The $4bn withdrawal

In the end, the hassle proved too much. US private equity firm Lone Star has terminated a $7.3 billion agreement to sell its controlling stake in Korea Exchange Bank to Kookmin Bank because of prosecutors' ongoing investigations into the firm's initial investment in 2003.

John Grayken, chairman of Lone Star, said: “We have concluded that we cannot move forward with the sale of KEB to Kookmin Bank due to the continuing investigations surrounding Lone Star's investment in KEB.”

On 20 November, local prosecutors indicted Korea Exchange Bank and Lone Star on stock manipulation charges. This came after a Korean court granted prosecutors warrants to arrest Ellis Short, co-founder and vice-chairman of Lone Star, and Michael Thomson, the firm's general counsel, on charges of manipulating the stock price of the bank's credit card unit in 2003.

“Once the investigation is finally completed, we will again consider our strategic options,” added Grayken. “Until then, we will continue to vigorously defend our company and our officers against the prosecutors' groundless accusations.”

A spokeswoman for Kookmin Bank said of Grayken's statement: “We are a little surprised by the decision, but we believe the impact of Lone Star's decision will be limited. We are prepared for a stand-alone asset growth strategy.”

Another source said Kookmin had been hopeful the agreement with Lone Star would be completed, even though a termination had not been completely ruled out.

Grayken continued: “We appreciate Kookmin Bank's hard work on this transaction and regret that it could not be consummated.”

Lone Star would have made more than $4 billion in profit if the sale had been successful. This roused nationalist sentiment and is seen by many as having helped trigger probes into the 2003 purchase of KEB.

The investigations are examining the possibility that the bank's financial health was misrepresented to allow the sale to Lone Star. Many people, including government officials connected with the transaction, have been questioned by prosecutors, who have also raided a number of offices.

Lone Star's dilemma has earned Korea a reputation of being opposed to foreign private equity, which some sources say is unfair. “It is not as simple as some foreign reporters make it seem: an anti-foreign witch hunt. The prosecutors are in a difficult spot too. They need to come up with something tangible,” said an anonymous Seoul-based source.