The Match Tycoon Ivar Kreuger: Genius or Crook?

Introduction

It was Saturday the 12th of March 1932, a sunny but chilly early spring day. Andrè Kostolany, the German/ Hungarian speculator, found himself in a tide of compassionate French citizens on the magnificent Champs- Elysée in Paris, where they had gathered in huge numbers bidding farewell to their late president Aristide Briand. Kostolany, who was more of a practical than sentimental personality, took the opportunity to make a detour to his stockbroker, located just around the corner, to check the ticker.

The stock market was open on Saturdays, albeit only for two hours and trading was usually sluggish. It would not be different that specific day, but nevertheless Kostolany would be up for a huge surprise. One company immediately caught his eye. Kreuger & Toll Inc., the company of the famous Swedish financier and match manufacturer Ivar Kreuger. The stock was heavily traded but, somehow mysteriously, the issue would barely budge.

Kostolany immediately figured out the obvious. Banks, on behalf of interested parties, were supporting the share price. It would cost them dearly in the not-too-distant-future and make Kostolany, (who was short the stock) a little fortune. Because what neither the banks, nor Kostolany, were aware of was Ivar Kreuger had met his maker. Lying on the canopy bed in his mansion with a 9mm bullet in his chest. 

Apparently, not all were as uninformed. Among those who knew, was a senior officer from the Police Department. He was lunching with his daughter’s fiancé, an American journalist, and let him in on the little secret, noting that: “I'm sure you will know how to get some benefit from the News. But promise me that you won't pass it on until evening!”

Who was Ivar Kreuger?

Kreuger was born in Sweden in 1880, the eldest son of an industrialist in the match industry. Already at young age Ivar demonstrated extraordinary achievements, skipping ahead two classes in school, and graduating with a combined master’s degrees in mechanical and civil engineering at the age of just 20.

Following graduation from university, Ivar Kreuger traveled the globe extensively for several years, mainly working as an engineer in the building industry. During that time, he would gain detailed knowledge about a patented system for concrete-steel constructions (Kahn System) that had not been introduced to Sweden. He managed to get the representative rights for the system for both the Swedish and the German markets. In 1908 he founded the construction firm Kreuger & Toll together with the engineer Paul Toll, which would be transformed into a joint-stock company in 1911.

The evolution of the company was impressive. Already a few years after establishment, Kreuger & Toll became one of the country's leading building firms, winning several of the most prestigious assignments available in pre-World War I Sweden.

Over time Ivar Kreuger’s involvement in the construction business decreased significantly. Swedish bankers were financing the merger of almost all independent Swedish match factories into AB Forenade Svenska Tandsticksfabriker (United Swedish Match Factories) and had chosen Kreuger as the managing director as the merger also included the two factories owned by his family

In 1917, Kreuger and Toll Inc was split into two separate entities: Kreuger & Toll Construction AB (with the majority of shares owned by Paul Toll) and Kreuger & Toll Holding company - a pure securities issuing company, with Ivar Kreuger as general manager and major shareholder.

Simultaneously, AB Forenade Svenska Tandsticksfabriker and AB Jönköping-Vulcan, the largest Swedish match company, merged into Svenska Tändsticks AB (Swedish Match). The biggest shareholder in this new, all-inclusive Swedish Match Company was Kreuger & Toll Holding. And its managing director, armed with a wicked plan for the reorganization of the global match industry, was the selfsame Ivar Kreuger. He would immediately start rolling up the Scandinavian match industry. However, that would be just the beginning of his flabbergasting ascent.

From Sweden Into the World

After WW1 Kreuger went on a buying spree across continental Europe. The devastation of the war, and dire economic consequences for continental Europe, brought forth mouthwatering deal making opportunities for Kreuger. Controlling blocks of shares in well-established continental match companies were popping up all over the place.

In addition, chaotic conditions on the foreign exchange markets divided Europe into two zones. A hard currency sphere (Scandinavia) and a soft currency one (Continental Europe). Those conditions enabled Kreuger to scoop up one leading continental match company after another at bargain basement prices.

Until the beginning of the 1920’s, the Swedish capital market was the principal source of financing the large sums needed for Kreuger’s endeavor. But synergy and rationalization effects were not always as promised and Kreuger was insatiable. Swedish financial institutions and its financial market were getting constrained, also because Sweden started to feel the pain of a full-blown banking crises that was brewing.

