The Match King

by Frank Partnoy

  Both Jack Morgan and Ivar learned by transcontinental cable of the panic and wild price swings. An assistant reported to Jack that:At noon today the decline in the Stock Exchange, which for several days has been severe, turned into panic conditions. With no supporting orders whatsoever stocks began to drop many points at a time in a perfectly wild, illogical and uncontrolled manner. We decided to make a sort of faith cure demonstration by purchasing certain pivotal stocks on a scale down, thus attempting to steady the decline.18

  The New York Stock Exchange announced it would close for the Friday and Saturday trading sessions, and reopen on Monday. The hope was that investors would be calmer then. Littorin cabled to Ivar that:As you know, the market has for several days shown symptoms of a threatening collapse, and the sales pressure has today reached hectic proportions. Several of the leading shares have fallen by 25-50%, while our shares have kept up reasonably well with a price drop of only 12% during last week in spite of very little support. Banking circles are very nervous, and there is no doubt, as I see it, that our issue comes at a very bad moment, as banks are being hit right and left. The enthusiasm (for our issue) that we had counted on, has been transformed into a feeling of great skepticism.19

  Perhaps the most intense panic was from members of Lee Higginson’s syndicate for the new Kreuger & Toll issue of American Certificates. That syndicate included nearly all of the major banks except Morgan: Brown Brothers, Clark Dodge, Dillon Read, Guaranty, National City, and Union Trust Company. Investors already were reneging on their promises to buy American Certificates. So many purchasers had backed out that more than one-fourth of the issue was now unsold. Now that investors were refusing to pay, these banks would be on the hook. They were stuck with 28 million dollars of American Certificates whose value already had fallen 12 percent, and might fall even more.

  Ivar saw the next few days as a crucial turning point. Sentiment was turning, as investors fled from stocks. Opinion easily could turn against him as well. He had learned from dealing with Swedish bankers during the early 1920s that he must preserve the confidence of his supporters. Ivar’s bankers had to believe in him, even if the markets were crashing. Even if they believed in nothing else. Ivar had to give Durant and his partners good reason to think Ivar was different.

  On Friday, as he reflected on the reports of panic in the United States, Ivar spent several hours composing an extraordinary cable to send to Lee Higginson. He needed to say something to persuade the bankers that, although the American markets were collapsing, everything was just fine in Europe. Ivar would show them that his companies were as strong as ever. They might be worried about America, but they didn’t need to worry about him.

  This is what he wrote:I am very sorry that our issue seems to have come at a very unlucky moment. We are very anxious that the syndicate that has taken over … our debentures will not have reason to regret their action, and we are also anxious not to overload the American market with our paper. We have therefore arranged with a Swedish syndicate to offer to take over, on December 31, 1930, up to half the amount of such debentures as the American syndicate has acquired. This will be done at the acquisition cost to the American syndicate. We expect to receive notice no later than December 15, 1930, of the extent to which the American syndicate wishes to avail themselves of this offer.20

  This was astonishing news. Ivar was saying he had arranged to guarantee half of the banks’ exposure to the American Certificates. If the banks were unable to sell the certificates in one year, Ivar would buy them at cost. In other words, he was giving them the right to “put back” the certificates to Ivar. And he was doing it for free.

  Durant couldn’t believe what he was reading. Ivar was bailing out not only him and his partners, but several other major American banks. The tone of Ivar’s cable was almost casual, as if he couldn’t be bothered with such a trifle as millions of dollars worth of unplaced American Certificates. After all, he was about to close the biggest privately organized government loan in history. What was a little panic in New York compared to his blockbuster deal with Germany?

