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Bernie Madoff, Meet Ivar Krueger


Before there was Bernie Madoff, there was Ivar Kreuger, the man John Kenneth Galbraith called the Leonardo of scammers. When Kreuger, an extremely successful and much-admired businessman during the 1920s, killed himself in 1932, investors discovered that his financial empire, based in the manufacture of matches, was made of sand, built out of complex financial instruments that are the forerunners of today's derivatives.

This is a rush transcript created by a contractor for KPBS to improve accessibility for the deaf and hard-of-hearing. Please refer to the media file as the formal record of this interview. Opinions expressed by guests during interviews reflect the guest’s individual views and do not necessarily represent those of KPBS staff, members or its sponsors.

MAUREEN CAVANAUGH: I'm Maureen Cavanaugh. You're listening to These Days on KPBS. At first the saga of financial wheeler dealer Ivar Krueger sounds like a story from the distant past. He was involved with post World War I finance. In a grainy photo and high color cut way and his nickname was the Match King. But as it turns out, he might have felt right at home in 21st Century Wall Street. After all, he created some of the financial innovations investment firms from sgron to live. Kreuger won't. Madoff scandal and our recent Wall Street crash, because, you see, he also had some personal experience with major financial collapse.

My guest is Frank Partnoy and his new book is called, The Match King: Ivar Kreuger, The Financial Genius Behind a Century of Wall Street Scandals. Frank is the George E. Barrett professor of law and finance at USD and expert on the complexities of modern finance and financial market regulation. And Frank, welcome to These Days .

FRANK PARTNOY: Thanks so much.

MAUREEN CAVANAUGH: Well, why was Ivar Kreuger called the Match King?

FRANK PARTNOY: He was called the Match King because he controlled the match business. Back in the 1910, matches were an incredibly important staple product. Lighting cigarettes. Gas heaters and he built his family business in Sweden where matches were invented, into a massive conglomerate. And throughout the 1920s he hopped throughout on Europe and got monopoly on the production and sale of matches just about everybody.

MAUREEN CAVANAUGH: It's so interesting for us, because now the whole concept of match seems so dated, except perhaps if you you want to light your fireplace. This was big business

FRANK PARTNOY: This was major business. 20 billion boxes a year and matches were a staple product. And the monopolies that he was able to obtaining throughout Europe why incredibly profitable not just for him but American investor who during the 20s were excited about investing in new technologies and they liked RCA and General Motors. And international match was one of those hotd companies that they invested in and made a lot of money on.

MAUREEN CAVANAUGH: Tell us about Mr. Kruger, what kind of man was he?

FRANK PARTNOY: He was an incredibly charming man. He was an advisor to Hoover and pan ka Ray. People trusted him. He was a kind of person who set out to reform his personality elly in life when he saw that he had certain flaws. He was met particular includes about getting rid of those nras and say, people didn't like me for this reason I think I'll khainks that part of my person natural.

MAUREEN CAVANAUGH: Like sweed sden gats bee.

FRANK PARTNOY: Exactly and he was able to be just as charming ultimately, but one of the things that happens to people like that, is they start to lose the bit to recognize themselves over time and as he khaenksd his person natural more and more, he became this heroic epic figure but I think he also lost touch with himself.

MAUREEN CAVANAUGH: It's interesting to hear all the things he was involved in one of which was Sweden's movie industry and I was dumb founded to find out this was the man who discovered Greta Garbo.

FRANK PARTNOY: That's right, he walked into Swedish department store, the equivalent of Macy's in Stockholm and sees 125 year ovrt. Greta guv stuff son there and says, I'd like to pay for some acting lessons for you and he takes her understand his wing and they become very close and after doing a couple of B films in Sweden he introduces her to the U.S. and becomes a very prominent person in film. He sends Mary Pickford be Hollywood crowd. Much like Bernie Madoff is.

MAUREEN CAVANAUGH: So, getting down to the crux of his financial genius, he had a scheme to turn his match business into something that would allow him to basically be very, very important politically in Europe. Tell us about that.

