Ivar Kreuger: The Grandfather of Financial Scams?

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?
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.

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