"The more things change, the more they stay the same"
- Jean-Baptiste Alphonse Karr
- Jean-Baptiste Alphonse Karr
In a nutshell, this is my take from The Match King, a book on Ivar Kreuger by Frank Partnoy.
The official name of the book is "The Match King: Ivar Kreuger and The Financial Scandal of the Century." It tries to bring out a long forgotten "scandal" from the period of 1920s rapid expansion in US, followed by The Great Depression. Ivar Kreuger is the "architect" of this scam, whose story is well captured in this pleasant narrative.
Hailing from a small Swedish town. Ivar went on to control 3/4th of world match sticks production. He became one of the largest financier, taking over from Jack Morgan (son of JP Morgan), and bailed out many war torn (WW 1) European governments.
After establishing match monopoly by borrowing and consolidating the industry in Sweden, Ivar sets out for US with a brilliant idea. Because of stringent monopoly regulations in US, there were no major monopolies for US citizens to invest in. Enter Ivar, who has ability to raise capital and lend it to European countries, in return for match monopolies in those countries. In return, there was a promise of high dividends for the optimistic American investors.
This was the time of poor disclosure norms for listed entities. Financial statements were at best a page long, and that too infrequent.
"In 1926, only 242 of 957 companies listed on the New York Stock Exchange published quarterly reports. Nearly a third of listed companies did not issue reports at all, primarily because they had been members of the Exchange for many years and had nondisclosure agreements that were grandfathered from when they first joined. Newly listed companies filed quarterly reports, but they lacked detail. Listing requirements varied by company and were open to negotiation."
This was also the time of 1920s where optimism of Americans were running high.
"Radio sales doubled in 1923, then tripled in 1924. On average, nearly every family had a car, and drivers were branching out from black Model Ts to an assortment of new makes in colors ranging from “Florentine cream” to “Versailles violet.” Average people bought items they hadn’t imagined spending money on just a few years earlier: from Listerine mouthwash and crossword puzzle books to vacuum cleaners and meat slicers to new golf clubs and even property in Florida."
"As stock trading became more popular during the early 1920s, so did this kind of cognitive error, and the widespread passion about markets led investors to focus on winners more than losers, like gamblers who vividly remembers cashing a winning ticket from a particular race at the horse track, but conveniently forgets that she lost money overall."
This was the perfect time for Ivar to raise money with his "too good to be true" offering and he orchestrated this amazingly well. The book claims that he was inspired by Charles Ponzi. But unlike Ponzi, he intended to create real businesses and assets and not defraud anyone.
All this was made possible with multiple holding companies and subsidiaries in different countries and havens. This ensured that there were multiple auditors with limited sight. Innovations like "B shares" helped him keep the control and keep raising money.
Throughout his efforts went in managing his and his investment's perception in order to keep raising money and pay high dividends to older investors along with purchasing business interests.
"He knew markets reflected emotions and perception. In finance, there was no such thing as reality. There was only, as Pierpont Morgan had intimated, what traders thought of a man's character. If everyone saw Ivar as shining beacon of confidence, his securities would maintain their value, even if the rest of the market crashed."
But as it happens each time, with 1929 crash, things started to become tight. Panic reined in and liquidity dried up. People's optimism started to fade away and questions poured in about how Ivar is earning so much.
He was cornered when he failed to raise incremental money at a critical due date. The result, he shot himself, leaving all the mess for his bankers and investors and governments to clear.
His death brought in "changes" in the system in US. A new Securities Act was passed in 1933. A year later, Securities Exchange Act, which created Securities Exchange Commission (SEC). This act also gave american shareholders a right to sue the companies for fraud. One of the most important and controversial right.
World has seen many regulations come in with respect to raising money and protecting the interests of shareholders. The disclosure norms have become highly standardized and stringent. In fact, non-reporting of results has now become a major red flag on the company. Yet, time and again, we have seen frauds being committed by companies world over. World continues to encounter Ivars and resultant financial scandals.
As author says, "Financial scandals are complicated and their investigations typically lead to the search for a human face: John Law of the Mississippi Scheme, Robert Harley of the South Sea Bubble, Michael Milken of Drexel Burnham Lambert, Jeff Skilling of Enron, or Bernard Madoff . Ivar Kreuger became the face of the International Match scandal".
There are things certainly beyond a face committing a fraud.
This book and every mania shows that a fraud is a culmination of entire system. Overeager investors, sloppy auditors, independent directors, vague regulations, lack of law enforcement, etc. Each scandal brings with it a new lesson, new regulations and new systems.
