Part 1 of the NYTIMES article Mr. Worswick alluded to
The New York Times, May 31, 1998
BYLINE: By Michael Lewis; Michael Lewis is a contributing writer for the
magazine. His last article was about start-up companies in Silicon Valley
BODY:
It has been less than 10 years since a Japanese company nobody had ever
heard of bought Rockefeller Center, but it might as well be 10 centuries. The
fear and loathing of the Asian corporate enterprise seems a thing of the distant
past. The financial crash that began in Thailand last July 2 and that is still
playing itself out across Asia was the final great clarifying event: in a stroke
it explained away a great deal of mystery. American businessmen who had wondered
how, say, Thailand kept growing by 8 percent a year, or how South Korea
supported five large automobile companies, found themselves gazing into the guts
of the busted machine.. . .Oh,so that's how it worked!
The second of July was the day that the central bank of Thailand gave up
trying to support its currency, and the baht collapsed. While currency traders
in midtown Manhattan danced little jigs of joy, the Thai central bank disclosed
what it had lost in its futile attempt to bolster the baht. In just a few months
it had spent $60 billion, $23 billion of it borrowed, which in Thailand is a lot
of money. Only in retrospect could anyone understand why they had done such a
thing: they were propping up not just a currency but an economy.
Over the previous few years, half of corporate Thailand had taken to
gambling on its currency. Seeing that the interest rate on baht was higher than
the interest rate on dollars, Thai companies borrowed as many dollars as they
could, exchanged them for baht, raked in the interest differential, and prayed
that the baht would not collapse. In the end, their prayers went unanswered. By
the end of last summer just about every large company in Thailand was bankrupt.
It was as if someone had waved a wand over an economic miracle and turned it
into a savings and loan.
But that was only the beginning. A vicious circle emerged: when investors saw
that corporate Thailand was bankrupt, they sold their Thai shares, and the stock
market crashed. When the stock market crashed, more money fled Thailand and the
baht fell further. The Thai people responded by tossing out one Government --
the oddly named New Aspiration Party -- and tossing in another, the reassuringly
named Democrats. But that wasn't going to stop anyone with any sense from
getting out of town. In the past seven months three different men have taken on
the job as Thailand's finance minister and tried to sort out the unbelievable
mess. But no one can, and no one will, at least not anytime soon.
Pretty much the same thing that happened in Thailand happened in South Korea.
In Indonesia, the economic crisis brought on a political one, with protests and
looting and hundreds of deaths and the resignation of President Suharto. The
reason for the East Asian economic collapse was surprisingly simple: large Asian
companies were failing to make money doing what they were supposed to be doing.
They were selling hundreds of billions of dollars of consumer goods abroad
without making a dime in profits. It wasn't business, it was a habit, and they
gambled to support it. In other words, by capitalist standards, the Asian
miracle was a bust. And its collapse was in one way more dramatic than the
collapse of Communism -- no sane person believed that Communism worked.
Half a billion Asians got the news about their corporate culture more or less
overnight. The psychological crash played itself out in stages. The first was
denial. The Thais blamed Americans upset with Thai policy toward Cambodia; the
Koreans blamed Westerners who feared they could not compete with Koreans; the
Malaysian Prime Minister blamed the Jews. Across Asia, politicians became like
those B-movie victims of torture who take a bit too long to figure out that it's
better not to insult their captors. Every time one of them opened his mouth to
complain, Westerners shorted his markets, and the markets crashed. The verbal
abuse of foreigners didn't last long, though. After all, it's difficult to blame
foreigners for your economic troubles when you had designed your economy to
exclude them.
Once it became clear that denial didn't work, the hatred turned inward. The
values and beliefs that created the economic miracle suddenly seemed actually
pernicious. That earnest self-denial! Those bad suits! They didn't work! None of
it worked. For one thing, the whole of industrial Asia had been built on a faith
in elites. Elites rather than markets had determined who got capital, and
therefore who was allowed to succeed in business. The elites suddenly were on
the run. The economies no longer needed elites; they needed dollars. Entire
societies assumed a position no one had seen in a generation, the colonial
cringe.
