Friday, April 3, 2009

Playing with Matches

URL: http://www.wilmott.com/blogs/satyajitdas/index.cfm/2009/4/1/Playing-with-Matches

Frank Partnoy The Financial Genius Behind a Century of Wall Street Scandals (2009) The Match King; Public Affairs, New York (to be published on 4 May 2009)

Before Bernard Madoff, before Enron, there was Ivar Kreuger - the Match King - and his Swedish Match Company.

In the roaring 1920 and early 1930s, Kreuger constructed a financial empire that had its heart the simple safety match. For a time, the Swede, through his astute cultivation of the popular and financial press, ruled the world - building a global business, advising government (including the US, French, German and Italian leaders) and living the “first class” life befitting a “master of the universe” in the company of the rich and famous.

Kreuger’s business was not entirely a fraud – at its heart was the real business of making matches (the global market for matches was around 150 billion boxes annually). Kreuger’s “business model” was to raise money from investors and on-lend it to needy governments in exchange for a monopoly or preferential rights to sell matches.

With an unparalleled mastery of financial techniques that would not be out of place in modern financial markets, Kreuger convinced American investment banks and investors to finance his businesses and speculations. Early versions of modern financial innovations – off-balance sheet financing; hybrid equity such as non-voting shares; convertible bonds; complex corporate structures; use of secretive tax havens – were all part and parcel of the Match King’s repertoire.

But the reality was a familiar one. Bizarre and shady dealings, faked profits and cash flows and in the end fraud and forged securities. In 1932, Ivar Kreuger died in mysterious circumstances – suicide was the official if disputed verdict. His empire collapsed shortly thereafter inflicting large losses on investors and destroying a storied investment bank of the time – Lee Higginson.

Frank Partnoy, the well regarded author of F.I.A.S.C.O. (a memoir of derivative trading) and Infectious Greed (a critical analysis of the role of finance in modern economies), has crafted a very readable and enjoyable fable of the rise of Kreuger framed by his entry into America and his suicide.

The intriguing thing about the portrait of Kreuger that is drawn is how little about the man is known. It is entirely appropriate that Kreuger the man remains an enigma as he identified and sponsored the talents of Greta Lovisa Gustafsson (better know as Greta Garbo). The reclusive Garbo came to be associated with her famous line from Grand Hotel: “I want to be alone”. Garbo later commented that she had never said: “I want to be alone.” She insisted that she had said: “I want to be let alone.”

Even at the peak of his brief financial success, Kreuger remained a mysterious figure whose real motivations and personality was never really clear. This remains the “essential” mystery of the Match King.

Lucid and insightful, The Match King shows how little in the world changes. As John Kenneth Galbraith once remarked: “The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.”

© 2009 Satyajit Das All Rights reserved.

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).

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