When the Tail Wags the Body

— Omitted passage —

With U.S. and Japanese markets moving sideways, Korea’s KOSPI climbed 12.2 percent on a monthly basis, posting the highest gain among major developed-market exchanges.

But Korean investors were hardly celebrating.

Most stocks barely moved at all, while only the battery company GL Entech kept rising. The company’s market capitalization, which had stood at 80 trillion won at the time of its IPO, had now ballooned to 450 trillion won—roughly $400 billion—more than five times higher in just one month.

GL Entech’s abnormal surge was affecting not only the cash market, but the futures market as well.

As the volatility of the KOSPI 200 increased…….

— Omitted passage —

In truth, the situation was one GL Group had brought upon itself.

GL Group had pushed ahead with the GL Entech listing despite fierce opposition from GL Chemical shareholders. In the process, it ignored demands for a stock dividend, then locked up the shares it held for three years in an attempt to get around the issue.

In the end, a petty scheme meant to keep shareholders from sharing in the profits had sparked a catastrophe of this scale.

One investor who had been in the Korean market for decades put it this way:

“Unlike other countries, Korean corporate law says a director’s decisions must be made solely in the company’s interest. Since there’s no legal problem with ignoring the interests of minority shareholders, directors are effectively nothing more than the major shareholder’s rubber stamp. Korean stocks are structured so that controlling shareholders can siphon corporate profits out whenever they want, so investors need to be extremely cautious.”

Korea was the world’s tenth-largest economy.

That meant it held a considerable position in the global equity market. And yet one single stock had managed to send both the cash and futures markets into a frenzy.

The world’s attention had turned to this bizarre phenomenon in the Korean market.

The KOSPI 200 reflected not only market capitalization but trading volume as well, so it was almost unheard of for the entire index to be thrown into turmoil just because one or two stocks ran into trouble.

But when the second-largest stock by market cap surged like this, there was nothing anyone could do.

People usually said, “the tail wags the body,” when the futures market shook the cash market. This time, though, the body itself was shaking, and the tail was trembling along with it.

GL Entech’s rise pushed the KOSPI 200 higher, and the institutions that had issued options rushed to buy the underlying stock in order to hedge.

But buying the stock for hedging drove the price even higher, which in turn pushed the futures market up again, forcing even more stock purchases. The vicious cycle kept repeating.

In short, the stock was rising because it was rising.

What’s more, this fiasco exposed the flaws in Korea’s stock market to investors around the world.

Korean controlling shareholders can split and merge companies however they please.

Korean managers dump subsidiaries on the market the moment a business starts growing, then siphon off the profits.

They don’t care about share prices; they care only about increasing the controlling shareholder’s grip on power.

Even when revenue and profit are identical, Korean companies should trade at roughly a 30 percent discount to American ones.

Global investment banks slashed their target prices across the board for companies planning subsidiary listings.

Some stocks were even assigned target prices below their current share prices, along with outright sell ratings.

As confidence in the entire market collapsed, global capital fled Korea at speed—and that pushed the won higher as well.

The first time I came up with this plan was after I saw GL Entech announce that it would extend its lock-up period.

Of course, that had never happened in my first life.

Back then, GL Entech went public without facing much opposition or criticism, and its share price moved sideways in the 100,000 to 150,000 ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠won range for quite a while.

Institutions had far more mandatory lock-ups than voluntary ones, and the controlling shareholder’s lock-up period was only six months.

That meant there was no way to push the stock price higher through supply and demand alone. If anything, people worried about an overhang issue, where large-scale selling would crush the price.

But once GL Entech extended its lock-up period to three years, buying up even half of the shares floating in the market was enough to create exactly the kind of situation we were seeing now.

Chairman Yoo Jae-ho let out a sigh and said,

“At this rate, the top spot by market capitalization could really change hands.”

In the early 2000s, Yuseong Electronics had risen to the number-one spot in the KOSPI by market cap. And since then, no one had ever taken that place away.

It had been so overwhelmingly dominant that not even a single company had come close to half its market cap.

And then, all of a sudden, a company appeared that threatened that throne.

It was GL Entech.

With hedging demand flooding in, GL Entech’s market cap had now approached 500 trillion won, closing in fast on Yuseong Electronics.

Whether GL Entech would overtake Yuseong Electronics was now the burning question of the hour.

Granted, its revenue and earnings were less than one-twentieth of Yuseong Electronics’…… but did that really matter?

Whatever the fundamentals looked like, if the share price kept climbing, the market cap could be rewritten.

“President Jeong Nam-cheol asked me to pass along his thanks.”

“Not ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠at all. I benefited too.”

Using individual investors’ shares for short selling had long been standard practice at brokerage firms.