But the underlying fundamental principles remain the same, driven by how people behave. History keeps on rhyming and things remain the same.
Overall, a worthy read to understand how scandals (or unsustainable businesses) build up bit by bit, over the years, and how they keep getting fragile with time, before their ultimate collapse.
Hailing from a small Swedish town. Ivar went on to control 3/4th of world match sticks production. He became one of the largest financier, taking over from Jack Morgan (son of JP Morgan), and bailed out many war torn (WW 1) European governments.
After establishing match monopoly by borrowing and consolidating the industry in Sweden, Ivar sets out for US with a brilliant idea. Because of stringent monopoly regulations in US, there were no major monopolies for US citizens to invest in. Enter Ivar, who has ability to raise capital and lend it to European countries, in return for match monopolies in those countries. In return, there was a promise of high dividends for the optimistic American investors.
This was the time of poor disclosure norms for listed entities. Financial statements were at best a page long, and that too infrequent.
"In 1926, only 242 of 957 companies listed on the New York Stock Exchange published quarterly reports. Nearly a third of listed companies did not issue reports at all, primarily because they had been members of the Exchange for many years and had nondisclosure agreements that were grandfathered from when they first joined. Newly listed companies filed quarterly reports, but they lacked detail. Listing requirements varied by company and were open to negotiation."
This was also the time of 1920s where optimism of Americans were running high.
"Radio sales doubled in 1923, then tripled in 1924. On average, nearly every family had a car, and drivers were branching out from black Model Ts to an assortment of new makes in colors ranging from “Florentine cream” to “Versailles violet.” Average people bought items they hadn’t imagined spending money on just a few years earlier: from Listerine mouthwash and crossword puzzle books to vacuum cleaners and meat slicers to new golf clubs and even property in Florida."
"As stock trading became more popular during the early 1920s, so did this kind of cognitive error, and the widespread passion about markets led investors to focus on winners more than losers, like gamblers who vividly remembers cashing a winning ticket from a particular race at the horse track, but conveniently forgets that she lost money overall."
This was the perfect time for Ivar to raise money with his "too good to be true" offering and he orchestrated this amazingly well. The book claims that he was inspired by Charles Ponzi. But unlike Ponzi, he intended to create real businesses and assets and not defraud anyone.
All this was made possible with multiple holding companies and subsidiaries in different countries and havens. This ensured that there were multiple auditors with limited sight. Innovations like "B shares" helped him keep the control and keep raising money.
Throughout his efforts went in managing his and his investment's perception in order to keep raising money and pay high dividends to older investors along with purchasing business interests.
"He knew markets reflected emotions and perception. In finance, there was no such thing as reality. There was only, as Pierpont Morgan had intimated, what traders thought of a man's character. If everyone saw Ivar as shining beacon of confidence, his securities would maintain their value, even if the rest of the market crashed."
But as it happens each time, with 1929 crash, things started to become tight. Panic reined in and liquidity dried up. People's optimism started to fade away and questions poured in about how Ivar is earning so much.
He was cornered when he failed to raise incremental money at a critical due date. The result, he shot himself, leaving all the mess for his bankers and investors and governments to clear.
His death brought in "changes" in the system in US. A new Securities Act was passed in 1933. A year later, Securities Exchange Act, which created Securities Exchange Commission (SEC). This act also gave american shareholders a right to sue the companies for fraud. One of the most important and controversial right.
World has seen many regulations come in with respect to raising money and protecting the interests of shareholders. The disclosure norms have become highly standardized and stringent. In fact, non-reporting of results has now become a major red flag on the company. Yet, time and again, we have seen frauds being committed by companies world over. World continues to encounter Ivars and resultant financial scandals.
As author says, "Financial scandals are complicated and their investigations typically lead to the search for a human face: John Law of the Mississippi Scheme, Robert Harley of the South Sea Bubble, Michael Milken of Drexel Burnham Lambert, Jeff Skilling of Enron, or Bernard Madoff . Ivar Kreuger became the face of the International Match scandal".
There are things certainly beyond a face committing a fraud.
This book and every mania shows that a fraud is a culmination of entire system. Overeager investors, sloppy auditors, independent directors, vague regulations, lack of law enforcement, etc. Each scandal brings with it a new lesson, new regulations and new systems.
But the underlying fundamental principles remain the same, driven by how people behave. History keeps on rhyming and things remain the same.
Overall, a worthy read to understand how scandals (or unsustainable businesses) build up bit by bit, over the years, and how they keep getting fragile with time, before their ultimate collapse.
