Weijian Shan - Money Games: The Inside Story of How American Dealmakers Saved Korea’s Most Iconic Bank

1. Chapter 9

Weijian Shan

Copyright 2021 by Weijian Shan. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 7508400, fax (978) 6468600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 7486011, fax (201) 7486008, or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 7622974, outside the United States at (317) 5723993, or fax (317) 5724002.

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Names: Shan, Weijian, 1953- author.

Title: Money games : the inside story of how American dealmakers saved Koreas most iconic bank / Weijian Shan.

Description: Hoboken, New Jersey : Wiley, [2021] | Includes index.

Identifiers: LCCN 2020026499 (print) | LCCN 2020026500 (ebook) | ISBN 9781119736981 (cloth) | ISBN 9781119737001 (adobe pdf) | ISBN 9781119736998 (epub)

Subjects: LCSH: Cheil Unhaeng. | Bank mergersKorea (South) | Financial crisesAsia.

Classification: LCC HG1722 .S588 2021 (print) | LCC HG1722 (ebook) | DDC 332.1095195dc23

LC record available at https://lccn.loc.gov/2020026499

LC ebook record available at https://lccn.loc.gov/2020026500

Cover Design: Wiley

Cover Image: People Images/Getty Images

To all our limited partners

In 1998, during the Asian Financial Crisis, the central banks in many Asian countries melted down and could not protect their nations' currencies or their commercial banks, and thus needed bailouts from the International Monetary Fund (IMF). As a condition of these bailouts, the IMF often required the governments of recipient countries to sell off assets, particularly failed commercial banks. Korea was no exception. In fact, it was the poster child for this paradigm. Among the assets the Korean government attempted to sell was Korea First Bank (KFB). KFB had historically been the largest commercial bank in Korea, but by this time had shrunk to the fourth largest. Still, under the right ownership and management, KFB could be a very profitable asset. Accordingly, Korean government officials and their investment bankers went around the world in the hope of finding a strategic investor to turn around KFB. They didn't have much luck. Part of the problem was that the few Western financial institutions interested in KFB wanted to buy the whole bank, and only after a bailout had left all the bad loans with the Korean government. This would leave the good bank for the foreign investors. The Koreans, however, were keen to keep a significant ownership stake so that if the bank was indeed turned around, the Korean government would have something to show for all the financial support it had given KFB by keeping the bad loans. Into this fray came Weijian Shan and his team at Newbridge Capital, the Asian affiliate of our private equity firm TPG. TPG had pioneered the good bank/bad bank model in the United States some years earlier and we thought that this model could work for the Korean government and the failed banks. Money Games is the story of a major takeover: the origin of the deal, the incredibly difficult negotiation between the Newbridge team and the Korean government, and the subsequent transformation of the most iconic bank in Korea, the first to be fully controlled by a foreign investor. The two sides negotiated for more than a year through a series of understandings and misunderstandings, which ultimately led to the injection of needed capital by Newbridge in KFB for a majority stake with full control of the bank. It was through an arduous process that Newbridge finally took over control of KFB. Shan, our teammates, and I held secret meetings outside of Korea because we worried our phones might be tapped. (Mr. Kim Chee was the nickname I was supposedly given by the Korean negotiating team after they had heard me complaining about kimchi, the spicy Korean cabbage, on a tapped phone.) Strong personalities and divergent cultures clashed, often resulting in colorful manifestations of different negotiating styles and tactics.

It turns out that while negotiating sessions were grinding on, Shan was taking notes and writing detailed memos. These give Money Games a strong backbone, making it a truly riveting read. Not only does it shed much light on the Asian Financial Crisis of 1998, but it also serves as an interesting primer for anyone who is curious about how private equity works and how private equity investors make deals and create value. The bank was ultimately restructured by Newbridge, which brought in new management, and returned to profitability, particularly in the housing mortgage business, which KFB had more or less invented for Korea. Shan's account of this fascinating story sets forth some lessons for us all, whether we are private equity veterans or curious outsiders hoping to better understand this secretive world. I hope you enjoy the journey.

David Bonderman

Chairman and Founding Partner, TPG

April 9, 2020

This book is the inside story of how Newbridge Capital, a U.S.-based private equity firm, acquired and turned around Korea's most iconic bank. Almost everyone in high- and middle-income countries is a beneficiary of private equity investing. The sovereign wealth funds that manage money on behalf of their countries' citizens; the pension funds that provide for government and corporate employees; the endowments that fund schools and universities; not to mention the banks, insurers, and other financial institutions that look after the savings of millions of retail clients: All are active investors in private equity for the benefit of their constituencies. I am grateful to all our investors who have entrusted us with their money over the years, first at Newbridge Capital, then at TPG, and now at PAG.