Everything in life is founded on confidence.

—Ivar Kreuger

Thomas Edison invented the first electric light bulb in 1879. This innovation changed the world in immense ways but it didn’t happen overnight. Not a single home was wired for electricity over the year following Edison’s breakthrough, but by 1940 nearly 100% of urban homes were wired.^[1] In the intervening years, people still had to do something for light and warmth. It’s hard to imagine now what with the ubiquity of electricity, but matches were a consumer staple in the late-nineteenth and early-twentieth century. They didn’t fall too far behind food, clothing, and a roof over your head in the pecking order of household necessities. Matches were used in a variety of ways – to light kerosene lamps, gas heaters, candles, fires, stoves, and everyone’s favorite deadly habit back then – smoking. Cigarette production in the US doubled in the decade ending in 1929, so matches were used for both needs and vices.

The Swedes were the first to develop the safe phosphorous surface used to light a match by striking it against the side of a matchbox. They were called safety matches at the time and became an enormous hit. This innovation quickly turned Sweden into the biggest exporter of matches in the world. By the 1920s, one Swedish man controlled three-quarters of the production and sales of all matches used in the world, owning more than 200 match factories in 35 different countries all around the globe.^[2]

Many frauds start from a legitimate business or idea that gets taken too far from some combination of greed, loose morals, and overconfidence. Once the ball gets rolling, money begins pouring in, and a certain amount of power is obtained, it becomes difficult to turn off the spigot. Certain people will do just about anything to ensure money and power continue indefinitely. And so it was with the Match King from Sweden, Ivar Kreuger.

On October 28, 1929, Kreuger appeared on the cover of Time magazine. He was the most talked about person in the United States at the time because he was rich, powerful, and mysterious. The Match King owned a private island in the North Sea and apartments all over the world. Greta Garbo, a fellow Swede and famous actress, was his good friend.^[3] President Herbert Hoover asked for his advice in business matters during private meetings. Kreuger played a prominent role in the Nobel Prize ceremonies and had business dealings with world leaders and prime ministers. Elon Musk is a decent modern-day comparison in terms of celebrity, but Kreuger was more mysterious. There were even plans to use his story to depict the American dream in a full feature-length film. That film never saw the light of day because he shot and killed himself shortly thereafter in 1932 as his empire of fraud crumbled all around him.^[4]

How to Create a Monopoly

To understand how Kreuger got into this position in the first place we have to go back to the beginning of his business dealings. The man started out as an engineer, and even worked in the US for some time, but by 1907 returned to Stockholm where, with Paul Toll, he formed the construction firm of Kreuger & Toll. A few years later he would enter the match business, using Kreuger & Toll as something of a holding company for his other investments and match factory purchases.^[5]

International Match Corporation quickly became one of the largest players in the match industry worldwide, mainly because of the CEO’s take-no-prisoners approach to business. The first step in the process involved entering a local market and selling at local prices with a higher-quality product to grab market share. Once International Match owned the market and later the local factory, they would lower the quality of the matches to save money. Match factories were modernized, and sales would be expanded overseas. Kreuger also purchased the companies that made the machines for production to reduce costs and increase efficiency in the factories. The enigmatic CEO was far ahead of his peers, going so far as to predict in advance how the United Kingdom abandoning the gold standard would open up international finance and trade. Kreuger wanted in on a more globalized economy but more importantly, he wanted the ability to raise prices by cornering the market and creating a monopoly. By 1915, he controlled ten match factories in Sweden alone. Kreuger’s growing collection of companies began making money by year two and was one of the few profitable European companies during World War I, a period that decimated businesses around the globe. But the match business was highly competitive and had few barriers to entry. Competition was driving down prices. He knew he needed monopoly power to make it last.^[6]

Kreuger’s business plan boiled down to a loan-for-monopoly trade. To gain access to match companies in different countries, one of Kreuger’s companies would loan money to needy countries at favorable terms so that government officials from those countries would then allow him to buy up the local match factories. It was an I’ll-scratch-your-back-if-you-scratch-mine business strategy. This gave International Match free reign in countries such as Poland, Peru, Greece, Ecuador, Hungary, Estonia, Yugoslavia, Romania, and Latvia. The Time magazine cover story explained it like this:

From the standpoint of a government that is not too proud to monopolize, business done with Herr Kreuger is good business. The government gets large sums of needed cash and then repays the loan by a tax on matches.^[7]

These loans were typically paying him back 6–8% interest while his match company and financial holding company regularly paid out double-digit dividends to investors, up to 25–30% at their peak. It doesn’t take a genius to understand that receiving 6–8% while simultaneously paying out 20–30% isn’t a winning trade. There would need to be massive profits to make up for this inherent shortfall in the interest rate spread. Because of the times, no investor even bothered to ask how this was possible.

