The liquidity crisis at Tong Yang Group has reignited the long-standing debate over the pros and cons of greater restrictions on conglomerates owning financial subsidiaries.

The question of erecting a strict firewall between manufacturing capital and financial units has resurfaced amid mounting allegations that Tong Yang’s owners exploited the group’s financial units as behind-the-scenes funding sources for some of its distressed nonfinancial units.

The nation’s top antitrust regulatory official, in particular, has called for the separation of financial capital from nonfinancial capital.

“It is necessary to bolster the firewall in a bid to prevent chaebol owners from abusing financial units as their private cash cow,” said Fair Trade Commission chairman Noh Dae-lae over the weekend.

“The cross-shareholding structure in Tong Yang Group has been used as a tool to fund ailing affiliates,” he said. “To prevent further similar cases, a bill banning fresh cross-shareholdings (in the conglomerate sector) should be legislated as soon as possible.”

Since the 1997 Asian financial crisis, the government has pushed restrictions on industrial capital’s holding of stakes in financial units.

The rules were eased slightly in 2009 under the former Lee Myung-bak administration. Now the argument for toughening the rules is gaining ground again.

More and more market insiders are raising the possibility that the prosecution will seek an arrest warrant for Tong Yang Group chairman Hyun Jae-hyun regarding suspicions that the chief and vice chairwoman Lee Hye-kyung, Hyun’s wife, created slush funds via the conglomerate’s lending units.

“Considering a variety of ethical breaches and the huge number of victimized investors, I believe the courts will eventually sanction the arrest of chairman Hyun,” said a commercial bank executive.

The Financial Supervisory Service had planned to exclude TY Money, one of the two money-lending units of the group, in its emergency probe into Tong Yang financial units.

The regulator, however, has recently decided to scrutinize TY Money, whose headquarters are located in Yeoksam-dong, southern Seoul, amid allegations that chairman Hyun exploited the lender as a key funding source.

Hyun and his family hold an 80 percent stake in TY Money, followed by Tong Yang Inc. (the group’s de factor holding firm) with 10 percent and Tong Yang Financial Services (the other financial unit) with 10 percent.

TY Money is the main shareholder of Tong Yang Networks, which has been placed under court receivership for cash flow woes, with a 23.1 percent stake.

Earlier this month, the embattled group’s five nonfinancial units, including the holding firm Tong Yang Inc. filed for court receivership, as part of chairman Hyun’s alleged efforts to prevent the default on maturing bills worth some 1 trillion won ($909 million).

By Kim Yon-se (kys@heraldcorp.com)