The Match King

by Frank Partnoy

  Meanwhile, A.D. Berning continued to help Ivar with positive spin. Berning included in International Match’s financial statements substantial gains from various subsidiaries,30 including Swedish Pulp Company, a significant subsidiary that had generated some skepticism among American bankers.31 But because Berning and Ernst & Ernst vouched for the profits of Ivar’s subsidiaries, those bankers had no way to dispute the accuracy of the financial statements.

  With Berning’s help, Ivar’s reputation in the international markets remained solid. He was still able to borrow money. One major bank, Paribas, wrote in a May 1931 credit report that “Kreuger & Toll enjoys the best reputation and unlimited credit.”32

  By this time, Ivar had fooled just about everyone: the world’s smartest bankers and accountants, leading journalists and politicians, and millions of investors in America and throughout Europe. Bluffing these people, and winning, was exhilarating in a way. But Ivar’s sources of funds were running out. Now, to get the money he needed to survive, Ivar would need to confront the one bank he had not yet been able to fool: J. P. Morgan & Co.

  Ivar had first started buying shares of L. M. Ericsson Telephone Company in 1927, based on A.D. Berning’s recommendation. Berning had envisioned a global merger between L. M. Ericsson and International Telephone & Telegraph, known as IT&T .33 Ivar understood the synergies such a global conglomerate would enjoy. He told a friend, “The telephone, as far as I am concerned, has the same qualities as matches. With the arrangement and management of telephone organizations, I can get State concessions and monopolies just as I can with my little wooden soldiers.”34

  Within a few years, Ivar had acquired control of Ericsson and put Oscar Rydbeck and other friendly directors on Ericsson’s board. Ivar then used his control to get something he needed even more than a worldwide telephone monopoly: cash. Ericsson had paid 8 million dollars for part of the German loan and issued 25 million kronor of 5.5 percent debentures in June 1931.35 After a year under Ivar, Ericsson was hardly the same company. It now had much more debt and was losing money. Still, it had a strong market share, and was an attractive takeover candidate.

  Before the 1929 crash, Sosthenes Behn, the president of IT&T, had proposed a merger of his company and Ericsson.36 At first, Ivar had rejected a deal with IT&T. In part, Ivar wanted to wait to cement control of Ericsson. But Ivar also was skittish about dealing with IT&T, which was represented by J. P. Morgan & Co. Ivar was busy taking over Morgan’s lending role in Europe, and the last thing he wanted was to give Morgan’s bankers any insight into his business. Two Morgan partners sat on IT&T’s board of directors, and Ivar knew they would be digging for information.

  In May 1931, though, Ivar succumbed and told Sosthenes Behn he was prepared to discuss a deal. Ivar also sent Berning a coded telegram saying he would “appreciate your getting together as much information as possible about international telephone and telegraph corporation.”37 If Behn thought Ivar might be desperate, he held his tongue. The men agreed to meet in New York, after Ivar stopped in Washington to discuss world affairs once again with President Hoover.

  In New York, Ivar met first with Donald Durant. He told Durant about IT&T and, more importantly, the Italian deal, which Ivar insisted Durant must keep secret and refer to only as a deal with “Country X.”38 Ivar informed Durant that, although he appreciated all of Lee Higginson’s hard work on his behalf, Ivar would represent himself in the negotiations with Morgan and IT&T.

  The talks were to be held at IT&T’s headquarters. Ivar stopped by his New York office, which he almost never visited, to prepare. Even after the crash, everything seemed to be in place, including, he was pleased to see, all of the eighteenth-century furniture he had chosen: twin walnut Queen Anne side chairs with a matching lowboy, a William and Mary folding card table with three mahogany and leather Hepplewhite armchairs, and two mahogany desks with inlaid drawer fronts, floral marquetry, and bun feet.39 It was quiet and formal, just like his apartment at Villagatan in Stockholm. Since the crash, the influences of his wild Norwegian friend Anders Jordahl had become more muted.

