One factor which has made it difficult for South Korea to weather financially troubled times is that the major corporations of South Korea have linked themselves together financially. These linkages are not motivated by financial self-interest but instead are dictated by family relationship and comradery.

In December of 1997 Halla, then the 12th largest chaebol of South Korea, went bankrupt. Its debt/equity ratio was about twenty to one. This bankruptcy cost Hyundai, the largest chaebol, about $1 billion. The lost could be even more because Hyundai guaranteed some of the debts of Halla. Hyundai's loans and support of Halla was not based upon any assessment of the risk and returns for Halla debt. Instead it was based up family relationship, the head of Halla was the brother of the head of Hyundai.

Chaebol are family businesses. This means male members of the family get to run businesses. If they do not have the abilities necessary to be part of the main company subsidiaries are set up for them to run. For example, a relative of the leadership of the Samsung operates a soft-drink company. The vending machines in the Samsung buildings stock those soft drinks.

The linkages between chaebol are not limited to family relations. There is a perplexity propensity of Korean firms to make nationalism more important than profitability. It is perhaps a holdover of the feudalistic and tribalistic mentality in Korean culture.

A chaebol is a collection of firms. There may be one or a few main firms within the colllection which are making most of the profits. The financial health of the main firms may seem sound but when the consolidated accounts of the entire chaebol are compiled the profit may largely or entirely disappear. The entire chaebol may be operating at a loss even though the main firm is comfortably profitable.

The chaebol have been so heavily involved in loan-guarantee practices that the South Korean legislature found it necessary to restrict chaebol's loan guarantee to no more than the amount of their equities.

The government tries to restict the loans between chaebol, but the chaebol have found ways aroung the government restrictions. They did using the following strategems:

• A firm can pay in advance for supplies thereby providing funds, called trade credit, to the supplier firm.
• A parent chaebol can make it appear that one of its subsidiaries is getting outside equity financing. It does this by arranging for an outside buyer to purchase stock being sold by its subsidiary. The outside buyer is willing to purchase the stock only because the parent chaebol guarantees the outsider buyer against losses on the stock purchased. This arrangement is the same as if the parent chaebol gave a loan itself to the subsidiary.
• The chaebol set up financing companies and investment banks as subsidiaries. The government rules do not apply to these finance company subsidiaries.
• The chaebol can help with another's commercial operation outside of South Korea where the South Korea government rules do not apply.