TCH: Ivar Kreuger

???????????What do matches and money have in common? Not much perhaps, except that one man seemed an especially powerful supplier of each. Ivar Kreuger is possibly the person whose fame has diminished the most in the last century of financial history. During the 1920s, he was one of the largest creditors, and borrowers, in the world; the financial resources he controlled ranked amongst that of the governments of the largest countries. He personally negotiated loans to governments, extracting as compensation not just interest, but monopolies in the match industry. To onlookers, it seemed he had built a reliable profit machine, that is until the machine broke down.

Kreuger

???????????Ivar Kreuger was born in 1880 in Kalmar, Sweden. The family was already in the match business; his father and uncle owned two small match factories. Indeed, modern matches were something of a Swedish invention. The safety match, lit by striking it against a red phosphorus strip attached to the matchbox itself, was invented in Sweden and the industry took root there. Kreuger himself did not immediately enter the family business; instead, he studied civil engineering and emigrated to America.

???????????Kreuger arrived in New York in 1900 with $100. He was hired as an engineer; among his projects in America was the construction of New York’s Plaza Hotel. He also made money selling real estate before moving to South Africa, where he engaged in similar work. When Kreuger returned to Sweden he established a building company in 1908, Kreuger & Toll. The company became a leading construction firm, receiving prestigious contracts; among them was the stadium built for the 1912 Olympic Games in Stockholm.

Matches

???????????Using capital raised through Kreuger & Toll, Ivar Kreuger took over his father's match business and combined it with other small independent match factories. This company then merged with its largest competitor amidst the supply disorders of the First World War, caused by shipping shortages and blockades. Most of Sweden’s match production was exported so this was a major issue for the industry but Kreuger used the opportunity to acquire the troubled competitor. From this combination, the Swedish Match Company was born in 1917, combining all Swedish match factories in a single firm; Kreuger now held a monopoly on domestic match production.

???????????Global demand for matches was rising with growing adoption of gas ovens and increasing consumption of cigarettes. Kreuger collaborated with major foreign match firms to divide markets and control prices. The favorable conditions would benefit fewer firms from now on, especially after smaller producers, often in war-ravaged countries, had been acquired. To expand and secure his company’s place in the global market, Kreuger raised capital in Sweden and Britain while market conditions were favorable.

Loans

???????????Kreuger’s money raising ability goes a long way towards explaining how he would turn from tzar of the match business to international banker. Starting in the mid-1920s, Ivar Kreuger would lend money to governments in exchange for a legal monopoly on match production. The governments would tax matches, or earn a royalty on match sales, and these revenues would secure the Kreuger loan and cover its payments.

???????????As the monopolist, the Swedish Match Company or its local affiliate would be incentivized to increase its own profitability, and thus the royalties which it paid to the government, and which ensured successful repayment of the loan, perhaps with money to spare for the state. Since both parties would therefore benefit from protecting the monopoly, a Kreuger loan would seem to avoid the usual conflict between a lender and debtor, especially important for sovereign debtors that can more easily repudiate their debts.

???????????Kreuger reached an agreement to provide a $75 million 5% loan to the French government in 1927, a rate lower than the markets would have given, in exchange for a partial monopoly. By 1930, the company had structured such deals with nine European countries and three South American ones. The largest was with Germany, which received a $125 million loan in October 1929, just as the stock market crash of that year was roiling markets.

???????????By 1932, besides the communist Soviet Union, there were just three other countries in Europe where Kreuger’s companies did not have either a match monopoly or substantial market share. Nonetheless, for many of his borrowers, Kreuger loans seemed attractive and less injurious than alternatives.

???????????Much of this lent money was raised in New York, where Kreuger borrowed through the International Match Corporation he established in 1923. He borrowed $150 million there and took almost all this capital abroad. In the period between 1927 and 1930 alone, the Kreuger companies accounted for 4% of capital exports from the U.S. To help raise this money, Kreuger cultivated an image of honesty and modesty which ultimately proved fictitious even if his charm and intelligence, also captivating, were more real.

From Success to Suspicion

???????????The Kreuger strategy seemed genius and while this may have been true, it was also expensive to implement. Not only were the loaned funds raised but the company also needed money to purchase the local match producers in the target countries. Buying out the local producers was crucial to getting approval for a typical Kreuger deal. The agreements with governments were usually signed in advance of having to fund the loan, giving the match tzar time to raise the necessary money.

???????????The funds Kreuger’s companies raised were not cheap though and the firms borrowed a lot, some $500 million cumulatively between 1925 and 1931. This amount rivaled the public borrowings of even large countries. On its shares, Kreuger promised very high dividends to investors. Kreuger & Toll was paying a dividend on its paid-in share capital of 30%. By comparison, the sovereign lending was a loss leader of sorts, a means of entering the match market in a given country. It had no chance of covering payments to investors; those had to be paid by raising new capital. In any case, this was hardly difficult while the stock price of the International Match Corporation rose 1000% between 1923 and 1930.

