By Song Jung-a in Seoul

The South Korean government on Tuesday defended its 2003 decision to sell Korea Exchange Bank to Lone Star, saying it was “the only viable option” to save the country’s fifth-largest lender.

The finance ministry denied most of the accusations by the Board of Audit and Inspection over the sale process, a day after the state-run agency said the deal lacked fairness and transparency.

The ministry said the high-profile sale to the US private equity fund proceeded with full support from major shareholders including Commerzbank of Germany and warned that KEB could have gone under if there had not been investment from Lone Star.

“If KEB’s capital had not been boosted, the worst case scenario - KEB’s bankruptcy - was very likely to happen. In that case, the chaos in financial markets would have been similar to that of the 1997 financial crisis,” the ministry said.

The Financial Supervisory Commission also said the sale was approved in consideration of uncertain economic situations and weak management conditions of KEB at that time. And it claimed that it did not exaggerate KEB’s losses or understate its capital adequacy ratio.

The strong protests by financial regulators underlines how the issue is becoming increasingly divisive even within the government. Before the audit board’s announcement, government officials had refrained from making any vocal statements while the 2003 deal was the target of public resentment for the $3.85bn profit Lone Star stands to make from the KEB sale to Kookmin Bank.

Following a three-month-long investigation, the audit board on Monday cleared Lone Star of any wrongdoing, but said KEB was sold at a bargain price because KEB's former management and government officials "undervalued" the bank.

But the finance ministry said it did not have many choices, because the bank’s major shareholders were not willing to make additional investments and there were not many potential buyers.

It said KEB was very weak financially because of its big exposure to troubled companies such as Hynix Semiconductor and SK Networks and huge losses at its credit card affiliate.

The bank’s share price fell to as low as Won2,865 at the end of March in 2003 before it began to recover in April on expectations of foreign investment.

“Lone Star’s purchase price of KEB is higher than the share price, which reflected an M&A premium,” the ministry said, noting that Lone Star bought a 51 per cent stake for Won4,250 per share.

Despite the ministry’s clarification, the controversy is likely to intensify in coming weeks until prosecutors wrap up their own investigations into the case, as doubts still linger on the circumstances surrounding the disposal of the distressed bank three years ago.

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