KDB 'Gives Up' on Buying Lehman Korea Development Bank to Go Private on Its Own FSC to Ease Bank Ownership Rules KDB Functions to Change Under Privatization

The committee considers founding a Korean equivalent of Goldman Sachs a blue-ocean strategy. Committee members have made a concrete suggestion that the investment division of the Korea Development Bank be privatized in order to establish an investment bank. It has also been proposed that Daewoo Securities, the Industrial Bank of Korea, and Woori Financial Group be merged with the KDB's investment division to become a competitive investment bank.

But armed only with ambition, can Korea, an inexperienced country in the investment banking sector, compete with top investment experts around the world?

I asked a key member of the Transition Committee this question early this year. He gave an off-hand though clear-cut reply. "Do you think it'll be difficult to compete with Goldman Sachs? Then we can just take it over, can't we? No matter how big it is, such a world-class investment bank doesn't have a huge amount of equity capital."

His remarks sounded a little farfetched at first. But on further consideration, his idea didn't seem to be such a remote possibility. In fact, if the four above-mentioned financial institutions, all under the government's influence, are merged, their equity capital would amount to W49 trillion (US$1=W953), far more than Goldman Sachs' W37 trillion.

A few days later his remarks became a partial reality. The Korea Investment Corp. injected US$2 billion into Merrill Lynch, an American investment bank that rivals Goldman Sachs. In return, the KIC received stocks in Merrill Lynch that can be converted to common stocks two years and nine months after they are issued. Upon conversion, the KIC will hold a 3.1 percent stake in Merrill Lynch. This investment surely is a meaningful first step for the Korean financial industry in joining the club of global investors.

The CEO of a consulting firm who is well-versed in the domestic financial industry looked worried when I asked him about the idea of founding a Korean equivalent of Goldman Sachs.

"Japan has world-class commercial banks, but has no viable bank that can be called an investment bank in serious terms. Why? In my opinion, Japan haven't made any serious attempt to found such a bank in the first place. This shows how difficult it is to found an investment bank. Nonetheless, all the domestic banks are calling for an investment bank. This makes me worried that we might pay a dear price for it later."

A global investment bank should be able to solve political and diplomatic issues on its own, he added. It should have the ability to create standards and have them accepted as global standards, and the political ability to take the initiative in resolving thorny global issues.

The director of a private economic research institute expressed a similar view. "Many people seem to believe that they can found an investment bank just by becoming bigger. Even if all the banks in the country were merged into an investment bank that could rank with the top banks in the world in terms of equity capital, it's still doubtful that businessmen in advanced countries would immediately start doing business with it."

And yet both experts agree on the basic need to foster an investment bank. They said that commercial banks are in urgent need of fresh projects, since their current business models have now hit the wall, and they need the help of an investment bank to boost their own capabilities.

They also agree that we shouldn't be too hasty. The private economic think tank director said, "Everybody talks about Goldman Sachs. But we should begin with a Silverman Sachs instead." (Silverman Sachs refers to an imaginary investment bank that would be less risk-prone than Goldman Sachs.) He suggests that we should gradually enhance our competitiveness by mediating and consulting on acquisitions and mergers of small and medium-sized domestic enterprises at first.

"The first thing we should do is become 'investment bank-literate'," the consulting firm CEO said. He meant that despite their calls for an investment bank, senior bank executives and senior government officials are ignorant of what an investment bank really is.

At a time when people are beginning to criticize the Transition Committee for moving too hastily, we hope that the incoming government will lend an ear to these experts' harsh advice on the idea of fostering an investment bank.

This column was contributed by Lee Jee-hoon from the Chosun Ilbo's Business News Desk.