August 25, 2008 / 5:10 PM / 12 years ago

UPDATE 2-Hopes for Korean investment in Lehman take a hit

(Updates share price, adds information on asset management unit sale)

By Kim Yeon-hee

SEOUL, Aug 25 (Reuters) - A top regulator voiced concern on Monday about state-run Korea Development Bank’s (KDB) interest in buying a global bank such as Lehman Brothers Holdings Inc LEH.N, saying KDB should be just a “cheerleader” and let local private banks take the lead in any such purchase.

The comments threw more cold water on investor hopes KDB could soon invest in Lehman and sent the U.S. investment bank’s shares down 6.7 percent.

KDB said on Friday it was open to the acquisition of an overseas financial institution, naming Lehman as one of its options [ID:nSEO332057].

The comments lifted Lehman shares 5 percent on Friday, giving hope to investors about the investment bank’s prospects for raising capital, a day after a news report said KDB and another Asian financial institution had walked away from a deal.

On Monday, South Korean regulators said that, to the extent KDB is potentially interested in Lehman, it is in the early stages of doing anything.

That is bad news for Lehman, which is looking to raise money and scale down its more than $60 billion of mortgage- related assets amid investor fears it is undercapitalized.

On Monday, when asked about the status of KDB’s possible interest in Lehman, South Korean Financial Services Commission Chairman Jun Kwang-woo told reporters: “That would be an international marriage. Would you get married just after one or two blind dates?”

Cross-border acquisitions by South Korean companies should be led by the private sector and state-run institutions such as KDB should play a “cheerleader role,” Jun said.

“My point is that state-run institutions may take a catalyst role in pursuing these kinds of deals,” he added. “I think that KDB might have considered forming and leading a consortium (to buy Lehman Brothers).

“But it appears burdensome for a state-run institution to play a leading role (in the purchase of a foreign company) and take risks which may be more than financial.”

Lehman may succeed in raising capital by selling off a controlling stake in its asset management business. Television network CNBC reported that private equity firm Kohlberg Kravis Roberts & Co [KKR.UL] is in the lead in bidding for a 70 percent stake in that business. That business could be worth some $10 billion total.

PRIORITIES

Jun also said KDB needed to consider its priorities before pursuing global expansion, pointing out that stabilisation of the domestic financial markets might be the most urgent issue.

KDB has not publicly confirmed it directly approached Lehman.

The government plans to privatise KDB by 2012, a process it hopes will help turn it into a global investment bank.

Separately, a report in the U.K.’s Observer on Sunday said Richard Fuld was likely to step down as Lehman chief executive by year-end. The report cited “well placed sources within the bank.”

A person close to Lehman said the report was not true. Lehman declined to comment.

Lehman shares fell 96 cents to close at $13.45 on the New York Stock Exchange after falling as low as $13.20 in morning trading. The shares have dropped 80 percent this year and trade at about 0.4 times their book value, while most U.S. investment banks trade above their book value. (Additional reporting by Dan Wilchins in New York; Editing by John Wallace and Andre Grenon )

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