Securing a Foothold 4
On the morning of March 14, 2003, the head of the Financial Supervisory Commission’s Policy Department emerged from the Saneun Capital Building in Yeouido with a face as gloomy as the overcast sky. He was in the midst of investigating the SK Global accounting scandal and had uncovered issues that could shake the entire financial market.
He had scrutinized funds containing SK Group bonds with the precision of a microscope, finding it odd that the redemption requests were disproportionately large compared to the fund’s size. The root cause, he discovered, was the card bonds.
Card bonds are short-term funds borrowed by credit card companies to cover customer payments. The credit card system itself is a chain of debt. Since late 2002, the Financial Supervisory Commission had been watching with concern due to excessive competition and a surge in credit delinquents. However, because many bonds were asset-backed, they believed that as long as there were no special variables in bond maturity extensions, major issues could be avoided.
But with the North Korean nuclear issue halting overseas short-term borrowing and the SK Global scandal escalating financial market instability, the situation spiraled into an uncontrollable crisis. The card bond scale was initially thought to be around 50 trillion won, but the commission’s investigation revealed it exceeded 90 trillion, prompting immediate action.
The financial authorities convened a financial policy meeting at the Bankers’ Club in Myeongdong, Seoul, chaired by the Vice Minister of Finance. The urgent meeting stretched into the night, and on March 17, a comprehensive plan for credit card companies was announced. The plan called for stringent self-rescue efforts and profitability improvement measures by the credit card companies, while easing some regulations to support funding.
The crux of the issue was the demand for rigorous self-rescue efforts from the card companies. This term implied pressure to reduce debt, even if it meant pouring company funds into the effort. However, the conglomerate families valued their personal wealth over the company. They might use company funds and government support to prevent the card companies’ collapse, but no one was willing to dip into their own pockets, making further deterioration inevitable.
“What about the short-term bonds?”
“We’re barely covering them with surplus funds from affiliates, but it won’t last long.”
“We’ve temporarily reduced cash services and card limits, but by next month, we’ll have to stop cash services. We’re running out of cash.”
Vice Chairman Jin Dong-ki rubbed his forehead. He thought he was sweating, but it was just a misconception. Being in heavy industry, he could sense long-term market changes, but the day-to-day financial juggling required by a card company was excruciating.
“We need to pull more funds from affiliates. Otherwise, next month will be a disaster…”
“No. We can’t drag our healthy affiliates into a cash crunch just to bail out those juggling with cards!”
“But if cash services stop, it’ll be uncontrollable.”
“Yes, if Sunyang Card usage is halted, it will negatively impact not just the card company’s stock but the entire Sunyang Group.”
As the executives voiced their concerns, Vice Chairman Jin Dong-ki stopped rubbing his forehead.
“What are we doing here? Is this meeting just to warn me of the risks? Aren’t we here to devise a strategy to overcome them?”
Short-term foreign debt, card bonds—they’re all just fancy names for debt. We’ve borrowed, and now it’s time to repay. The only way to clear debt is to pay it off.
The executives were trying to scrape together money to pay off the debt, but with no solutions left, all they could offer were warnings.
There is a way to douse the immediate fire. Vice Chairman Jin Dong-ki could tap into the funds he’s stashed away here and there. It would amount to at least several hundred billion won. But no one dared to suggest it.
Vice Chairman Jin Dong-ki looked at the silent executives with disapproval and spoke.
“How about Do-jun… I mean, what’s the situation with Sunyang Life’s bonds?”
It was a matter he couldn’t ignore, given his concerns.
“We have two months left to repay 300 billion won. We must extend the maturity. Frankly, repayment is impossible.”
As expected, only the most extreme options remained.
At that moment, a voice from the corner of the meeting room spoke up.
“Vice Chairman, perhaps it’s time to discuss the self-rescue measures the government mentioned.”
“What?”
“We need to increase the card company’s capital. Without ensuring stability, all measures are temporary, and we’ll eventually face the worst-case scenario of halting card usage.”
The other executives were aware of this, but it was a sensitive topic to broach in a formal setting.
Sunyang Card had no affiliate shares. Increasing its capital wouldn’t strengthen the group’s control. It would be better to increase Sunyang Heavy Industries’ capital to solidify Vice Chairman Jin Dong-ki’s control. Lending funds from heavy industry to the card company to douse the immediate fire was what Vice Chairman Jin Dong-ki wanted and thought.
But the oblivious executive pressed for an answer.
“Sunyang Group carries a reputation of trust. Expanding Sunyang Card’s capital shouldn’t be too difficult.”
“Hey, let’s discuss that later…”
An executive sitting nearby tried to signal him to stop, but it was too late.
“Really? How much do you think we need? Tell me your thoughts.”
“Four hundred billion won.”
“Will that solve the problem?”
“Yes. It won’t just douse the immediate fire but also allow for stable fund management. A fourfold capital increase is entirely feasible…”
“You’re suggesting issuing 5,000 won shares at 20,000 won?”
“With Sunyang Group’s reputation, I believe it’s possible. With a capital increase of 100 billion won and a capital surplus of 300 billion, totaling 400 billion, we can overcome this crisis.”
The executives couldn’t hide their tension, but having their unspoken opinions laid out on the table was a relief.
“But Vice Chairman, we must extend Sunyang Life’s 800 billion won bond. Even with an influx of over 400 billion, there’s no way to cover Sunyang Life’s bond.”
