Founders - #348 The Financial Genius Behind A Century of Wall Street Scandals: Ivar Kreuger

Starting point is 00:00:00 The man whose life forms the basis of this book was a master of investor psychology. The match king had perpetrated the greatest financial fraud in history. The world now saw an epic betrayal. A villain, not a hero. A schemer, not a planner. A destroyer, not a builder. Ivar became the Judas of the financial markets. Ivar's company suffered a similar fate to his body.

Starting point is 00:00:24 Panicked selling reduced them to dust. Less than two weeks after the public learned of Ivar's death, investigators from Price Waterhouse declared that his companies were insolvent. The Swedish committee investigating his construction firm concluded that its 1930 balance sheet grossly misrepresented the true financial position of the company. Investigators estimated the loss at $2 billion, more than Sweden's national debt. The accountant said Ivar had treated his public companies as personal assets. He had wired millions of dollars among secret subsidiaries

Starting point is 00:01:00 and arranged for dubious intercompany transactions. The details were too complex to unravel. At first, it was difficult for some people to accept Ivar as a fraud. He had helped Europe avert a financial crisis. He was a friend and advisor to government leaders, including the American president Herbert Hoover. At the height of the Roaring Twenties, Ivar Kroger was one of the richest men in the world.

Starting point is 00:01:25 Through an ingenious plan to sell stakes in foreign matchstick monopolies to American investors, he built up a tremendous enterprise, paying impressive dividends to his investors. His company was one of the few to survive the crash of 1929. But shortly after his death in 1932, it became clear that the great financier was not all that he had seemed. Driven by success to adopt ever more perilous practices, Kroger had turned to shell companies, tax havens, off-balance sheet accounting, fudged income statements, and even forgery. And the Kroger crash that followed bankrupted millions. That was an excerpt from the book that I'm going to talk about today, which is The Match King, Ivar Kruger, the financial genius behind a century of Wall Street scandals, and is written by Frank Partnoy. So there is a pretty amazing story,

Starting point is 00:02:16 how I came to know about this book and read it this week. And last week, I actually got to have this incredible, almost four-hour dinner with Daniel Eck, the founder of Spotify. The dinner was me, Daniel, and my friend Patrick from Invest Like the Best. I've been a fan of what Daniel's been able to build. I think his life story, I've heard him on a bunch of other podcasts, his life story is absolutely incredible. And one of the coolest things to happen to me over the last few years is Daniel's constantly tweeting about the fact that he likes this podcast. He goes on other podcasts and mentions founders podcasts. And so during the dinner, when Daniel asked, like, can I give you a recommendation for a book to cover on the podcast? I was like, of course. And it is this book that contains one of the most

Starting point is 00:02:57 unique stories. I cannot think I went back through the list and I cannot think of another example of somebody that had a life like Ivar Kroger had. This book reads like a thriller. It's almost like he's some kind of evil genius secret agent. So before I jump into it, and keep in mind, this is not a typical biography. We're going to heavily focus on the last 10 years of his life. He shoots himself, or at least that's the rumor. Some people believe he was murdered. He shoots himself at the age of 52. But before I jump into the book and try to start explaining how he was able to do what he did, I need to differentiate because any time that you hear his name, and a lot of people don't know who he is, in his day, he was one of the wealthiest and most famous businessmen on the entire planet. And anytime you read about him or you search about him,

Starting point is 00:03:45 he's always compared to the inventor of the Ponzi scheme or the person that the Ponzi scheme is named after, Charles Ponzi. I need to read this one paragraph from Ivar's Wikipedia page that explains why that comparison is not 100% accurate. It says, Kroger's financial empire has been described

Starting point is 00:04:02 by one biographer as a Ponzi scheme. However, in a Ponzi scheme, early investors are paid dividends from their own money or from that of subsequent investors. Although Kroger did this to some extent, he also controlled many legitimate and often very profitable businesses. He owned banks, real estate, a gold mine, pulp and industrial companies, in addition to his many match companies. Many of these companies have survived to this day. He owned or controlled over 400 companies. And so his main company, probably his most profitable company, was this Swedish match monopoly company. It's called Swedish Match. It was founded in 1915, but it existed up until a few years ago when Philip Morris,

Starting point is 00:04:45 the gigantic tobacco company, launched a takeover bid for Swedish Match, and they actually took it private. They delisted it from the Swedish stock market. That just happened a few years ago. And so when the book starts, Ivar is 42 years old, and he's going to America to try to pitch American investors on this European monopoly. Something that'll become very apparent is he's got world-class charisma and selling skills. I would say a main part of his early success was based on this charisma and selling ability that he had.

Starting point is 00:05:17 But one of the most surprising things about this guy is just how simply how methodical he is. His charisma was not natural. He practiced lines. He practiced what he was going to say for hours, just like great actors do. And when I say practice, I don't mean just if he's going to do a presentation in front of a bunch of in front of an investment bank or something like that. I mean, if he's going to a party, if he's going to a meeting, he is practicing what he's going to say. And the end result is a bunch of descriptions of Ivar in the book, such as he spoke in beautifully

Starting point is 00:05:44 constructed paragraphs. When Ivar began weaving a story, a listener had no choice but to follow him to the end. He dominated every conversation. Those around him wanted him to say more, not less. Whatever the topic, he always returned to business. There was an air of greatness about him. He could get people to do anything. They fell for him. They couldn't resist his peculiar charm and magnetism. And you're going

Starting point is 00:06:10 to see world-class communication skills because we see how his first pitch to investors is simple, easy to understand. And this is an important part. It is completely legitimate what he's doing at this point. And so as I was reading this part of the book, it's talking about he's on a boat. He's sailing from Europe, going to America. And he's like, well, why is he going to America? He says, for one simple reason. That's where the money was. In 1922, America was awash in cash. Now, this is remarkable. It's amazing to me how many times the same principles you and I talk about are applicable to multiple different fields. And this is a theme that you and I are going to talk about a lot today when you analyze the career of Ivar Kroger. And so Ivar is on this boat. He's like, listen, I have a product to sell.

Starting point is 00:06:53 I need to go to where the money is. A few weeks ago, I did this episode on this guy named Joseph Duveen. This is episode 339. Joseph Duveen was the art dealer to the robber barons. And in that episode, there's a line that says, Duveen noticed that Europe had plenty of art and America had plenty of money. And his entire astonishing career was the product of that simple observation. Ivar did the exact same thing. Instead of bringing European art to America, he's bringing European match monopolies.

Starting point is 00:07:22 He's giving American investors a chance to invest in European match monopolies. And that may sound funny today, like when's the last time you bought some matches? But at this point in history, matches were a basic and essential product that everyone used. And so we need to go back to this idea that his first pitch, these are excellent communicators, right? It's simple, easy to understand, and legitimate. And so it says he wasn't trying to sell anything complex, at least not at first. His pitch involved a basic and essential product that everyone used and could understand, the match. At the time, matches were a staple. People used matches to light kerosene lamps, gas heaters, stoves, and tobacco.

Starting point is 00:07:56 Everyone carried matches. Everyone used them, and everyone bought them. So his pitch is simple. American investors could earn profits from a monopoly abroad. And what is fascinating is how he came to build this Swedish match monopoly. He uses a lot of ideas. In fact, he studied in detail, John D. Rockefeller, Andrew Carnegie, and he essentially did what you and I do in this podcast. Like we study the principles behind, right? We're not trying to copy the what, we're trying to copy the how. He copied the how. How did Rockefeller build monopoly in oil? How did Carnegie build monopoly in steel?