South Korea offered maybe the clearest view of this startling phenomenon. The
day the International Monetary Fund dictated the terms of its $57 billion loan
to Korea, Dec. 3, 1997, was immediately named National Humiliation Day. Since
then, all that is Korean has wilted, and all that is Western has risen. Now
anyone who has dollars, or knows where to find them, is cast in the role of
colonial administrator. The International Monetary Fund, with its own
blowfish-throated bureacracy, turned up and chipped in its $57 billion.
Free-market American financiers, once ignored, are calling the shots. Goldman,
Sachs was hired to persuade the world to buy $3 billion worth of Korean
Government bonds. Morgan Stanley was retained to sell off state-owned Korean
banks. A hedge fund from New Jersey, called Appaloosa, was permitted to gobble
up big stakes in a local tire manufacturer, a bank and a cell-phone company.
People no one had ever heard of back in the States turned up with a fistful of
dollars in downtown Seoul...and were welcomed!
An Asia Fund Is Not Necessarily a Joke
In early april two men with dollars to invest in Asia agreed to let me tag
along on one of their business trips. Paul Matthews and Mark Headley of a San
Francisco-based group of mutual funds, Matthews International Capital
Management, are among the Western investors now trolling Asia for bargains and
striking deals with the locals that before the financial collapse would have
been inconceivable or just plain illegal. Since they opened for business in
1991, Matthews and Headley, who run four Asia-based mutual funds, have made
these trips every few months. But from the moment Asia first cracked, the trips
took on a different tone. We found ourselves in these meetings with corporate
finance directors, says Matthews. They'd just look across the table and tell us
point-blank: 'That's it. It's all over. I just bankrupted my company. What do I
do now?'
At the time Matthews and Headley had their own problems. Every dollar they
had invested in Thailand and Korea last June was by December worth 50 cents.
Their many investments in Indonesia, Malaysia, Singapore and the Philippines
fared nearly as poorly.
Matthews, who is English, and Headley, who is American, had always thought of
themselves as stable, humble, long-term investors, the marrying kind. After the
crash they found themselves running some of the worst-performing mutual funds in
America. They faced ruin. At the end of 1997, Matthews and Headley were on the
fast track to becoming a punch line.
But then something happened. On Jan. 1, a Wall Street Journal reporter called
and asked Headley how he was dealing with his new role, total loser. "I bought a
pool table and installed it in my office," Headley said, which was true. "When
the markets tank, I shoot pool."
The Journal reported some of his panache in the lead of a short piece about
pathetic Asian money managers. The piece caught the attention of Sir John
Templeton, the famous mutual-fund investor. A week later Sir John called and
placed $10 million in the Matthews Korea Fund, mainly, it seems, because it was
the simplest way to invest in Korea. Matthews and Headley were running one of
the only solvent, open-ended Korean mutual funds in America. A few articles
about Templeton's money, and their solvency was confirmed. By early April,
Matthews and Headley controlled more than $110 million in Korea and another $70
million in Indonesia, China, Thailand, Malaysia, Singapore and the Philippines.
On a continent rapidly becoming the world's largest going-out-of-business
sale, Matthews and Headley had dollars to spend.
Seoul on Ice
Until we landed in Seoul, I hadn't thought it possible that Tokyo could look
charming in comparison to anything. It is the hottest April morning in the
recorded history of Korean weather, and the air hangs thick with a godforsaken
yellow dust that sweeps down upon South Korea from northern China. Otherwise,
the most unsettling thing is how normally life motors along. You half expect to
see riots and mass starvation, but there is nothing of the kind.
It is the first time that Matthews and Headley have visited Korea together
since the crash, and both are struck by the tranquillity of street life. This is
the quietest Asian city on a Monday morning I have ever seen, Matthews says,
gazing into the yellow haze.
Financial collapses are dissatisfyingly abstract. They leave no trace of
their destruction, outside of a few sale signs and a skyline of unfinished
construction. At this point in the Korean collapse, at least, all important
disruptions have been internal. The suicide rate is up more than 30 percent
since the crash, with a noticeable shift in its composition, from teen-agers
to middle-aged businessmen. Yesterday a man named Lee Myung-Chul, an executive
of the Hansol paper company, was dragged in by the Korean police for questioning
about his balance sheets. During the session, according to news reports, he
tried to kill himself by banging his head against the table. When that failed he
stabbed a pair of scissors into his neck. A financial collapse is a tsunami of
the soul.