The oblivious one remained oblivious to the end. If he had read Vice Chairman Jin Dong-ki’s expression even slightly, he wouldn’t have said that last part.
“Well, we’ve laid everything bare, so it seems there’s nothing more to discuss… Shall we end the meeting?”
Without looking back, Vice Chairman Jin Dong-ki left the meeting room. As everyone lingered awkwardly, his voice echoed back into the room.
“Card company president, see me.”
The president of Sunyang Card dashed out of the meeting room like a sprinter. As he caught up to Vice Chairman Jin Dong-ki’s brisk pace, a cold voice reached him.
“I don’t want to see that guy from tomorrow. And I’ll handle Sunyang Life’s bonds, so you take care of the rest.”
Everyone knew who “that guy” was, even without a name.
Increasing the capital by 100 billion would reduce the shareholding to below 30%, and control over Sunyang Card would slip away.
The owners of conglomerates would rather abandon a company than lose managerial control.
A landlord reduced to a tenant is something they would never accept.
“Yes, Vice Chairman.”
The president of Sunyang Card realized his days were numbered. It might even be the first time Sunyang Group faces bankruptcy.
Facing a disgraceful exit, he bit his lip unconsciously.
“You all must realize now how absurd those ads were, like ‘Everyone, become rich’ or ‘Dad said, enjoy life,’ right?”
“Even if they do, they forget. If everyone remembered, would con artists like these still exist in Korea?”
Oh Se-hyun gave a cynical smile.
“Now, be honest. Did you foresee this situation?”
I witnessed it firsthand, but I answered differently.
“It’s a business where debt keeps piling up. I didn’t foresee this level of crisis, but I did think managing the company was becoming burdensome.”
“Either way, thanks to that, the bomb in your pocket is gone. It’s a stroke of luck.”
“When the bomb’s gone, I plan to bring it back.”
“Are you sure that’s wise?”
“A card company is no different from a bank that lends money first and collects interest. If they were just careful with card issuance and limits, it’s like shooting fish in a barrel.”
Banks thoroughly investigate loan applicants and secure collateral before lending money. Card companies don’t need to go that far because most loans are short-term and small. As long as they carefully assess the customer’s credit and income when issuing the card, the risk of loss drops significantly.
Why would anyone refuse such a business?
“Reclaiming Sunyang Card won’t be easy.”
“There’s no rush, but we should start accumulating shares as the stock price falls. And I’m a major bondholder, aren’t I? There are many ways.”
Reclaiming just the card company is easy. The challenge is achieving two goals at once.
Vice Chairman Jin Dong-ki will have to ask his brother, Vice Chairman Jin Young-ki, for a favor. For that, I’ll have to play hardball… but it’s not difficult.
And that day came sooner than expected, indicating just how hot the fire at the card company was.
“Uncle, that’s difficult. I’m in a tight spot myself.”
“What?”
Vice Chairman Jin Dong-ki glared at me.
“The card crisis has cut off the flow of funds. Life, fire… they’re all in an uproar. I’m even looking into short-term borrowing. I had to borrow from my father’s hospital, for heaven’s sake.”
In ‘99, cash loans were only 48 trillion won, but by the end of last year, they had soared to 268 trillion. As card companies lowered credit limits, 3 million credit delinquents emerged.
The Korean economy was already suffering from arteriosclerosis. Few companies could boast of being unaffected.
“Insurance premiums that used to come in regularly are now halved. If you don’t sort out those bonds, we’ll be in big trouble too.”
Feigning distress, I tossed a thick file onto the table.
“Take a look. With the funding plan in shambles, all affiliates are in a bind. As you know, we’re all about money management, aren’t we? You’re in heavy industry, so your financial situation should be better than ours, right?”
“Don’t even get me started. We’re scraping together funds from other subsidiaries just to keep the credit cards afloat. At this rate, we’re going to go under.”
My uncle’s complaints were nothing new, but this time, it seemed more serious than mere grumbling.
“Anyway, let’s wait a little longer. The government might step in with financial support…”
“No, there won’t be any government support. This all blew up right after the new administration took over. It’s the price of reckless spending on credit. They won’t have the guts to ignore public outrage over moral hazard and push through with aid.”
Wow, he’s sharper than I thought.
He’s cautious, preparing in advance instead of waiting until the last minute when the bonds mature and things could really go south.
“So, are you just going to stay put? If you don’t help us with our bonds, I can’t hold on. I’ve let it slide when you didn’t even cover the interest on the bonds. But this is my limit.”
Vice Chairman Jin Dong-gi couldn’t hide his troubled expression. Seeing his face, I suggested gently.
“Why not consider borrowing some money from outside?”
“Dojun, if I had somewhere to borrow from, do you think I’d be here asking my nephew for help? Even the banks are shaky because of the credit card mess.”
“No matter how tough things get, they say wealth lasts three generations. Surely there’s somewhere that can lend a few hundred billion?”
Suddenly, Vice Chairman Jin’s eyes lit up.
“Where? Is there really a place with that kind of capital? You’re not talking about those loan sharks in Myeongdong, are you?”
“If we go to Myeongdong, we’ve hit rock bottom. No, not there… What about your older brother?”
I pointed upward with a subtle gesture.
“My… brother!?”
Vice Chairman Jin’s brow furrowed immediately.