No one bothered to ask about the underlying financials of Kreuger’s companies either. And if they did ask, they didn’t get truthful answers. No one else besides Kreuger knew what the actual profit and loss numbers looked like for International Match or his holding company. Kreuger deceived investors, board members, and auditors alike by forming around 400 different off-the-book conduits to move money around and hide what was really going on. No one had a clue how these loan deals worked or what the terms were. At one point he told the board of directors for International Match that Spain would be paying 16% interest on a loan he extended the country. The only other person who saw the loan documents thought they were fake. Kreuger lived by the Napoleon saying, “one first-class brain is enough for an army.”^[8] This line of thinking would come back to haunt him.

When board members would visit his office, Kreuger used a dummy phone where he would pretend to have conversations with world leaders. “Good morning, Prime Minister!” he would exclaim to a dead phone line. Percy Rockefeller, the nephew of John D. Rockefeller, was a member of the board of directors. At one point he was so impressed with these fake phone calls that he told the other directors, “He [Kreuger] is on the most intimate terms with the heads of European Governments. Gentlemen, we are fortunate indeed to be associated with Ivar Kreuger.”

One of the defining characteristics of someone who takes advantage of others financially is the ability to make people believe what you’re saying. Kreuger knew how to read a room and get people to believe in him because he acted as if he knew exactly what he was doing. Even President Herbert Hoover leaned heavily on Kreuger during the 1929 crash for advice on how to proceed during the onset of the Great Depression.^[9] The guy who was running one of the biggest financial frauds in history was being relied upon to offer business advice to the president of the United States. This would have been like Barack Obama asking Bernie Madoff how to handle the Great Financial Crisis.

The Roaring 20s

When technology moves forward by leaps and bounds, as it did in the first part of the twentieth century, people prefer betting on the future more than betting on the past. For Kreuger, the past was selling matches while the future was selling financial securities. No one really knows why but something shifted in his business strategy around 1923 or 1924. A good guess would be an insatiable desire for money and power with an environment that was ripe for those looking for both. Up until that point it appears he was running a legitimate business enterprise.

The 1920s were a breeding ground for financial fraud and malfeasance. Kreuger went from businessman to stock promoter, industrialist to financier, and, by all accounts, a moderately honest man to an outright fraud. His match business made little progress in the 1920s, but the holding companies he created sold a variety of securities worth $250 million in the United States alone (that’s around $3.6 billion in today’s dollars). The Wall Street Journal sang his praises for the innovative ways he was raising capital. One securities analyst said of his 1923 IPO, “it was like touching a match to a bucket of gasoline.” None of the companies actually had any assets. Investors went nuts in the 1920s for anything to do with Wall Street. Money was being made hand over fist, and the fear of missing out was maybe as strong as it’s ever been, before or since. The number of Americans who paid taxes on at least $1 million of income a year or more quadrupled by the end of the 1920s. Newly issued financial securities jumped from 690 in 1923 to almost 2,000 by 1929. Bank loans to investors grew fourfold in this time.^[10]

Investors were in the market for “too good to be true” in the 1920s and that’s exactly what the Match King gave them. From 1923 to 1929, Kreuger tripled his funds raised in America. Many of the deals involved complex derivative products. Investors placed such a premium on the securities he was putting up for sale that he began making more money from the appreciation of these securities than the actual loans they were set up to finance.

Forming a new company was as simple as filling out a piece of paper at that time so Kreuger would set up a new holding company and transfer money from one of his existing companies to the new one. Voila! A new company with no true assets but good enough to fool unwitting investors. To paraphrase Dickens, fraud becomes much easier to commit when it was the best of times and when it was the worst of times. The 1920s were the best of times, but they morphed into the worst of times.

