Lee Jin-man/AP
Korea Exchange Bank, Seoul, South Korea

Korean Financial Blogger Case Highlights Press Freedoms, Behavioral Economics

January 29, 2009 08:54 AM
by Anne Szustek
A financial blogger’s accurate predictions of the economy’s slide has landed him in a South Korean prison, after the government blamed a $2 billion loss on him.

Blogger's Arrest "A Very Strong Censorship Tool"

In public, Park Dae-Sung was arguably an unremarkable character. The 31-year-old Korean man was a graduate of a garden-variety junior college in a town south of Seoul, South Korea’s capital. He has spent the better part of his life single and alone, blogging about finance despite never having worked in the sector. As his father was quoted as saying by The Washington Post, "He can't even get a job."

But online, under the persona Minerva, named for the Roman virgin goddess of wisdom, his knack for economic soothsaying, aided with knowledge gleaned from financial publications, earned him the media credentials the “online oracle” and the “Internet president of the economy.”

Among his accurate predictions: the demise of 186-year-old U.S. investment bank Lehman Brothers and the steep weakening of the Korean won against the U.S. dollar.

But two of his 200-odd postings struck the South Korean government as potentially contentious: the first said the South Korean government had issued letters to financial institutions advising them to stop buying dollar reserves in a bid to bolster the won, according to the Washington Post. 

The second was a post that said the “Finance Ministry would immediately terminate a foreign exchange program for government agencies that owed dollar-denominated debt overseas,” writes Forbes.

The South Korean government has categorically denied those claims and is holding Park responsible for a $2 billion foreign-currency loss. Deemed by authorities to be a threat to society and spreading false rumors, the blogger upstart is being held in a South Korean cell after being denied bail, awaiting trial under a little-invoked telecommunications law that could see Park imprisoned for up to five years.

Since the “Minerva” case has emerged, several others, many of them with formal training or experience in finance, have claimed they have written under the Minerva screen name, although the government claims it has substantive electronic records pinpointing Park.

Meanwhile, however, others allege the veracity of Park’s writings pierced through what they see as the growing opacity of the South Korean government, namely its window dressing on economic issues.

“A lot of people believe Minerva's writings have contributed to the public interest because the public interest includes not just credit rating but also exchange of financial information and free discussion of macroeconomic predictions,” Park Kyung-shin, a law professor at Seoul’s Korea University, told Forbes magazine. “If what you believe is contrary to what the government believes, you will be punished. So this is a very strong censorship tool. The freezing effect is just terrible.”

The government claimed, for example, that the post about letters to financial institutions was false, though currency traders have told reporters in South Korea "that the government did urge banks that day to refrain from buying dollars," the Post said.

Background: Behavioral economics, Volkswagen short squeeze

The claim that Dae-Sung is responsible for the $2 billion loss could, if true, be an example of behavioral economics at work. Behavioral economics studies the psychological effects on the economy, including peoples’ propensity to spend and save, as well as how this can transpire on the financial markets.

One recent example of hysteria's potential for adverse effects was October’s short squeeze on Volkswagen stock. In the week prior to Oct. 28, Volkswagen shares soared 286 percent, closing at a record high €945 (about $1,198) on the 28th.

The reason VW shares traded so high was not a sudden surge in car sales, but rather rival carmaker Porsche’s heavy accumulation of shares, resulting in few shares available for normal market trading. As VW’s stock price rose, traders who had sold VW’s stock “short” were forced to buy shares to reverse their earlier transaction. A short sale occurs when a trader sells shares it does not own, hoping to re-purchase the shares later on at a lower price.

Porsche announced on Oct. 26 that it effectively controlled 74.1 percent of VW stock—holding 42.6 percent of the carmaker’s common stock and 31.5 percent in cash-settled options. This left less than 6 percent of Volkswagen stock as “float,” or stock not held by majority owners or insiders.
This prompted a surge of buying of VW stock, driving up the stock price nearly fourfold. Porsche denied any wrongdoing and asserted that its announcement gave ample time for short sellers to back out of their positions.

Porsche earlier this month gained indirect control of Volkswagen after purchasing more than 50 percent of the company’s shares.

Reference: Investing guide

Related Topics: Press freedom under fire in SE Asia; huge fraud from little-known trader

South Korea isn't the only country in Southeast Asia that seems to be cracking down on free speech. Nguyen Cong Khe, editor in chief of Vietnamese newspaper Thanh Nien and Le Hoang, who edited the Vietnamese publication Tuoi Tre, were fired just months after two of their reporters had gone on trial over their coverage of a major government corruption case. Vietnam’s Communist authorities have in recent months been tightening control of the media with a new policy to crack down on both state-run media and the blogosphere. Two other publications, Legality and Saigon Business People, lost their editors-in-chief in December.

Sometimes it's the most unexpected people that cause the biggest uproars. Last January, Société Générale, or SocGen, France’s second-largest bank, discovered that a single futures trader committed a “massive” fraud, resulting in a $7.1 billion loss for the bank. The trader concealed the money using “sophisticated and varied techniques.”
The rogue trader turned out to be 31-year-old Jérôme Kerviel, a trader at the bank working at such a low-level position in the company that few suspected he was capable of such a feat. Kerviel made an unauthorized bet on European indices worth $50 billion—more than SocGen’s entire value.

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