As America is sprawled in the dirt, stunned and battered by turmoil in its financial markets, Frank Partnoy, a law and finance professor at the University of San Diego and previously author of Infectious Greed: How Deceit and Risk Corrupted the Financial Markets, looks back at a mighty industrialist and financier of the 1920s and '30s, Ivar Kreuger, in his new book The Match King: Ivar Kreuger, the Financial Genius Behind a Century of Wall Street Scandals.
Partnoy convincingly frames Kreuger as the fountainhead of modern financial shenanigans and crimes, and the proximate cause of "the securities laws that govern today's markets." Yes, despite what you may have heard, Partnoy makes a case that it wasn't the 1929 crash or the Great Depression that prompted New Deal innovations in financial market regulations. Rather, it was the disgraceful and mysterious fall of Swedish man of money and mystery Kreuger, known as "the Match King," whose various companies' securities were owned in the early 1930s by more Americans—and Earthlings—than any other.
Kreuger started in the building trades. Later, the humble safety match (which only ignites if struck against its own box, rather than against any old surface) became the linchpin of his sprawling international empire. That empire made him as famous as Lindbergh, a consort to Garbo, and filled him with a sense of grandiosity that made him loathe to ever leave well enough alone. In that last characteristic, at least, he's a blood brother to the U.S. government that never got a chance to try him for his frauds, even as the government reshaped its financial regulatory system in reaction to those frauds.
Kreuger rose from a working class background in Sweden to, in the 1920s, become likely one of the richest men in the world. He was a wise friend and advisor to King Gustav of Sweden and President Herbert Hoover, and a self-made man who won the hearts (and cash flow) of snooty blue-bloods in the highest echelons of Boston banking (he particularly delighted in being a thorn in the side of the Morgan banking interests). He was a man with the charisma (and success) to engender what in retrospect was a foolish level of trust. He also managed to inspire Ayn Rand's 1930s antinomian mystery play of a Swedish tycoon's death, The Night of January 16th.
Trust was the key, because Kreuger's operations were all about Kreuger. Only he knew where the money came from and went to. (Partnoy writes of a corporate report in which "half the company's profits were listed simply as 'earnings from various transactions.'")He played his American auditor like a beloved pet, bribing him with both paid vacations and deeply craved attention. Kreuger had to keep auditors at bay, because he played an elaborate game of shifting cash from American concerns to Swedish ones (and on to secretive ones in Lichtenstein) in order to keep paying off the wildly huge dividends—usually 25 percent or more yearly—that endeared him to investors.
If things were getting dicey and the more prudent would have thought of cutting dividends, Kreuger, no ordinary man, would raise them in order to maintain investor confidence, ensuring that investors would continue to loan money and buy securities from the Match King's interests.
Partnoy's readers will ultimately find keeping track of the money as difficult as did his business partners and auditors. (The book requires flow charts for optimal comprehension of its labyrinthine but always fascinating tale.) Still, Partnoy tells a story of great historical importance, fascinating in both business and human terms, with a winning concision. While Partnoy is mostly storyteller rather than moralist, he does attempt a quick and somewhat convincing attempt to partially rehabilitate Kreuger's reputation.
That reputation was in tatters after his suicide in 1932, on the afternoon of what would have been a very tense meeting with his bankers, as attempts to shuffle millions around the globe to meet his various debts and dividend obligations had finally run out of wiggle room. His death left behind a tangled and ugly mess of destroyed investment banks, angry securities holders, and livid legislators.
But Partnoy points out that unlike such pure fraudsters as Charles Ponzi, who claimed to be arbitraging international postal coupons to pay off investors but was merely paying off old ones with investments from new ones, Kreuger really did have an immensely valuable set of properties and businesses. Securities holders of his supposedly "fraudulent" empire in some cases made off better than the average investor in a generally grim early 1930s market.