Starting point is 00:08:29 And he's like, oh, okay, I can take those exact same principles and I'll apply it, right? I'm not building the American oil monopoly, the American steel monopoly, but I can take those principles, export them, and actually use them to build a Swedish match monopoly and it works. And so before he starts building this monopoly in the match industry, he actually has a really successful career building this construction firm and construction partnership. And as he makes more money, he gets more interested in, instead of building bridges and buildings,

Starting point is 00:08:58 he gets more interested in constructing companies. And so he starts branching out into other industries. He's trying to build film companies and real estate and telecommunications. He's already a millionaire by this point in his life. And then he sees that his family's match business in Sweden was struggling. And he identifies, he's really smart. This guy's likely a legit genius. And so what he notices is there's a lot of characteristics in the Swedish match industry that's very similar to the early American oil industries. Essentially, if you wanted to open an oil refinery in Rockefeller's day, there was almost no barrier to entry. And so in Rockefeller's opinion, that industry is

Starting point is 00:09:34 only going to survive if it's under the complete control of one formidable individual. Ivar runs this exact same playbook in the match industry. So it says he quietly purchased match factories throughout Sweden. He was a pioneer of vertical integration. He'd buy timber tracks and chemical factories to secure the raw materials needed to make matches. This is exactly what Rockefeller did. He merged the leading competitors to form Swedish Match. It was a single dominant business. His plan was to limit competition and increase profits by securing a monopoly on match sales throughout the world, mimicking the 19th century oil, sugar, and steel trusts. Swedish Match Corporation was just one part of his empire. He controlled 10 other businesses through his public holding company. He controlled the holding company with a tight grip. Annual meetings were

Starting point is 00:10:21 perfunctory. At this point that he's coming to America, his two largest and most profitable businesses is Swedish Match and then his construction firm, Kruger & Toll. He's going to use the track record of these two successful companies in raising a ton of money. He raises hundreds of millions of dollars from American investors. And the main theme of his life and career is that too much finance ruined a legit business. His two companies were making a profit. That wasn't enough for him. He wanted to be richer. He wanted to operate on a bigger scale. He wanted to have hundreds and hundreds of different companies. And so what they would do is he would say, hey, we pay a 25% dividend. And even though his financial statements contained almost no information, it didn't matter

Starting point is 00:10:57 when investors learned that Kruger and Toll had been paying 25% dividends each year, they simply went mad. And this is an important point. He understood human psychology. He was studying the history of finance. Now, I would say he studied the history of finance. It's not clear to me. In fact, I would argue,

Starting point is 00:11:18 I always say that learning is not memorizing information. Learning is changing behavior. So he studied this, but it never affected his behavior. To me, he never really learned. It said that he had studied financial history and was aware of the infamous periods of mania and later panic, such as the South Sea Bubble of 1720 and the infamous rise and collapse of the Dutch Tulip Bubble in 1637. In those cases, men became rich as they rode the wave of investors speculating. He knew that timing was crucial, that American optimism would not persist forever. When investors were manic, they would purchase just about anything. But during the

Starting point is 00:11:53 panic that inevitably followed mania, the opposite was true. No one would buy. And so even at this point in the book, we know how his story ends. He loses millions of dollars for a ton of people. Some are just normal investors. Then he also loses a ton of money for very wealthy people. He kills himself and then he dies in disgrace. And so I'm reading this. I'm only a few pages into the book. And I immediately think of what Charlie Munger said that I feel is true over and over and over again.

Starting point is 00:12:20 And he said, the problem isn't getting rich. The problem is staying sane. The problem isn't getting rich. The problem is staying sane. The problem isn't getting rich. The problem is staying sane. Ivar was not able to stay sane. And so when he gets to America, Ivar starts to target several different investment banks. And what he does is really smart. He knows, hey, JP Morgan, they're not going to give me any money. Goldman Sachs is not going to give me any money. And so he targets this bank called Lee Higginson. It was one of the most prestigious and profitable banks in the world, but it was a step behind JP Morgan, Goldman Sachs, and Lehman Brothers. Before they get involved with Ivar, it's a seven decade old, it's a 70 year old company. By the time they're done, they are bankrupt and the partners are impoverished. And this is the first example that I referenced earlier of this. Ivar just had this fundamental understanding of human psychology, this genius level, this evil genius level way to manipulate people. And so there is a partner at Lee Higginson, this guy named Donald Durant, who's going to be his main banker throughout

Starting point is 00:13:20 this entire thing. And so as he's on his way to America, he starts seeding this. They're covering what he's doing in newspapers. He's having rumors spread within the finance industry about how profitable Kruger and Toll is and how successful Swedish Match is. He is watering the ground before he ever meets him. So Durant is devouring all the details of Ivar's trip to America. All these people around him were telling him, hey, Kruger and Toll and Swedish Match are the two hottest companies outside the United States. The colleagues,

Starting point is 00:13:48 there was a branch of Higginson & Company in London. His colleagues in London reported that Ivar already had made them a fortune on a highly unusual and complex

Starting point is 00:13:56 swap transaction. And the end of this sentence is really important, that even the sharpest investment bankers could not understand. That is another main theme that he got away with that made this scheme of his successful.

Starting point is 00:14:08 He intentionally muddied the waters to make them appear deep. Turns out in the end, he didn't even understand what he had built. We're still half a decade at least from there. So in addition to this, Ivar pays a Swedish stockbroker, this guy named Lagerkrantz, to set an appointment with Durant to inquire about syndicating some investments for some of his sweetest clients. That was the stated goal. This is what I meant. This guy's like an international man of mystery. Nothing is as it appears with Ivar Kroger. So he sends Lagerkranz before he gets there. He says, hey, I'm going to pay. He actually pays him to do

Starting point is 00:14:43 this. Go and have this meeting with Durant under this false pretense and then happen to mention me and what I'm up to. And the fascinating thing is this appeared as just an aside, just something that casually came up in conversation. Durant never imagined that Ivar had arranged it all the entire time. And so by this point, news about Ivar and how great his companies are and the fact that he's coming to New York, he's got these great opportunities. Durant's heard about it from three or four different sources. So he contacts Ivar and he's like, let's please have a meeting. Now, this is what I meant that Ivar understood human psychology. If something is limited and hard to get, that increases desire. This works for both products like Ferrari and for people like celebrities. At this point, Ivar made himself a business celebrity.

Starting point is 00:15:28 And so even though he wanted to meet Durant the whole time, when Durant asked to meet him, Ivar was like, no, I'll try to fit it in. Let's see what I can do. I read three or four books on Enzo Ferrari. There's a great story that I've never forgotten where in the early days of Ferrari, you know, I think he's making probably a hundred cars a year by this point. These, all these rich Americans are coming to Italy. They, Enzo Ferrari gives them a tour of the entire factory and he's like, come, you know, please Enzo, let me buy a car. And he's like, oh no, of course, like I'll see what I can do, but you have to know, like,

Starting point is 00:15:59 you know, it's going to be at least a few months, maybe a year, whatever the case is. And the, the American leaves and Enzo's employee walks up to him. It's like, I don't understand. Like, why did you tell him behind the factory? We have a parking lot full of unsold Ferraris. And Enzo said, yeah, but Ferrari has to be desired. It can't be something that's readily available. He understood that at the very beginning, in the very early days of the history of Ferrari,

Starting point is 00:16:22 that fundamental understanding of human psychology, that like that fundamental understanding of human psychology, that genius-level understanding of human psychology that Ferrari had, you see that Ivar Kroger had as well. And so it says, when Durant requests a meeting, Ivar responded that he was busy with other business, but he would try to arrange a time. He had learned that playing hard-to-get was a promising strategy with America's elite.

Starting point is 00:16:43 He waited a few more days to ensure that the publicity about him has saturated Lee Higginson, which is the bank that Durant works for, the bank that Ivar is going to take down. And finally, he arranged to have a meeting with Durant. And there's a great line in the book a few pages later, this meeting ultimately would lead to the destruction of their firm. And so this is the pitch to Durant. This is a great description of Ivar's plan. Listen, this plan would and did work. It was only the lying, the falsifying of his financial statements and being overextended that caused his downfall. That's why I said it's like it's not a clear Ponzi scheme. It was working. He just took it for some

Starting point is 00:17:24 reason. He risked what he had to pursue what he didn't have and didn't need. There's a great line in one of Warren Buffett's shareholder letters is about this. And when I was reading this section and what Ivar winds up doing to this, you know, taking a good plan and destroying it reminded me of something that Warren wrote about on the importance of using debt sparingly into making sure that you're putting survival ahead of every single thing else. I'm going to read you this excerpt. It comes from the book, The Essays of Warren Buffett. If you have a subscription to Founders Notes, highly recommend after this. Going back, I have 65 highlights and notes from this book. Spend the 10 minutes it takes to reread those highlights. It's excellent. And on the note, the note I left myself on this, it says, all that matters is to survive. The rest is just words. That is a quote from Charles DeGaulle. And this is what Warren Buffett says in his shareholder letters. We use debt sparingly.

