At the time, even the hardest skeptics were drawn to widely publicized tales of successful trading schemes, which dominated print advertising and radio info-mercials. Americans have always wanted to believe rags-to-riches stories are true, and the more they heard about young men from poor backgrounds who made implausible fortunes, the more they believed those stories could be theirs.
One widely publicized tale, which Ivar and the other passengers aboard Berengaria certainly would have known, was about Jesse Livermore, whom many regarded as the greatest market speculator of all time.23 Livermore reflected the burgeoning optimism of investors, and the 1920s were his heyday, the time when he went from being rich to being absurdly rich. The Saturday Evening Post serialized his biography, and a million readers followed his story. Livermore confirmed the quintessentially American belief that an average person can beat the market.
As the story went, young Jesse Livermore left his family’s small Massachusetts farm for a job posting stock quotes at brokerage firm Paine Webber in Boston. In his spare time, he devised a set of trading rules for the most volatile shares bought and sold by the devious bucket shop dealers. By outsmarting them, and by trading on inside information, he turned $5 into $1,000 by the age of fifteen. He made his first million soon after that.
When the bucket shops finally banned Livermore, he switched to trading shares of leading companies on the New York Stock Exchange, where he made still more millions. He bought several mansions, a fleet of limousines, and a steel-hulled yacht, which he sailed to Europe. He became an instant hero to many investors. His stories were so popular that Edwin Lefèvre, the author of the articles in the Saturday Evening Post, assembled them into a bestselling book, Reminiscences of a Stock Operator.24 During the years after the book’s publication, Livermore lost the entire $100 million he had made betting on the markets, and then shot himself with a .32 caliber Colt automatic pistol.
Another example of the irrational exuberance of the era was Charles Ponzi, who had a similar tale, and a similarly unhappy ending.25 Ponzi also was from a poor family, and he skipped school to work odd jobs for more than a decade, including a stint at a bank where he was fired for forging checks. After he served a prison term for the check forgeries, Ponzi worked a temporary job as a messenger at J. P. Poole, a Boston import/export broker, and he discovered that the value of so-called “postal reply coupons” - slips of paper that substituted for foreign stamps - had been set at fixed exchange rates in 1919, and not adjusted since then. Meanwhile, the value of several European currencies, particularly the Spanish peseta, had plummeted. Because the value of the postal reply coupon had not been adjusted since then, Ponzi thought he could buy coupons in Spain at a discount and then sell them in America at a profit.
There was only one catch: the entire supply of postal reply coupons was small, less than $1 million. Even if Ponzi could buy every coupon issued in Spain and take them all home, there wasn’t that much money to be made. Moreover, travel was expensive, and he wasn’t the only person who knew about the scheme. Still, Ponzi thought it was worth trying to raise money based on the idea.26
Ponzi placed some magazine advertisements stating that he could double an investor’s money within six months by purchasing postal reply coupons outside the United States and then redeeming them at home for a higher price. Much to his surprise, 40,000 people sent him money. He distributed some of this money as “profits” to the earliest investors, who then spread word about their newfound fortunes. Others heard the news and bought in. And so on. Investors from California to Maine sent him more than $15 million. He had to hire sixteen clerks just to collect and deposit the cash.
Ponzi’s scheme didn’t last long. A journalist exposed him after just a few months by pointing out that Ponzi could not possibly have bought enough postal reply coupons to sustain the profits he advertised - there simply weren’t sufficient coupons in the world. When investors who weren’t at the top of the pyramid learned about these limitations, they tried to bail out. Unfortunately, they were too late. Their money was gone.
Ponzi didn’t invent the idea of a financial pyramid where a few early investors (at the top) receive payments from many later investors (at the bottom). And he certainly wasn’t alone: during the early 1920s, hundreds of promoters marketed investment pyramids in commodities, real estate, and diet supplements.
Indeed, what was remarkable about this scheme wasn’t Ponzi. It was his victims. If people really would believe that a 34-year-old ex-bank clerk who had just served three years in prison for check kiting was capable of doubling their money in six months by exchanging millions of 10 cent postal coupons from Europe - well, if they would believe that, then they would believe anything.
