Page last updated at 12:43 GMT, Friday, 13 March 2009

Kreuger: The original Bernard Madoff?

By Bill Wilson
Business reporter, BBC News

Ivar Kreuger
Ivar Kreuger built a global industrial and financial network

Enraged investors, phantom profits, weak auditing, and a clamour for tighter regulatory control - it all sounds like the case of disgraced financier Bernard Madoff.

However, the year in question is 1932, not 2009, and the man sending shock waves through the financial world was Swedish business genius and swindler Ivar Kreuger.

Kreuger had the fantastic idea of turning his family's match-making industry, based in provincial Sweden, into the leading provider of loans to the shattered economies of post-war nations during the 1920s.

He raised cash through a number of share and bond issues in the US, and then loaned the money to national governments in exchange for match-making monopolies in those countries.

There are so many parallels with Madoff. He was the original Madoff - it was the financial scandal of its age
Professor Frank Partnoy, University of San Diego
Like Madoff he promised fantastic rates of returns to investors, as high as 25%, but the loans he provided to countries such as Germany were returning only 6% to him.

Money was shuffled between dozens of subsidiaries to provide the illusion of profits, while Kreuger speculated with other people's cash in an attempt to fill the interest rate gap.

But the stock market crash of 1929 delivered a mortal blow to his speculating, and the whole house of cards came crashing down in 1932 as Kreuger committed suicide.

'Leading lender'

Frank Partnoy, is author of a new book about the Swede: The Match King - Ivar Kreuger and the Financial Scandal of the Century.

"There are so many parallels with Madoff. He was the original Madoff - it was the financial scandal of its age," Professor Partnoy, who teaches law at the University of San Diego, told the BBC.

Poland, Danzig, Greece, Ecuador, France, Yugoslavia, Hungary, Germany, Latvia, Romania, Lithuania, Bolivia, Estonia, Guatemala, Turkey

"The last days of both are strikingly similar - trying to give money or valuables to their friends and family while holed up in a luxury apartment.

"Even though people don't remember Ivar Kreuger he was the leading private lender to Europe in his day. People became enamoured with his idea of raising money in the US to lend in Europe in exchange for match-making monopolies."

Over the period of seven years from 1922 to 1929, as share-buying and investment mania hit the US, things went well, but then disaster struck.

Cover of book The Match King
The Kreuger story has been investigated by Professor Partnoy

"In October 1929 he made his massive $125m loan to Germany, just days before the stock market crash of Black Monday and Black Tuesday, and it was about that time that his troubles really began," says Professor Partnoy.

But, ironically, in 1929 at the height of the great stock market crash, confidence in his firms grew even more, as they continued to return large dividend payments, even though Kreuger's ability to generate speculative returns was being squeezed.

"He made people confident," observes Professor Partnoy, who a few years ago gave expert testimony to the US Senate committee investigating the collapse of Enron.

"He had the same sort of confidence that Warren Buffett - who is entirely legitimate - has now. He was seemingly able to survive the crash, and continued to pay his returns."

However, at the same time, as the Canadian-American economist and historian John Kenneth Galbraith described it, Kreuger's "great aversion to divulging information, especially if accurate, had kept even his most intimate acquaintances in ignorance of the greatest fraud in history".

'Handsome' dividends

Meanwhile, Kreuger's financial methods were becoming increasingly devious.

He had always sailed close to the edge of legitimacy; keeping liabilities "off balance sheet", establishing a network of more than 200 firms that bamboozled his auditors and bankers, and inventing non-voting shares.

He also conjured up "options", "derivatives" and stashed cash away in secret subsidiaries in Liechtenstein and Switzerland.

He paid the huge dividends to sustain confidence in his businesses
Professor Frank Partnoy

Kreuger then began Enron-style financial engineering, reporting profits when there were none, and paying his generous dividends by attracting new investment or plundering existing ones.

"He paid the huge dividends to sustain confidence in his businesses," says Professor Partnoy. "A business that pays out handsomely every year is going to be more attractive to investors than one that pays out patchily, a year here and a year there."

Meanwhile, Kreuger was seen as a business titan of the times, with his firms seemingly triumphing during the crash.

President Herbert Hoover regularly sought out his advice about the problems affecting the global economy, and he consorted with Hollywood stars.

He was hailed on the cover of Time magazine, and was seen as a hero in countries such as France, which he had bailed out with a huge loan.

'Valuable businesses'

According to Professor Partnoy, there are differences between the feted Kreuger and the obscure Madoff.

"What Ivar did wasn't as simplistic as a Ponzi scheme," he says.

"There was an underlying legitimate base to what Ivar was trying to do, but he was paying out more money in returns than his schemes were earning."

A Ponzi scheme is a fraudulent investment scheme that pays investors using money paid in by other investors rather than real profits.

Kreuger also had businesses outside of match-making. His industries included film making (he discovered Greta Garbo working in a department store), construction, mining, and communications - he owned the phone giant Ericsson.

Bernard Madoff at Tuesday's hearing
Mr Madoff's scheme was a straightforward Ponzi fraud

He wasn't a complete fraud and his Swedish Match firm exists to this day.

"When the bankruptcy trustee started trawling through Ivar's affairs he found all sorts of valuable businesses," observes Professor Partnoy.

"The bondholders did get a large chunk of their money back. In contrast, where did the billions of missing money in the Madoff scheme go?"

In March 1932 Kreuger shot himself in a hotel room in Paris, just before a meeting with bankers, at which he would have faced some extremely tricky questioning.

A number of forged bonds had been found in his safe - on which he had also forged signatures - which were then used as security against his loans.

'Kreuger Crash'

At the time of his death his Swedish bankers estimated he was third-richest man in the world.

And, as with Madoff, the recriminations began apace once the extent of his deception became known, and investors were hit by what was known as the "Kreuger Crash".

Regulators were lambasted by Congress for their light-touch approach, and in the fallout a raft of new laws and regulatory bodies were created, including the Securities and Exchange Commission.

His colleagues and advisors were publicly humiliated, and the hunt began for anyone else in the know about the deception.

"A generation of people have forgotten Ivar," says Professor Partnoy.

"But if they look back they can see he was arguably the Madoff of his day. It is going to take years to get to the bottom of the Madoff case, as it did with Ivar's empire too."

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