Gov’t Watchdog Going After More Finance CEOs

The Financial Supervisory Service yesterday issued warnings against the heads of major financial institutions after handing out a de facto suspension against KB Financial Group Chairman Hwang Young-key Thursday.

The sanctioned CEOs are National Pension Service President Park Hae-choon; Woori Bank President Lee Chong-hwi; former credit unit manager for Nonghyup Bank Chung Yong-keun; and Shinhan Financial Group Chairman Shin Sang-hoon.

The financial watchdog’s decision to punish finance CEOs en masse is unprecedented and came at a meeting of its sanction review committee held Thursday afternoon to yesterday morning.

○ Unusual move

According to the results of the review, Hwang, who headed Woori Financial Holdings and Woori Bank from 2004 to 2007, was suspended as KB chairman. Former Woori Bank President Park and his successor Lee also received warnings.

The financial watchdog said the three men violated a number of laws as their banks invested 1.58 billion U.S. dollars in derivatives, including collateralized debt obligations and credit default swaps, from 2005 to 2007. This caused an estimated 1.62 trillion won (1.3 billion U.S. dollars) in damage.

Among them, Hwang received the heaviest punishment for being held directly responsible for investment decisions. But Park and Lee were given relatively light penalties for mismanagement of invested assets.

An institutional warning was given to Woori Bank, which incurred huge losses from derivatives investment. A bill on partial suspension of Woori operations will be submitted to the Financial Services Commission to prevent the bank from dealing in derivatives for a certain period of time.

The supervisory service issued a stern warning against Chung, saying he caused damage to the bank by investing in inappropriate derivatives while heading Nonghyup’s credit unit. A warning against Shinhan’s Shin cited managerial problems at Shinhan Bank, including embezzlement at a branch in Gangwon Province while he was president of the bank.

Final decisions on Hwang’s punishment and partial suspension of operations at Woori Bank will be made at the commission’s regular meeting Wednesday. Penalties against others will be finalized by the head of the supervisory service.

○ Hwang to appeal

Hwang received a stern penalty because of the scale of losses Woori Bank suffered from derivatives investment from 2005 at 1.62 trillion won, and because he decided to invest in high-risk, long-term products that should have been avoided by a bank dependent on customer deposits.

Mortgage-related collateralized debt obligations Woori Bank invested at that time generally entailed maturity of more than 30 years. Finance insiders called the investment too aggressive, considering that the portion of long-term investments with a maturity of 10 years or longer relative to total assets at general banks was only 1.3 percent as of late last year.

Hwang said he was not informed of individual investments in credit default swaps and collateralized debt obligations until he retired in March 2007, and that those products were widely perceived as safe bets at the time.

A financial authority source said, “The result of the general inspection into Woori Bank clearly shows Hwang violated laws in the process of making investment decisions,” adding, “It is natural that the person who made the final decision be held accountable for the results.”

Hwang’s side blasted the punishment against him, with one of his aides saying, “We’ll wait and see until the Financial Services Commission makes its final review before considering filing an appeal or an administrative civil complaint.”

Under the punishment, Hwang can keep his post as KB chairman through the end of his term in September 2011 but is barred from serving another term or taking up an executive post at another financial institution.

Former and current CEOs of other financial service companies who received warnings, however, are not restricted in taking up executive positions.

jaeyuna@donga.com legman@donga.com