Back at work, Berning was dismayed to see that his previous correspondence with the Wisconsin regulators had not made them go away. Instead, Commissioner Hibma continued to press for details, to see if International Match was performing as the company’s reports claimed it would. That meant Berning would have to get more information from Ivar. He reluctantly wrote to Ivar, who even more reluctantly responded, with a pithy summary of International Match’s first half of 1925. Berning thought he could dress up this new information in a way that might satisfy Wisconsin. He thanked Ivar and wrote, “[W]e hope that you will have no further annoyance from this source.”57
Berning was wrong yet again. Wisconsin immediately rejected the summary and asked for a more detailed statement of International Match’s earnings for the first six months of 1925. It was early December and Ivar was in New York, so Berning reported the bad news and requested to see Ivar in person.58 Ivar promised to meet, but said he couldn’t do it right away. They set a date, and meanwhile Ivar sent five lines of more detailed information for Berning to work with.
The categories were broad, but each item was carried out to the penny:
Interest on Advances, Bank Accounts, etc. $2,763,463.57
Profit on Exchange $1,129,568.16
Interest on Investments and Sundry $323,449.19
Dividends $102,346.92
Total $4,318,827.84
Before sending the revised information to Wisconsin, Berning checked to see how Ivar’s new numbers compared to what Lee Higginson had sent to investors a few months earlier. Berning also sent a request to Lee Higginson, seeking to confirm the details of International Match’s income for the first six months of 1925.59 In its investor circular, Lee Higginson had represented, also apparently based on information from Ivar, that earnings for the first six months of 1925 were “in excess of $4,400,000.” However, when Berning checked the numbers from the new lines of information Ivar sent, they summed to a total of just $4,318,827.84. Anyone could see that this number was less than $4,400,000. That shortfall was a serious problem. It suggested the previous numbers had been inflated.
The discrepancy would raise eyebrows in Wisconsin, where the regulators certainly would notice that the new reported income for the first six months was less than the income set forth in the investor circular. If Commissioner Hibma saw this shortfall, he would open an investigation into whether International Match had misrepresented its earnings. Was there any chance he wouldn’t notice? Ivar had not expected a Wisconsin securities regulator to have a sharp financial mind. Yet Hibma was the only person Berning and Ivar had been unable to shake.
Berning concluded that he couldn’t run the risk of using Ivar’s new numbers. He simply had to find a way to send the Wisconsin regulators something that added up at least $4,400,000, the amount Lee Higginson already had told investors was International Match’s income.
In an extraordinary auditor-to-client letter, Berning wrote to Ivar on December 11, that “In view of the fact that the circular stated that the earnings for the first six months ‘were in excess of $4,400,000’, I thought it best to increase this amount slightly.” Increase this amount slightly? Yes, at Berning’s request, Ernst & Ernst reported net income for International Match of $4,475,000, a nice round number that was higher than the income Ivar and Lee Higginson previously had reported to investors. In a letter to Lee Higginson, Berning did not highlight the fact that he had adjusted the earnings. Instead, he merely noted, somewhat opaquely, that “the figures shown on the attached are subject to any necessary adjustment upon the final closing of the books of the various companies at the end of the fiscal year.”60
Meanwhile, Berning and Ivar still had not met in New York. Berning summed up his most recent work in a letter to Ivar: “It is therefore to be sincerely hoped that the enclosed will be the final chapter with respect to the State of Wisconsin.”61 Indeed, with the “adjusted” numbers, it was.
Ivar received Berning’s good news before he sailed to Europe on a New Year’s cruise. Berning was performing just as Ivar had hoped. Ivar resolved to send the man and his wife on an all-expenses-paid trip to Europe every year. However, while Berning relished his face time with Ivar, Ivar didn’t feel the same affection. Now that Berning had resolved the inquiry from Wisconsin, Ivar saw no need to see him, and he canceled their meeting in New York. Like a dog missing his master, Berning wrote, “I am very sorry that I did not have an opportunity of personally wishing you a very happy and prosperous New Year before you sailed.”62
7
LE BOOM
The mid-1920s were a time of great mirth and movement in America, book-ended by the death of President Warren Harding and the Great Crash. From 1923 to 1929, Ivar tripled his funds raised from American investors; he persuaded the New York Stock Exchange to list his securities; he pulled even with Morgan as a leading lender to Europe by securing match monopolies in several countries, including France; he built his 125-room Match Palace in Stockholm; and in general he got really, really rich. The six years leading up to 1929 were a blur, a period when Ivar’s story was the story of a newly prosperous America. In six short years, Ivar wove his way into the fabric of American culture.
After the exhausting years of war and tension under Woodrow Wilson, President Harding was a relief. His first official act was to throw open the locked gates in front of the White House and let sightseers roam the grounds. If they pressed their noses to the windows, they might catch him in a favorite unofficial act: playing poker, practicing his golf swing, smoking a cigar, or even violating the laws of Prohibition. Harding was Midwestern handsome and small-town good natured - “just folks,” he liked to say. Cigar-smoking lobbyists from oil and banking swarmed him and his cabinet, a fraternity of laissez-faire businessmen led by Andrew Mellon and Herbert Hoover.