  Ivar’s offer to give the banks this “put back” right was designed to instill confidence in the bankers, and investors, and to buy time. They did not need to rush to take any dramatic action, even if the markets continued to free fall. They could take a breath. Indeed, Ivar’s bailout package gave them the ability to wait more than a year, until the end of 1930. Then, if any bank ultimately had been unable to sell its allotment of Kreuger & Toll Certificates, Ivar would make up the difference in his rescue package by letting the banks put the certificates back to Kreuger & Toll. After Durant read, and then reread, Ivar’s cable, he eagerly established a book entry at Lee Higginson for the “Ivar Kreuger Current Account” to keep track of these put backs.21

  Durant reported Ivar’s extraordinary guarantee to members of the syndicate. He described the put back right, “which we believe to be absolutely without precedent, which shows conclusively the breadth of the man.”22 Charles Mitchell, head of National City, told Ivar it was not necessary for him to exercise any put back yet. Mitchell announced that the “industrial condition of the United States is absolutely sound” and that “nothing can arrest the upward movement.”23 Joseph R. Swan, president of the Guaranty Company of New York, heartily agreed. Swan’s endorsement reflected the bankers’ confidence in Ivar: “He certainly plays up handsomely and, also, I think, wisely.”24 Both National City and Guaranty agreed to hold onto 1 million American Certificates.25 No need to put them back to Ivar, or to worry about any paper losses. They would sell them to investors when this panic subsided.

  Donald Durant was relieved. Given Ivar’s guarantee, it seemed that Lee Higginson would take no risk, the members of its syndicate would take no risk, and yet Durant and his firm would pocket a fee of nearly 1.4 million dollars.26 The entire banking syndicate earned a fee of 2.5 percent. Given losses from the declining markets and the dearth of deals, that fee was indispensable.

  Ivar remained cool throughout. He calmly sent Durant a one-sentence cable that was probably the greatest understatement of his life: “I regret very much that our issue seems to have gone at a very unfortunate moment.”27 The put back right could cost Ivar his entire fortune. Essentially, he had given his bankers a put option - the right to sell him American Certificates - until the end of 1930 at a price of 28 dollars. For every dollar the price fell below 28 dollars, Ivar would lose a million dollars. That could amount to a lot more than “regret.” For now, though, everyone seemed safe. As Kreuger & Toll’s 1929 annual report later would state:The issue was announced on October 23, 1929. Although a stock market crisis of exceptional severity hit practically all of the world’s financial centres immediately thereafter, it is satisfying to note that the whole issue was rapidly subscribed to, so that the underwriting syndicate did not have to absorb any part of the issue.28

  Now that Ivar had agreed to guarantee the American Certificates, he faced an even more difficult question that weekend: Should he actually sign the German deal? If he said no, he still could try to salvage his reputation. He could cite the recent market decline as a plausible excuse for him to pull out. And there were good business reasons for him to do so. Although the loan was clearly a good deal for Germany, it wasn’t necessarily good for Ivar. Germany’s government would lock in a low 6 percent interest rate in an environment of rising rates. But Ivar could do better by lending his money elsewhere. Moreover, given the market collapse, and Ivar’s put back obligations, it would be much less risky for Ivar to keep the cash he had just raised in America, instead of sending it to Germany. If Ivar abandoned the German loan, he could use the money he had just raised for Kreuger & Toll as a cushion against further stock price declines. His businesses still were profitable and his companies were in a reasonably solid position, at least relative to everyone else. Saying no to Germany was the prudent course.

  But if Ivar said yes, he could make history. He could leave a legacy even more permanent than the t
urrets at Kalmar Slott, the castle near his childhood home. Ivar Kreuger, a self-made Swede, would become the largest lender to foreign governments. Acting alone, he would replace the Dawes and Young Plans, which had been negotiated over years by several governments and dozens of officials. He would become known forever as a one-man financier to Europe. He, not Jack, would take over Pierpont Morgan’s throne as global banker. And, if Germany’s economy recovered, Ivar would earn huge profits from his match monopoly there.

  Of course, he would be taking incredible risks, especially if the stock market collapse continued. It wasn’t even clear that he could raise the entire 125 million dollars to send to Germany; the money he raised by issuing American Certificates covered less than a quarter of that amount. And even if he did raise the money, the German loan would leave little room for error in his business overall. Ivar would receive interest of just 6 percent from Germany, but his dividend obligations would remain as high as 25 percent. Was Ivar confident he could earn enough profit to make up the difference? Was it worth the risk?

