Part 2 of the NY TIMES article Mr. Worswick alluded to:
FOR PERSONAL USE
Rosencrantz And Guildenstern At Sea In LG Chemical
Our visits to large Korean companies blend together. All have the obligatory
grandfather clock, the homely oil painting and the depressing slogan painted
on the even more depressing gray wall advertising the company's vision for the
coming century: Vision 2000, Vision 21 or, in one especially weird case, Vision
2005. All have the young men with bad haircuts whose job it is to be insulted by
foreign investors. These men exhibit precisely the qualities encouraged by the
stereotypical American 1950's corporation: loyalty, conformity, self-sacrifice.
These qualities, once globally admired, are now globally suspect. Eight months
ago the young organization men seemed necessary to the economic miracle. Now
they seem as doomed as Rosencrantz and Guildenstern.
This afternoon we visit another mammoth company, called LG Chemical. LG
Chemical is part of the LG Group, and the LG Group, like the Daewoo Group, makes
just about any product you can imagine. But while Chairman Kim projects
machismo, LG projects desperation. In fact, Desperate Survival is the title of
the investment brochure handed to us. Matthews and Headley page through it with
feigned interest, until Matthews looks up and asks, "How many products exactly
does LG Chemical make right now?"
The Koreans confer. Guildenstern leaves the room for a moment and returns
with a thick green binder. They study it. Three hundred thousand, says
Rosencrantz, finally.
"How many of those 300,000 products are you planning to eliminate?" Matthews
asks.
Rosencrantz and Guildenstern vanish into a long conversation in Korean. I
can't help but notice that when the locals disappear into their language,
Matthews and Headley retaliate with a rude discussion about the company in
English. Headley points out to Matthews that the company has hired firm McKinsey
& Company to make sense of its senseless business. A recent audit by Coopers &
Lybrand revealed the fantastic web of bad debts used to create the LG Group in
the first place. In effect, each putatively distinct LG company said to the
bankers of every other LG company: if they fail, we'll pay the bills. "This is
what the whole society did in place of credit analysis," Headley says.
When the two Koreans emerge from their discussion, they say they do not
understand Matthews's complaint.
"Someone at McKinsey should be shot, Headley says.
Hearing From President Kim (And That Other Kim)
We set off to an investment conference to meet President Kim Dae Jung.
President Kim has declared war on the Korean social structure and is using
foreign financiers as his howitzer. His Government has passed laws that shift
the balance of power away from Koreans who use capital and toward foreigners who
have it. When Korean companies borrow money they must now say so publicly.
Korean corporate accounts must be audited. The heads of the chaebol will no
longer be allowed to quietly shuttle profits and debts around their various
companies. Foreigners, previously limited to a 26 percent stake in Korean
companies, will this June be permitted to buy companies whole. Ditto land. The
big question in Matthews's and Headley's minds is: how much further will the
President go?
We sit quietly in the ballroom of the Seoul Hilton with perhaps 75 other
Westerners and as many Koreans as President Kim is ushered to the stage by large
bodyguards. He hobbles in slowly, and you have to remind yourself that not that
long ago he was a dissident on a boat in the Japan Sea, being fitted by the
Korean Central Intelligence Agency with concrete shoes. (A last-minute call from
the State Department saved his life.) He comes to rest behind a lead bulletproof
desk, then lets fly against the old economic structure in a way that was
unthinkable just a few months ago. In a single caustic sentence he sums up the
Korean economic miracle: A model for growth based on authoritarian politics. He
then says that he will greet with open arms foreigners who wish to stage hostile
raids on Korean corporations.
But on the heels of the South Korean President comes the other Kim --
Chairman Kim of the Daewoo Group. He jitters up to the podium and eyes the
audience as a mongoose eyes a snake. His remarks, delivered in Korean, are the
opposite of the President's. I plan to expand into this crisis, he says. It is a
great opportunity for Korea. It is the moment in the story after the curtain had
been pulled back on the Wizard of Oz, but before the Wizard notices what has
happened. He's still yanking his levers and blustering through his microphone
while his audience looks on. Matthews shakes his head: the man who has flushed
billions of dollars down the drain building a monument to corporate inefficiency
proposes to extricate himself from his problems by flushing down a few billion
more. He makes a mental note to dump his shares in Daewoo Shipbuilding.
"That was thrilling," says Headley afterward.
"I think he's actually gone mad," says Matthews.
Meet Professor Jang, Capitalist Rebel
Sometimes the bravest thing a person can do is to behave badly. On a brief
visit to a Korean bank we discovered that the bankers had been rattled by a
university professor who declared personal bankruptcy. Though bankruptcy laws
exist in South Korea, they have been overridden by the shame of unpaid debts.
