South Korea’s financial institutions and authorities are in talks to create a bad bank to help companies recoup the losses from disgraced hedge fund Lime Asset Management, according to industry sources Monday.

The Financial Supervisory Service held a closed-door meeting with 19 private financial institutions including commercial lenders Woori Bank and Shinhan Bank and securities firms Shinhan Investment and Daishin Securities to discuss details of the private bad bank, or an asset management company -- as to how much capital is needed, how and where to draw money to create a fund, among others.

“It is hard to predict when the details will be finalized, but we are seeing a progress in the discussions,” a senior official at the FSS told The Korea Herald.

The bad bank will be designed to acquire Lime Asset’s four troubled master funds, in order to maximize the value of its bad assets. The investment targets are associated with mezzanine instruments, privately placed bonds and promissory notes issued by a company that took over trade finance funds involved in a ponzi scheme by International Investment Group.

The measure is likely to be followed by the financial authorities’ penalty against Lime Asset, which in the worst case could revoke its registration.

The news comes amid growing distrust about Lime Asset’s ability to redeem money to investors in 173 feeder funds after it froze their withdrawals last year. The investors have entrusted a total of 1.67 trillion won ($1.37 billion) to the hedge fund.

In January, one of the frozen Lime Asset’s funds was found to have invested in some 19.5 billion won to a company called Star Mobility and lost a majority of its investment. Star Mobility was once controlled by a corporate raider surnamed Kim, who attempted to have acquired Lime Asset’s master funds and is now accused of embezzlement.

In the meantime, the value of assets the master funds owned have shrunk by more than half of the principal amount as of April, as the scandal surrounding Lime Asset intensified. Lime Asset had allegedly attempted to conceal its financial troubles to its investors, while switching the investment target.

By Son Ji-hyoung (consnow@heraldcorp.com)