  The crucial question for Ivar was this: What would the markets do when the New York Stock Exchange opened on Monday? If the markets recovered, he would be able to raise more money, fund the German loan, and continue to pay high dividends. But if the markets continued to crash … Well, he couldn’t even think about that. His best guess was that the markets would rise Monday.

  On Saturday, Ivar met again with finance minister Hilferding in Berlin and finalized terms. As Ivar held the pen, about to sign the loan documents, he considered the two paths his life might follow as a result of his decision. This audacious deal might be the miracle that would reverse the darkening psychology of investors everywhere. Ivar imagined the buzz spreading about his extraordinary weekend feat. When the New York Stock Exchange opened on Monday, his securities would soar in value. The rising tide of optimism would make it possible for him to raise more cash and shift his personal loan obligation to American investors. Those investors would rescue him and buoy stocks overall. With any luck, by the close of trading Monday, the worst would be over.

  That was one possibility Ivar could imagine. The alternative - that the crisis would continue, or even deepen - was unthinkable. He couldn’t bear to consider what would happen if the market freefall continued. Then, the German loan would catapult him to ignominy, not fame.

  Ivar decided not to spend the evening alone in his apartment at Pariser Platz, as he normally would on a Saturday night in Berlin. Instead, he walked to the Hotel Adlon nearby, and celebrated with a culinary binge at its restaurant. In one meal, Ivar violated every dietary rule he had been obeying for more than a decade: he ate all of his favorite dishes at once, from caviar to rich bouillon to ice cream to chocolate soufflé. Back at his apartment, completely stuffed, he phoned Ingeborg Eberth, his neighbor at Villagatan in Stockholm, and asked her to play the piano for him, as she often did when he was home.29 Ivar tried to savor the moment, and the brief peace. He had taken the greatest gamble of his career.

  Jack Morgan still didn’t believe Ivar really would close a deal with Germany. He knew Ivar had been working with German officials for several years, but he never imagined that Ivar would do a deal on his own, or that Germany and Lee Higginson would agree to exclude Morgan from any participation. Morgan partnered with Dillon Read & Co., another bank, which also had been working on a loan arrangement with German officials. Jack had assumed that either there would be no loan at all or that there would be a loan on favorable terms, which Morgan would participate in by taking a piece. Jack and his bankers assumed they had plenty of time given the recent turbulence in the markets.

  When Ivar told Donald Durant he had secured a preliminary agreement with Germany, Durant and Lee Higginson decided to refuse to share the loan with anyone, including Morgan. Durant flatly rejected any joint arrangement with Dillon Read, even after Clarence Dillon offered to increase the size of the deal. Dillon proposed to do a 200 million dollar issue together, with 125 million dollars going to Ivar and 75 million dollars going to Dillon Read.30 But Germany didn’t need 200 million dollars. One hundred and twenty-five million dollars was plenty, at least for now, and all of that could come from Ivar.

  Lee Higginson sent a “courtesy notice” to Morgan describing the terms of Ivar’s deal with the German government.31 There wasn’t any new information, just the same details previously reported in the business papers, along with a note saying that the parties had signed a deal. Jack didn’t find that notice very courteous. When he learned that Ivar had closed the loan on his own, and that Morgan wouldn’t be part of it, he was furious. He angrily cabled home, “Am just advised by telephone from Gilbert that Dr Schacht informs him that Dillon’s proposal has been declined by German Government.”32 Parker Gilbert, one of Morgan’s partners, said he was “fully alive to the dangers of the situation” and saw a need for secrecy. Gilbert had called Jack by phone, instead of cabling, “so as to leave no record.”33