From Manufacturing to Financing to Monopoly

Kreuger was not perturbed and convinced Bankers in the City of London to place a large issue of Swedish match company shares. The placement was extraordinarily successful and would be Kreuger's first step onto the international capital market, the utilization of which was a prerequisite for the implementation of his vision.

The second, and most important step was taken at the end of 1923. Unlike continental Europe, the U.S was drowning in capital. While Europe had spent ruinously during the war period, Wall Street hardly knew where to channel all the new wealth from the post-war boom.

With the assistance of Lee, Higginson & Co. of New York, by then the leading investment bank, Ivar Kreuger founded the International Match Corporation (IMCO), a subsidiary of Swedish Match. Shortly after IMCO floated its first bond issue in the U.S. When offered to the public it was  over-subscribed by several times that very day and Ivar Kreuger transformed from a match manufacturer into being a financier ready to rumble.

The grand scheme of Kreuger’s business idea was brilliant but not new. The blueprint was borrowed from the German Fugger family (1536-1806). Basically, IMCO would offer concession loans to cash strapped nations in exchange for a monopoly contract on safety matches. Not only pocketing interest payments on the loans, which are backed by the concessions given to IMCO, but also charging sky high prices on matches.

This was a win-win-win situation for Kreuger, the share- and bondholders (Kreuger paid double-digit interest and dividends), and for short-sighted European governments in desperate need of capital.

For the elite in the financial centers of the western hemisphere Ivar Kreuger was an entrepreneurial superstar with visionary disposition. They saw in IMCO something akin to the IMF and World bank as of today. Financially stabilizing a fragile central Europe and enabling the western elite to engage in lucrative businesses in the old world. Truth be told, for match workers and consumers, like with the IMF today, it meant mass-unemployment and a lowering of the disposable income.

The unstable political situation after WW1 made it easy for Kreuger. Kreuger always proceeded the same template: Compete for market share in a country with unsound financials by provoking a price war. Buy up the leading companies that could not compete. Make the government an offer that it cannot refuse, i.e. lending large amounts of money on decent terms, in return for the monopoly on matches.

The man with the serious face soon dominated not only Scandinavia, but also France, Hungary, Greece, Poland, Slavic countries, and some South American states. By now Ivar Kreuger is the undisputed king of matches with 260 production sites and 75,000 workers.

By the end of 1920, IMCO possessed gold mines, ore mining and smelting works, large parts of the Swedish paper industry and the associated forests, expensive real estate in European capitals, the Ericsson telephone, and the Swedish Film Industry company. His interests touched the world almost at every point. And Kreuger was the largest creditor to many states. Between 1925 and 1930 he doled-out half a billion dollars to 17 countries.

At the peak, Kreuger was easily the most respected and celebrated businessman in the world. An entrepreneurial superstar - he was decorated with the Grand Cross of the Legion of Honor by the French Parliament, received an Honorary Doctor of Business Administration degree at Syracuse University. He was a frequent guest in the White House and Elysée Palace. He also lived glamorously, owning luxury apartments in all major financial hubs. Celebrities are frequent guests on his yachts what made him the darling of the yellow press. What nobody knew was Kruger and his empire were already in big trouble.

The Jig is Up

For quite a while, an invention developed during WW1 was penetrating European markets more and more. The mechanical pocket-lighter. It had serious negative implications on the price elasticity of matches, inhibiting IMCO increasing the price on its product without negatively impacting demand.

Surprisingly, Kreuger seemed to be ignorant to this fact, as his negotiations with countries had not contained any provisions for limiting competition from lighters. IMCO still made money on his matches, it just was not enough to support the lofty interest payments on its debentures and dividend payment on stocks.

To keep the flywheel spinning Kruger needed a new monopoly loan, and a big one. He found it in Germany. Germany was in desperate need for the money because it had just negotiated the Young Plan with its victors. A program for settling Germany's World War I reparations written in August 1929 and formally adopted in 1930. Kreuger negotiated a match monopoly loan of $125 million to Germany. The biggest loan ever given to a state by a private, non-financial enterprise. The deal was so spectacular that it would get him on the cover-page of the Time Magazine on Thursday the 24th of October 1929, just four days before the Great Crash.