Harding’s administration left a trail of scandal, but also an improving economy that boosted the mood of American investors. The reaction to his funeral, in 1923, was more about the future than the past. New issues of securities of industrial companies would increase from 690 during the year after Harding’s death to nearly 2,000 in 1929.1 Brokers’ loans to investors and share ownership would quadruple by 1929.2 The number of Americans who paid tax on income of a million dollars a year also would quadruple.3
The new optimism about the future led to a boom in consumer spending. Radio sales doubled in 1923, then tripled in 1924. On average, nearly every family had a car, and drivers were branching out from black Model Ts to an assortment of new makes in colors ranging from “Florentine cream” to “Versailles violet.” Average people bought items they hadn’t imagined spending money on just a few years earlier: from Listerine mouthwash and crossword puzzle books to vacuum cleaners and meat slicers to new golf clubs and even property in Florida.4
Prosperity changed the culture. Suddenly there were traffic lights, filling stations, and new concrete highways with chicken dinner restaurants and tourist rest stops. Giant broadcast radio stations with nationwide hookups brought Graham McNamee’s play-by-play or the Happiness Boys or reports on the Scopes Monkey Trial into more than one out of three homes. More Americans followed politics now, including the presidential nominating convention, which was covered live from Madison Square Garden.5
The legendary newspaper editor William Allen White, who had found President Harding “almost unbelievably ill-informed,”6 found it more difficult to criticize his replacement, Vice President Calvin Coolidge, who was easily reelected in 1924. Coolidge was so hands-off there simply wasn’t much to say. Even friends called him “silent Cal.” The best White could manage as criticism was an observation that the aloof Coolidge always seemed to be “looking down his nose to locate that evil smell which seemed forever to affront him.”7 Even Dorothy Parker, the witty founder of the Algonquin Round Table, couldn’t skewer the president. As the story went, at a dinner party she asked him, “Mr Coolidge, I’ve made a bet against a fellow who said it was impossible to get more than two words out of you.” His famous
reply was, “You lose.”8 (Parker got the last word, as she typically did. When told in 1933 that Coolidge had died, she quipped, “How can you tell?”9)
Like Andrew Mellon and Herbert Hoover, who remained as Secretaries of Treasury and Commerce, respectively, President Coolidge believed that individuals and markets, left alone, naturally would produce the best decisions and the greatest wealth. Together, these three men reduced income taxes, deregulated industry, and encouraged borrowing and spending. Coolidge’s famous statement, often misquoted, was that “the chief business of the American people is business.” From 1923 to 1929, he was right.
Along with America’s new wealth came a hunger for sophistication. College applications spiked, as did international travel. The most popular nonfiction books included Outline of Science, The Story of Philosophy, Why We Behave Like Human Beings, and Emily Post’s Book of Etiquette (the top seller). The now-literary-minded masses read an astonishing rush of new novels during this period: F. Scott Fitzgerald’s The Great Gatsby, Ernest Hemingway’s A Farewell to Arms, Herman Hesse’s Siddhartha, Franz Kafka’s The Trial, and Virginia Woolf’s Mrs Dalloway. Newly minted intellectuals tried to parse James Joyce’s Ulysses or T. S. Eliot’s The Waste Land. New fans of the arts listened to George Gershwin’s Rhapsody in Blue, and saw plays by Eugene O’Neill, who won three Pulitzer Prizes during the 1920s.
One sure way for both men and women to appear sophisticated was to smoke cigarettes. Advertisers depicted pretty girls, cigarettes in hand, imploring men to blow smoke their way. Tobacco manufacturers announced that “now women may enjoy a companionable smoke with their husbands and brothers.”10 Women had earned the vote and entered the work force; now millions of women of all ages exercised their right to take up smoking. Blue tobacco smoke wafted through theater lobbies, where Greta Garbo’s most important silent movies - Flesh and the Devil, The Temptress, The Torrent, and Love - appeared in 1926 and 1927, just as talking movies débuted. Sports fans smoked as they watched Babe Ruth, also a smoker, hit sixty home runs in 1927 for the New York Yankees; his teammates, known as “Murderers’ Row,” easily smoked their way through the World Series that year. Prohibition also fueled smoking, just as it increased illegal alcohol consumption. The more people drank, the more they craved a smoke. And, most important to the story of Ivar Kreuger, the more they smoked, the more they needed, and thought about, matches.
During the decade prior to 1929, US cigarette production doubled. Ivar didn’t have a monopoly on match sales in the United States, although Swedish Match accounted for a significant share of US match imports. Still, each time an American lit up was an advertising opportunity for investments in International Match. As Americans smoked more, so did the rest of the world, particularly Europeans. What could be a better bet for newly sophisticated American investors than the securities of a company with a monopoly on match sales abroad?