FRANK PARTNOY: Yes, he did. So he first raised money from Americans and the deal was, he was going to take that money and bring it over to Europe. And lend it to the struggling governments of post World War I Europe. And he hopped through Poland and France and Germany, playing the role that the World Bank and IMF play today. He befriended many of the leaders of these governments. And he helped Europe survive throughout this period. Lending them millions and millions, ultimately hundred of millions of dollars. And his trick was, I'll lend you this money at low rate. Very favorable late. But you have to give me a match monopoly. And he became the Match King.

MAUREEN CAVANAUGH: And he based this scheme on an even earlier scheme called the South Sea Bubble, which had, I guess, English explorers did the same thing.

FRANK PARTNOY: That's right. This idea is not new. The idea of going to the government and acquiring a monopoly and being able to charge more. He was a student of history. He understood that the scheme was there ultimately, and when he came to the United States in 1922, that was his plan and he was able to go to the bankers and leaders of the United States, and maybe they didn't know as much about history as he did, because the South Sea Bubble didn't end well, and ultimately, his schemes didn't end well either. But in 1922 they looked good and people invested so much moneys in his securities that International Match became the most widely held stock in the world.

MAUREEN CAVANAUGH: Now, in your book, you sort of list the, the financial innovations that Ivar Kreuger came up with, that actually, exist till today. Tell us about a few of them.

FRANK PARTNOY: He invented a lot of the complex financial transactions that brought down Enron's and the banks. Special purposes entities, these off balance sheet entities, these complex securities that people have issued and used to raise money without reflecting them as liabilities.

He invented and created many of those instruments. He went offshore and incorporated and tax havens like Liechtenstein at the time was a very popular place to avoid regulation.

MAUREEN CAVANAUGH: They was the first one to do this.

FRANK PARTNOY: They were first to do this. And he invented what are known as A and B shares, people familiar with New York Times or Google is govern. A shares have one vote. B shares have 1/1000th of a vote. Most of us own B shares. He was the father of the financial markets in many ways and the response to his collapse, securities laws which govern our markets today. So for better and worse, he really is the father of modern financial markets.

MAUREEN CAVANAUGH: Now, what differentiates what he did from the Ponzi scheme. Because the Ponzi scheme is something that we're quite familiar with.

FRANK PARTNOY: That's a great point, because people say Ponzi scheme and people know it's pyramid. But Charles Ponzi was small time. He is rdz d about fifteen million dollars. Almost fed me discovered his scheme and the big difference between Ponzi and Kreuger wasn't just size, it was that Kreuger started off legitimate. Like Bernie Madoff. As it got bigger and bigger, it got out of control. Many of the greatest pyramid screams of all time are those that start out. Ponzi schemes now. Now back in 1932, 1933, everybody referred to these as Kreuger schemes. And I think maybe just Ponzi sounds better. It's a more, flowed off the tongue better than Kreuger. So we now call Ponzi, but back then. They were

MAUREEN CAVANAUGH: And, I think it's very interesting that you point out that, the majority of his career, the majority of Kreuger's career was completely legitimate.

FRANK PARTNOY: That's right, and I think people who are now struggling to get inside the minds of Bernie Madoff or the leaders of the bank to try to understand how these people can do something so awful. Can go back and understand that the way these things happen typically is not somebody deciding I'm going to be a criminal. I'm an evil person. It happens slowly over time. They reach, stretch, start off legitimate, but ultimately bite off more than they can chew and that's when they collapse. And I think we're struggling now to understand how so many people could have led us down this path. We trusted them and they betrayed us. I think it's impossible to get inside their minds today. They're not talking. And so I hope that Ivar Kreuger is away for us to go back and to history. And to understand the mindset that leads to these massive financial frauds in a way that's just not possible from looking at these people today.

MAUREEN CAVANAUGH: In writing this biography, what did you find out about his mind? What was going on in his mind?

FRANK PARTNOY: He was a troubled mind. I think like a lot of great figures in finance and politics, he suffered from some mental problems. I think he was likely bipolar, he suffered from depression. He created a silence room in his match palace where he would lock himself up for days and just sit there and brewed in silence, over what he should do and what he had done. And he would emerge in these periods of mania and go wild and be an avid partier with the Hollywood types and so forth. I think he had the intense bipolar nature, and that ultimately, that led to his demise, as he over extended himself. And I think lost sight of his core, where he had come from, and his values that had built up a legitimate business and I think at the end he really did snap. And there are various stories about his demise.

