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The U.S. government¡¯s plan, just defeated in the House of Representatives, to inject US$700 billion of public money into insolvent financial institutions had many things in common with the Korean response during the Asian financial crisis.
According to the Financial Services Commission on Monday, the Korean government injected a total of W168.5 trillion (US$1=W1,190) from November 1997, when the financial crisis erupted, until March this year and recovered W90.7 trillion of that money. The U.S. government was hoping to spend a far greater amount of public money -- around W840 trillion -- over the next two years, raising most of the money through issuing sovereign bonds. That is what the Korean government did.
Korea spent a lot of public money on purchasing insolvent debt from banks, brokerages, insurance companies, merchant banks and other troubled financial institutions and covering the deposits of their clients. The Bush administration was hoping to spend most of this money on purchasing insolvent debt from troubled financial institutions. Whether it will use public money to cover returns on deposits in a new version of the bill is unclear. In the original plan, pension funds and regional governments, in contrast to the Korean solution, were to be included among the recipients of public money.
And like in Korea, public money was to be recovered by selling off insolvent debt and stocks held by troubled financial institutions.
There are differences, too. U.S. politicians are paying more attention to offering benefits to taxpayers and are more wary of moral hazards among executives at the insolvent financial institutions. For example, they want strict regulations regarding compensatory measures so that the CEOs of the financial institutions don¡¯t become reckless in the way they manage their firms to get higher bonuses and retirement pay. They also want to include rules requiring financial institutions that received emergency funding to lower the principal and interest faced by mortgage recipients. And they want the Government Accountability Office to monitor the way insolvent financial institutions are spending public money.
In Korea, state prosecutors investigated officials at financial institutions and businesses to find out why public money had to be injected, and many were held legally accountable. Such measures could follow in the U.S. to make the deal more palatable to lawmakers.
Kim Hyun-wook, a researcher at the Korea Development Institute, said the similarities came because Korea used the U.S. as a model in handling its insolvent financial institutions when it pulled through the Asian financial crisis.
(englishnews@chosun.com )
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