There's money in tragedy, however. On the drive to our first meeting, Headley
explains that there are two kinds of Korean companies worth buying. A relative
handful of thriving midsize firms operate along lines more or less familiar to
American entrepreneurs, and they're a good bet to emerge from the rubble. The
other desirable category of companies, the gargantuan conglomerates called
chaebol, will be permitted to survive only because the banks that lent them
dollars can't afford for them to fail. Run-of-the-mill large Korean companies --
like large companies throughout Asia -- are now widely, suddenly, viewed as the
worst-run on the planet, to be avoided at any cost. The American consulting firm
McKinsey & Company just released a study showing that with the same amount of
capital and labor, Korean companies produced only half as much stuff as American
firms.
Quotations From Chairman Kim
The Daewoo Corporation's build-ing is less like a modern office headquarters
than a prison. The corporation is part of a group that includes Daewoo Motors,
Daewoo Shipbuilding, Daewoo Heavy Industries, Daewoo Electronics, Daewoo
Construction, Daewoo Capital and a lot else
besides. The Daewoo Group's annual revenues are pushing $100 billion, which
represents about 10 percent of the Korean economy. This part of the portfolio,
says Headley, as we find our way into a decrepit elevator, is a proxy for Korea
Inc. It's neat to find the small company with the great technology that no one
has ever heard of. But when foreigners rediscov-er Korea it'll be the chaebols
that take off.
Lord knows how. Rows of exhausted Korean men hunch over their desks trying to
look busy. Gray walls and decrepit linoleum floors are poorly lighted by exposed
florescent lights. Half of the bulbs have been removed from each of the ceiling
fixtures to save on the electric bill. Stepping off the elevator we are met by a
weary young man with serrated forelocks and a nervous handshake. He leads us
past an incongruous grandfather clock and several large photographs of Kim Woo
Choong, the founder and chairman of Daewoo Group.
Chairman Kim, as he is known, created Daewoo in the early 1960's. He's the
only man still running a chaebol of his own creation; all the others are run
by heirs of the founders. At the zenith of the South Korean economic miracle,
Chairman Kim became fashionable with American plutocrats, who, from a safe
distance, admired his fanaticism. "The American company is not what it used to
be," he wrote in his autohagiography, "Every Street Is Paved With Gold," which
is decorated with encomia from John S. Reed, Henry Kissinger and the Forbes
family. "In the old days," Kim wrote, "Americans worked hard to challenge new
frontiers. But as their economy got mature, they became more interested in nice
houses, jogging and having a good time than in doing business. How can you
compete without dedication?"
Chairman Kim is now in an awkward predicament, similar to that of an old
Soviet party hack after the fall of the Berlin wall. He is one of a handful of
people most culpable for the ideas on which modern Korea was constructed. Yet
his response has been to call for more of the same; more sacrifice from the
average Korean worker, for example. Back in January, Chairman Kim and the head
of another chaebol, the Samsung Group, requested that their employees gather any
gold they might have in their homes and exchange it for the South Korean
currency, the won. Kim wanted the Government to collect the gold, exchange it
for dollars and alleviate the debts of Daewoo, Samsung and the rest. Old habits
die hard; immediately the wishes of Chairman Kim became a national mandate.
Forty thousand Koreans delivered up nearly two tons of gold treasures. In two
days the fire sale of Korean family heirlooms drove down the price of gold on
world markets to its lowest price in 15 years.
We leave the last of Chairman Kim's smil-ing portraits behind and come to
rest in a grim little room with a table and chairs where the only sign of life
is an etiolated plant. There we wait.
After a bit, a trim, officious Korean man in a neat suit, who declined to be
identified and whom I'll call K., comes and takes a seat at the head of the
table. Paul Matthews, who just turned 42, has been coming to this sort of
meeting for 20 years, but in 20 years he has learned nothing by asking direct
questions. Matthews came to Hong Kong shortly after his graduation from
Cambridge University, in the great British colonial tradition, and has spent the
better part of his career blending in. For the whole of his career it would have
been thought rude for a foreign investor to challenge a Korean honcho; in any
case it would have yielded only ill will. But now Matthews goes, in a pleasant
way, on the attack.
matthews: It must be a tremendous burden for you to meet your next year's
interest payment.
k.: Yes and no.
matthews: What percentage of your debt is in construction loans?
k.: (a bit nervously) I haven't got the details.