Starting point is 00:18:13 We will reject interesting opportunities rather than over leverage our balance sheet. As one of the Indianapolis 500 winners said, to finish first, you must first finish. The financial calculus that Charlie and I employ would never permit our trading a good night's sleep for a shot at a few extra percentage points of return. I've never believed. This is what Warren Buffett's about to tell us that he never believed in is exactly what Ivar Kruger, the mistake that he made. This is what I mean. Learning is not just memorizing information. Learning is changing your behavior. Ivar knew this and he could not change his behavior. This is like my worst nightmare. I'm like sweaty. I have a sweat above my lip right now thinking

Starting point is 00:18:52 about this. I've never believed, go back to Warren Buffett, I've never believed in risking what my family and friends have and need in order to pursue what they don't have and don't need. And so with that in mind, this is the plan. This is the new idea, the prospect of Americans investing in foreign monopolies. You can't monopolize in America. This is after they'd broken up trusts like Standard Oil and steel and everything else. Antitrust laws prohibited a match monopoly in the United States, but nothing prevented American investors from buying into monopolies abroad. And the smart thing that Ivar does, again, he's a student of history. He's like, oh, this idea worked. I can adapt it to my circumstances, my industry, and my environment now. So he knew that there was this extraordinary scheme that was orchestrated during the 17th

Starting point is 00:19:37 century by this guy named Robert Harley. He's the one that formed the South Sea Company. Now, the history behind this is fascinating. So he forms the South Sea Company to assume England's national debt. The scheme had become known as the South Sea Bubble for the sharp increase in the price of South Sea Company shares. But the original idea is the same idea that Ivor is going to use. In exchange for the South Sea Company assuming the debt of England, of the British government, the British government gave the company a monopoly on trade to the South Seas. These government-granted monopolies are very, very common in Europe. That is another important idea. Nothing that Ivar was doing was new. He just applied it to a different industry. It was an audacious deal, but a simple idea. And the idea could be replicated.

Starting point is 00:20:19 It was not limited to England and the South Seas or to a time 200 years earlier. In theory, if a government needed money and a company wanted a monopoly, both sides could benefit from a similar compact, anytime, anywhere, with any product. Ivar's idea was to do just what Harley had done, except with matches instead of South Sea trade. Ivar would lend money to the government of Europe in exchange for a monopoly concession for the production and sale of matches within their territory. There was one problem, though. Ivar didn't have enough money to lend millions of dollars to foreign governments.

Starting point is 00:20:53 Ivar needed the backing of a major bank. You see where he's going here. It's very easy to follow what he's trying to do. I'm coming to you because I need the money. I'm going to take the money raised from American investors. I'm going to help out European governments that are in debt. In return from lending the money, they have to give me a monopoly in their country on match production and selling matches. And so this is the summary. It's very similar to what I just said. A single thread runs throughout.

Starting point is 00:21:18 Americans would lend money through EVAR to foreign governments. And in return, everyone would make unimaginable profits from match monopolies. He hooked Durant with his simple, brilliant idea, government loans in exchange for match monopolies. That's seven words, and you understand exactly what you're buying into. Government loans in exchange for match monopolies. And so I want to give a little background because I want to go back to this just insane idea to me, the fact that you risked a successful, legitimate business to speculate. And he's not alone. There's a million examples in the book. There's a million examples through history. And that's why it's, I think, so important to spend time talking about. Most of this book is

Starting point is 00:21:58 just about, you know, the last decade of his life. But there are a few examples from his early life that I think are important to go over because he wasn't just a financier and an entrepreneur. He was also a civil engineer. And before he made a bunch of innovations in finance, which we'll get to, he also made innovations in building. And so this is fascinating. This is the self-confidence of a 28-year-old Ivar. At the time, he's working on the construction of the Archbold Stadium at Syracuse University. And I thought this paragraph was fascinating. He regarded his bosses there as inferiors, men who lack the intellect and ambition of the stadium's namesake, John Deed Archbold, the great capitalist, oil refiner, and philanthropist. Ivar wrote to his parents, I cannot believe that I am intended to spend my life

Starting point is 00:22:42 making money for second-rate people. I shall bring American methods back home to Sweden. I shall bring American methods back home. Wait and see. I shall do great things. I am bursting with ideas. I'm only wondering which to carry out first. So as he's working on the construction of the stadium, he meets this other guy named Julius Kahn. Julius Kahn is the inventor of this method for making iron called Kahn iron. Kahn introduces Ivar to another Swedish engineer named Paul Toll. And that is when Ivar leaves America, goes back and founds him and Paul Toll together, formed this company, this very legitimate and winds up being very profitable construction company called Kroeger and Toll. And what he does next is rather genius because it's not like construction. Humans have been building things forever. It's like one of the most ancient industries. And yet the way that

Starting point is 00:23:36 Ivar, young Ivar, figures out to gain entry in a foothold in an existing industry is fascinating. It is by realigning incentives. And if there is a, the main character of this story is Ivar Kroger, right? The supporting character is the super power of incentives. I almost started the podcast with this long speech that Charlie Munger gives on incentives, which I'll read to you in a little bit. It is so obvious in the story, the power of incentives, like the role that it plays. And so not only do they make innovation and actually the method of constructing buildings, right? But maybe even more important than that, he's able to take customers from other existing businesses by realigning their incentives.

Starting point is 00:24:21 And so it says he came up with novel contract features. This is a really surprising way to get customers, a really surprising way to increase your distribution. So Ivar is willing to change the standard terms of construction contracts to reallocate the risks to him. If I want to build a building and I hire a construction firm, anybody who's built anything knows that these timetables, most times they're late. They're almost like they just pick dates out of thin air and just completely make it up. And so up until this point, construction firms had not been willing to take on the risk associated with delays because every day the construction firm that has not built my building is late. That costs me money. And yet I don't have any control over when they complete the

Starting point is 00:25:03 creation of the building. And so the ability to speed up the project lies with the construction company, but the risk of them failing to do so lies with the client. Ivar understood this misalignment of a sentence, and all he did is just realigned it. And he's like, I'm going to take on that risk. Construction firms, not clients, were in the best position to reduce delays. Ivar realized that the best way to minimize construction delays was to shift the risk of loss that arose from such delays to him, meaning to his firm. Then Kroger and Toll would have the incentive

Starting point is 00:25:32 and the ability to speed up a project. And here was the punchline. Clients would pay more if they knew the job would be done on time. This is really, really smart. Kroger and Toll became the first firm in Europe to commit to finish projects by a fixed date. Step one, I guarantee that your building is done by this date. Step two, if I do not follow through on that commitment, I have to pay you,

Starting point is 00:25:59 the client, $1,200 for each day I'm late. That is step two. Step three, if I finish early, you pay me for every day that I beat that agreed upon fixed date. Again, this guy is a genius at aligning incentives, understanding human psychology, and then making it very easy to understand what he's trying to explain to you. You customer hate construction delays, so therefore I will guarantee you that your building will be done by this date. Any day I go over, I pay you more money. Any day I save you, you pay me more. The end result. He repeated this formula and earned completion bonuses for every single project. Builders were happy to pay extra to know a high-quality project would be finished ahead of

Starting point is 00:26:45 schedule. Within a few years, Kruger and Toll was regarded as the best building company in Sweden. A few years later, as one of the top firms in Europe. That is really smart. It also leads us to the next part of the story. Why is this important? Because he's going to use his construction firm as collateral to enter and then consolidate the match industry. And so now he goes to banks in Sweden and says, look at this successful construction firm. I want to run this playbook that they use in America on the Swedish match industry. And I'm going to use this very successful company they have as collateral. He saw that the match industry was in the same economic position.

Starting point is 00:27:18 Oil, sugar, and steel had been a few decades earlier. There's too many owners of too many factories. Competition was driving prices down. This is when he starts doing, and he does it on borrowed money, just like Rockefeller did at the beginning of his career. You and I have gone over Rockefeller in detail. I will do probably 15 more episodes on Rockefeller. I'll read every single book on Rockefeller I could find. Why? Because Charlie Munger believes that Rockefeller built the greatest company of all time. And you see in this book, this is fascinating, Ivar is using Rockefeller-esque domination tactics. I think the last time I talked about this was on episode 324, where Rockefeller's writing all those letters to his son, if you really want to go about domination and his conquering mindset.

Starting point is 00:27:59 So this is what he's doing. Over the next eight years, Ivar parlayed a few family match factories into a conglomerate. He modernized factories and expanded overseas sales. He doubled production and tripled profits. He reduced costs by purchasing the companies that made his machines, as well as companies that supplied the chemicals that he needed to make the matches. At the beginning, everybody said Ivar's decision to enter the match business seemed foolish. They said the exact same thing about Rockefeller. Ivar would continually to vertically integrate. Now he's taking over all the factories because you need all like phosphorous, you need all these other chemicals to make matches. So he would take over the suppliers and then he would choke off his competitors so they can no longer buy the

Starting point is 00:28:36 supplies they need to manufacture the matches that they're trying to manufacture. He would destroy anyone who refused to sell with ruthless tactics. He took over supply contracts, interfered with customers, and temporarily lowered prices below cost. Rockefeller did all of those. As a result, Swedish Match was one of the few European businesses that remained profitable throughout the war. That is World War I that they are referencing. And why are they profitable? Because they are a monopoly. And so that is all important backstory because now we're back in America in 1922. He has control of these two companies, the Swedish match monopoly. He has Kruger and Toll.

