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Dec 22, 2008

Financial Crisis: Doopey Hacks and Savvy Crooks

By Sean Hayes (Korea Times 12/11/08)

Discord in our financial institution is not caused by structured finance (securitization) or other ``complex" financial instruments, but dopey hacks and savvy crooks.

I had a conversation with an attorney from one of Korea's best known law firms. The attorney, to my surprise, was obviously not familiar with securitization and thus naively blamed the financial crisis on these ``complex schemes.''Securitization may be considered a complex scheme, but complex does not necessarily have to lead to tribulations.Chess is one of the most complex games man has made.

Few understand or can even spell Latvian Gambit or Alehine's Defense.However, chess and the complex tools (moves) used are not maligned because of complexity. However, a hack player leads to poor games and cursing by eccentric masters.

Likewise, the securitization tool in the hands of hacks leads to poor performing markets and cursing taxpayers. When we throw the crooks into the mix the situation is exasperated and leads to lawsuits, defaults, write-downs and eventually government bailouts.Securitization should not be maligned because of its players, since without it our access to capital would be stymied, interest rates would rise, and our growth rates would decrease.

In America, the advent of our modern structured finance, in the mortgage industry, began in the early 1970s by Ginnie Mae.Ginnie Mae, a government corporation, intended, through securitization, to create a secondary market for residential mortgages, thus, increasing liquidity. This increased liquidity led to an increase in homeownership.Securitization is not as complex as one would imagine.

Securitization, in short, is simply when a non-marketable asset is converted into a marketable security. This is accomplished, in the mortgage context, by the pooling of an originator's illiquid individual mortgages.The new pooled security is then sold by the originator to other financial institutions, thus, replacing a potentially non-performing asset on the originator's books with cash.The cash can then be used to offer more mortgages.

Thus, the originator does not need to raise additional cash through the more expensive tools of issuing debt or equity.These mortgage-backed securities (MBS) are enticing to investors, since they guarantee a fixed rate of return.

All individuals, including homeowners, benefit from securitization, since it increases market efficiencies while promoting additional access to capital.Problems occur when markets are dominated by dopey hacks and savvy crooks.

For example, a type of security called a collateralized debt obligation (CDO) is a security, in short, where assets and loans are pooled and the pool is divided into classes (tranches).Each tranche represents a different risk with the higher risk tranche receiving a higher yield than a lower. The safer, lower yielding tranche, normally is the senior tranche, thus during default, will be paid first. CDOs allow great flexibility, thus encouraging more investment.Problems occur when language in the agreement is worded in a manner that obfuscates.

The unintentional obfuscation by the dopey hack or the intentional obfuscation by savvy crooks causes litigation.For example, Citigroup's billion-dollar CDO is ending in litigation because of conflicting language in the CDO contract.

This wouldn't occur if it was drafted in a clear manner and all parties were astute enough to understand the implications of their investments.These same dopey hacks and savvy crooks had their hands in our rating agencies, government sponsored enterprises, financial institutions, congressional hallways, academic institutions, think tanks and even in some of our best known law firms.


Politics Takes Backdoor to Progress

Politics Takes Backdoor to Progress

By Sean Hayes (Korea Times 12/03/08)

South Korea and India are scheduled to sign a Comprehensive Economic Partnership Agreement (CEPA). The accord will offer more opportunities for trade. However, many reforms are needed in both nations before the full benefits of the pact and free trade are realized.

For my Korean and international clients looking to invest in India, one of the most alarming discoveries is the dreadful state of the Indian banking sector.Many investors are hopeful for the continuation of 9 percent growth in India, but fear that if foreign direct investment (FDI) decreases, because of our present financial situation, it is likely that India's growth rate will drastically fall, which will naturally lead to fewer opportunities and benefits from investing in India.An interesting seminar, which I had the pleasure to present a paper at, hosted by the Asia-Europe Perspective Forum and the India-Korea Business and Policy Forum, was held Thursday.

The seminar discussed some of the necessary reforms that both nations need to quickly adopt. My presentation, at the seminar, emphasized business opportunities for Korean and Indian companies, while noting reforms that are needed in both countries.

In India, necessary reforms must be immediately implemented, according to many observers, in the banking sector. However, many fear that political interest groups in Korea and India, for their own self-interest and possibly self-preservation, will never allow them and that the status quo is likely to remain unchanged in the foreseeable future.

For example, India is vigorously seeking FDI mainly because of the lack of funding opportunities for local companies and the difficulty Indian companies face in obtaining external commercial borrowing (ECB).One reason for the funding difficulties, amongst others, is that India's financial sector is controlled by state-owned commercial banks, which are required to lend to ``priority" sectors.The Statutory Liquidity Rules (SLR) require that 25 percent of bank deposits in government securities, the nation has a low savings rate, the local stock markets only account for around 140 percent of GDP, and the bond market is dominated by the debt-ridden government (90 percent of the bond market in government debt).

These facts led to an economy that lacks the ability to adequately fund needed industries and corporations. Thus, FDI and ECB are vigorously sought.The answer to this problem, at first blush, is obvious. However, India is often, for political motivations, not willing to pursue the obvious.

India, first, needs to privatize banks. Nearly 80 percent of the assets and deposits in the banking sector are controlled by state-owned commercial banks. These banks are notorious for allocating capital in an inefficient manner.Secondly, India must lower the amount mandated to be loaned to priority sectors. Regulations mandate that state-owned banks must provide 40 percent and private banks 25 percent of their funds to priority sectors.

These sectors include politically sensitive entities such as agriculture enterprises and small businesses. These sectors' loans have a high likelihood of being non-performing and often are in industries that are returning very low returns on investment, thus leading to an inefficient use of capital.Additionally, India's high amount of government debt, SLR, and low stock market capitalization effectively creates a situation where companies have few internal sources of funding.

The answer lies in these and other liberalizations and the development and fostering of a vibrant and liquid market for corporate bonds.Koreans played an instrumental role in launching the Vietnamese stock market and will launch a Cambodian stock market. There experience in developing markets could be beneficial to an India striving to maintain consistent growth.

Hopefully, for the sake of India, politics will take a back door to development.


Dec 21, 2008

Garnishing Pay in Korea

Garnishing Wages in Korea

I received a call from a friend asking about information concerning collecting on a large debt. He loaned money to a “friend” and the friend never made a payment on the loan. Word to the wise, don't make large loans to friends----cry poverty instead.

In Korea, after a judgment or order to pay by a court, a plaintiff can collect on an unpaid debt through garnishing of wages. Garnishing of wages is normally the best way to guarantee the collection of debt when a debtor doesn’t have real or personal property. Most law firms can perform the service for a modest fee.

  • Less than W1.2mil (No wages can be garnished)
  • W1.2mil - W2.4mil (Monthly Wage – W1.2mil)
  • W2.4mil –W6mil (1/2 Monthly Wage)
  • Over W6mil (Half monthly Wage minus W3mil divided by two plus W3million minus monthly wage)
1. W2,000,000 Monthly Pay (Can garnish monthly W800,000)
2. W3,000,000 Monthly (Can garnish monthly W1,500,000)
3. W5,000,000 Monthly Pay (Can garnish W2,500,000)
4. W6,000,000 Monthly Pay(Can garnish W3,000,000)
5. W12,000,000 Monthly Pay (Can garnish W7.500,000)
6. W20,000,000 Monthly Pay (Can garnish W13,500,000)