That meant they were ready for Ivar Kreuger.
Americans who were excited by stories of Livermore and Ponzi were enthralled by Ivar. He wowed the passengers on Berengaria with dramatic tales of his various construction projects: from his exploits in Johannesburg while building the Carlton Hotel to his twelve-year odyssey putting up the Stockholm City Hall with nearly 8 million bricks. Architects already were calling Stockholm City Hall the most beautiful building in Scandinavia, and its stunning room, the “Blue Hall,” was soon to house a 10,270-pipe organ and host the Nobel Prize ceremonial dinner.
Unlike Livermore and Ponzi, Ivar seemed destined to have a happy ending. He generated increasing profits for his investors, year after year. Kreuger & Toll was composed of legitimate businesses. It produced and sold tangible assets. As the company’s most recent annual report circulated among the passengers, the excitement on board rose like the frenzy of a bucket shop. The report was simple, just a few lines. It noted Kreuger & Toll’s link to Swedish Match and its 25 percent dividend, but said little about where that money came from. Over half of the company’s profits were listed simply as “earnings from various transactions.”
These passengers didn’t need any financial detail from Ivar. A reliable 25 percent dividend was impressive enough. Ivar himself seemed trustworthy, and made dozens of new friends during the journey. He danced with the women, and smoked cigars with the men. He delighted everyone with stories of the up-and-coming actresses working for his film production company. Ivar seemed the sort of person who would take care of you, no matter what happened. By the time the ship docked in New York, the passengers were practically begging to give him their money.
As they disembarked, Ivar performed the final act of this trip. On shore, when a journalist who had heard about his arrival took out a pipe and asked for a match, Ivar pretended to fumble through his pockets looking for, but not finding, one of the billions of Swedish safety matches his factories had produced that year. The journalist bought the charming, and disarming, story, and the front-page headline the following morning was: “The Match King Who Does Not Carry a Match!”27
2
GETTING TO LEE HIGG
Donald Durant read the news of Ivar Kreuger’s arrival on Berengaria in his office at Lee Higginson & Co. in New York. In the early 1920s, Lee Higginson was one of the most prestigious and profitable banks in the world - just behind J. P. Morgan but ahead of Goldman Sachs and Lehman Brothers. The firm’s roots were in Boston, not New York, yet even as America’s financial business shifted from State Street to Wall Street during the early twentieth century, Lee Higginson remained one of a handful of global “money banks.”
A native New Yorker, Durant had worked his way up from nothing at the firm, starting as a stock boy in the Manhattan branch office eighteen years earlier. Durant had been promoted faster than anyone in the firm’s seven-decade history. While Ivar was building Kreuger & Toll from an empty shell into a hugely profitable European firm, Durant was helping develop Lee Higginson’s New York office into the new engine that would drive the venerable bank into the future.
Durant looked nothing like the typical banking partner of the era. Most bankers were exactly what paintings from the time suggested: old, fat, and bald (or balding) with unfathomably beefy m
oustaches. Durant was just thirty-four years old, a generation younger than most Lee Higginson partners, and eight years younger than Ivar.1 Durant was trim and athletic, his thick hair slicked back to reveal a handsome forehead, high cheekbones, a clean-cut face, and a charming smile. He looked more like Fred Astaire than a banker.
Lee Higginson’s stodgy partners were drawn to Durant’s handsome charm, wit, and New York street smarts. Like Ivar, Durant was comfortable playing a range of roles. He had served in the infantry during the world war, and his devotion to the sea suited the Boston sailing crowd. Durant had earned the designation “master mariner,” and he navigated the politics of Lee Higginson as easily as he sailed through Boston harbor. He developed relationships with clients during trips to the coast of Maine on a Marconi-rigged 50-foot yawl called Sequoia.2 Durant sailed his own ship. And he looked fabulous doing it.
