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Bad Trades, Except in Korea
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Derivative "kiko" contracts sold in S. Korea to exporters for protection in currency fluctuations such as dollar depreciating in value, with clauses that provide for huge losses if the won depreciates in value. The won collapsed in 2008 going from 1000 to the dolalr to 1500 to the dollar leading to huge losses the exporters could not pay. The Seoul District Court blocked enforcement of nine such contracts saying the risks were not disclosed, the banks obfuscated the risks, and the investments were inappropriate for the companies.
The month the Korean won collapsed in 2008 and the derivative "kiko" contracts sold by banks to Korean exporting companies
04/03/2009
Confusing derivative contracts sold by banks to exporters offer some protection against currency fluctuations but huge losses if the currency goes the other way. What happened in Detroit happened in S. Korea. The difference is that the Korean courts decision was that the contracts were confusing, the companies had no clear idea what they were getting into, and that it was designed to address a weakening dollar not a collapse of the won. The won went from 1000 to the dollar to 1500 to the dollar in 2008 during the global financial crisis of 2008. "Kiko" comes from the technical term banks used for "knock in, knock out" clauses in contracts. Obfuscation is defined as rendering something unintelligible, a practice used in these types of contracts in the period leading to the crisis.
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The huge losses suffered by Detroit and by exporters in S. Korea and how the issues raised were handled in the two places. What takes precedence fairness or contracts, how much of a contract has to be intelligible to the investor and the broader question of why banks needed to write such contracts or conduct business in this way which could hurt their reputation. An example is given by Floyd Norris of NYT where Bankers Trust reputation suffered badly in 1994 for selling such contracts to P&G.
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