  During the discussions at IT&T, Ivar sat on one side of the table alone, while Sosthenes Behn sat on the other, flanked by a dozen men, including IT&T’s directors and the Morgan partners. Occasionally Ivar would ask a question about IT&T and one of the men from the other side would leave the room for an hour to get an answer. But when someone from IT&T asked a question, Ivar always stayed put and answered from memory.

  Ivar’s performance during these talks was enormously impressive, and he held forth on a tapestry of topics. According to one source, every night Ivar would stuff his memory with details about some obscure matter, such as Hungarian financial statistics, and the next day he would ensure that the topic came up and then would recite every memorized detail. Someone from IT&T would check the facts, in the hope they could confront Ivar the next day with an exaggeration, but everything Ivar said was correct, to the penny.40 Later, when Ivar cited precise income figures for one of his companies from memory, it seemed more certain that the men from IT&T were hearing the truth.

  Ivar also employed to great advantage the tactic he had used during the luncheon speech he gave to Lee Higginson’s partners nearly a decade earlier. When the men from IT&T asked an important question, Ivar would take an uncomfortably long pause, sometimes as much as several minutes, before saying a word in response. According to one person who attended the negotiations, Ivar wouldslowly take out a cigarette, tap the end of it on the table for several minutes, slowly light it, then twirl it around in his fingers and squeeze the tobacco out of the unlit end before he finally tore the end off or crunched the cigarette out. The whole process might take five minutes or more, and then he might repeat it. Nine times out of ten, someone else would break the silence by saying something that would somehow modify the type of answer Kreuger gave. His poise was tremendous.41

  On June 18, after two weeks of long pauses, Ivar and Behn finally reached agreement.42 Ericsson would deposit 600,000 shares with Swedish banks in the name of IT&T, and IT&T would write a check for 11 million dollars to Kreuger & Toll.43 Ivar also agreed that, during the upcoming year, accountants from Price, Waterhouse & Co., the firm that had discovered inaccuracies in Ivar’s financial statements during his earlier run-in with Diamond Match, could perform an audit of Ivar’s companies in Europe. In fact, Ivar would have agreed to just about anything, as long as IT&T gave him the 11 million dollars upfront. He needed the money right away.

  IT&T’s check cleared just in time for Ivar to meet the payments due on one of Kreuger & Toll’s participating debentures on July 1. Meanwhile, Price Waterhouse’s accountants would not come to Sweden until early next year. Ivar still had a few months.

  Donald Durant was becoming more of a problem for Ivar. He asked for an annual report that was “more complete than usual” along with a “supplemental memorandum in typewritten form to be used in the greatest confidence by the Guaranty, the City, and possibly by some insurance companies and investment trusts.”44 Durant said other bankers were pestering him every few days to get more details from Ivar. They wanted to send their own men to Sweden.

  Even Joseph Swan, the head of Guaranty, who had praised Ivar’s put back deal in 1929, was concerned. Durant wrote to Ivar,The other day Joe Swan came in with rather a long face and with your report in his hand and said he was a little afraid the situation was getting too big. His attitude intrigued me a good deal because generally Joe Swan has been very bullish about your securities and has always had an opportunity to talk to you when you are here and I believe has been to see you in Sweden.45

  Durant told Ivar “I may be over suspicious,”46 but he still needed some comfort in the form of more details. For example, Durant still did not know the answer to an earlier question about whether Ivar was including unrealized “mark-to-market” profits from his trading activities in International Match’s income.47 Durant’s concern was that Ivar could exaggerate the gains from investments the company
held but had not yet sold.

  Ivar struggled to address Durant’s concerns. He began by agreeing to pay Lee Higginson an additional 300,000 dollars a year as a “financial advisor” fee, in addition to the other fees he had been paying. He also tried to use a more personal touch with Durant, and even began signing his notes “Ivar” instead of “Kreuger.”

