Frank Partnoy's The Match King.

Reading between the lines.
April 27 2009 6:50 AM

Where's Our Scapegoat?

Meet Ivar Kreuger, greedy villain of the 1930s.

(Continued from Page 1)

Despite all the trickery, Kreuger had real government contracts to sell matches. And Swedish Match made a lot of money for a lot of people. He paid obscene dividends on the stock he issued, shelling out 20 cents or more yearly for every dollar invested, even after October 1929. Such generosity was part of his public persona; but because of those high dividends flowing out of his coffers, he never quite had enough money to cover the next installment of the loans to different governments. Rather than lower dividends, Kreuger just went out and raised more cash—not hard to do in the heady 1920s, even if he was vague about what the cash was for. (He said it was hush-hush.) But for seven years, he never missed a payment.

Again, it all could have worked—just as it all could have worked in 2007 and 2008 if housing prices had continued to rise. But credit tightened up in late 1929, and when a few proud governments turned down Kreuger's offers of monopoly in the early 1930s, he couldn't raise the capital to cover his obligations.

Heroically, he kept paying out dividends, and he managed to conceal the magnitude of his debt while he lived. But soon the Silent Room became a veritable bunker for a depressed and desperate man—and in early 1932, his whole empire disintegrated. Lots of businesses had disintegrated by then, but Kreuger was the one person who'd seemed to survive Black Tuesday in 1929—he was singular proof that the nation's financial system wasn't necessarily broken. Kreuger had given people the chance—and they clutched at it—to keep believing that everything wasn't fundamentally busted.

It's irresistible to scour The Match King and underline passages about the life of Ivar Kreuger that hold parallel lessons for today—there was even a 1920s terrorist attack on a New York financial site. But, really, the months after Kreuger's death are the most apropos. As his biographer notes, the federal government showed little interest in reforming the stock-market system for years after the 1929 crash. Only after Kreuger died and regulators pored through his ledgers did they realize how scarily thin his margin of escape had been for years. Hundreds of venerable people felt, fairly or not, that Kreuger had deceived them with his company's habitually and almost contemptibly brief—but perfectly legal—financial statements. Such people suddenly couldn't deny the nation's financial system would have to change, and the result of their anger and embarrassment was awfully convenient: They exhumed a dead man as a wicked Gatsby, the incarnation of unrepentant greed. But vilification actually seemed to help the public grieve, and it absolutely galvanized efforts for reform. Remember the Alamo? Remember Ivar Kreuger!

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Kreuger-as-villain emerged only years after the 1929 crash, so there's still some hope for us today. But so far, of the candidates shoved onto a spit for the subprime-mortgage mess—Richard Fuld, Madoff, Alan Greenspan, AIG—none quite fits, the way Kreuger did, as both the architect and the great white hope, the wonk and the public face of a once-regal and suddenly battered stock market. In the current mess, bankers and homeowners in every economy from the United States' to Iceland's share blame.

And what are we looking for, in any case? If scapegoats provide the catharsis of capital punishment (excuse the pun), they also have another function. In the original, biblical sense of the term, they exist to let us off the hook: A scapegoat was an animal onto which people foisted all their sins, something cloven-hoofed that was then publicly sacrificed. After it was flayed, people felt absolved and could return to doing exactly what they'd been doing before.

After purging the memory of Ivar Kreuger, Wall Street adopted most of his stock innovations and made them standard tools of finance. And in a newly regulated market, they turned out to be good things—you, dear reader, probably own(ed) some Kreuger-concocted investments. But whether Wall Street 3.0 should, even with new safeguards, resurrect credit-default swaps, collateralized debt obligations, and subprime mortgages is a different question. An era of wariness might be good for us, and perhaps it's lucky we can't find one greedy bastard to take the fall.

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