Partnoy doesn't make a big deal of it, but alert readers will note that underlying Kreuger's whole system was not the actions of the unregulated free market but the actions of government. He notes that 1920s stock manias were undergirded by Federal Reserve flooding markets with cash. And Kreuger was in his biggest operations an agent and helpmeet of the state all the way.
His largest fame and success came from a hubristic desire to beat the Morgan banking interests—and enrich himself and his stockholders—via loaning huge amounts of money to impecunious European governments, in exchange for national monopolies in match-making and sales. Every step of his downward path to suicide was paved not with free-market transactions, but with government ukases, special favors, and backroom deals with public officials. By the end, he was a match monopolist for 24 nations and had loaned $300 million to sovereigns. Little wonder John Maynard Keynes, on Kreuger's death, called him "perhaps the greatest constructive business intelligence of his age"
That much of Kreuger's business came via government monopoly deals served him well in putting off his business partners, who tended to ask pesky questions about from where the money was coming and to where it was going. Kreuger would simply insist his business dealings were sensitive matters of state that could not be widely bruited about.
In revisiting a story of high finance malfeasance—one so huge in its day that Partnoy is stunned Americans could have ever forgotten it—one can't help but mine it for contemporary relevance, though Partnoy doesn't do much of this. Knowing the exigencies of book researching, writing, and publishing, doubtless the book was substantially done before Bear Stearns or Lehman Brothers fell. But there are still valuable lessons in Kreuger's tale for those who think we can regulate ourselves to a financial market free from substantially damaging frauds or mistakes.
Start by noting that the set of securities laws enacted in the wake of Kreuger's fall (as Partnoy notes, "when Congress began to discuss the securities laws, the debate began with Ivar, not the crash") by no means created a paradise where no poor, ignorant yutz of investor might lose his shirt through foolish risk or misleading statements or lies from securities sellers (Hello, Enron; hello, Bernie Madoff).
The lessons, then, are clear and timeless. Speculating is risky; playing a game where a force outside your control (the Federal Reserve) can make more chips and distribute them at will is especially dangerous; and even controls and regulations designed to make sure that highly reputable financial instruments are on the level is not sufficient to prevent enormous market downturns that cost lots of people lots of money.
Madoff is the nearest analog to Kreuger in the current market-collapse morality play, with high-payoffs that could not ultimately be sustained, floating on the sweet success of success. Madoff proved that confident, charismatic men who can fake their way through the appearance of great success with larceny in their hearts will continue to break hearts and break banks.
Partnoy makes the convincing case that with better luck Kreuger's game could have worked out. He was at root a successful industrialist who overextended himself and made some crazy promises. He then made some unfortunate decisions about how to cover his ass when things didn't work out (like forging Italian treasury bonds when Mussolini declined a Kreuger match monopoly for his nation), but wasn't a crook from start to finish.
Kreuger was an early innovator in such potentially confusing—but often lucrative—investment vehicles as the class-B non-voting share, the participating preferred share, and the convertible debenture derivative. For those not used to dealing with such concepts, even Partnoy's skilled explanations might leave you thinking that Kreuger must have been pulling a fast one, relying on a strategy of confusing investors.
But it didn't take Kreuger's complications to create the situation where everyone from the savviest investment bankers to man-in-the-street-investors to the president of the United States fell for his charms and successes. It was simple naivety, seeking the main chance, and an unwillingness to be left on shore when the good ship lollipop sailed. As long as those are aspects of human nature, no amount of regulation will save markets from people like Ivar Kreuger, master industrialist and master financial criminal.
As Partnoy writes, after Kreuger, "the era of laissez-faire self-regulation was over." But did that era even exist? Much like in Kreuger's time, we still have a Fed manipulating interest rates for political gains, we still have government making and influencing most big economic decisions, and we still have human greed, ignorance, foolishness, and mistakes.
In his suicide note Kreuger wrote, "I have made such a mess of things that I believe this to be the most satisfactory solution for everybody concerned." If only those government officials and financiers who today believe we should all be on the hook for their mistakes would be as noble about their institutions' fates as Kreuger was about his personal one.