We aren't eating shoe leather just yet, but in one way, people in the 1930s had it easier than we do today: They had a scapegoat. The stock market crash that began in October 1929—and continued for years, lest we forget—was the result of heady speculation on shaky assets, paid for with the Monopoly money that new, highly leveraged financial tools provided, all of it abetted by legal bribes to oversight agencies. Seems like yesterday. But unlike our predecessors, we lack a satisfying villain, despite the efforts of the press and President Obama to pillory unnamed "bankers" and metonymic "Wall Street greed." Forget our economic well-being for a minute; for our emotional health and happiness, we need someone to go down hard. We need Ivar Kreuger.
Who? As Frank Partnoy explains in his riveting biography, The Match King, the fact that no one remembers Kreuger in 2009 would have seemed more fantastical to people in the 1930s than being told we'd invented flying cars and time machines. Kreuger was Warren Buffett with the panache of Sir Richard Branson, the British playboy billionaire. Just as Buffett transformed Berkshire Hathaway from a textile mill into a behemoth investment company, Kreuger took a family match factory in his native Sweden and transformed it into one of the world's biggest financial firms and, certainly, its most dynamic.
Along the way, he discovered and publicly courted Greta Garbo and built a palace in Stockholm with a mural of a fire- and match-giving Prometheus. He dazzled New York society types on cruise ships with his elaborate manners and wowed managers in boardrooms with his encyclopedic memory. Every time he deigned to visit the United States, editors begged to run cover stories on his travels. He ended his days in a luxury suite in a Paris hotel in 1932—but he ended them by his own hand, with a pistol shot to the heart.
Don't worry that my mentioning Kreuger's downfall and suicide has already spoiled the book. This is a rare story that's actually better—more incredible, more suspenseful—when you know the comeuppance that awaits the hero. Like recent captains of finance, Kreuger built and lost his empire by selling a sure thing: matches. In an era of rampant cigarette smoking and wood-burning stoves, people went through matches like Kleenex. But instead of selling investors on the market for homely, sulfur-tipped sticks, Kreuger sold them an even more can't-miss market: monopolies.
Though Americans in the 1920s frowned on monopolies at home, they had no problem with investing in monopolies abroad. And after the chaos of World War I, European governments were desperate enough to sell Kreuger monopoly rights in exchange for upfront loans of stable American dollars. Kreuger was the ideal middleman, armed with the vision and connections to bring all the actors together: He persuaded investors that they would see immense profits because he would set the price—which he could do, because governments agreed to stifle competition or seize competitors' factories and sell them to Kreuger.
What made Kreuger special was the way he raised money to pay those governments. Before Kreuger, Americans could buy only plain-old stocks and bonds—which a growing bourgeoisie was eager to do, especially if their investments were in companies whose products they adored, like RCA and Ford. In the mid-1920s, Kreuger created new financial tools ex nihilo to meet more adventurous demands: convertible shares, stock options, preferred shares, nonvoting B shares, etc. He began offering economic amalgamations that could be converted into either safe bonds or risky but thrilling stocks. He also offered people shares that had no voting power, creating an entirely new concept of "investor"—those who didn't want to be bothered with the way companies were run as long as they got paid. With his Midas reputation, Kreuger raised millions in small bundles, took his cut, and was hailed for stabilizing Europe in the process. Not for nothing did John Maynard Keynes call Kreuger "perhaps the greatest constructive business intelligence of his age."
And it all worked! For a while. Kreuger's downfall wasn't crookedness. As The Match King explains—in one of about a billion parallels to today's markets—Kreuger's nimble innovations made it hard to judge what, if anything, he did was illegal. He was no Charles Ponzi or Bernie Madoff, looking for a quick score. It's more that Kreuger was hubristically confident and almost neurologically immune to the normal human fear of risk, ruin, and debt. To give himself maximum flexibility in his dealings, he set up dozens of shell corporations in various international tax havens and shuttled money around at will—more "innovation." No one but Kreuger and a few lackeys knew the dummy groups existed, and no one but Kreuger had anything like the full picture. (He often sketched out his web in his palace's "Silent Room"—a sanctum reserved solely for Kreuger.)
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!
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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