  Durant’s wedding engagement was a timely opportunity for Ivar to try to restore his credibility. In May, Durant sent Ivar a handwritten note:Dear Ivar,

  I want you to know in advance and for the moment confidentially that I am engaged to Miss Alice Stowell whom I think you have met. We plan to be very quietly married some fine day in the next month.

  Sincerely,

  Donald.

  Have told Krister.

  Ivar sent a basket of orchids to Durant’s apartment, on East 74th Street, and Donald, Alice, and Ivar had dinner together the next evening.48

  Ivar must have impressed the new couple. Alice sent a glowing thank you note, and Durant followed up with a letter to let Ivar know he heard “that you called on Mr Hoover while here and that Mr Hoover’s recent plan for the improvement of the world is really a creature of your brain.”49 But Ivar’s kind gestures and public service didn’t stamp out Durant’s suspicions. There were too many coincidences. International Match’s reported net income was always just enough to pay its dividends. The company had needed 2.35 million dollars to pay dividends each quarter during 1930 and 1931, and its quarterly net income had ranged from 2.36 million dollars to 2.4 million dollars.50

  International Match earned most of its profits from interest charges on loans to its subsidiaries, particularly Garanta and Continental. 51 Nearly half of International Match’s dividend payments were covered by interest on the 17 million dollars “owed to it by Garanta,” and still charged at a rate of 24 percent. International Match also had claims of 74.7 million dollars on Continental, apparently related to Italian, Polish, and Spanish loans. The fact that the subsidiaries’ interest payments almost precisely matched International Match’s earnings couldn’t be a fluke.

  For some banks, such as National City, these coincidences were too much, and they stopped dealing in Ivar’s securities entirely. The other banks collectively sent Durant a seven-page memorandum asking for a “break-down of the balance sheet items” of International Match, Swedish Match, and Kreuger & Toll.52 Durant reported to Ivar that the banks’ request for more information was “of the greatest importance and is rather charged with dynamite.”53

  Yet Ivar ignored the request for two months. When he finally responded, he apologized for the delay, and for the “fall in our securities,” and blamed “the constant propaganda which is carried on against our concern. There is hardly one day when there is not a new rumor … of such a nature as to frighten the investors.”54 Ivar blamed short-term speculation by short sellers - traders who borrowed and sold securities, betting on a decline in prices.

  To assuage Durant and the directors of International Match, Ivar sent them a confidential memorandum claiming that International Match’s assets included a 17.5 million dollar loan to Poland, a 30 million dollar loan to Italy, a 27.8 million dollar loan to Spain, and a 9.5 million dollar investment in the Diamond Match Company.55 Ivar cited extensive details about his holdings throughout Europe: two companies in Norway, one in Denmark, and a new match concession in Poland. He also said that Continental owned two companies in Finland, a factory in Estonia, and controlling interests in match factories and other companies in Austria, Czechoslovakia, Latvia, and, most significantly, Italy and Spain. The directors had never seen any documents establishing this ownership. Durant called the memorandum “particularly interesting.”56 The other bankers were surprised by all of the assets in Italy and Spain. No one could tell whether any of Ivar’s claims were true.

  The memorandum was enough to persuade Ivar’s bankers to agree to one last loan. If International Match actually held all of those assets, it was still a relatively low risk proposition. On August 27, 1931, Donald Durant announced that he had formed a syndicate with National City, Bankers Trust, Continental Commercial of Chicago, and Union Trust of Pittsburgh and arranged for a six-month unsecured loan. Payment of 4 million dollars, the full principal amount, would be due on February 27, 1932.57

  By fall 1931, Berning decided to try to verify all of the numbers Ivar was sending him. Apparently, he finally had become concerned that Ivar’s companies couldn’t afford to continue to pay high dividends. 58 When he asked Ivar for more information, Ivar rebuffed him at first, saying he “would like to postpone as long as possible.”59 After several inquiries, Ivar reluctantly permitted Berning to return to Stockholm in late 1931 to inspect all of the documents supporting Anton Wendler’s Swedish audit.

