Grandfather of the Scam?

As the Bernard Madoff affair shows, new and more audacious chapters in the history of financial fraud are written every year. But in scale, drama and ambitions, few have rivaled the dealings of Swedish financier, civil engineer and entrepreneur Ivar Kreuger. Known as the Swedish match king, Kreuger made a fortune making matchsticks and took international markets by storm during the frenzied 1920s, cutting deals with sovereign governments and became a major figure on Wall Street before his empire collapsed in the early1930s. Frank Partnoy, a former derivatives trader and law professor—and an all-around connoisseur of financial shenanigans—argues that Kreuger, in fact, pioneered many of the techniques used by today's financial wizards. He describes Kreuger's extraordinary life in a new book, The Match King: Ivar Kreuger, the Financial Genius Behind a Century of Wall Street Scandals

NEWSWEEK's Daniel Gross interviewed Partnoy for his book podcast, Every Day I Read the Book. Their conversation, which is excerpted below, can be heard hereor downloaded as an MP3 filehere.

GROSS: How did you happen on to this character and why is he important?
PARTNOY: Several years ago I was looking at the list of the top financial schemes of all times, published in the Financial Times. I knew all the schemes and the scamsters on the list, but I'd never heard of Kreuger. So I started investigating him and doing some digging. He was like a combination of Warren Buffet and Donald Trump and all the colorful businesspeople of today all rolled up into one.

You say that Kreuger was a pioneer, writing "For better or worse, this man is the father of today's financial market. Hedge fund managers and investment bankers employ many of the same techniques he invented." That's a dubious honor, but what do you mean?
He invented many of the complex financial instruments that are used now. He created off-balance-sheet financing and offshore subsidiaries. After he raised his first capital in the U.S. in 1922, he transferred it all to this subsidiary in Lichtenstein. He engaged in a bunch of transactions, that resemble today's derivative transactions, where he was able to shift assets and liabilities all over the world. He invented class A and class B shares, with the class B shares having controlling votes.

He also knew how to invent a persona.
He was an incredibly suave guy. He planned conversations in advance; he decided what he would talk about with particular groups of people.He memorized facts and statistics to mesmerize people and then he would quickly disappear, in kind of a whirlwind. On the ship to America in 1922, he went to the radio shack, and sent out messages for almost a day, nonstop. Sometimes he was actually sending messages through the ship's Marconi wireless but sometimes he was just pretending to send messages. He had learned from other trips to the U.S. that he had to look like somebody who was truly important and get people wondering who he was.

What was the significance of being a Swedish match king?
After succeeding in the real-estate business, he had taken a relatively small family match business and parlayed it into a monopoly in Sweden. Back then, matches were a huge business. The Swedes had invented the safety match—you know, it has a phosphorous head and you strike on the outside of the box. He essentially controlled the match market in Sweden. His idea was that he would come to the U.S., raise money and establish match monopolies that span the globe.

After World War I, New York had surpassed London as the global financial capital. And the U.S. in the 1920s was really ripe for him.
The U.S. investor base was primed for some kind of an exotic story about how they can make double-digit returns. Much like Bernard Madoff, he was paying double-digit dividends every year reliably, even though they didn't always bear a relationship to how much his company had actually made.

Did he come here to raise money to do more deals, or to steal it?
Initially he came here to build his empire. He was completely legitimate in his businesses up to this time. He was involved in building the Flatiron building and the Macy's building in New York. He was selling 20 billion boxes of matches a year.