May 7, 2024 • 1hr 15min
#348 The Financial Genius Behind A Century of Wall Street Scandals: Ivar Kreuger
Founders
Key Takeaways
- Ivar Kreuger built a massive financial empire in the 1920s based on match monopolies, but it collapsed spectacularly in 1932 amid fraud allegations
- Kreuger was a master of investor psychology and communication. He practiced lines for hours like an actor to appear charismatic and persuasive.
- His initial pitch to American investors was simple and legitimate: invest in Swedish Match to earn profits from foreign monopolies
- Kreuger studied monopolists like Rockefeller and Carnegie and applied their tactics to the match industry globally
- He pioneered financial innovations like B-shares to maintain control while raising capital
- Kreuger's empire became too complex and opaque. He resorted to fraud and deception to keep it afloat as it grew unsustainably.
- The 1929 crash cut off Kreuger's access to capital markets, leading to the collapse of his over-leveraged empire
- Incentives played a huge role in enabling Kreuger's fraud to continue for so long, as auditors and bankers were compromised
- The story illustrates the dangers of risking a good business to pursue unnecessary growth, as well as the power of incentives in shaping behavior
Introduction
This episode examines the life and business empire of Ivar Kreuger, known as "The Match King", based on the book by Frank Partnoy. In the 1920s, Kreuger built one of the largest financial empires in the world centered around match monopolies, before it spectacularly collapsed in 1932 amid allegations of fraud. The episode explores how Kreuger was able to achieve such success through financial innovation, mastery of investor psychology, and ultimately deception, before it all came crashing down.
Topics Discussed
Kreuger's Background and Early Success (4:00)
Ivar Kreuger came from a family match business in Sweden. He studied engineering and worked in construction in America before returning to Sweden to start his own construction firm, Kreuger & Toll.
- Kreuger innovated in construction contracts by realigning incentives - guaranteeing completion dates and taking on risk of delays
- This made Kreuger & Toll one of the top construction firms in Europe within a few years
- He used the success of Kreuger & Toll as collateral to enter the match industry
Kreuger studied monopolists like Rockefeller and applied their tactics to consolidate the Swedish match industry:
- Bought up match factories across Sweden
- Vertically integrated by acquiring timber and chemical suppliers
- Merged competitors to form Swedish Match
- Aimed to secure a global monopoly on match production and sales
Kreuger's Pitch to American Investors (6:01)
In 1922, Kreuger sailed to America to pitch investors on his match monopoly business. His pitch was simple and legitimate:
- American investors could earn profits from monopolies abroad
- Matches were an essential product everyone used
- Anti-trust laws prevented monopolies in the US, but not investment in foreign monopolies
Kreuger targeted second-tier banks like Lee Higginson rather than top firms. He used his charisma and carefully rehearsed communication to win them over.
"By investing in Swedish Match, Americans could earn profits from a monopoly abroad." - Ivar Kreuger's pitch
Building the International Match Empire (10:01)
Kreuger used the success of Swedish Match and Kreuger & Toll to raise hundreds of millions from American investors for his new venture, International Match Corporation.
- Promised and paid 25% annual dividends to attract investors
- Set up a complex web of hundreds of subsidiary companies
- Made deals with European governments - loans in exchange for match monopolies
- By 1929, controlled over 200 companies and rivaled JP Morgan as a lender to Europe
However, Kreuger promised more than his legitimate profits could sustain. He began using new investments to pay dividends to earlier investors in a Ponzi-like scheme.
Financial Deception and Fraud (22:03)
As Kreuger's empire grew more complex, he engaged in increasing financial deception:
- Provided incomplete and misleading financial statements
- Set up secret companies to hide transactions
- Forged signatures and documents
- Hired actors to pose as ambassadors to impress investors
- Used a fake phone to pretend to take calls from world leaders
Kreuger was able to continue fooling auditors and investors through a combination of charm, misdirection, and incentives that made people reluctant to dig deeper.
"As more cash flowed in, the directors' questions went away."
The Role of Incentives (38:07)
The podcast emphasizes how incentives enabled Kreuger's fraud to continue for so long:
- Auditors were paid large fees and given perks like vacations
- Banks were major shareholders in Kreuger's companies
- Everyone was profiting from the high dividends
- Exposing problems would destroy lucrative relationships
This aligns with Charlie Munger's views on the power of incentives in shaping behavior:
"Never, ever think about anything else when you should be thinking about the power of incentives." - Charlie Munger
Collapse of the Kreuger Empire (54:09)
The 1929 stock market crash cut off Kreuger's access to new capital, exposing the unsustainability of his over-leveraged empire:
- Could no longer raise money to pay dividends and earlier debts
- Banks became suspicious and stopped lending
- Auditors and regulators started asking harder questions
In March 1932, Kreuger committed suicide in Paris. The subsequent investigations revealed the full extent of his fraud and financial manipulation.
Lessons and Legacy (1:02:10)
The podcast draws several lessons from Kreuger's story:
- The danger of risking a good business to pursue unnecessary growth
- The importance of financial conservatism and avoiding over-leverage
- How incentives can lead people to overlook or enable fraud
- The power of charisma and communication in business
Kreuger's innovations like B-shares are still used today. His story led to many financial reforms and regulations in the 1930s.
Conclusion
Ivar Kreuger's rise and fall is a cautionary tale of financial innovation taken to extremes. While he built a legitimate and profitable match business, his empire ultimately collapsed due to fraud, deception and over-leverage. The story illustrates the dangers of unrestrained ambition and the importance of financial conservatism. It also demonstrates the power of incentives in shaping behavior, and how they can enable fraud to persist. Kreuger's legacy includes both lasting financial innovations and reforms aimed at preventing similar schemes in the future.