He Said That? 10/24/17

From Edward Chancellor, “A Fortune Up in Smoke,” a review of Frank Partnoy’s book The Match King, a biography of Ivar Kreuger, 4/17/09, wsj.com:

Boom times are always accompanied by fraud. As the Victorian journalist Walter Bagehot put it: “All people are most credulous when they are most happy; and when money has been made . . . there is a happy opportunity for ingenious mendacity.” Bernard Madoff has now joined the ranks of great financial villains whose illicit activities have been exposed by market downturns. Among this select group none is more intriguing than Ivar Kreuger, the Swedish entrepreneur known as the Match King.

Kreuger’s suicide in the spring of 1932 led to the uncovering of the Depression era’s leading financial scandal. Soon after, accountants looking into his holding company, Kreuger & Toll, found a black hole in the balance sheet that was bigger than Sweden’s national debt. The failure of Kreuger’s U.S. investment vehicle, International Match, brought down the venerable Boston bank Lee Higginson & Co. And Kreuger’s downfall provided the impetus for the securities regulation of the New Deal.

Nevertheless, the tale of the Match King holds lessons for our own day and for future generations. First, as Bagehot observed, loose business practices will always prevail during boom times. During such periods, the gatekeepers of the financial system — whether bankers, professional investors, accountants, rating agencies or regulators — should be extra vigilant. They are often just the opposite.

Kreuger was allowed to go so far because his bankers, Lee Higginson & Co., were more concerned about fees and the desire to best their arch rival, J.P. Morgan, than about the return of their money. As one partner said after the collapse: “I suddenly knew we had all been idiots.” Amen. Kreuger’s auditors, Ernst & Ernst, were also busy collecting fees for consulting and tax advice and didn’t look too closely into the Match King’s opaque dealings.

Regulation can do little to prevent this state of affairs from repeating itself. Regulatory agencies were created to protect the world against future Ivar Kreugers. Yet the same agencies failed to heed warnings about Bernard Madoff. Policymakers are now calling for new rules that, they say, will prevent future crises. The tragic, timely story of “The Match King” suggests that this is wishful thinking.

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