The International Center for Settlement of Investment Disputes (ICSID) has ruled that the Korean government pay 292 billion won to Lone Star, bringing an end to a decade long dispute between the Korean government and the U.S. private equity firm. The Korean government is required to pay out 310 billion won, including the interest of 18.5 billion won accumulated after filing for the dispute settlement. Investor-state dispute settlement (ISDS) is a system through which foreign investors may request settlement to receive compensation for any damages incurred by certain state actions, including policies or laws, in the country of investment. The Lone Star case is the first case in which Korea was sued against.
The unfortunate relationship between Lone Star and Korea started after the Asian financial crisis, when the Korean Exchange Bank was sold to Lone Star in 2003. There was public criticism of selling off a bank at a discounted price to foreign capital, but the Korean financial authorities advocated the transaction to promote further opening of the financial market and attract foreign capital. The issue was that Lone Star was not interested in financial industry advancement, only focused on making high profit. Lone Star earned 4.7 trillion won by sale profit and dividends and blamed for ‘eat and run,’ but the company applied for settlement to the ICSID, claiming that the Korean financial authorities delay in approving the deal citing accusations related to stock price manipulation of the bank's credit card business. The equity firm claimed that it missed the opportunity to sell off the bank to HSBC at a higher price in 2007 and settled to Hana Financial Group at a discounted price.
Among several dispute points, the ICSID dismissed all claims except for the delay in the government's approval in 2012, causing the price of the business to decline. The international organization recognized only 4.6 percent out of the 6.3 trillion won that was charged by Lone Star. Though the amount was much smaller than expected, the Korean government is considering filing for cancellation and suspension of execution to the ICSID. The outcome, however, remains unpredictable.
The Lone Star case reflects the lack of the financial authorities' insight to spot the intention of foreign speculative capital and its dogmatic way of promoting financial industry restructuring at a time when Korea's financial industry had been less exposed to the world. The government's failure to respond efficiently and lack of expertise has resulted in enormous payout through tax payers’ money. In other words, it is an utter failure of Korean government finance.
The government has changed hands many times since the financial crisis, but some of the key people who made critical decisions related to Lone Star are still working in key posts. Other ISDS cases are still being handled, suggesting that the same event may happen unless we come up with an effective response framework. The case should be thoroughly documented in a white paper format so that such events should not be repeated.