Just as Korean companies long agreed to sign for each other's loans, Korean
families liquidate their possessions to settle the debts of a single member. The
professor is, so far as anyone at the bank can recall, the first Korean
officially to pull the plug on his creditors. It is widely viewed not as an
economic act, but as a political one.
Tonight we head to a Japanese restaurant to dine with another Korean
professor, who has taken to raising a stink at shareholder meetings. His name is
Hasung Jang and he is a professor of finance at Korea University. He arrives
fashionably late, his face so thin that it appears carved, his forelock stained
with a distinguishing swoosh of gray, as if someone had been sloppy with a
paintbrush.
We have the distinction of running the only open-ended Korean mutual fund in
the United States, Matthews says, moments after everyone has taken his
uncomfortable seat on the floor. So our interests are allied. Allied but
distinct. The professor wants to make Korea a fairer society for the average
Korean. Matthews and Headley want to make a fortune. All three men wear suits.
But from start to finish their conversation has the deliciously illicit feel of
a conspiracy against established authority.
It turns out that Professor Jang, like Michael Milken, came to radicalism via
the Wharton School. In 1990, after teaching finance for three years to young
Americans who wanted to become investment bankers, he returned to Korea. After I
studied in the States, he says, I saw that there was no other way. I accept free
markets. There is only one way to organize an economy, and it will dominate the
world.
Jang wrote endless papers in Korean arguing for market efficiency, which had
exactly zero influence. "As you know," he says, "the market is not really
working here. So no matter what I wrote, they didn't care." And so: "I decided
to jump into the market. Since I didn't have money I should carry some other
weapon. I thought: how can I confront the guy who needs to be changed? And the
natural answer was: become a shareholder."
In 1996, well before the current crisis, Jang formed his shareholder rights'
committee. The thing muddled along for a bit until Jang seized on the idea of
bringing lawsuits against companies on behalf of shareholders. He sued Korea
First Bank, run by a friend of his father's, and has gotten nowhere. He later
sued SK Telecom, a wing of the giant SK Group, and succeeded through a court
order in getting three outside directors appointed to the board. In America
there is a brisk business in such activity; in Asia there is nothing of the
sort.
"In Korea the corporation is the vehicle for the execution of political
power," he says. "And that power is not questioned." Jang came from a prominent
Korean family and had gone to the best Korean schools and was friendly with many
important Korean businessmen. Now, suddenly, he was the unwelcome outsider.
Newspapers refused to accept his advertisements; friends declined to return his
phone calls. The free-market revolt was too new for people to put a label on it,
so if they spoke of it at all they grabbed for the old labels. The newspapers
referred to Jang as "a leftist."
The turning point for Jang came last fall, after the crash. In December he
went after Samsung Electronics. He used the voting rights of shares owned by the
American mutual fund Scudder, Stevens & Clark to force a meeting with Samsung's
president. The two men reached a gentleman's agreement that Jang would be
allowed to voice his criticisms at the annual shareholders' meeting. Then all
hell broke loose. To prevent unwelcome questioning, the big Korean companies,
like the big Japanese companies, often marshal their employees to fill all
seats. Outsiders can then be denied entry for lack of space. The President of
Samsung Electronics had assured Jang this would not happen, but it did. On the
day of the shareholders' meeting, which was scheduled to begin at 10:30 in the
morning, Jang turned up four hours early and found the auditorium jammed with
Samsung employees. The house remained full until 10:30 A.M., he says, and
everyone in it was sleeping.
When Jang finally elbowed his way into the meeting, he accused the Samsung
chairman of cutting various sweet deals for himself and his family, at
shareholders' expense. The initial reaction of everyone in the room was shock.
"The employees came up and said: 'How come you are calling my chairman's name
like you are calling a dog? Why don't you show him respect.' And I said, 'Why
should I call him in a respectful way even though I don't respect him?"' The
meeting ran for 13 hours and 30 minutes, which, Jang has been told, is a world
record for a corporate board meeting. By the end of it, Jang and his group of
radicals were on their way to court, where they intended to prove, among other
things, that the minutes of Samsung's corporate board meetings are forged.
The point of all of this is to open the company's books, and to force it to
run its business to maximize its profits rather than the power of its chairman.
If Jang succeeds, he will set in motion a process worth a fortune to investors
in the Korean stock market.
Have you ever thought of suing Samsung Electronics in America? asks Matthews,
a bit too calmly. "They have issued securities in America. You could bring a
class-action suit for 50 years of mismanagement." Actually, Jang has.
On to Thailand!
Bangkok's Sukhotai Hotel is where the American investment bankers stay.
Although it is meant to capture the spirit of ancient Thai culture, it resembles
the small, fashionable hotels that have been popping up in New York and Los
Angeles since the early 1990's. As slender young Thai men in black jackets glide
silently along the hardwood floors, plumpish white men in white shirts make
themselves overheard: I met with the guy from Merrill. Goldman was here not long
ago. That sort of thing.