  In signing the German loan even as the markets were crashing, Ivar was kicking Jack Morgan when he was down. This wasn’t the way proper bankers behaved, particularly when a German loan at a low rate of 6 percent was at risk of losing money. The loan would seriously harm Morgan’s business, even if it ultimately hurt Ivar even more. Jack wrote to a colleague:I do not see that there is anything else that we can do. I do not want to take any special stand in regard to the way we are being treated, for I think Schacht has been honest in the matter, but that the politicians have been too much for him. It is a horrid mess, isn’t it.34

  On Saturday, as the monopoly agreement was being signed in Berlin, Jack was still in London, still accepting congratulations on the Harvard alumni post, most recently from his son Junius, who had learned the news. In Jack’s life, the Harvard post really was a high priority. He responded to Junius, “Thanks very much for your congratulations on my new honor, which is quite impressive. Very well and getting on comfortably, but find myself in the usual rush before sailing.”35

  Many ships were ready to sail that weekend. A crew was putting the finishing touches on Jack’s new 3 million dollar yacht, which was being readied in Bath, Maine. In Washington, the US Secretary of Commerce was raising 100,000 dollars of public funds for upkeep of the original Corsair, which Morgan had just given to the federal government.36 Donald Durant, the master mariner, was considering a trip to Europe, though he could not sail right away. And Ivar had booked a cabin on Majestic, which would soon leave for New York.

  Ivar’s greatest triumph was immediately followed by the most spectacular two-day decline in the history of financial markets. The stock market fell 13 percent on Monday, and 12 percent on Tuesday. In two days, stocks lost a quarter of their value. This time, there would be no concerted buying effort from the banks. And this time, there would be no recovery.

  October 28 and 29 came to be known as Black Monday and Black Tuesday. Twenty-six million shares traded. In forty-eight hours, a full year of gains was wiped out. Goldman Sachs fell from $60 to $35. White Sewing Machine Company fell from a summer high of $48 to $11. Blue Ridge, an investment company, opened on Monday at $10, but closed on Tuesday at $3. It was the most devastating time in the history of stock markets.37

  By comparison, Ivar’s companies were star performers, buoyed, at least at first, by the news of his deal with Germany. A few days earlier, Durant had worried when the price of International Match debentures declined to $33.50, still in line with the original issue price. Now, like a single stone refusing to roll downhill, that was where the price remained. International Match’s debentures hovered above $33, defying the pull of the market’s black hole.

  Few people, including Jack and Ivar, could predict just how much the markets and the economy would deteriorate. Before he sailed home, Jack cabled,So far as we know, there are no houses in serious difficulty. The banking group had supporting orders in at the opening today but after that the market pursued a natural and vigorous course. Buying came in from all quarters, including some
excellent European buying. A public statement which John D. Rockefeller, Sr made today, after his people had talked with us, also helped to improve sentiment.38

  Jack knew that Ivar’s 125 million dollar loan would help Germany stave off a financial crisis, pay down its deficit, and carry out promised reforms. The loan wouldn’t help the American markets, though, and it already had angered senior Russian officials, who had opposed a deal and said Germany was favoring a foreign private investor at the expense of Russo-German trade relations. In an official communiqué, Russia’s trade commissioner in Berlin charged the German government with a “hostile act.”

  Jack studied the terms of Ivar’s German deal. As with all of Ivar’s financial deals, this loan had some unique innovations. Ivar gave Germany the option to pay a floating interest rate if rates fell below 6 percent, as well as the right to repay the entire loan early. The loan, and the fifty-year match monopoly, were contingent on Germany’s ratification of the Young Plan, which was scheduled to occur in a few months. If the Young Plan wasn’t ratified, the deal was invalid. Most importantly, International Match and Swedish Match would pay just 93 cents for each dollar of loan obligation. As with the French loan, Ivar would make extra profit, in this case 7 cents per dollar, if Germany prepaid the loan.39

  Bankers everywhere focused on Ivar now, as they tried to figure out exactly how he was making enough money to support his massive dividend payments to investors. The hefty discount on the German loan wouldn’t generate any cash to help Ivar meet obligations, and the Germans might not repay any principal for decades. The match monopoly might produce profits, but the Germans would keep half.