Kreuger wanted to prove he belonged with the elites of the world and what better proving ground than the greatest wealth machine on the planet. I think he truly believed all of his lies and fraudulent activities would reverse some day if he could only hold things together for a little longer. And he almost did it too, if it wasn’t for the greatest stock market crash the world had ever seen.

When the Tide Goes Out

Kreuger once claimed, "There is not a single competitor with sufficient influence upon the different markets to cause us any really serious harm. No market is sufficiently significant to be of importance to us.”^[11] That may have been true in the match business but there was another market he should have been even more concerned with – the stock market.

Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.” The tide had never gone out as much as it did during the Great Depression, and it revealed there was a massive number of people who forgot to wear their swim trunks in the lead-up to this massive market crash and economic downturn. By early 1929, investments in his financial holding company, Kreuger & Toll, were the most widely distributed securities in the world. They were selling at an unbelievable 730% premium to par value (or their intrinsic worth). Then the floor fell out from underneath the market, as stocks cratered in the fall of 1929. On October 24, 1929, the Dow Jones Industrial Average fell 11%. Four days later the Dow fell another 13%. The roaring 20s came to a screeching halt without warning.

Time magazine almost immediately regretted their decision to put Kreuger on their cover because the market crashed the very same week. They quickly changed their tune by following it up with another story that offered doubts about his scheme and the company’s ability to continue to pay such lofty dividends. Investors didn’t seem to care just yet. During 1929 Kreuger worried investors would abandon ship so he raised the dividend from 25% to 30% and prayed the downturn would end in short order. It didn’t. From June 1931 until December of that same year, his securities fell in value as much as 80% right along with the stock market.

A defining characteristic of charlatans is the ability to immediately move the goalposts and try to shift the blame when things go wrong. Kreuger wanted nothing to do with taking responsibility for his actions. Instead of accepting blame for overleveraging his companies, Kreuger complained his businesses, “have been the subject of a deceitful press campaign from…some twenty blackmailing papers who continually attack our securities.” He began spouting off conspiracy theories about an internationally organized short-selling syndicate that was out to get him.^[12]

Kreuger’s businesses all took a dive during the Great Depression, but it took a few years for his house of cards to completely fall apart. Not only was business slowing, but he had margined up the securities for his businesses, several times in many cases, faking the collateral on the issues. By 1932, Kreuger had 225 subsidiaries, including one in every developed country outside of Russia. He created monopolies in 24 countries and loaned out almost as $400 million to European governments at a time when many of them were struggling to borrow money. These loans actually helped some of these countries rebuild their infrastructure and stabilize their exchange rates following the first World War.

Not only did he control the largest match company in the world, he also owned real estate, telephone companies, newspapers, mining companies, and banks. But this mighty empire couldn’t withstand the brutal financial markets of the Great Depression. Kreuger shot and killed himself on March 12, 1932. An audit after the fact revealed his companies were bankrupt. Claims against his estate were more than $1 billion. When he took his own life, few people realized the size and scale of the fraud Kreuger had pulled off. This was one of the most well-known, wealthiest, respected businessmen in the world. Why would he do such a thing?^[13]

Not a Ponzi but Close Enough

Kreuger wasn’t running a Ponzi scheme in the traditional sense. If anything, the scale of his operation was much larger and lasted much longer than what Charles Ponzi tried to pull off. Plus, Kreuger raised 50 times as much money and lasted 10 times as long as Ponzi. At certain points, he was paying off old investors with newly raised money but even he knew that couldn’t last forever. In many ways, he was running legitimate businesses. The problem is he wasn’t allocating capital very well and he made promises he couldn’t possibly hope to keep because the company and its securities were so heavily indebted. High dividend payouts helped avoid too many questions, but it also made it nearly impossible to work over the long term as a viable business model. It was simply a matter of continuously raising outside capital to keep up the façade.

