How Ivar Kreuger turned a sleepy match company into a factory for new financial instruments and became the genius behind a century of Wall Street scandals.

[Ivar Kreuger in the head office of The Swedish Match, Stockholm around 1930]

Swedish emigre Ivar Kreuger made a fortune raising money from Americans in the 1920s and loaning it to mostly European governments in exchange for match-stick monopolies, Frank Partnoy describes in the book The Match King.

At one point he controlled almost 75 percent of the world's match production, and his fortune was estimated to total about $100 billion in 2000 dollars, making him the third richest man at the time. In 1932, however, tight lending markets undid his financial empire involving a Byzantine network of some 200+ companies, and both the SEC and a number of securities laws resulted.

When Ivar came to America in 1922 he had already created a near monopoly of match production in Sweden, starting with the family business and then threatening competitors with below-cost sales and buying them up on the cheap. Monopolies were legal in most of Europe, but not in the U.S. Ivar decided that repeating his Swedish tactics throughout Europe would be too expensive -- it was just too easy for others to start up a new match factory. Europe was just recovering from WWI, and money was hard to come by -- even for governments wanting to rebuild or make reparation payments.

Ivar decided to use eager American money -- a majority said they could outsmart the market, and win money gambling, and their appetites were constantly whetted by widely publicized tales of successful trading schemes. This money would then be loaned to governments (aka today's IMF and World Bank) in exchange for creating favorable monopolies via decree. Investors found Kreuger's offerings particularly attractive due to the up to 25 percent dividends he originally paid, vs. none at all from some of the best known American high-flyers of the time (eg. RCA).

Kreuger initially raised $15 million in the U.S. through 20-year-bonds paying 6.5% interest, and then parked them as off-balance sheet liabilities in a holding company managed by Swedish Match (controlled by Ivar) that he created for that purpose. A second accounting innovation that Kreuger pioneered was the use of 'mark to market' valuation of assets -- a tool that Enron would make much more use of decades later. His third accounting innovation was the later creation of "Class B" stock, with minuscule or no voting power for holders to bother him with. Kreuger later also made increasing use of preferred stock, with its low-strength claim on earnings, and a tax-shelter arrangement in Liechtenstein.

Partnoy tells us that about one-third of NYSE firms didn't publish any financial reports at the time, and reporting by Curb Exchange (Kreuger's 'International Match' -- IM) firms was even less available. Kreuger took full advantage of the loose and non-existent requirements by cajoling, bluffing, and sometimes threatening his U.S. accountant to approve IM's dodgy and infrequent (but probably not illegal) reports. Kreuger's first government loan was to Poland ($25 million) in exchange for a monopoly on match sales within that country. Danzig, Greece, Ecuador, Yugoslavia, Hungary, Latvia, Romania, Lithuania, etc. followed.

His undoing began after the 1929 market crash when it became more and more difficult to renew his financing and his just-made $125 million commitment to Germany. Eventually Kreuger resorted to forging some $20 million in Italian notes, then killed himself in despair. (Ivar's brother contends that Ivar was killed by agents acting for J.P. Morgan acting out of rage at Kreuger's success.)

Some contend that Kreuger was no different than Bernie Madoff, Charles Ponzi, and other famous fraudsters. Partnoy, however, points out that Kreuger had real companies with real products, as well as considerable holdings in Diamond Match (U.S.) and Ericsson telephone (Sweden). Part of the problem in fully reimbursing those affected was the fire-sale nature of Kreuger's assets -- eg. two expensive speedboats that he had shown to Greta Garbo and others were sold for a mere $162 and $180.

Bottom Line: Partnoy's The Match King provides a fascinating look back to the post-WWI era, and an embarrassing reminder that we haven't learned much when it comes to regulating the financial markets. My one complaint is that too much of the book gets tied up in knotty details that lack significance.

Frank Partnoy is the author of F.I.A.S.C.O.: The Inside Story of a Wall Street Trader and Infectious Greed: How Deceit and Greed Corrupted the Financial Markets. He has worked as an investment banker at Morgan Stanley and a corporate lawyer, and has testified as an expert before both the United States Senate and House of Representatives. A graduate of Yale Law School, he currently teaches law at the University of San Diego.

- - -
To see more of Basil and Spice, go to http://www.basilandspice.com/ Copyright (c) 2009, Basil and Spice. Distributed by McClatchy-Tribune Information Services.