Starting point is 00:29:08 He's got a bunch of these other companies, too. But those are the two main ones. And so now his banker, the one that he's going to destroy, Durant, makes this makes Durant's pitch to American investors very easy because investors, like all people, they like easy to understand stories. And his whole point is like, this guy's got a great track record. He's got a thriving business that is paying very high dividends. And so that same person with a great track record, thriving businesses, high paying dividends now has a new idea that's easy to understand, which is loans to governments for more match monopolies. Do you want to invest? Oh, by the way, one of his companies is paying 25% dividends every year. And so this is when he starts what he's going to call international

Starting point is 00:29:49 match corporation. This is the company that American investors are going to invest in. And so he purposely sets up his board. He wants people that are distracted. And so he's selecting these directors that are supposed to, quote unquote, oversee international matches business. And one of them is the nephew of John D. Rockefeller, which Ivar thought that was incredibly cool because he idolized Rockefeller since he was a young man. But why is he? This guy's named Percy Rockefeller. Why is he picking Percy Rockefeller? Ivar saw that Rockefeller was currently serving on more than 60 other boards. He was an ideal director because he was well-connected and far too busy to care about any details.

Starting point is 00:30:30 This guy's an evil genius. Ivar had idolized Rockefeller since he was a boy, and now a member of that family would serve on his board. There's a great line describing his corporate structure. It was like a corporate family tree from hell and it extended into obscurity. And so this is his main mistake. This is when he's constantly having to raise more money, raise new funds to pay down past debts and past promises.

Starting point is 00:30:56 There's an excellent line. I went and searched all my notes and highlights because I remember he said something. So I just put in the word survive and it comes right up and it says, victory in our industry is spelled survival. That is Steve Jobs. Donald Durant and his partners had no idea. This is the investment bankers that helped Ivar raise money from American investors. Okay. They had no idea how desperately Ivar needed the money. Although his businesses seemed to be thriving, he had promised too much to his early investors. He had borrowed tens of millions of dollars from Sweden's leading banks, and both Kroger and Toll and Swedish Match were paying double-digit dividends every year. The company's profits alone did not always cover these

Starting point is 00:31:32 obligations. This is when we get into this Ponzi-esque scheme that he had going on. In order for his businesses to continue to succeed, they had to continue to grow. Now, that's fine. This is 1922. They're going to grow. 1929, you cannot tap the markets anymore, and that's what causes him to go bankrupt. If they stopped growing, Ivar would not be able to repay his earlier debts or continue to pay high dividends. It wasn't rocket science. To pay a 25% dividend every year, you either had to earn 25% from your business or else raise more money.

Starting point is 00:32:01 This is crazy. A large portion of the dividends recently paid by Swedish Match and Kroger & Toll came from cash raised by International Match in America. In other words, the dividends paid to old investors came from the proceeds raised from new ones. That is Ponzi. This is crazy that he did this because unlike Charles Ponzi, Ivar's profits were real. Swedish Match made and sold billions of boxes of matches every year. Kruger and Toll built landmark buildings throughout Europe. Ivar believed that if he kept raising cash to pay earlier debts, his business would grow fast

Starting point is 00:32:35 enough to survive. What are you doing? Why are you so smart and talented and why would you put yourself in a position like that? Victory in our industry and every industry is spelled survival. Even the very best ideas fail if a company runs out of money. There's a great line about this by the founder of Sequoia, Don Valentine. He says, all companies that go out of business do so for the same reason. They run out of money. The minute Ivar's businesses stop growing fast enough and the minute he cannot raise more money, he goes out of business. He destroys everything that he spent 25 years building. For what? Why? And it goes back to what Charlie Munger said. The problem is not

Starting point is 00:33:18 getting rich. It's staying sane. He was unable to stay sane. And so right before he raises money from American investors for the first time, there's a public accountant in Sweden. And so you have Swedish regulators that are coming down. And again, there's like no laws. There's a lot of stuff that he did now would be illegal. But even then, the regulators start talking to Ivar's main banker in Sweden, this guy named Rydbeck. Rydbeck is extremely influential. And so he's able to calm down the regulators. He says, listen, it's in, it's our interest to survive. We don't need costly new rules. We don't need extra regulation. And so this report that's put out about the dangers that's happening with the Sweet Smash Company, it's phrased as advice from regulators and it didn't require any action. And so you're like, I don't understand. Why would the bank want to do that if their main customer is potentially taking risks that could make them lose money?

Starting point is 00:34:28 And the answer is incentives. The banks were not only lending money to Ivar, they were his biggest shareholders. So when the bankers help get the regulators off of Ivar, they're in turn getting the regulators off themselves. And why? Because they like those fat dividends that are coming in. And when you give people fat, effortless money, they don't question things. When Swedish Match paid hefty dividends, much of that money went to the bank. Again, straight out of Rockefeller's playbook for different reasons. Rockefeller went around in the early days.

Starting point is 00:35:02 He did something very similar in the early days of his career. The banks that he was borrowing money from to build the early days of Standard Oil, he also gave them stock and he gave them stock. So his competitors, right, his other oil refining competitors would go to that same bank. Hey, give me a loan. I need to be in business. And the bank's like, why would I do that? You're a competitor of mine now because I'm not just the banker, I'm the partner. It's incentives. It's a misalignment of incentives all the way down throughout this entire story. It is the supporting character of this story. And again, there's some banks that two leading two other banks that he raised money from

Starting point is 00:35:37 the past. They made him settle their loans and return their money. And they said, hey, you got to raise funds somewhere else. And so he did just what Duveen did. He says, OK, where's the money? America? OK, cool, you got to raise funds somewhere else. And so he did just what Duveen did. He says, OK, where's the money? America? OK, cool. Hop on the boat and go over there. And so then we go back to Ivar being this evil genius. Of course, he's selling securities in America. Lee Higginson is this big bank. They're like, hey, we need to have an auditor. So they hire a young auditor at Ernst & Ernst. And this entire story, this guy is just completely mismatched

Starting point is 00:36:08 against Ivar, and Ivar manipulates him every time. But again, every single time somebody looks at his books like this doesn't make any sense, this guy's name is Burning, A.D. Burning. Burning was baffled by this arrangement. He couldn't decipher the financial statements Ivar sent. Were the measures of international matches profits accurate? Did the company's balance sheet entries include the assets and liabilities of Swedish matches subsidiaries? There was no way to tell. He had to rely entirely on Ivar's numbers, which changed more frequently than a careful accountant would hope or expect. Everything he did was based solely on information provided by Ivar. And yet he never says anything. Why doesn't he say anything? Again, it goes back to incentives, which we'll get to in a minute. At the time, there's no federal member,

Starting point is 00:36:50 there's no federal securities regulation. So everything at this time in America was handled by the states. You know, it's hilarious. This goes back to this idea that anyone who bothers to look closely is confused and suspicious. And so there's like, he's able to shake or like get away from almost every other regulator, except this one random regulator and securities regulator in Wisconsin. And so they keep sending burning because he's his audit. He's a bar's auditor over and over again. It's like, what's going on with this? We need more information.