What's really odd is that the victims of crisis are happier than their
would-be conquerors. They look happier, at least. But perhaps that is just the
irrepressible Thai character on display. According to the local financial people
who serve as our guides, Thais have a professional obligation to seem happy.
You'd see these pictures in the newspaper after a riot, says one brokerage
analyst, recalling the weeks after the baht collapsed, and all of the Thais who
rioted had these huge grins on their faces. Strangely, there have been none of
the bitter recriminations seen in South Korea. No one has gone directly to jail;
no one is hated with conviction. The murder rate has soared, however, with a
particular rise in domestic violence. When a Korean loses his job he kills
himself. When a Thai loses his job he kills his wife.
Matthews has gone home and left Headley in charge of putting their dollars to
work. Before he went into the investment business in 1989, Headley was a
nationally ranked fencer, and narrowly missed competing for the United States in
the Olympics. Fencing is one of those activities, like numismatics or Greek
poetry or, for that matter, investing in Asia, that strikes you as odd for
Americans to take up. But at this point, Headley's Thai strategy has a
straightforward American flavor to it.
There are two kinds of Thai companies, he says. Ones that will survive and
ones that won't. The trick is to own the survivors. His theory is that when
money comes flowing back to the region, as surely it must, it will flow first to
Thailand and Korea, since Thailand and Korea are furthest along in resolving
their problems. The market -- meaning Western money managers -- is thinking that
Thailand is in the pits for the next three years. All it takes is for the market
to think it's in the pits for only the next two years and the result will be
explosive.
In Headley's mind, Thailand has the same talent for chaos as Indonesia,
Malaysia and the Philippines. There is not in Thailand, as there is in Korea, an
elaborate corporate machine designed to chew up investment capital. There are
merely a lot of dubious (though happy) Thai characters looking to steal your
money. On a visit last September, in the middle of the meltdown, Headley and
Matthews checked up on a company that made small diesel engines used by rice
farmers. They had just made a tiny investment and were thinking about increasing
their stake. They expected to be greeted by the very picture of anxiety.
Instead, a couple of young Thais in mirrored sunglasses giggled through the
meeting. "When they're wearing sunglasses indoors and they think that the crash
is a joke, it's a bad sign," says Headley.
The small company, called Thai Engine Manufacturing, is a few miles from the
heart of Bangkok. A year ago the drive would have taken us perhaps an hour. But
the traffic has vanished -- it seems as if half the country has sold its cars --
and we arrive early, after maybe 10 minutes. The men with the mirrored
sunglasses are gone. In their place are a pair of respectable-looking
characters, eager to help.
They show us a video of their new television advertisement, in which a Thai
superhero, Engine Man, uses a diesel engine to pull a barn down on top of a Thai
villain's head, before lopping it off. They then walk Headley through a
meticulous set of financial statements. The crash has been very good for Thai
rice farmers, they say, who are now exporting at lower prices.
Headley asks if any foreign investors have been through. The happy Thai man
laughs and says the magic word: "Soros."
The New York fund manager George Soros is one of the few investors pouring
money into the region. He paid $15 million for a share in a Thai steel mill, for
instance. If Soros took an interest in Thai Engine he could double the share
price overnight. "The man from Soros made a list of 10 top Thai companies for
investment," says the man. "And we are No. 1." "Did he ask for a seat on the
board?" asks Headley. "He did!"says the man, surprised that Headley had guessed.
"And we say we would give it to them. It's good to have a Westerner on the
board."
"The company could double in three months," says Headley, as we leave. "When
you step back and look at what Thailand should be doing -- as opposed to what it
got into because it had all this money thrown at it -- rice makes sense." A few
hours later, he checks in with the market. Thai Engine is up 20 percent.
Get Them!
A year ago we would have been on our way to Malaysia or Indonesia, but the
crash has caused the Matthews Fund to flee Islam. On Headley's last visit to
Malaysia the police raided his brokers' offices and confiscated tapes recording
private conversations about money. The headline in the newspaper the next day
was: get them. them referred to foreign financiers. Headley gave an interview to
The Wall Street Journal in which he accused Prime Minister Mahathir Mohamad of
Big Brother tactics, then dashed for the flight home. A few days later, safely
back in San Francisco, he received a call from the Journal reporter telling him
that his quotes were picked up by the Malaysian press, controlled by the
Malaysian Government. Be careful before you come back here again, the reporter
said. Some people are upset.
After that, Headley sold most of what he owned in Malaysia, and also in
Indonesia. Indonesia had made Malaysia seem calm -- though there the preference
for scapegoats ran to students and Chinese shopkeepers. Last fall I went to
China and said, 'There is no problem here.' Then I came to Thailand and said,
'Well, it's bad but they'll dig their way out of it.' Then I went to Indonesia
and said, 'Jesus Christ, it's a social catastrophe in the making.' "
And so we are flying to Manila.
