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The Original Bernie Madoff
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The forgotten saga of Ivar Kreuger—a financial fraudster from the 1920s who spun lies to friends and investors, was put under surveillance in his Park Avenue apartment, and sparked an epic bankruptcy scandal— provides valuable lessons for today’s economic crisis.
We think the story is new: On an icy winter morning in New York, a financial fraudster stuffs envelopes with valuables, checks, and cash to send his family and friends. He wires funds to offshore accounts, and spins lies to colleagues and relatives about where the money has gone. He is nabbed and put under 24-hour surveillance at his Park Avenue apartment so he will not suffer harm, either from his victims or himself. When the world learns his story, his face is on the front page of every newspaper for months.
One historian wrote that Kreuger “must surely have been the best-liked crook that ever lived.”
This man might sound like Bernard L. Madoff, the now-infamous financier who admitted to a $50 billion financial pyramid scheme and was arrested in December. But the story is not about Madoff, and it did not happen last year. It is about Ivar Kreuger, an incredible man from three generations ago, the world’s most eligible bachelor and the most sought-after economic and political counselor, a man who advised President Hoover, discovered Greta Garbo, and parlayed a Swedish match monopoly into one of the world’s greatest fortunes, only to lose it all—and, it originally appeared, his life—in a scandal so epic it caused the bankruptcy of a leading investment bank and led Congress to enact the 1930s securities laws.
At the time, Ivar Kreuger’s story was played out in popular film, theater, and numerous bestselling books, so much so that it seemed inconceivable that he could be forgotten. Historian Frederic Whyte wrote that he “must surely have been the best-liked crook that ever lived.” The investigation of his apparent death, and the unwinding of his companies, continued for decades.
Yet memories of Ivar have faded, even more than the blue telex printing on the thousands of cables he sent from luxury liners and five-star hotels as he moved among offices in New York and throughout Europe. Many of those telegrams, along with decades of personal letters and financial statements, have sat unexamined for years in a castle in Vadstena, Sweden. Piled end to end, these documents would stretch for miles.
The Match King. By Frank Partnoy. 288 pages. Public Affairs. $27.
For the past six years, I have researched this man’s doings and misdoings, and have distilled the elements of his story that are most relevant to investing and business today. My hope is to resurrect him for anyone who is interested in markets, or who worries that, left unattended, even the most compelling stories in the cycle of history can disappear. There are valuable lessons in his rise and fall. His inventions are the predecessors to today’s subprime derivatives, off-balance-sheet transactions, and offshore subsidiaries. There are eerie similarities between his dramatic collapse and the current financial crisis.
Although many people compare Bernard Madoff to Charles Ponzi, that comparison is unfair to Madoff. Ponzi was a small-time operator in postal reply coupons, and a journalist exposed him within months. Investment pyramids are known today as “Ponzi schemes,” Ponzi didn’t invent them, or even perpetrate a major one.
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Lloyd Grove is editor at large for The Daily Beast. He is also a frequent contributor to New York magazine and was a contributing editor for Condé Nast Portfolio. He wrote a gossip column for the New York Daily News from 2003 to 2006. Prior to that, he wrote the Reliable Source column for the Washington Post, where he spent 23 years covering politics, the media, and other subjects.
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Christopher Buckley's books include Supreme Courtship, The White House Mess, Thank You for Smoking, Little Green Men, and Florence of Arabia. He was chief speechwriter for Vice President George H.W. Bush, and is editor-at-large of ForbesLife magazine. His new book is Losing Mum and Pup, a memoir. Buckley's Daily Beast column is the winner of an Online Journalism Award in the category of Online Commentary.
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Frank Partnoy is a law professor at the University of San Diego and has written several books about financial markets, including The Match King: Ivar Kreuger, The Financial Genius Behind a Century of Wall Street Scandals (just out from PublicAffairs).
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Frank Partnoy is a law professor at the University of San Diego and has written several books about financial markets, including The Match King: Ivar Kreuger, The Financial Genius Behind a Century of Wall Street Scandals (just out from PublicAffairs).