The Match King also had complete control over the funds produced by his collection of businesses and he did what he pleased with those funds. Kreuger kept the books for his vast enterprise but he chose not to share that information with investors or even his employees. The books were fudged in both good and bad years to balance things out. His belief was he just needed business to grow enough to be able to continue paying high dividends to pay off their earlier debts. But when your burn rate exceeds your revenue by a factor of almost five-to-one, eventually you’re going to go broke. There was never an explanation on the financial statements about how this conglomerate made so much money. The largest category was “Profits from other investments.” To keep the auditors at bay he would simply tell them his deals with governments were politically sensitive and couldn’t be disclosed.^[14]

Following his death, auditors claimed the companies were completely insolvent. Balance sheets grossly misrepresented the financial standing and assets in the company. The losses were more than the national debt of Sweden. The accountants who combed through the books proclaimed the balance sheets of his holding company, Kreuger & Toll, “grossly misrepresent the true financial position of the company,” and the fraudulent entries were made “under the personal direction of the late Mr. Kreuger.” Congressional debates called him “the greatest swindler in all history.” A year later Congress created the SEC and gave Americans the right to sue companies for fraud. Some claimed his company’s collapse was “probably the strongest activating force…” for creating those new provisions and regulations.^[15]

The Seductive Power of FOMO

The brain of someone high on cocaine or morphine expecting to get another fix is indistinguishable from someone looking to make money on their investments.^[16] This applies not only to investors looking to score a quick return on their capital but also to those con artists who orchestrated these frauds. There are small gateway drugs in the business of fraud as well. This is one of the main reasons we humans almost always take things too far in the markets. We become addicted to gains, and once those gains are achieved it takes a bigger hit each time to satisfy our needs. The fear of missing out, or FOMO, results from watching others get rich, which typically provides the lighter fluid on the fire that is a raging bull market. Keeping with this same analogy, investors were basically using dynamite to fan the flames in the 1920s.

All these years later, there still isn’t a great explanation for what triggered the Great Depression. Fred Schwed shared an anecdote in his book, Where Are the Customers’ Yachts, that comes close to describing why it occurred:

In 1929, there was a luxurious club car which ran each week-day morning into Pennsylvania Station. Near the door there was placed a silver bowl with a quantity of nickels in it. Those who needed a nickel in change for the subway ride downtown took one. They were not expected to put anything back in exchange; this was not money – it was one of those minor inconveniences like a quill toothpick for which nothing is charged. It was only five cents.

There have been many explanations of the sudden debacle of October, 1929. The explanation I prefer is that the eye of Jehovah, a wrathful god, happened to chance in October upon that bowl. In sudden understandable annoyance, Jehovah kicked over the financial structure of the United States, and thus saw to it that the bowl of free nickels disappeared forever.^[17]

Kreuger had been collecting from that bowl for most of the decade, except his scheme involved a lot more than nickels. The Match King’s financial scam had just the right mix of money, power, influence, obedience, secrecy, and the promise of massive profits all coming together during an absolute powder keg of a market environment. And it’s not like Kreuger’s investors were the only ones making money during that time. Everyone in the markets was getting rich. People almost felt entitled to profits in the roaring 20s. Why should everyone else get rich but not me?

Kreuger’s fraud checked all the boxes for the perfect storm to commit a massive fraud. The 1920s were a time of great technological change and innovation. The list of inventions that were rolled out during this decade is staggering. There was the automobile, the washing machine, the airplane, the radio, the refrigerator, the instant camera, the electric razor, the jukebox, the garbage disposal, and the television, to name a few. When people experience such rapid change in their lives you almost can’t blame them for getting greedy and extrapolating the current pace of innovation and growth into the foreseeable future.

The infrastructure of modern financial markets was still under construction so innovations in financial securities further enticed people to take unnecessary risks with their money. The tracks for the future were being laid in front of people’s eyes. Markets were booming but Kreuger was also promising massive financial returns to his investors. People wanted to believe, so no one questioned his actions because it seemed like he had his hand on the steering wheel the entire time. When things are going swimmingly, no one bothers to ask questions about complexity or financial statement trickery.

One of the hardest things to do as an investor is to keep your wits about you when everyone else is going mad. This is especially true when there’s an enigmatic figurehead overseeing the operation. A well-known British writer at the time called Kreuger, “The best-liked crook that ever lived.” One of his closest colleagues said, “There was an odd air of greatness about Ivar. I think he could get people to do anything. They fell for him, they couldn’t resist his peculiar charm and magnetism.”^[18]

Leverage and ego mixed with a bull market can be a lethal combination. Sprinkle in a massive fraud and you’ve got a nasty cocktail that can only lead to poor outcomes for all involved.