Wall Street: Economic Turnaround Lessons From Asia

Lee Chol-Hwi heads the Korea Asset Management Corp. (KAMCO), which following the 1997-98 Asian financial crisis engineered a dramatic financial turnaround in what was then Asia's second largest industrial economy after Japan. KAMCO bought billions in distressed assets, helped refloat a handful of massively indebted banks and conglomerates and even sold the toxic waste it disposed of at a handsome profit to taxpayers. On Thursday, U.S. lawmakers and key financial officials agreed to create a similar rescue agency and to begin the arduous process of untangling the web of complex financial products created to bankroll America's housing boom. Lee lauds the effort but warns that it marks not the end of America's worst financial crisis since the Great Depression but the beginning. He forecasts major corporate failures, pressures that are powerful enough to bring down the U.S. financial system and a painful global economic slump that could write the epitaph for what he calls "the American style of capitalism." Lee spoke with NEWSWEEK's George Wehrfritz in Manila. Excerpts:

NEWSWEEK: In recent weeks we've seen major bank failures, unprecedented government intervention in the U.S. financial market and a new congressional effort to address the financial woes on Wall Street. Is this the end of the credit crisis?
Lee Chol-Hwi:
I think we just entered the tunnel, and don't know where the end is. This is not simply a financial problem. It's the collapse of a bubble [economy], one built up over the past 10 years. Not just real estate, all kinds of assets. The bubble is not deflated enough yet. I can say that [this process] has just started.

What's likely to happen next?
The crisis began in real estate and moved to the financial sector. Next, problems will occur in the real economy. I don't want to name specific companies, but some [big corporations] will fail [in the United States].

KAMCO played a central role in South Korea's recovery following the 1997-98 Asian financial crisis. Are the lessons in that for U.S. policymakers?
Actually, all the things that are occurring in New York now are very similar to our experiences during the Asian financial crises in Korea and Japan. If Americans want to exit from the tunnel, just do as they said to Korea and Japan. Transparency. Disclosure. Eliminate moral hazard. [Reduce] uncertainty. I think [these things] are very important for American markets at this moment. After the bubbles burst in Japan and Korea, there was a crunch caused by mistrust among market players. It is difficult to solve the problem of mistrust during a financial crisis. The only way is to [force] full disclosure and transparency.

Aren't American companies doing that?
In this sense the U.S. financial market is very, very dangerous. No disclosure. No transparency. So pessimism is prevailing and the markets [remain] suspicious. If this continues, not even the biggest bank [would be invulnerable] to attack. The reason nobody understands what's going on is that they see only the financial markets, not the real economy behind it. A big crunch [in asset prices] has just begun, and the fall is not sufficient yet. America has so many problems but no courage to disclose them. Just like us 10 years ago.

Are the U.S. Treasury Department and Federal Reserve addressing problems or making them worse?
An old Korean saying holds that there is no such thing as a well that will never dry out. I'm very [concerned about] the Fed's balance sheet. They've spent too much money.

Could the U.S. financial system collapse?
If I were to bet, I'd bet yes.

What should be done to avoid that?
That's a hard question to answer, like a doctor who must say something to a patient with cancer. America needs an intermediary like KAMCO [to buy and dispose of distressed assets]. I was impressed when I heard the news that Washington may establish a restructuring agency. They could raise money by issuing bonds, which would [reduce] uncertainty and stabilize markets. But they would need big money to do that.

KAMCO spent $39 billion in Korea nine years ago. How much to you think a similar rescue would cost in the United States?
A hundred times as much.

Is the American model of free-market finance dead?
Not dead, but tested very seriously. The period of [excessive] prosperity lasted too long. Once, we viewed the American style of capitalism as the best model for the world. We thought your investment banks were fantastic without a detailed understanding of their methods. Nowadays, we realize they are very vulnerable and that the American system is not the textbook that everyone should follow.

So what's the new model?
We should look at Japan and its megabanks as the model. They reformed [beginning in the late 1990s] and made their [strongest] banks bigger through mergers. To some extent, they [adopted] the American style of investment banking, but their basic methods are very traditional.