In terms of trading volume alone, Yuseong Securities had actually been the most active. But after hearing what I said, they quietly banned stock lending, and Hwaan Securities and DA Securities did the same.

Just like banks, once people open a brokerage account, they rarely move it.

But once it became known that brokers were using customer shares for short selling, angry retail investors began transferring their ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠accounts to the firms that had promised not to do it.

While the other brokerages were in a state of emergency, those three firms were suddenly drowning in account openings.

This incident would probably reshuffle the brokerage rankings.

“It looks like the financial authorities have been lodging complaints nonstop.”

“Well, it’s a government that’s on its way out anyway.”

President Oh Young-hwan’s term was due to end this year.

He had already been in the throes of lame-duck status, but once rumors spread that he had taken bribes from GL Group and helped push the listing through, his approval rating collapsed to below 20 percent.

The amusing part was that Representative Im Chang-sik’s approval rating had crashed along with his.

Chairman Yoo Jae-ho gave a wry smile.

“Go Jae-ik must be in a difficult spot.”

The reason chaebol founders could control an entire group with only a small stake was the ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠strength of their friendly holdings.

They had never cared about the losses of minority shareholders, but they had taken great care to protect their interests, and those shareholders had in turn strongly supported the founding family’s management.

But this fiasco had put Go Jae-ik’s management ability on the chopping block.

He wouldn’t lose control of the company, but from here on out, it would be hard for him to run things however he pleased.

I let out a small laugh.

“Well, he chose that road himself. He’ll grit his teeth and ride it out with nothing but spite and stubbornness.”

GL Group ranked fourth among Korea’s business groups.

Thanks to the GL Entech listing, it had jumped past the LK Group to take third place. And with GL Entech’s share price now exploding upward, it had even overtaken the Daeyeoncha Group and climbed into second place.

If GL Entech were to pass Yuseong Electronics as well, it might really end up surpassing the Yuseong Group and taking the number-one spot among the country’s conglomerates.

And yet……

Rather than cheering, GL Group was in a mood no different from a house of mourning.

After the GL Chemical and GL Entech disasters, the group’s image had fallen so far that it had practically punched through the basement floor.

Outside headquarters, minority shareholders staged daily protests, and a fierce boycott movement took hold.

GL Entech shares were soaring every morning before the sun was fully up, while GL Chemical’s stock barely moved at all.

People might endure hunger, but they couldn’t tolerate being left with a stomachache, and GL Chemical shareholders were now feeling something beyond frustration—they were furious.

Go Jae-ik looked at GL Entech’s share price.

GL Entech was the core affiliate of GL Group. As the next chairman, it was his job to grow it as much as possible.

And yet, before he had even taken charge of management, the stock had already surged more than sixfold. He had no idea how much higher it would go from here.

Even if he worked himself to death, he would never have been able to push the price this high.

But Continue Capital had managed it in just one month.

The problem was that all of it was a bubble.

In the end, this situation would only be over once Continue Capital sold back the shares it had bought. But the moment that happened, the stock would collapse.

It had been Continue Capital that pulled the trigger, but all the criticism was raining down on GL Group instead.

The company had become an international embarrassment and been branded as unethical.

Minority shareholders had all turned their backs, and even the friendly holdings were starting to show signs of slipping away. Some pension funds had already sold every share of the holding company and walked away.

It was, in every sense of the word, the worst possible situation.

Why did it come to this?

When you ran a massive company, there were countless moments when you had to make a choice. Sometimes you made the wrong one, but regretting every mistake afterward was just foolish.

He was not the kind of man who dwelled on the past.

But……

This time, he regretted it.

If I had delayed the GL Entech listing…… if I had given the GL Chemical shareholders an in-kind dividend……

There had been several chances to prevent this from happening. He had ignored them all, and this was the result.

Go Jae-ik recalled Han Miru’s words.

GL Group will pay the price.

And so it was.

GL Group was now paying a painful price for betraying its shareholders.

President Oh Young-hwan harshly criticized GL Group at a Cabinet meeting.

“As recent market instability has widened, investors have suffered serious losses. To prevent further damage, I ask GL Group to prepare countermeasures as soon as possible.”

He was trying to distance himself from GL Group, if only to escape the bribery allegations.

But GL Group itself had no real solution to offer.

With market turmoil continuing, the government applying pressure, and minority shareholders furious while friendly holdings slipped away, President Go Jae-ik finally held a press conference and bowed his head.

“I deeply regret and apologize for the financial instability caused by GL Entech’s excessive listing. GL Group will do everything in its power to stabilize the share price. Going forward, we will improve our financial structure and increase dividends to protect shareholders. We will also consider an in-kind stock dividend of GL Entech shares to GL Chemical shareholders once the lock-up is lifted.”

But the public reaction was freezing cold.