And a scant fifty years later- Reaganomics! The Republican free for all that let it happen all over again.
Didn't anybody smart enough to sleep their way into an SEC job wonder why there was all that regulation back in the day? Or were they doing too much blow with the folks at Interior...
Everybody knows that a Ponzi scheme is named after Ponzi because his type of scheme was different than the typical pyramid scheme. Madoff was the one who described his scheme as a Ponzi scheme because that is what it is was.
A pyramid scheme gets the people to do the work, the recruiting and selling of whatever it is they sell to make it appear like a legitimate business, where as the Ponzi schemer will offer to do all the work, and he only expects the person to hand over money, then old investors get some of the new investors money until the scheme runs out of new investors then it collapses due to the lack of new money, or when a demand for getting money back is greater than the amount of money which can be put back in.
That is why Madoff's scheme kept going for so long, cause so many people invested in it without doing any work. It was the lack of work and connection to the where the source of returns came from that hid what the scheme was, from investors and SEC, making the IRS one if the scheme's inadvertent benefactors.
This scheme could have have gone on for ever, as long as more money was being put in than was being taken out. That is why it grew the way it did.
They were all blowing into the bubble, and then pop.
No one is comparing the men, Bernard Madoff to Charles Ponzi, they are calling the scheme what it is, a ponzi scheme because calling it an affinity scheme would be harder to imagine what it is.
A ponzi which relies on security fraud and deceiving investors in investing money that won't actually be invested is a one layered scheme, whereas the multi layer schemes in typical pyramid schemes, collapse a lot faster.
A ponzi scheme is really an affinity scheme. That is what it should be called, but no one would know what you were describing if you called it that.
If anybody had looked into where the returns were coming from they would have known what it was, which matters more than the name they use to describe it.
But Madoff was allegedly able to hide the nature of the scheme, through the proprietary rules which protect cash flow and inadvertently making IRS one of its biggest, benefactors, and maybe at the end the only benefactor, if people have to give back their "earnings" and land up at sum zero, technically IRS may be the only one at the end who actually made money off this, not counting Madoff and alleged company.
If you are an investor who was defrauded from this, you would call it a horrible rip off.
There is a huge difference between Kreuger and Madoff schemes. Krueger's scheme was not a ponzi scheme, Madoff's scheme was. The fact was what Madoff did was such a simple ponzi scheme, and wasn't caught for so long is incredibly outrageous, that is what the issue is. There was no trades. It would have been easy to have audited Madoff's scheme compared to Kreuger's. In madoff's scheme, his accountant had his own alleged fraud going, he was not doing the job he was supposed to be doing, in Kreuger's case he made it very difficult to audit.
[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. ] excerpted from http://news.bbc.co.uk/2/hi/business/7939403.stm
[He also conjured up "options", "derivatives" and stashed cash away in secret subsidiaries in Liechtenstein and Switzerland. 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. ] excerpted from http://news.bbc.co.uk/2/hi/business/7939403.stm
["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. ]excerpted from http://news.bbc.co.uk/2/hi/business/7939403.stm
The secret appears to be "become too big to fail". When the boys in power all share a vested interest in you prospering, and your ulitmate survival, you will survive and prosper.
Gives a new meaning to Mr. Spock's "live long and prosper".
Now, at the risk of sounding like a broken record, it bears reminding that the stock of the richest man in the world, Warren whatsisname is too expensive to purchase except by the uber-rich. This makes it too big to fail.
The billions funneled into Berkshire Hathaway through the backdoors of the AIG counter-party agreements, and through the outsized holdings in Wells Fargo continue to keep this balloon over-inflated.
Yesterday's close $94,390 per share for this "value" investing holding company speaks for itself. If my rantings strike you as "sour grapes" keep in mind that when the returns were rolling in for the Madoff investors, any questions raised were simply dismissed in similar fashion.
my dad once charged a guy twice for the same thing at his store, and now I got a hankering to get a ponzi scheme going-- coincidence? I don't think so (and can I really get away with it for 40 years? that is so cool)
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