A dysfunctional relationship to capital is at the heart of the Asian crisis:
companies were able to borrow money without many questions being asked. After
the markets successfully destroyed the South Korean won last fall, the Daewoo
Group was revealed to have debts five times its market value. Korean companies
were able to pull this off because: a) the mystique of the Asian miracle seduced
lenders; b) they eventually became so big that no one imagined them failing, and
c) they kept their financial problems to themselves.
The most distinctive trait of the big Asian company is that it was never
required to provide information to outsiders. An investment in Korea, for that
matter most anyplace in Asia, could never be based on a piece of hard analysis.
Often there were no books to inspect, and even if there were you probably
wouldn't be allowed to inspect them, and even if you were, you could be sure
that what you were permitted to see was far less important than what you were
not. In this morning's paper one of the chaebol chiefs is quoted protesting the
I.M.F.'s demands that Korea open its books: We, chaebol, cannot restructure
ourselves in an open way because corporate deals need to be done in secret.
Not anymore. Now -- now! today! -- for the first time in these Western
investors' experience, they might just figure out exactly how this mysterious
Asian corporation is put together. If Matthews can determine that Daewoo is
serious about dismantling itself, for instance, he can make a lot of money
buying the parts that it intends to sell. Korea is like the brilliant athlete
who has troubles off the field and is looking for a team to take a chance on
him, the Latrell Sprewell of the Global Economy. By Matthews's reckoning, the
Korean stock market, now worth $70 billion, could be worth between $200 and $700
billion if Korean companies were decently managed.
matthews: General Motors has said it might take a 50 percent stake in Daewoo
Motors, but you have made no comment on that. Is it true?
k.: (producing a cigarette and lighting up) The current negotiation is 50
percent, that is true.
matthews: Will G.M. get control of the company?
k.: No, thank you for that!
Bad news. The only hope for Korea, Matthews thinks, is for half of it to be
owned by foreigners.
matthews: What is the possibility of any of the Daewoo businesses changing
its name? Could Daewoo Motors become General Motors Korea?
k.: The Daewoo name is our brand. It does not make sense to change it.
Matthews shakes his head and K. mumbles something, then excuses himself to
take a phone call. In his absence, Matthews suggests to Headley that K. does not
fully appreciate what has hit him. And he's wrong about the brand name, says
Matthews. "Daewoo Capital would be much more valuable if it was called Merrill
Lynch."
After a few minutes K. returns to the inquisition a changed man. He sits
squarely in his chair, as if he's been strapped in. But this time he carries
with him a spanking new booklet containing all sorts of information about
Daewoo. For some reason he is now willing to answer Matthews's questions:
matthews: (leafing through the booklet) Are you still expanding into eastern
Europe?
k.: Not really. We're not looking for new projects.
Good news. Matthews stops; he realizes that something important has changed.
He raises the booklet in the air.
matthews: I don't think anyone has ever given me this information before.
k.: We never had to prepare it before now. Five years ago we did not need it.
matthews: One year ago you did not need it.
k. grunts.
Matthews now locates a chart that purports to clarify relations between the
many different pieces of the Daewoo empire: the car company, the shipbuilding
company, the bank, the brokerage house, the electronics company, the
construction company and so on. It looks like a Greenwich Village street map.
"Does anyone understand this?" Matthews asks. K. chuckles nervously and sucks
dead another filterless cigarette.
matthews: Is there any chance that you'll give board seats to foreigners?
k.: (long pause) Board of directors of a Korean corporation, in a real sense,
has not existed before now.
matthews: (again holding up the magic booklet) I'm curious what is not in
here. If I wanted a chart for the whole Daewoo Group's finances could I make it
from this?
k.: (lighting yet another cigarette) That should be quite interesting to
have. But it should be quite difficult to produce.
matthews: Does it exist anywhere?
k.: Chairman Kim's head.
Later, outside on the street, Matthews turns and says, "I don't know what is
more interesting: the prospect of this regime changing, or how terrifying it is
that we have been investing under it." |
