Paris, March 1932. The cover of The New York Times pick up the news of a man who has been found dead in his room, shot in the heart. Outside, no one still knows that that body hides the major financial fraud of his time.
That man had lent money to governments and personalities across Europe, dined with Greta Garbo, and advised presidents. In Sweden they called him “the second king.” On Wall Street they treated him almost like a god of finance.
However, as Frank Partnoy told in his biographical book ‘The Match King’behind that shining empire there was something much darker. That story begins, like so many other great falls, with a product so simple that no one suspected it: a match.
An empire born of fire
Ivar Kreuger was born in Kalmar, southeastern Sweden in 1880. His family already had a small match making business Therefore, her wealthy position allowed her to study engineering and travel around the United States, where she learned construction systems based on the use of reinforced concrete that were not yet used in Sweden.
In 1908, he returned to Sweden and founded the construction company Kreuger & Toll along with Paul Toll with just $2,500 in capital. The main advantage of your company is that, when use concrete armed in their constructions, they managed to shorten construction deadlines without losing quality in the constructions. This allowed them to obtain projects as important as the construction of the Stockholm Olympic Stadiumwhich would be the venue for the 1912 Olympic Games.
The founders of Kreuger & Toll: Paul Toll (standing), Henrik Kreuger (left) and Ivar Kreuger
In his first business venture, Kreuger discovered something key: knew his way around finances almost as well as with concrete.
With that mix of ambition, engineering and business acumen, Kreuger entered the family matchmaking business with the Swedish Match (that still exists) in 1917, uniting different dispersed factories into a single holding company. In a few years, the new company manufactured 75% of the matches on the entire planet.
Trade matches for debt
However, and despite the buoyant business of his factories, Kreuger’s great move was to exchange matches for debt. After the First World War, half of Europe needed money to rebuild. Kreuger saw the opportunity.
It offered huge loans to governments in financial trouble and, in return, asked for match manufacturing monopoly in your country. He lent money to France, Germany, Poland, Greece and other nations, thus managing to monopolize the production of matches in half of Europe. It is estimated that the total loaned to the different countries was around 387 million dollars in 1930.
It had factories in 43 countries and almost total control in 25 of them. The business was no longer selling matches, it was now lending money disguised as an industry and its empire extended to other industries. It came to dominate 50% of the iron market and became shareholders in banks, mining companies, railways, lumber, paper, film distribution, real estate and the pulp industry.
In 1925, he even gained control of an important package of Ericsson shares and the other three largest companies in Sweden, as well as more than 200 companies and represented 60% of the Swedish stock market. Its 125-room Stockholm office earned the nickname “Match Palace.”
To finance so much borrowing, Kreuger needed a constant flow of capital. To achieve this, it issued shares with very high dividends, up to 30% between 1919 and 1928. Investors, especially in the US, entered en masse due to the promise of obtaining a return well above the average. He managed to raise 750 million dollars with this system, according to collected The Economist.
The trick he used to offer those succulent dividends was not new, although no one saw it at the time: he paid old investors with the money of new ones. That is, the same pyramid system that I was using Carlo Ponzi on the other side of the pond: a ponzi scheme with the appearance of an industrial multinational.
Nobody audited Kreuger’s books and, as how I collected a chronicle of The New York Timeswhen an English executive proposed it to him, Kreuger responded with a phrase that today exudes fine irony: “Do you think I’m a swindler?” The answer is clear: Yes.
A house of cards on fire
The Wall Street crash of 1929 suddenly cut off the flow of capital that sustained Kreuger’s pyramid scheme, which, in desperation, went so far as to sell the same securities several times. counterfeit Italian bonds for 80 million without actually having that monopoly.
In 1931 he requested a loan of 800 million crowns from the Swedish banks, the equivalent of 10% of the country’s GDP. It wasn’t enough. He Swedish Riksbank hesitatedhe government intervenedbut the hole was now impossible to cover.
On March 12, 1932, Kreuger took his own life in his Parisian hotel room. A few weeks before, the telephone company ITT (International Telegraph & Telephone) had forced him to return 11 million dollars after discovering that the Swedish millionaire had deceived them making up Ericsson accounts.
Subsequent audits uncovered the true extent of the pufo. Their companies accumulated credit debts of more than 1.2 billion dollarsin addition to a personal debt of 265 million dollars, compared to just 18 million dollars in assets that he had in his possession. All of this, we remember, in the 1930s, which represents a debt of unaffordable proportions even by today’s millionaires.
Thousands of families lost their savings. Entire factories closed. And the man who one day lent money to half of Europe ended up being, himself, the biggest financial hole of his time. The United States Congress called him the biggest fraudster in history. A year later, the SEC was created to monitor the markets and ensure that Kreuger’s scam It did not repeat itself.
Image | Wikimedia Commons (Ericsson), Unsplash (Ian Talmacs)
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