???????????Kreuger’s New York underwriters were Lee, Higginson, & Co. They had begun to warn him that his bank creditors were upset about being less informed of the company's operations than they felt they should have been. For one, it wasn’t at all clear how profitable the match monopolies actually were. Further, in markets where the company didn’t have a monopoly, it was said the Swedish Match Company sold their product at prices below costs to deter competition there as well. This was an awfully expensive way to control the world match market.

???????????The stock market crash of 1929 ended the boom and the recession that set in proved more persistent than most, including Kreuger himself, had expected. If the company’s financial position appeared to weaken, it would be unable to raise the money it promised to lend under the terms of its recently agreed loan to Germany. Short sellers were betting against the company's stock and gaps in the company's financial statements were being discovered.

Kreuger Crash

???????????Kreuger needed to appear in good financial position to raise the money he promised certain governments but the markets were in turmoil and the value of all securities were falling. The companies turned to fraud. Their assets were overvalued on their books. Nonetheless, rightfully concerned of the fall in the value of securities held, creditors demanded new collateral. To meet their demands, Kreuger forged $142 million in Italian government bonds.

???????????The Kreuger companies turned to the Swedish government for help but the government was surprised to find its directors’ ignorant of the financial condition of the company. Kreuger kept them in the dark. His American directors, far from the headquarters in Sweden left the work of keeping an eye on things to the Swedish directors, who in turn were convinced the Americans were closely controlling the company’s activities; after all, they provided most of its money. In any case, despite their surprise, the Swedish government had its central bank make a loan to Kreuger’s firms.

???????????In the summer of 1931 though, the financial situation in Europe deteriorated sharply with bank failures in Austria and Germany. The final crisis for Kreuger came from a rather small and peripheral transaction by his standards, his sale of a controlling interest in Sweden’s Ericsson telephone company for $11 million. After a few months, the buyer, International Telephone & Telegraph, found the company’s liquidity position was far from what Kreuger had promised; they demanded he repurchase the shares, but Kreuger was out of money.

???????????With greater scrutiny of his companies and his access to capital falling well short of his urgent need for it, Kreuger killed himself in a Paris apartment in March 1932. The initial global reaction was sympathetic. His dishonesty was not yet widely known. Kreuger was eulogized by The Economist, reporting that “the world has lost a man of great constructive intelligence and wide vision, who planned boldly, yet on a basis which seemed to be protected by carefully devised safeguards, and who for once seemed about to combine with the profits of private enterprise a real contribution to the welfare of nations.”

???????????The carefully devised safeguards seemed lacking though, when knowledge of Kreuger’s frauds were exposed in the subsequent weeks. His debts exceeded that of the Swedish government and the false Italian bonds became public knowledge. Kreuger & Toll was bankrupt by May 1932. Its American underwriters, Lee, Higginson, & Co., closed its business. Among Kreuger’s legacies was the Securities Act of 1933 in America, a direct consequence of the Kreuger Crash. Firms he led or owned substantial interests in have nonetheless survived in one form or another. Swedish Match and other Kreuger affiliated firms, like Ericsson and Svenska Cellulosa (SCA), remain large Swedish firms to this day.

Lesson

???????????During the 1920s, the Swedish Match Company and other Kreuger firms used their well-exercised access to capital to win concessions from governments that solidified their position in the match industry. However, the mathematics was aggressive; the loans Kreuger extended to governments could not cover his costs. Critically, it turns out building monopolies can be a task as expensive as it is potentially profitable. Thus, Kreuger’s business could only survive so long as markets were buoyant. For the governments who relied on him as a favorable banker, it turns out an unreliable lender can be as much a headache as an unreliable debtor.

More from the Tontine Coffee-House

????????Frauds in financial history often combine money with such common articles as matches. Read about frauds in financial history involving stamps and salad oil. Consider subscribing to this blog’s newsletter?here.?

Further Reading

1.?????Barman, T. G. “Ivar Kreuger: His Life and Work.” The Atlantic, Atlantic Media Company, Aug. 1932.

2.?????Lindgren, H?kan. “The Kreuger Crash of 1932 in Memory of a Financial Genius, or Was He a Simple Swindler?” Scandinavian Economic History Review, vol. 30, no. 3, 1982, pp. 189–206.

3.?????MacLeish, Archibald. A 3-Part Series on the Life and Death of Ivar Kreuger. Fortune, 1 May 1933.

4.?????“The Match King.” The Economist, 19 Dec. 2007.

5.?????Partnoy, Frank. The Match King Ivar Kreuger, the Financial Genius behind a Century of Wall Street Scandals. PublicAffairs, 2010.?