The Nail in the Coffin

The great crash and IMCO’s looming obligations for the German monopoly loan let IMCO’s financials deteriorate almost daily. Kreuger had to engage in financial shenanigans to show sufficient profit to pay share and bondholders, like plundering the cash register of the subsidiary Ericson.

Surprisingly, Kreuger was still able to tap the international capital markets. There was only one problem. Kreuger was not able to place all the bonds. An increasing mountain of loans would pile up on his own books. He would use those loans as collateral to get short term financing from a Swedish bank, creating an increasing maturity mismatch (no pun intended!) on the balance sheets.

The summer of 1931, Kreuger was forced to sell his crown jewel Ericsson to ITT. The Americans quickly realized that Kreuger had largely looted Ericsson before the sale. They asked for an unwinding of the deal. But Kreuger did not have the money. Nor did he have any to keep paying the lavish interests and dividends. Somehow, he saved himself over the next few months. However, Donald Durant, his New York banker, got more and more nervous and asked for a meeting and finally an explanation. They had an appointment for lunch in Paris on March 12, 1932 - Durant waited in vain.

The news of Kreuger’s death broke in the evening and during the weekend spread like a wildfire. The issues of the Kreuger empire plummeted when global stock markets opened the following Monday, dragging down the leading stock market indices around the globe. The event would be remembered as the “Kreuger Crash”. Kostolany immediately started to cover his short position, pocketing a tidy profit

Conclusion

After Kreuger’s death, the saint would turn into a villain almost overnight. He would become branded as the greatest fraudster in financial history, and his empire seen as nothing more than a gigantic Ponzi scheme. Supposedly shocking details about his dissolute personal lifestyle were spoon fed by interested parties via the tabloids to the public. Kreuger the gambler, womanizer, masochist, and squanderer. Reporters from all over the world engaged in an unveiling marathon, and the records fell by the hour.

Today, most Swedes see Ivar Kreuger as an evil trickster king who judged himself. But many apparent paradoxes in the Kreuger saga render a final historical judgment much more complicated. One such paradox is the fact that unsecured creditors received almost 50 percent on the dollar out of the bankruptcy. Another, that most of its subsidiaries survived and have been successful and the pillars of the Swedish economy ever since.

Kostolany puts the Kreuger Saga as follows: “I don’t think Ivar Kreuger was the fraudster the world press portrayed him. The basic business idea was sound. He was only mistaken in the events and the victim of the circumstances. When he started sliding, he tried to hold on to everywhere, no matter where, as anyone would do. Clinging to the plank that could save him, he drifted from one way out to the other, on and on, without clearly recognizing the dividing line between what is legal and what it is not. Certainly, the audience lost billions. But responsibility for it should not be attributed solely to the illegal actions of Kreuger, but also to the political events and financial conditions in Central Europe. And with a little tolerance, I think Ivar Kreuger has to be allowed to extenuate the circumstances.”

Collateral damages of the demise of IMCO were significant. The Swedish Prime Minister Ekman was forced to resign. The foreign exchange reserves of the Swedish central bank were dwindling, and the Swedish Krona going into a tailspin. Membership in the Communist Party doubled. Many of the richest men of the country were bankrupt. The King’s brother Carl, father of the Crown Princesses of Norway and Belgium, had to move into more humbled quarters.

And there was the American Journalist who had been let in on the Story about Ivar Kreuger’s death. "Well, did you benefit from my communication?", asked the father of his bride to be. “Indeed”, replied the young man proudly, “the publisher congratulated me personally on my article because, thanks to you, I was the first to bring the news.”

The poor chap had to pay dearly for his simplicity. He would not get the hand of his beloved, because obviously he was not ready for the struggle for existence in life.

Source:

Das tragische Ende des Herrn Ivar Kreuger by Andrè Kostolany (Die Zeit)

Wie ein einziger Mann die Währung seines Landes ruinieren konnte by Tobias Straumann

Der König der Streichhölzer (Süddeutsche Zeitung)

Ivar Kreuger: An International Swindler of Magnitude by Tage Alalehto

Wie der Zündholzkönig Ivar Kreuger die ganze Welt täuschte by Christian Schütte (Capital)

Das Zündholz-Komplott by Andreas Beerlage (Brandeins)

The Kreuger Crash of 1932 in memory of a financial genius, or was he a simple swindler? by HÅkan Lindgren (Scandinavian Economic History Review)