Starting point is 00:37:14 Every time they get more information like this isn't good enough. And then this is where burning should have known. Burning knows that he was a liar. And it's not even that sophisticated, sloppy and obvious. He sends. He's like, hey, Wisconsin needs all this information. I need more about international matches books. And so he sends, Ivor sends burning these financial statements. Listen to this. It was obvious that the statements had been hastily and not very carefully prepared. Why? Ivar sent balance sheets for international match for 1921

Starting point is 00:37:47 and 1922, showing that the company had 1 million shares outstanding. But international match had not even existed during those years. And look at the numbers, right? He's just completely making everything up. The company doesn't exist, okay? But he said, 1921, we made $1.9 million in profits. 1922, $2 million in profits. 1923, $2.1 million in profits. And it goes on and on. Every year, you know what he does? He literally just increases the amount of profits by $100,000. So I made 1.9, then the next year it's $2, then $2.1, then $2.2, then $2.3. That's not a joke. That is literally what he submitted to these regulators. And the first sign that Ivar could control burning is he's like, oh, you obviously made a mistake. Don't worry, I will reconcile. He fixes them to the best of his ability on the very limited knowledge that he has,

Starting point is 00:38:40 and then resubmits them to the Wisconsin regulator. But the message was very clear. His auditor would easily change numbers for him. And why he does this will make perfect sense later on. Again, I need to paint this picture here because it sounds absolutely... In the world that you and I live in, remember, which is heavily formed by the financial swindle that Ivar is perpetuating in the book. It sounds ridiculous. Like who, how is this possible? And it's, but it was par for the course. Not all, I mean, this guy took it to extreme, but this lack of information, this lack of regulation, it was just par for the course at the time. And so it says, few people seem to care that

Starting point is 00:39:17 the information was incomplete. Indeed, international matches, cursory financial statements were typical of corporate disclosures at the time. Even companies with securities listed on the New York Stock Exchange at the time would give scant detail. Fewer than one third of stock exchange companies even published, even bothered to publish quarterly reports. Another third of stock exchange companies didn't publish any reports at all. And so it's this constant mix of legitimate business, outright lies, this excessively complicated company tree structure. But again, this idea was not new. For centuries, European governments had granted monopolies of all kinds of production and trade. These were not gifts. The governments required payment in return in the form of cash,

Starting point is 00:40:01 interest, or a share of the profits. These monopolies were an alternative to state control. Industry remained in private hands, but government received a steady stream of revenue. So past examples, before Ivar did this with matches, early monopolies included cigarettes, gunpowder, liquor, petrol, playing cards, salt, and tobacco. Even the idea of a match monopoly was not new because we're in the 1920s, right?

Starting point is 00:40:25 The first match monopoly in Europe was created back in France in 1872. He's just taking an old idea and bringing it back to his modern day. And so the first deal they do, which is a legitimate deal, this is international's first deal, it's with Poland. They say, okay, we'll lend you a bunch of money in exchange for this monopoly. This is just after the war. So Poland needs, he says it has a bunch of humanitarian fiscal needs. And the deal is structured like this.

Starting point is 00:40:50 International Match would pay a royalty from its match sales in Poland to the Polish state. And the proceeds of the royalty would secure the loan to the government. As a result, all existing match factories were nationalized, combined, and then leased to international match for the next 20 years. That is a legitimate deal. That is real. And then, of course, he does something that he's always combining the legal with the illegal. When he received a copy of the signed documents, he did something rather unusual. He thought it might be useful to be able to replicate Dr. Glockwacki's signature in the future. That is the senior finance ministry of Poland who he's doing this deal with. So he gets

Starting point is 00:41:31 the documents. What does he do? He makes a copy of the signature. What are you doing? So he took a signed copy of the contract to a stamp shop and ordered a rubber stamp that would produce a exact replica. He would obtain rubber stamps of official signatures for nearly all of his match deals. I'm telling you, if you read this book, this guy's gonna just blow your mind over and over again. On the very next page, he has a problem. I need more cash from investors,

Starting point is 00:41:56 but I don't wanna give up control. So what could I possibly do? This guy literally invented the B-share, this dual class share system that is still used to this day. He devised an elegant solution to his problem. It was an ingenious piece of financial engineering that would survive the test of time. He introduced a new type of security, which he called a B-share. He divided its common shares into two classes.

Starting point is 00:42:17 Each class would have the same claim to dividends and profits, but the B-share would only carry one one-thousandth of a vote compared to one vote each for an A share. B shares could be sold to investors without affecting control. And go back to incentives. There's so many times where Ivor is kind of like he's just sloppy with his record keeping. He's kind of caught in a lie. And Durant, the main guy that's going out into the American community and saying, hey, buy these securities. Sometimes it pops up.

Starting point is 00:42:43 He's like, man, this is kind of weird. So then he goes and talks to Bernie and Ernst and Ernst. You're supposed to be the auditor. You're like, are you OK with these numbers? Like, what's going on here? But then what happened? It's incentives. It says Durant was conflicted because Ivar's financial statements were sloppy and incomplete, yet investors nevertheless clamored to buy securities of international match. So any kind of, oh, I feel a little uneasy about this. As soon as that money floods in the door, Durant's concerns are eliminated. And so when Durant tries to balance his suspicions with what's actually happening, he just like, oh, well, the money's coming in. He says everything worked just as Ivor said it would. International match began receiving

Starting point is 00:43:19 quarterly interest payments of about a million dollars each quarter, just as the Greenland Polland said. As more cash flowed in, the director's questions went away. And I think that sentence, so I double underlined that sentence. As more cash flowed in, the director's questions went away. I think that double underlined sentence is why these Ponzi deals last a long time. I remember Ed Thorpe's autobiography, one of my favorite books that I've ever read. It's episode 222. It's called A Man for All Markets. You should read the book. I've read it, I think, two or three times by now. Ed Dorp just lived a remarkable life. Listen to episode 222 if you haven't listened. It's just remarkable. This guy's like the financial history Forrest Gump.

Starting point is 00:44:01 Started the first quantitative hedge fund, created the world's first wearable computer with Claude Shannon, figured out the accounting card system to how to beat Blackjack and wrote a book about it, sold millions of copies, was the first LP at Citadel, had dinner with the 38-year-old Warren Buffett, goes out in the car, tells his wife, hey, that guy one day is going to be the richest person in America. He's just remarkable. But in addition to that, back in 1991, Ed Thorpe was doing research for a friend of his, and he discovered, he was one of the first people to discover the Bernie Madoff Ponzi scheme. And he warned his friend and client, I think at the time, hey, get your money out of here, which he did. One of the guys, and the reason I bring this up is because it's like, okay, well, why would Durant, Durant knows something's going on, but he's not acting on it. So one of the guys is at this meeting where Ed Dorp presents. He's like, no, this guy is clearly a fraud. This is clearly a Ponzi scheme. You know, this is 20 years, almost 20 years before Bernie Madoff actually gets caught.

Starting point is 00:44:52 And he finds out when after the when all the stuff came out that the client on the client list is one of these guys that was sitting at the table listening to Ed Dorp in 1991. So he knew and refused to take his money out. And it says in the book, one of the reasons he did it, because he made hundreds of millions of dollars. And so if you're making hundreds of millions of dollars over two or three or four decades with Bernie Madoff, you don't want to believe that it's a fraud or that it's a Ponzi scheme. And there's a handful of things that clearly point that Ivar knew what he was doing. So he's setting up all these subsidiaries. He's got these secret companies. He's got these Swiss companies. He's got, you know, it's like the Russian dolls, like one inside of another.

Starting point is 00:45:32 And so he sets up a new secret company that he doesn't tell anybody about. He needs a new auditor for that company. And the auditor that he selects for the new secret company was fired, was previously fired from a bank for giving himself a secret loan. And Ivar knew that because Ivar was a director of the bank. And so he knowing, think about this, this is driving me crazy. So he knowingly has, you know, bad people around him. And then you realize like, why is he doing that? He wants people that are under complete control. And so this new secret company is called Garanta. Listen to this. The man quickly got to the business of Garanta's audit. Ivar showed Lange a balance sheet for Garanta listing millions of dollars of assets and liabilities and abruptly asked him to sign, attesting that the figures were correct. That was it. Then he could go. But then he told Ivar, he's like, well, I need to look over the balance sheet as huge sums are involved. According to one account, Ivar stared at him stone-faced in response. When Lange mumbled that it would be nice to know where all the money was going, Ivar said it was being spent secretly in Poland and this should not be mentioned. Ivar then told Lange, if you

Starting point is 00:46:38 don't believe me, you can go to Poland and see for yourself. Lange nodded and then signed. And then we get to the part where I've already been exposed to Ivar and all the machinations that this guy does. And this is the first time that I mentioned something that I've mentioned to you over and over again.

Starting point is 00:46:52 I go, oh, this guy's an evil genius. And so it's not like he just taps the American investors once. He keeps going back and forth, back and back, not back and forth, back again and again. And what he does is like,

Starting point is 00:47:03 he'll raise money, take the money, sign one legitimate deal, then go back, exaggerate everything else to raise another money. It's almost like using every little milestone. It's like, yeah, he has these little milestones that he then exaggerates or in some cases lies about completely. Then he uses that data to keep going back to the markets. And so now this has been going on for a while where his main auditor of International Match Company, that guy Burning, is asking questions and still not getting the right responses, but he's not like drawing this out or refusing to do the audit or sign in

Starting point is 00:47:35 the documents. And so there was an important fundraise happening. And so what he does, he's like, oh, Burning, why don't you come, you and your wife come to Europe on an all expense paid vacation? And you should go at this specific time. And this is why, and this is when I read this paragraph, I'm like, oh my God, this guy's an evil genius. The money Ivar had spent on the Burning's vacation was well worth it. As the details of the new preferred issue were being finalized, Ivar's auditor, the one man who might've asked penetrating questions about the accounting details of the deal, had been just where Ivar's auditor, the one man who might have asked penetrating questions about the accounting details of the deal, had been just where Ivar wanted him, strolling the streets of London and Paris with his wife. The size and scale of what this guy did in the 1920s is incredible.