He was discovered in his Paris flat in the built legal, and people debate whether he committed suicide or was murdered.

He had a competition going with Jack Morgan and some people think maybe one of Jack Morgan's hinchmen murdered him. Some people think he faked his own suicide and escaped into the night. Part of it certainly was a massive massive break dpoun under the intense pressure of the time.

MAUREEN CAVANAUGH: Now, part of his legacy is the Security and Exchange Commissions rules and regulations. So not only does he leave us these derivatives and the offshore investments and so forth. He also, because of what happened, because of the meltdown, because he lost so much money for so many people, Wall Street got regulated.

FRANK PARTNOY: They did, and the reaction to discovering that this man, this great man, had put a bullet in the front, in the center of his heart was incredible. It was front page news every day. People talked about it for months and months. Imagine if we woke up tomorrow and Warren Buffet was discovered. And people were astonished and shocked. There was an enormous investigation. Price Waterhouse 60 plus volume. And hearings in Congress and his bankers and, and ford to explain how they let this happen. And people saw ,we need some rules to protect us. We need some regulations that will require companies to disclose more information, and it will protect investors. And that's where we got our securities laws.

MAUREEN CAVANAUGH: That's back in the 1930s, where these laws started and now we find ourselves in 2009 maybe needing some new laws, and you recently wrote an OpEd piece in New York Times on a danger you see in current Wall Street's reform package. What is that danger?

FRANK PARTNOY: The danger is in these instruments call derivatives. There's are the complex financial instruments that were the core of the crisis. This is a market that's so huge, it's 600 trillion dollars. Just take a minute to think about that. 600 trillion dollars, and it's largely unregulated. The administration has put forth a proposal to regulate these markets and I think the danger is that the lobbyists on behalf of these instruments, will lobby for holes. It's like thinking about a piece of Swiss cheese. They lobby for some exceptions from the rules. And then over time, the holes get bigger and bigger and bigger. And this has happened in the history of regulation of these complicated financial instruments, that the holes keep getting bigger and bigger. And so my concern is that we'll go through some hearings, have this deregulation, but they'll be some holes.

And that, if we don't patch those holes, that in another five years or ten years, we'll go down the same road in the shadow market, this very complicated market.

MAUREEN CAVANAUGH: Interesting. And in my last question to you about your book, in reading your book, it seems that you have, developed an empathy, or grudging admiration for Ivar Kreuger. Why is that?

FRANK PARTNOY: People called him a crook of the most attractive kind. I think he's a very charming figure and he was able to charm everybody. I think people who read this book will be charmed by him and gilded by him, and that's part of the story of how people are able to coax us out of our money. It's not the simple trickster. It's the complicated compelling personality.

The other things, he did many things, involved in the construction of great buildings, Plaza and beautiful buildings in Stockholm. Where the Nobel Prize ceremonies are held. Patron of the arts, supporter of film as we discussed earlier. And so, he is a compelling personality, and in order to become a great financial crook, you have to have a truly great personality. And Bernie Madoff was the same way, I think. These are unbelievably smart and charming and attractive people.

In fact, many of Ivar Kreuger's investors ended up getting money back, as the bankruptcy estate worked through his assets in the same way Bernie Madoff trustee is working through assets. They found value there. We'll see if they find value Madoff's investments. I think it's a complicated story. He was a nuanced person. He was a great person. One of the most incredible things the story has been forgotten, that this enormous figure of the era, who was on the cover of magazine after magazine, week after week who everybody talked simply slipped away. So one of the things I wanted to do in writing this book is revive him so people who don't know the story of the Match King can know his story and appreciate what an incredible man he was, for better and worse.

MAUREEN CAVANAUGH: The book is called, The Match King: Ivar Kreuger, the Financial Genius Behind a Century of Wall Street Scandals, and the author is Frank Partnoy. He's been my guest.

FRANK PARTNOY: Thank you so much for inviting me.

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