Durant devoured the details of Ivar’s trip to America. His sources told him that Kreuger & Toll and Swedish Match were two of the hottest companies outside the United States. His colleagues in London reported that Ivar already had made them a fortune on a highly unusual and complex swap transaction that even the sharpest investment bankers there could not understand. Ivar had opened an account with Higginson & Co., the British branch of Lee Higginson, and then offered a deal that, stripped to its essentials, involved Ivar selling shares worth 30 pounds to the London bankers, but charging them just 20 pounds. At its core, this swap guaranteed a profit of 10 pounds per share for Higginson & Co. Ivar said he would debit the 10 pound difference to one of his personal accounts, and he explained a number of complicated aspects of that debit. The British bankers lost interest in the murky details after they heard “riskless profit of ten pounds.”3
The Higginson & Co. deal was baffling. Even if Ivar could control the market, so that he could buy low there and sell high in London, it wasn’t clear why he would give such arbitrage profits to Higginson & Co., instead of keeping them for himself. Outside the rarefied world of investment banking, this complicated transaction might have been called a bribe. But Higginson & Co. accepted it and, as Ivar had hoped, began praising him to the firm’s counterparts in New York, including Donald Durant.
At the same time, Ivar asked a Swedish stockbroker named Gustav Lagerkrantz to visit Durant and to recommend, casually and unobtrusively, that Durant ask to meet with Ivar. Durant had no reason to suspect a connection. From Durant’s perspective, Lagerkrantz was just another broker seeking access to one of America’s top banks. Durant headed Lee Higginson’s syndicate department, a group that arranged new securities issues, helped divide the securities among the top banks, and then sold the securities to investors. Lagerkrantz naturally would have wanted Lee Higginson’s syndicate department to allocate its most promising investments to his Swedish clients. When Lagerkrantz happened to mention Ivar Kreuger during his meeting with Durant, it appeared to be merely an aside. Durant never imagined that Ivar had arranged it all.
Meanwhile, Lagerkrantz received side payments from Ivar. In 1922, Ivar sent Lagerkrantz “the usual sum for the month” plus an additional 2,000 dollars, which Lagerkrantz said he needed to pay rent and settle some personal matters.4 Although these communications suggested bribery, the quid pro quo was more likely implicit. Lagerkrantz was a broker and Ivar had paid him large trading commissions in the past. It was only reasonable for Lagerkrantz to help Ivar, and then expect that Ivar would continue to pay large, or perhaps even larger, commissions in the future.
For Durant, news about Ivar seemed to come from every direction, just as Ivar had planned. First, Higginson’s London office. Then, Lagerkrantz. Now, the media surrounding the arrival of Berengaria. Ivar sounded like the ideal new opportunity. He was one of Europe’s brilliant industrialists. He had built a modest family match company into one of the world’s largest industrial trusts. Kreuger & Toll’s dividend in Sweden was 25 percent. Durant thought he could sell that to anyone. When he read about Ivar’s arrival in New York, he eagerly requested a meeting.
Ivar responded that he was busy with other business, but would try to arrange a time. Ivar did not want to seem too enthusiastic; he had learned that playing hard to get was a promising strategy with America’s élite. Just a few months earlier, Ivar had been invited to join Congressional Country Club, and when he did not respond to the invitation, the club’s chairman, Admiral Cary T. Grayson, had sent a letter imploring Ivar to join: “You will recognize among the names presented here a number of your friends and associates, and we sincerely trust, Mr Kreuger, that we shall have the pleasure of having you as one of us.”5
Ivar waited a few more days, to ensure that publicity about him had saturated Lee Higginson. Finally, he arranged to meet Durant.