The Imelda Marcos Fund
Tonight Imelda Marcos, who is running -- unsuccessfully, as it would turn out
-- for President, put a fine point on the problem of investing here. During a
televised debate with other presidential candidates she looked meaningfully into
the camera and said: We don't need the I.M.F. We can have my I.M.F. Half the
country was on the edge of its seats. What was she talking about? "The Imelda
Marcos Fund," says Imelda.
"Those people," says Headley, referring to the Marcoses, "raped these poor
people," motioning to the peasants on the squalid streets. Thanks in large part
to the Marcoses' misgovernment the wave of dollars that crashed down upon the
rest of Asia missed the Philippines. The nation somehow got itself classified as
a Latin American country during the Asian boom, and as an Asian country during
the current Latin American boom. They never had an economic miracle, says
Headley, so there's no economic miracle to lose.
Headley visits a couple of banks, a distressed credit-card company and a
large family-owned conglomerate. Compared with Thailand and Korea, however, the
country is boring. The family conglomerate is actually profitable. It is run by
a couple of guys hired by the family from the Harvard Business School.
How Investors Become Activists
Each night Headley receives a fax from the San Francisco office that tells
him how many dollars have entered or exited the Matthews Fund. Tonight the
portfolio is up 2 percent and investors have dumped in another $230,000.
Attached to the fax is an unexpected letter, addressed to the chairman of
Samsung Fire and Marine, and signed by six American investors. Dear Mr. Lee,
it begins, We the undersigned represent 454,609 common shares of Samsung Fire
and Marine. It goes on to insist that: a) the company appoint outside directors
to represent them; and b) that the company under no circumstance siphon off
funds to the ailing Samsung Motors company. The signatories together wield
billions of dollars in capital.
Paul Matthews has also signed the letter. It is the first political act in
his investment career.
A couple of weeks ago I paid a call on Headley and Matthews in their San
Francisco offices. The Indonesian army was at that moment on the streets of
Jakarta. Asia had resumed its collapse. This is it, says Headley. In the worst
case it takes 24 months and requires bloodshed." To them, the Indonesian revolt,
like the Asian collapse, appears promising in the long run but costly in the
short run. It just adds to the pall of gloom hanging over Asia, says Matthews.
And contributes to the idea that no sane person could put his money there. The
putatively global economy was meant to guard against wild imbalances, but the
imbalances in the world today are large and emphatic. One industrial region is
in the midst of its greatest stock-market boom in history, with companies run by
teen-agers trading at 200 times earnings. Another great industrialized region is
in the midst of the greatest stock-market collapse in its history, with
companies that have $20 billion in sales trading at two times earnings.
The Asian markets are now plummeting again. The Matthews group, with
investments throughout Asia, is now down nearly 10 percent. The Matthews fund
that invests exclusively in Korea has fallen 13 percent. Since their return,
Headley and Matthews have bought a chunk of Thai Engine and a piece of the
Philippine conglomerate. They have sold a Singapore bank with business in
Indonesia and are thinking about selling anything having to do with Chairman
Kim.
There was a time when these were mere investment decisions. No longer. They
are cultural signals that encourage one type of behavior and discourage another.
Echoed 1,000 times, as these investment decisions most certainly will be by
other capitalists, they may transform societies. The crash was thus an
intellectual event as much as an economic one. It put an end to the belief that
Asian economies could be run along different lines than others. Markets force
the convergence of all things, of prices and of values. Before July 2, 1997, the
Asian economies masked that. They suggested the possibility of another way of
doing things. No longer.
Interestingly, Matthews already has had a response to his joint letter of
protest to Samsung Fire and Marine. The company has acceded to one of his
demands and appointed an outside director. More than anything, what impressed
Matthews is that the boss of a Korean company bothered to respond in the first
place. A year ago, he says, I don't think we would have heard a word.
GRAPHIC: Photos: Surveying the damage: Mark Headley gazes over the skyline in
Bangkok, where he trolls for bargains in the aftermath of the Asian financial
collapse that began last summer in Thailand. Now, with the so-called East Asian
Tiger economies in ruins, Western investors are making new demands of the
region's corporations: planning and accountability. (p.34); Above: Headley,
left, and Matthews in Seoul. Right: Hasung Jang is suing to force secretive
Korean conglomerates to open their books.(p.36); Headley and Matthews attend a
conference featuring the new, investor-friendly President of South Korea.
(p.39); Above: Headley at lunch with a securities executive in Bangkok. Right:
Highway construction in Bangkok. Headley believes that Thailand is a strong
candidate to lead East Asia back to economic health. But for now, the collapse
continues unabated. (Photographs by Paul Hu/Assignment Asia, for The New York
Times)
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