Starting point is 00:48:18 From 1923 to 1929, Ivar tripled his funds raised from American investors, persuaded the New York Stock Exchange to list his securities, pulled even with J.P. Morgan as a leading lender to Europe by securing master monopolies in several countries, built a 125-room match palace in Stockholm, and in general got really, really rich. And by 1929, he has 400 companies. And so now I want to get into this idea of these terrible incentives all the way down that kind of produces these predictable human behaviors. And so the next time, the last time he tapped American investors, he's got his auditor, his auditor, Bernie, walking around Paris, right? The next year, he has to sell another 450,000 shares. And so Bernie is in New York when this is happening. He's obviously very

Starting point is 00:49:06 important in this deal. And he's noticing some odd things that he says nothing about. Let's get into it. While Burning was updating international matches reports to reflect this new share issue, he discovered a reference to this thing called Garanta, this Dutch hidden company. Burning was surprised to see that Garanta owed International Match $17 million. He asked Ivar for some assurances about Garanta. What was it? Did this company make any profits or have any assets? Why hadn't he told him about this existence?

Starting point is 00:49:36 Ivar reassured Burning that Garanta's income during 1925 was $46 million and that Garanta made enough money in one year to repay its entire debt. There was no reason for concern. There's no evidence. I need to be clear. There's no evidence of what Ivar is saying. He's just saying, no, this is, I can write it down on a piece of paper, this is what it is. It's in my head. Now you're like, this is ridiculous. Like, why isn't burning doing anything? And the author asked the same question. What was burning supposed to do? Should he be suspicious of Ivar? Should Burning accuse his most important client of hiding crucial information? Would this accusation then destroy Burning's relationship with Ivar? And the destruction of that relationship, would that

Starting point is 00:50:16 ruin Burning's chances of making partner? Ivar paid all of his bills on time. His fees to Ernst and Ernst were rising. The match monopoly in Poland was real, Ivar had a reputation that was unassailable. Every day in the newspaper, there's stories about Ivar negotiating potential match monopolies in Ecuador, Estonia, Greece, Hungary, Peru, Portugal. Those negotiations were undeniably real. Ivar met regularly with government leaders. Given these facts, Burning told himself Garanta wasn't important. It couldn't be. In other words,

Starting point is 00:50:52 Burning is incentivized to believe Ivar because if he's wrong, if he's lying, all the overtime, all the extra money, oh, and I forgot, Ivar is also paying him for consulting fees and paying him on the side and everything else,

Starting point is 00:51:04 paying for trips for his wife. All of that, the trips, the extra money, the prestige, all of that goes away. And so it's at this point in the book where I think about one of my favorite passages from Poor Charlie's Almanac. I'm going to pull up my highlights now. It really, the summary of what Charlie's about to tell us. Number one, we all underestimate the power of incentives. Number two, never, ever think about anything else before the power of incentives. And number three,

Starting point is 00:51:27 the most important rule in management, get the incentives right. As usual, Charlie Munger describes it in a beautiful way. Almost everyone thinks he fully recognizes how important incentives are in changing behavior, but this is not often so. I think I've been in the top 5% of my age cohort almost all my adult life in understanding the power of incentives, yet have always underestimated that power. Never a year passes that I don't get some surprise that pushes a little further my appreciation of incentive superpower. One of my favorite cases about the power of incentives is from a Federal Express, so FedEx. The integrity of the FedEx system requires that all packages be shifted rapidly among airplanes in one central airport each night. The system has no integrity for the

Starting point is 00:52:10 customers if the night work shift cannot accomplish its assignment fast. FedEx had one hell of a time getting the night shift to do the right thing. They tried everything in the world without luck. And finally, somebody got the thought that it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service, but fault-free rapid performance of a particular task. If they paid the employees per shift and let all the night shift employees go home when all the planes were loaded, the system would work better. And lo and behold, they test this and that solution worked. And then Charlie Munger tells us another story from business history. Early in the history of Xerox, Joe Wilson, the founder of Xerox,

Starting point is 00:52:49 had a similar experience. He couldn't understand why its new machine was selling so poorly in relation to its older and inferior machine. He found out that the commission arrangement with the salesman gave a large and perverse incentive to push the inferior machine on customers. This maxim is a wise guide to a great and simple precaution in life. Never, ever think about something else when you should be thinking about the power of incentives. The most important rule in management is get the incentives right. And so if you analyze the incentives in this story, the behavior makes perfect sense. So there's a many, many ways like he's constantly fighting off. Remember, I think I've said this

Starting point is 00:53:29 multiple times over a decade. People are like, this is weird. The books seem funny. Like there's no detail. The numbers change. What the hell's going on here? And he's got other ways. You know, he's an evil genius. So he's got other ways to get people off of his trail. He has an auditor ask him for a bunch of paperwork. That paperwork is back in Sweden. And so he does something here that I remember. This is probably 20 years ago. I was reading a bunch of biographies of very famous trial attorneys. And I think it was the biography of Roy Black, if I'm not mistaken. And they had a tactic that was very interesting where let's say they were representing their client. They knew a client did something wrong. And during discovery, the other side's asking for all this information and you're compelled by law to give them that information.

Starting point is 00:54:15 So they're like, oh, hey, cool. We need to give this to you. They would essentially bury them in a mountain of paperwork. So let's say you get six months to go through discovery, they'd give you something that you couldn't read in 10 years. Now, you might happen to find that needle in the haystack early, but their goal was to just bury you, to lose you in a mountain of paperwork. And so he does this exact same thing. He sends the auditor. He says he was overwhelmed by the mountain of new information that Ivar had sent. He asked if they could meet to discuss how they might filter what he really needed to see. There were so many documents that it was impossible for them to do more than simply scan through the list of what was at the office. More insane shenanigans. You're not

Starting point is 00:54:51 going to believe what I'm about to read to you. You're just not going to believe it. He has this, he builds his match palace in Stockholm, right? He sets up at his office. So he's got a desk. You have a visitor. It's like, oh, this is great. I'm meeting one of the wealthiest and most famous businessmen on the planet. And that's what he was at this point, right? He's in this giant mansion, this match palace, right? You're sitting on the other side of the desk and you notice next to his desk is a little table. On the table is three telephones. The middle phone was fake. It was a non-working phone that Ivar could cause to ring by stepping on a button under the desk. He used it for two purposes. One, if you're visiting him and he wants to get you out of there, he'll step on the button. It rings like, oh, sorry, like I have another visitor. I have to take this call. The second thing that he would do is let's say he has a he had like Percy Rockefeller in his office. Right. He's got very famous, like important people, impressive people he wants to impress.

Starting point is 00:55:48 He pressed the button. He's literally taking fake phone calls. The phone would ring, he'd pick up and he would pretend to receive calls from various European government officials, including Benito Mussolini and Joseph Stalin. That's not it. It's not, this is not over.

Starting point is 00:56:03 Are you like, wait till we get to what's next. That evening, he threw a lavish party and introduced Rockefeller to numerous ambassadors. And I put ambassadors in quotation marks, ambassadors from various countries who actually were movie extras that he had hired for the night. This guy's got fake phone calls and hired actors. What is that? I don't think I've ever read a book like this. And so the longer this goes on, the more questions happen. The more questions happen, the higher the bills go. This is how and why his auditor winds up becoming an accomplice. And he doesn't ever get in trouble for this, by the way. And the reason that the auditor at

Starting point is 00:56:40 Ernst & Ernst, that A.D. Burning never said anything, is exactly what happened. The Ernst brothers, who run the firm that he works for, told Burning that they had an important matter to discuss with him. After seven years, Ivar had become one of the firm's biggest clients, and Burning deserved the credit. You are now resident partner. Mrs. Burning certainly was proud of her husband. Now they could afford a new apartment at 40th Fifth Avenue in Greenwich Village. They could afford a new social circle as well. The Burning's joined several of New York's most prestigious societies. And so remember, this only works if the companies keep growing and if he can keep tapping the markets.