Harvard Professor William Z. Ripley began warning as early as 1924 that, although the stock market kept going up, trouble was brewing. He first focused on the sharp rise in real estate prices and the surge in mortgage lending. While the price of land increased, the profits from land fell, particularly for farms (then the predominant use of land). Even during the prosperity of the mid-1920s, many farms were defaulting on their debts, and these defaults were creating a minor crisis at some regional banks. In seven states, nearly half of the banks doing business as of 1920 failed before 1929. Ripley believed these regional difficulties in the mortgage markets would soon spill over to the stock markets.
Ripley also pointed out that, although investors were flocking to buy shares, even shares without votes, they were doing so based on little or no information. According to Ripley, the sketchy disclosures by International Match continued to be typical of those by leading companies. National Biscuit Company’s income statement from 1925 was just three-by-four inches, and didn’t need even that much space - it included just a single entry labeled “Earnings, Year 1925.”11 The Royal Baking Powder Company didn’t issue any financial statements at all.12 Many corporate reports contained disclaimers that the official income account “does not by any means give a clear picture of the annual earning power” or that “the balance sheet by no means discloses the true value of the company’s fixed assets.”13
In 1926, only 242 of 957 companies listed on the New York Stock Exchange published quarterly reports.14 Nearly a third of listed companies did not issue reports at all, primarily because they had been members of the Exchange for many years and had nondisclosure agreements that were grandfathered from when they first joined. Newly listed companies filed quarterly reports, but they lacked detail. Listing requirements varied by company and were open to negotiation.
Even the minimal New York Stock Exchange requirements were too much for many companies, which instead listed securities at the Curb Market. Shares of major companies, such as Singer Manufacturing, traded at the Curb, and those companies did not publish quarterly reports either. International Match traded at the Curb because it had not yet met the Exchange’s minimal requirements.
According to Professor Ripley, the stock price boom couldn’t possibly be based on reality because investors lacked basic information about companies. Before 1929, virtually everyone thought he was wrong. National Biscuit, Royal Baking Powder, and Singer Manufacturing were real companies that made real products. So were RCA and General Motors. Share prices were rising because companies, like most Americans, were prospering. Moreover, these companies were backed by leading investment banks and accounting firms. Why did investors need to see detailed financial statements when prestigious firms such as Lee Higginson and Ernst & Ernst were vouching for the companies? The average investor wouldn’t understand the details anyway.
Meanwhile, Lee Higginson and Ernst & Ernst were too busy serving current clients, and soliciting new ones, to consider the doomsday scenarios of some Harvard professor, or to worry about giving investors more information than they wanted. Indeed, in one surprising instance, Lee Higg even neglected to disclose the commissions Ivar had paid to the firm. At the beginning of March 1926, A.D. Berning cabled Ivar to let him know the mistake. Lee Higg had received the commissions, but Berning hadn’t deducted the amount from International Match’s reported earnings. Ivar suggested that Ernst & Ernst simply shift some money away from earnings over a several-year period to cover up the missing commissions. “In this way the deferred charges will disappear in a relatively short time.”15 That seemed like a reasonable solution to everyone. Investors would never know the difference.
The bankers and accountants had a similarly casual approach to International Match’s annual meetings. Most companies arranged for shareholders to meet once a year, typically in the early spring, to vote on major business decisions, such as the election of directors. In advance of this meeting, companies typically sent shareholders and directors annual statements summarizing results from the previous year, however terse those statements might be, so that everyone could make informed decisions.
Yet, as late as April 1926, it remained unclear when International Match’s annual meeting would take place. There were still no financial statements for the year, and Donald Durant cabled A.D. Berning to ask if some kind of a report - anything - would be forthcoming soon.16 On April 21, Ivar said he had prepared a summary letter to shareholders.17 The annual report was finally printed in May.
International Match’s annual meeting that year was perfunctory. Ivar still controlled the common shares. American investors didn’t have votes, and in any event Ivar and the other board members were easily reelected. The directors covered just two items of interest at the meeting. First, they discussed the fact that International Match’s financial statements were intended to be only general summaries; all of the details would remain off the balance sheet. Berning reminded the directors of the rationale for keeping any other liabilities out of the annual report. He reported that “it is only customary to consolidate the assets and liabilities of companies in such a balance she
et when a substantial majority of the outstanding shares are owned by the parent company. Where less than such a majority is owned, the shares are included as investments.”18 Everyone agreed that this off balance sheet approach was fine.
Second, Durant and Frederic Allen asked Ivar to change one line of the report, a reference to an asset worth $5,293,113.38 that Ivar had labeled “Advances to Governments and Government Monopolies.” They didn’t object to the amount or question how such a broad item might have been calculated with to-the-penny accuracy. Nor did the directors question the rationale for including the value of such “advances” as assets without listing more specific information. Everyone presumed that the money related to Poland and the match monopoly there.
Instead, what the directors objected to was Ivar’s use of the term “government monopolies.”19 “Monopoly” was a dangerous and sensitive word in the United States, and the Lee Higginson partners were nervous about tipping off some overzealous antitrust prosecutor. It didn’t matter that the word was accurate, or that the entry actually reflected a real monopoly. At their request, “monopoly” was removed before the report was publicized on the Curb Market.
The Match King Page 13
