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How Will U.S. Financial Woes Affect Korea?

Posted September. 16, 2008 08:37,   


Bank of America’s takeover of U.S. brokerage giant Merrill Lynch and Lehman Brothers’ bankruptcy are projected to have significant repercussions on the Korean financial market.

The specific takeover terms are likely to affect the financial health of the government-owned Korea Investment Corp., one of the top three shareholders of Merrill Lynch. Worry is also rising over the degree of losses that Lehman’s bankruptcy will inflict on Korean financial firms.

The majority of staff at the Strategy and Finance Ministry and the investment corporation went to their offices yesterday, the final day of the Chuseok holidays, to check the specific conditions of Merrill Lynch’s takeover and hold emergency meetings on countermeasures.

The government and financial experts say the average price paid by Korean companies per Merrill Lynch share was reportedly lower than Bank of America’s offer of 29 dollars, indicating that the terms will unlikely deal a huge blow to Korean investors for now.

The investment corporation bought preferred stocks of Merrill Lynch worth two billion dollars in the beginning of the year. When the brokerage’s share price dropped from around 50 dollars at the time of investment to 20 dollars at the end of July, the corporation avoided losses by prematurely converting the stocks into common stocks at 27.50 dollars per share.

The investment corporation is the third-largest shareholder in Merrill Lynch, following Temasek, Singapore`s state-owned investment company, and the Kuwait Investment Authority.

Korea’s Hana Bank, which invested 50 million dollars in Merrill Lynch, paid an average of 24 dollars per share, lower than what Bank of America offered.

An investment corporation official said, “If Bank of America pays 29 dollars per share, we earn 1.50 dollars per share. The 30 million dollars in options we received when we made the conversion and the dividends we got before all add up to 110 million dollars.”

“If we add this to our original investment, this means we will earn a profit of more than 10 percent on our total investment.”

Skeptics, however, warned against complacency since the specifics of Bank of America’s offer have not been announced yet. Given the high possibility of swapping Merrill Lynch’s shares with the bank’s shares, losses and gains from the takeover could vary on specific terms.

Certain projections say losses are inevitable for domestic financial companies including banks and insurers that have invested a reported 700 million dollars combined in Lehman Brothers.

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