Starting point is 00:57:19 All this is going to fall apart. And it is absolutely remarkable. The timing is remarkable because he's going to do his biggest deal ever. He's like, I'm going to get a German match monopoly. I'm going to loan the German government $125 million. He does not have $125 million to lend. This is October 29th. While he's doing this, this is one of the craziest things.

Starting point is 00:57:40 I know I keep saying that because it's a crazy story. While he's signing this deal, the stock market is closed due to panic. This is going to be the largest decline in U.S. stock market history. At the same weekend, he's signing the biggest deal of his life. And I think this is just great writing. I'm going to read this paragraph to you. On Saturday, Ivar met again with the finance minister in Berlin to finalize terms. As he held the pen about to sign the loan documents, he considered the two paths his

Starting point is 00:58:04 life might follow as a result of his decision. This audacious deal might be the miracle that would reverse the darkening psychology of investors everywhere. Think about how grandiose you have to think about yourself if you think that's even possible. Ivar imagined the buzz spreading

Starting point is 00:58:18 about his extraordinary weekend feat. When the New York Stock Exchange opened on Monday, his securities would store in value. The rising tide of optimism would make it possible for him to raise more cash and shift his personal loan obligations to American investors. With any luck, by the close of Trading Monday, the worst would be over. That was one possibility Ivar could imagine. The alternative, that the crisis would continue or even deepen, was unthinkable. He couldn't bear to consider what would happen if the market free-fall continued. What a line this is. Ivar's greatest triumph was immediately followed by the most spectacular

Starting point is 00:58:59 two-day decline in the history of financial markets. This time, there would be no recovery. Warren Buffett once said that you don't know who's swimming naked until the tide goes out. That's a great description of what's taking place here. Now he shut off from the capital markets. His bankers are suspicious now. Nothing's adding up. His auditor is suspicious. Durant, his main banker at Lee Higginson, is constantly requesting meetings. He's like, look, there's just too many coincidences here. And slowly but surely, all these financial institutions are cutting him off. For some banks, such as National City, these coincidences were too much and they stopped dealing in Ivar's securities entirely. Another bank, Credit Suisse, declared Ivar a very dangerous person and said it would not lend to any of his companies. Ivar finally conceded

Starting point is 00:59:45 that he could not afford to pay shareholders of Swedish Match. Ivar's companies would soon be in default. If Ivar goes down, so does the bank Lee Higginson. So two of the partners go to Ivar's apartment in New York to try to see what's going on. He's in a full collapse and breakdown. They are let in. Says although it was midday, he was wearing yellow silk pajamas. He's babbling. He's acting like a madman. They call a doctor. Dr. Wheelwright diagnosed cardiac fatigue.

Starting point is 01:00:13 He prescribed some sedatives. During the next three days, Ivar would cycle through episodes of mania and depression. When the drugs were working, he would simply sit and stare into space. But when the medication were off, he would stand and shout, I'm losing my mind. I can't remember. I can't think. He imagined knocks at the door. He answered the phone, even though it hadn't rung. And then he collapsed. You know what I thought of by this time? I'm at the end of the book. I think it's more fakery. I think he's completely acting. No, no doubt he's under stress. He's going to end up shooting himself. But this mania, this like,

Starting point is 01:00:43 oh, I can't remember. I'm losing my mind being in pajamas. I don't trust it for a second. This is the same guy that would sit in a room and practice lines for supposed to be casual conversations that has a fake phone that carries on fake phone conversations that hires actors and introduces you to him at parties. So this ambassador from Germany, the guy that made rubber stamps of every single government official signature that he ran across, the guy that forged documents, the guy that made up numbers on the fly. That's the same guy that is babbling like an idiot in the middle of the day sitting in his pajamas. Now, I think I think he's faking it. That would

Starting point is 01:01:20 be my guess. Shortly after he's summoned, he's got to go to this meeting with all these bankers and investors in Paris. As soon as he gets back there from America, one of his executives, one of the people that works with him is like, hey, the Swedish government's investigating you. They're investigating your personal and business finances. They've already got search warrants. They collected many of your important documents. Auditors are already scouring our books. That was the night before this very important meeting. They are supposed to have a meeting at this hotel with all these bankers at 11 a.m. the next day. That guy leaves Ivar at 6 o'clock that night. Later that same night, the night before he's supposed to meet these bankers investors at 11 a.m., he walks into a gun shop in Paris and buys a gun and a bunch of ammunition.

Starting point is 01:02:03 The next day in this hotel in Paris, a dozen anxious men are pacing the floor while Ivar's employees are assuring that everyone that Ivar would be there soon. But Oscar Rydebeck and Donald Durant were concerned, these are his two main bankers, because it was the first time they could remember Ivar being late.

Starting point is 01:02:20 After several hours, a few of them go to Ivar's Paris apartment. They enter the bedroom and they see a man lying flat on his back. There was blood on his left wrist and a red stain on his shirt. They shouted, he is not sleeping, he's dead. On the bedside table were three sealed personal notes. One of them said, I made such a mess of things that I believe this is the most satisfactory solution for everybody concerned.

Starting point is 01:02:44 They rushed back to the hotel to tell the bankers that Ivar Kroger had committed suicide. Ivar's death confirmed everyone's worst fears about the man and his finances. The investment bankers from Lee Higginson, which had sponsored Ivar for a decade, were dismayed. Soon, Lee Higginson, one of the most prestigious investment banks of the era, would file bankruptcy and the partners would be ruined. George Murname, the senior partner, later told investigators what he thought when he heard the news. I suddenly knew that we had all been idiots. And that is where I'll leave it. For the full story, I highly recommend reading the book. I've already given the book as a gift to one friend

Starting point is 01:03:22 already. I think the story is incredible and very unique. And if you buy the book using the link that's in the show notes on your podcast player, are available at founderspodcast.com. You'll be supporting the podcast at the same time. That is 348 books down, 1,000 to go. And I'll talk to you again soon. Okay, so I have three things to tell you about real quick. Stick around if you can. I think you'll find this interesting and there's some deals for you that are not available anywhere else. And so the first one is highly going to recommend if you don't, if you aren't doing so already to subscribe to Founders Notes. Founders Notes is the personal tool that I have built.

Starting point is 01:03:53 It's what I use to make the podcast. It contains all my, every single note, highlight, and all the transcripts for every single book and episode that I've ever done. And the way I would describe it, there's a bunch of different ways to use it. But there's two ideas that I think I actually have around this. And so one, it actually came from something that Charlie Munger said, the entire reason that Founders Notes exists is because he said that learning from history is a form of leverage. And I think Founders Notes is a tool that enables you to do so. He said, I read Barron's magazine for 50 years. In 50 years,

Starting point is 01:04:20 I found one investment opportunity in Barron's, out of which I made about $80 million with almost no risk. I took the $80 million and gave it to Li Lu, who turned it into $400 or $500 million. So I have made $400 or $500, $400 or $500 million reading Barron's for 50 years and following one idea. And so if you subscribe to Founders Notes, you can read my notes and highlights on a different book every single day. And over the lifetime of your career, the idea that you're not going to find one idea in there that's not additive and helpful and actually improves about a few weeks ago when I did that Tarantino episode. If you listened to that, and even if you didn't, I guess I can tell you, Tarantino had this historical database in his head of the entire movie,

Starting point is 01:05:13 the history of the entire movie industry because he was obsessed with films. He says, he has this great line in that book. He's like, I didn't go to film school. I went to films. And the reason it was important because it was in his head is one, he could call on and use, he can call on that because it was in his head is one, he could call on and

Starting point is 01:05:25 use, he can call on that information that's in his head and then use it in his work later on. And so there's many examples in that episode, right? Where he's talking about, hey, I saw this movie, you know, 1970s, and I took that exact scene or a principle from that or an idea from that scene. And for this movie I made in the 1990s or in 2000, there's exact scenes in Kill Bill that first appeared in a movie that he saw 30 years ago. And so I use this all the time. Let me give you an example.

Starting point is 01:05:49 It's from this episode that you just listened to. There's multiple times where there's something's happening in a book that I was like, wait, this is like something else. And so I just got off the phone. I had to Zoom with the team at ReadWise because I built this product in partnership with ReadWise. I've been using ReadWise since 2018. I mentioned it. You can go back and listen to past episodes and talk about how great this app is. I had no idea they'd be partnering with them. Go on other people's podcasts, talk about it.

Starting point is 01:06:11 But there was a multiple time. So the reason I bring that up is because there's a lot of different ways to use Founders Notes. There's a lot of different features in there. And so I just want to highlight one of them that I don't think I talk about enough. And essentially, it's just this giant database that you can search anytime you want for the collective knowledge of history's greatest entrepreneurs.