Lee Higginson, or “Lee Higg” as it was popularly known, had been a dominant player in global finance since before the Civil War. John Lee and George Higginson, cousins by marriage, had formed a stock brokerage house on State Street, Boston, in 1848.6 The partners included three generations of Harvard men, many related by Boston blue blood, and they were wary of outsiders. One Higginson complained of the “self-made man without the backing of a family to keep him straight.”7 Another remarked, “I have never met one such yet in my business life who has not sooner or later lied to me, or at least tried to cheat me.”8
Henry Lee Higginson led the firm until his death in 1919. Henry was a prominent philanthropist - he founded the Boston Symphony Orchestra - and his advice about the banking business echoed Pierpont Morgan’s famous testimony to Congress that character came before money or property. According to Henry, “The house has always tried to do its work well and to have and keep a high character. Character is the foundation stone of such a business, and once lost, is not easily regained.”9
Following Henry’s counsel, Lee Higg’s partners advised the leading corporations of the day, such as American Telephone and General Electric, and the partners carefully avoided even a hint of self-interest. When James Storrow, Jr, a Harvard graduate from a prominent Boston family and a Lee Higg partner, became the lead banker and advisor to General Motors, he refused to permit the firm to own shares of the company. This policy cost Lee Higg a fortune in missed profits as General Motors shares soared in value, but it preserved the firm’s venerable reputation. Storrow insisted that his partners stick “closely to the things which we are trained to analyze and know how to weigh in the balance.”10
Lee Higg maintained its conservative culture even as it expanded to New York. Frederic W. Allen, the head of the New York office, was indistinguishable from the Boston partners, except, perhaps, that he had attended Yale, not Harvard. Allen was a physically massive and imposing presence, and he served as the distinguished leader of several philanthropic and business groups, including as head of Yale’s rowing committee and a director of Chase National Bank.11 Like the Higginsons, Allen was no self-made man.
During the world war, Frederic Allen was appointed Director of War Savings, and promoted the purchase of War Savings Certificates by Americans with a patriotic flourish. In one major speech, Allen gushed that “Every person who buys will not only help his country, but greatly benefit himself. If Benjamin Franklin, who secured no small part of his reputation as an advocate of thrift, were alive today he would be the flag bearer of this great undertaking. What he had to say about thrift over a century ago is as true today as it was then, and the war is bringing home the truth of it. War Savings Certificates are intended for everybody. They are within the reach of all.”12
Allen advocated thrift privately as well. A few years before he died, Henry Lee Higginson wrote to Allen that “As the house grows older, I think it grows more careful.”13 Allen was proud to hear it, and absolutely agreed with the firm’s conservative objective.
Still, Frederic Allen and his partners recognized that the markets were changing. Given its Boston roots, Lee Higginson lacked the national networks of Morgan or National City, a leading commercial bank. The firm needed someone to establish stronger conne
ctions, first with new companies whose securities would appeal to investors, and then throughout the United States with the investors themselves. Every American already knew Jack Morgan. They were getting to know National City’s chairman, Charles Mitchell, a former electrical goods salesman, who had been encouraging his brokers with sales contests, high commissions, and motivational speeches. Lee Higginson needed someone to join this fray, and to introduce the firm’s name and the companies it discovered to the public. It wouldn’t hurt if this man resembled Fred Astaire.
Donald Durant understood the common person, someone élite bankers, including the Higginsons, had politely ignored for decades. Since the Civil War, bankers had focused on wealthy institutions: first the railroads, then industrial companies, and most recently foreign corporations and governments. But now that individual human beings, men and women, were rushing to buy stocks, not only from unregulated bucket shops, stock jobbers, and brokers in lower Manhattan, but also from the leading national banks, Lee Higg needed Durant to help them connect.
Recently, Durant had become popular on Wall Street and among investors. In June 1922, colleagues from other banks elected him to serve as vice-president of the Bond Club of New York,14 a prominent group that hosted monthly lunches on Lower Broadway and an annual retreat at the Sleepy Hollow Country Club, just north of Tarrytown.15 The charge of the Bond Club was “to maintain high standards and just principles and to promote good fellowship and intellectual intercourse among men engaged and interested in the distribution of investment services.”16 Durant also oversaw publication of the Bawl Street Journal, an eight-page satirical newspaper with gag articles and spoofs of bankers and, it was claimed, the largest circulation of any amateur humor publication in the world.17 He seemed the ideal mixture of upstanding banker and regular guy.
The Match King Page 3