South Korea's top financial regulator Jun Kwang-woo, chairman, Financial Services Commission, has warned that that Korea Development Bank should take a ''cautious'' approach in its keenness in buying Lehman Brothers.

Korea Development Bank has been in talks with Lehman Brothers over a possible stake or acquisition (See: Korea Development Bank eyeing Lehman Bros), but failed to reach an agreement.

Lehman's shares, which had jumped to $15.52, in midday trading on Friday on the basis of interest shown by KDC, plumetted by more than 4 per cent from Friday's close to $13.77 a share after Jun Kwang-woo voiced concern about state-run Korea Development Bank's interest in the troubled US investment firm (Lehman Brothers may go for $4 billion write-down in Q3, feel JPMorgan analysts).

He told reporters in Seoul, while taking over a global investment bank can become an opportunity to raise the capability of the Korean investment banking business, but the risks were. "KDB should take a cautious approach.''

Jun Kwang-woo also said that while the government welcomed "any efforts" led by the private sector to go global, it may not be proper for state-owned financial institutions to lead the role and take on "excessive burdens,'' he said.

He further added that acquisitions of major global investment banks by South Korean companies should be led by the private sector and state-run institutions such as KDB should play a "cheerleader role.''

The regulator suggested that KDB could act as a catalyst for a consortium in pursuing the acquisition, saying that KDB should be "mindful of its priorities".

The South Korean government plans to privatise KDB by 2012 in a phased manner. It plans to establish a holding company, a part of which would be divesterd through an initial public offering.

Lehman is likely to incur a net loss of more than $2 billion and write-downs of more than $3 billion in the current quarter, expected to rise further to $4billion in the next quarter and the mortgage-related assets will suffer a continuing decline. In the last 12 months, the Lehman stock has fallen 76 per cent.

For a company whose market capitalisation has been beaten down to $9.5 billion and with a gloomy scenario ahead, the concern expressed by the Korean regulator just got gloomier.