Starting point is 01:06:31 And it happened because how many times did the importance of incentives and understanding the superpower that incentives are come up on the podcast you just listened to? So I just talked to the team at Readwise. They just updated the keyword search in Founders Notes. It is super fast now. And so we're talking about yesterday. And I noticed it because this week, so I type in the example, real world example, I would type in power of incentives. So actually, I'm going to do this with you a lot live. Okay. So what you do is when you're when you subscribe to founders notes, and if you already have a subscription, try this. So once you log into Founders Notes, you'll see search highlights. And in that box, it's the very top page, I put in power of incentives.

Starting point is 01:07:16 I press enter. Two seconds later, it's showing me, it shows you any time power of incentives has been mentioned, either in a note, a highlight, or on the podcast because it searches transcripts too. So within that two seconds, Founders Notes searched, and in the left column, it'll show you every single book or episode. It found the word Power of Incentives or incentives from 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, if I'm counting right, 27 different instances. Inside of those instances, it's sometimes multiple times I mentioned it. So in this, oh my God, I haven't done this episode in years. John Bogle, it's mentioned twice in that book.

Starting point is 01:08:00 Same thing happened when I searched. Now this is the remarkable thing, right? This is why I think it's a tool that if you're going to invest many, many hours in listening to founders, this allows you to like there's going to be something you hear in the podcast. And you're like, damn, David said that like what was that months from now? Well, if you have access to founders notes, you just search it. You find it. That's it. That's value.

Starting point is 01:08:21 That's worth 100 times the cost right there. But I was blown away by just this, the horrible position that Ivar Kroger put himself in. So I just searched debt. That is the one keyword I put in, debt. The first thing that pulls up, so again, it pulls up, I can't even count. This is like 30 books. I don't even know how many.

Starting point is 01:08:38 But the first thing it pulls up, it's Henry Ford in this book, Today and Tomorrow. And he's talking about, it's a, the note I left myself on the highlight is, what a powerful warning to be leery of debt from Henry Ford. And I'm rereading this highlight. And then I'm like, wait a minute. First of all, I didn't remember him saying that.

Starting point is 01:08:56 When did I do this? It's from the book Today and Tomorrow. You know where this is from? It's from episode 80. I published episode 80 on July 14th, 2019. That is the superpower right there. I remember reading the book. I made the podcast on it. I'm sure I've reread the highlights, but I didn't remember this exact thing. And I wouldn't have if I didn't have access to this tool. So if you were interested, and if you're already running a successful company, I would

Starting point is 01:09:20 buy the lifetime version because that means not only do you get access to every note highlight, every feature that I've done, everything I've done in the only do you get access to every note highlight every feature that i've done everything i've done in the past you get for every future note every future highlight every ability to search every future transcript any additional features i ever add and this is a living breathing tool for me i'm building the tool for myself so i'm always going to be constantly updating it's embedded in my workflow so to do that you go to founders notes.com that is founders with an s just just like podcastfoundersnotes.com. Second thing I want to tell you about is I'm working on, so think about it. I sit in between a bunch of killer entrepreneurs, investors, business nerds, and then a bunch of people listening to the podcast I've become

Starting point is 01:09:58 friends with are also building products and services for businesses. And so I'm building this out. It'll eventually be on my website. I will let you know when it's finished. But essentially I'm going around. This also is related to why I'm doing events and this idea that comes up over and over again that relationships run the world. So I am going to friends of mine, right,

Starting point is 01:10:19 that I've built relationships with, that I talk to on the phone, that I text, that I have dinner with, that I go on walks for, all of them listen to the podcast. And I'm going to them and saying, hey, I want to build, I don't think it's up there yet, but it'll be on my website. It'll be probably under like deals or something like that. I'll let you know the name when I do it. But essentially I'm saying, hey, you're building a service. We have a good relationship. You love the podcast. You're building a service that is valuable to the people that listen to founders i want you i'm finagling them i'm collaring them in

Starting point is 01:10:51 a as nicely as possible way it's like i want you right i will talk about your product and service in return and i'm going to build this directory of people that are doing this and it's already been like i already have a ton i already talked to you about yet. And in return, I want you to give them a deal that is a discount that is not available anywhere else. It cannot be just your standard, you know, Oh, like none. No, it cannot be standard. It has to be special. And so there's only, there's two I want to talk about real quick. One is in direct relation to a main theme of the podcast you just listened to. So my friend Eric Jorgensen is, how I met him, in addition to being a fan of Founders, he wrote one of my favorite books,

Starting point is 01:11:31 which is the Almanac of Naval Robicon. I think it's like episode 191 or something like that. When he wrote that book, he was a customer of Scribe. He used Scribe Media to publish that book. He is now CEO of that company and part owner of that company. He sold well over a million copies of that book. He is now CEO of that company and part owner of that company. He sold well over a million copies of that book. And so the reason it relates to what we just went over, it's like I mentioned the fact that Ivar did something really smart, which is he made it a point to become well known because becoming well known helped serve his business, like his needs in business.

Starting point is 01:12:02 Now, obviously, we don't want to run Ponzi schemes and all that stuff. But the actual concept behind it's really smart. In fact, when I sat down, so that was one of the things when I had lunch with Sam Zell before shortly before he died. That's one of the things he said to me, because we were talking about some of his business. Obviously, he sold a company, you know, for $38 billion. But he was talking about some of the best investments he ever made became because he was writing op-eds in, he was a, well before he was a national and world renowned entrepreneur figure, he was relatively well known and famous inside of Chicago. And the way he built his audience in Chicago was he would write op-eds in newspapers. As a result of that, he was invited to make an investment in the Chicago Bulls. And so he was

Starting point is 01:12:43 making the point to me that the bigger your podcast gets, the more well known you become, like you're going to have opportunities presented to you that wouldn't have come otherwise if you didn't have the platform that you have. And so recently I went to teach at, I was invited to teach at Harvard Business School. So if I had to teach at Columbia Business School and Notre Dame too, but at Harvard Business School, I was like, listen, I employ you. I implore you rather, please. Like you guys are doing so much research, so much learning. You have not only your main curriculum at Harvard Business School, but all the learning you're doing. Just organize that. It doesn't matter if it's a newsletter. I do it in a podcast. Write a book. You need to be easy to interface with.

Starting point is 01:13:19 And so what Scribe Media does and the reason I'm telling you about it is because there's a, think about all the founders investors executives consultants all these other professionals are that are listening to founders right you have domain specific knowledge you just haven't found a way to put it to organize it and then put it out there so you're easy to interface with scribe media essentially will do what they'll do is like they have a bunch of different services anywhere from like if you want to write a book and you want like a like essentially like a co-writer, like a guided author. They have three main things that I think are that you'd be interested in.

Starting point is 01:13:50 And you go to scribemedia.com for such founders to look at all this guided author, scribe professional and then scribe elite ghostwriting. Scribe has already produced 23 New York Times and Wall Street Journal bestsellers. Their programs are designed for entrepreneurs, consultants, executives, and other professionals. And so when I talked to Eric about this idea, this is not like a high margin business, but he gave you discounts that are available nowhere else. And so I'll list them down below, $1,000 off of Guided Author,

Starting point is 01:14:15 $1,000 off of Scribe Professional, and $3,000 off of Scribe Elite Ghostwriting. So that's scribemedia.com forward slash founders. The link will be in the show notes as well. And then the last thing is Vesto. I know the founder of Vesto. It's Vesto.com. V-E-S-T-O. V as in Victor, E as in egg, S as in San, Sanra, T as in Tom, O as in Oprah.com. Ben is giving founders listeners $500 off. And this product was actually pulled out of Ben because Ben's main business was helping businesses, whether you're bootstrapped or venture funded, get a better return on their

Starting point is 01:14:51 idle cash. And then all these listeners of founders were scheduling a demo because you actually talked to Ben. And a bunch of these people had the same problem, which is like, hey, I own a ton of different companies. These companies have bank accounts at different banks, sometimes in different countries. Can you please make a dashboard so I can actually see all of my company's financial accounts in one view? So if you have that problem, go to Vesto.com,

Starting point is 01:15:15 schedule a demo, tell Ben David from Founders sent you, and he will give you $500 off. I will have a lot more deals to announce in the future, and then I'll put them all in, they're already in one organized place. It's just not public yet. But once that is public, I will let you know. Thank you very much for listening. Thank you very much for the support, and I'll talk to you again soon.

Founders - #348 The Financial Genius Behind A Century of Wall Street Scandals: Ivar Kreuger

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