  During that visit, Berning went through several inches of paper for each subsidiary for each year, hundreds of pages that set forth minutiae for each of Ivar’s companies. For example, Wendler’s dossier on International Match as of December 31, 1930, showed 145.6 million dollars of assets, 56.7 million dollars of “Inter-Company Accounts,” and 32.5 million dollars of “Investment in Constituent Companies.” There was a mass of supporting detail for each category.60

  Berning also saw the complete list of International Match subsidiaries, which included many companies he had never even heard of. As Berning ran through the subsidiaries of International Match, which itself was a subsidiary of Swedish Match, he saw a few companies he recognized, such as Continental and Vulcan Match, an American firm. But he hadn’t realized that many of International Match’s subsidiaries, including Continental, also had subsidiaries. Did their subsidiaries have subsidiaries, too? It was like a corporate family tree from hell, and it extended into obscurity. Here was a partial list:Continental Investment A.G. and Subsidiaries

  Vulcan Match Company, Inc.

  Philippine Match Company Ltd

  American Turkish Investment Corporation

  Compania Mexicana de Cerillos y Fosforos, S.A. and Subsidiary

  Handels Kompagniet “Hafnia” A.S. and Subsidiaries

  Finska Elektrokemiska A.B.

  Nitedals Taend-stikfabrik and Bryn Och Halden Taendstik-fabriker

  Drvorez-Barska Tvornica Vrbovsko and Subsidiary.

  Bjorneborgs Tandsticks-Fabriks A.B.

  “Drava” Zundwaren-Fabrik A.G. and Subsidiary …

  It went on. Details for each subsidiary were included, along with the percentage ownership by International Match. Most of them were 100 percent owned by International Match; the exceptions were Bjorneborgs and “Drava” - whatever those were.

  The precision in the financial statements was staggering. Everything seemed official, too. The parcels for each subsidiary were sealed in orange wax with Anton Wendler’s signature. Berning worried that when he returned to New York, everyone would ask him one obvious question: Why hadn’t he looked through all of this before? He copied down as much detail as he could, and packed his pages of notes to bring home.

  Even after Berning finished his document review, Ivar refused to meet in person. Instead, Ivar went to the Grand Hotel and the men communicated through a bizarre room-to-room colloquy, handwriting notes on hotel stationery and passing them back and forth using a messenger.61

  Just as before, when Berning finally left Stockholm, Ivar immediately sent him cables with important information and requests. One cable to Berning’s first-class cabin on Mauretania explained that there were numerous mistakes in Anton Wendler’s documents. Ivar said he would come to New York to explain everything in a few weeks. Berning hastily responded:your message received will hold all papers for your disposal if there is anything I can do in preparation for your arrival regarding telephone or any other special newyork matters which we discussed I would be glad if you will advise me.62

  Ivar asked Berning to destroy the documents he was taking to New York, and it appears that Berning did.

  During the second half of 1931, Ivar’s securities plummeted in value, so that they
were worth only about a fifth as much in December as they had been in June. The decline weighed on Ivar. He complained to Durant that he and his companies “have been the subject of a deceitful press campaign from … some twenty black-mailing papers who continually attack our securities.”63 Ivar became increasingly paranoid about short sellers, and he personally bought large volumes of his companies’ securities, in an effort to prop up the price. As the short selling of Ivar’s companies increased during late 1931, he became increasingly frustrated and ultimately published the following statement:On account of the latest fall in the prices of Aktiebolaget Kreuger & Toll debentures and of shares in the companies belonging to that group, I would like to state that nothing has transpired in these companies that could justify this fall in price. In my opinion, this fall is due to recent developments in European money markets, and to the market situation in general.

  It must be remembered that the shares and debentures of Aktiebolaget Kreuger & Toll and Swedish Match have a wider international distribution than any other listed securities in the world. It is therefore only natural, that these securities are the first to be used to raise liquid funds abroad. This situation has been utilized by an internationally organized short selling syndicate, which has not hesitated to spread unfounded rumours about the group. 64