years. The main stockmarket index is at a one-year low. And the state has an uncomfortable exposure to other troubled American assets, such as Fannie Mae and Freddie Mac, the quasi-official mortgage agencies.

None of which should make the government keen to embark on risky foreign ventures. Reflecting the uneasiness, Jun Kwang-woo, chairman of South Korea’s Financial Services Commission, a regulator, has blown hot and cold on KDB’s plans. He worries that having a risky investment such as Lehman could conflict with KDB’s role as a state-directed lender to business.

The government plans to sell KDB and other state-owned banks such as Woori Finance Holdings, which has its own ambitions to buy its way into Wall Street via a boutique investment bank or a private-equity firm. Woori is believed to have been approached by KDB to be part of the group to invest in Lehman, but is reluctant having suffered already from bad mortgage investments in America.

What is more, there appears to be a suspicious element of personal ambition to the affair. Mr Min has been chief executive of Lehman in South Korea. Mr Fuld, meanwhile, has a huge interest in quickly stabilising Lehman, since his days there are probably numbered.

Ultimately Lehman wants money and South Korea has it. Even so, that may well not be enough to make a deal happen.