Grandfather of the Scam?

Kreuger knew how to play the media, the bankers and the investment bankers. Did he have a special gift for understanding the psychology of Americans in the 1920s?
I think so. I think he had the gift of understanding the psychology of just about anybody, but he particularly latched on to the naivetéof American investors, and he locked into that. He befriended a lot of people in the media, political figures. They loved the fact that he had discovered Greta Garbo. He was hooked into almost every artery of American society.

So what was his modus operandi in the U.S.?
He hooked up with an investment banker, Donald Durant of Lee Higginson. And his pitch is that he'd go to the struggling governments of Europe, and play the role that the IMF and World Bank play today. He'd lend them money in exchange for a match monopoly. He would generate returns by collecting interest on the loans and selling matches. He started off with relatively small amounts of money and he again was legitimate. He went to Poland and, with the help of his brother, got a match monopoly. Progressively, he went from country to country.

One of the things that allowed him to get away with it was the lack of disclosure and oversight. In the 1920s, companies didn't publish quarterly earnings or audited statements. How did he get around that?
He got around it as most companies did, by publishing only cursory information. But investors back then didn't care. He was able to convince his bankers and accountants that this was enough information, and then he would take the cash and the assets and move them offshore, where they wouldn't have a window on his dealings.

Did his basic idea— loans for match monopolies — work as a financial model?
I think it did. He made money on many of these monopolies he was able to secure in Poland and France. During the weekend of the crash of 1929 he was negotiating for one in Germany, and that's where things went wrong. If he had backed out then and said,"The market is crashing and I am not overextending myself," his business could have been profitable.

After the crash, Kreuger managed to muddle through for a few years, but mostly through a series of increasingly desperate measures.
He actually closed one of his biggest issues in the U.S. during the crash and continued to raise money in the U.S. throughout that period. The French paid his loan back just in time, so that he was able to lend money to Germany. He kept suggesting to investors that he was going to get a big monopoly with Italy. And he winds up forging the names of Italian government officials on documents. He was so bad at it that he actually misspelled their names.

By 1931 and 1932 this is all starting to come apart. More and more people are asking questions about his financial statements. What was the moment it came undone for him?
Everything came undone when he had a deal that had to go through J.P. Morgan in order to get money out of International Telephone and Telegraph, which was a Morgan client. Ultimately, the Morgan bankers found that he had been shifting these assets around and that there weren't any more assets as collateral for this loan. So ITT pulls the money, and that's when he went into serious personal decline. I think he snapped. He may have had bipolar tendencies before that, but he sunk into a deep depression, secreted himself at his Park Avenue apartment and wouldn't come out.

How did this all end?
His body was discovered in his Paris flat on March 12, 1932, a bullet in the center of his heart as his bankers are all waiting in a hotel for him to explain himself. He is on the front page of every paper for months, as people are unraveling his enterprises and trying to understand where and how he went wrong. Price Waterhouse did a big investigation, the Senate conducted hearings and we end up with the 1930s Security laws, which govern our markets today.

But it did not end all that badly for investors in his vehicles.
That's right, and here is where he is not a direct parallel to Madoff. Kreuger, it turns out, had legitimate businesses. Swedish Match, one of his companies, still exists and the loan he made to Germany did continue to pay interest for many years. And so one of the puzzles about him is that he actually did have this legitimate core.

With Anita Kirpalani

© 2009