Berning’s position was aggressive, but by this point he would do just about anything for Ivar. He still wasn’t a partner at Ernst & Ernst, but it was apparent that if he could get International Match a listing on the Exchange, he would be in an excellent position to be invited to join. Berning was now completely exposed to Ivar’s word, and to Ivar’s memory of the details of the numerous transactions among his various subsidiaries. Berning couldn’t verify whether the underlying numbers were accurate; he simply had to accept them as a matter of faith. He eagerly awaited a response from the Exchange. It wouldn’t take long.
June 1928 was a good month for America, and a better one for Ivar. Herbert Hoover, the Republican candidate for president, declared,The poorhouse is vanishing from among us. We have not yet reached the goal, but given a chance to go forward with the policies of the last eight years, we shall soon be in sight of the day when poverty will be banished from this nation.”13
Even during a blip when the market declined sharply, it quickly recovered, and both International Match and Swedish Match, which also was still traded on the Curb Exchange, kept soaring. Berning reported to Ivar that “The securities of both corporations held up remarkably well during the recent severe slump, which practically all securities suffered in our markets here.”14
This performance was remarkable, given that International Match had practically no money on hand and could barely meet its obligations. On June 30, 1928, Berning cabled Ivar that International Match “will require cash in time for July fifteenth dividend payment.”15 Ivar had to wire money quickly to New York so that his company, then the darling of investors everywhere, wouldn’t default. Investors were optimistically betting on International Match’s future; default seemed inconceivable. They didn’t care how much cash the company had, and wouldn’t bother to check as long as the dividend payments kept coming.
June also was a good month for A.D. Berning. The New York Stock Exchange backed down after Berning refused to give more detail about International Match’s income. His decision to hold firm paid off, and he gleefully reported to Ivar that the Exchange had given up its objections:I took the matter up personally with the Stock List Committee of the New York Stock Exchange and have convinced them as to the impracticability of such a course. The annual report of the International Match Corporation for the year 1927 will therefore be issued substantially in the form which we prepared together in Stockholm.16
Ivar learned the good news in Paris, where he was spending a few days with his assistant, Karin Bökman. The next time Ivar was in New York, he would visit the Exchange, and look down at a man standing at a specialist post trading the securities of one of Ivar’s companies. It was, in every sense, a childhood dream come true. Some of the ticker tape confetti falling to the floor of the Exchange every day would be printed with the trading prices of participating preferred shares of International Match.
Ivar quickly arranged for a celebration at Restaurant Paillard, one of his favorites. Dozens of guests attended, even given the last-minute nature of the event. He and Karin Bökman clearly had a rollicking time. The receipt from Paillard included an expense for 105 bottles of wine.17 Ivar must have savored every drop.
As usual, Berning was the last person to hear from Ivar, who sent a cable to Ernst & Ernst the day after the party: “It is with great satisfaction I learn that you have succeeded in getting the Stock Exchange to approve the Balance Sheet, substantially as discussed by us in Stockholm and I greatly appreciate your work in this respect.”18 The Ernst brothers also were greatly satisfied, and they began discussing a promotion for young Berning.
Ivar was happy for Berning to continue to work on his accounts, but he still didn’t want to meet in person. Now that Ivar had the Silence Room, he had become even more reclusive, and was even less inclined to see his accountants and bankers. Now that International Match was listed on the Exchange, Ivar asked Berning to prepare an application for Swedish Match to be listed as well. He dodged Berning in Europe and New York. Ivar didn’t want to look him in the eye, or take a chance that Berning would see him flinch in response to a probing question.
Ivar also asked Berning for help with the Metropolitan Life Insurance Company, one of the largest and most sophisticated investors in the world. According to Donald Durant, Met Life was considering a large purchase of International Match securities. A major purchase by Met Life would have almost as much cachet as a listing on the New York Stock Exchange.
Before Met Life would buy, though, it wanted more information about International Match, in particular a breakdown of its income from various international subsidiaries. Insurance companies generally classified their investments by industry and country, and Met Life said that if it couldn’t get enough information to do that, it couldn’t invest.
Ivar asked Berning to prepare some details to satisfy Met Life. Berning understood that this information must be kept confidential, because International Match “operates to a large extent under special government concessions, there would be a possibility of criticisms of a purely political nature.”19 As he had before, Ivar cited concerns that competitors might obtain precious secrets, and that foreign officials would balk if any details became public.
Ivar reviewed Berning’s memo and agreed to permit Durant to show it privately to Met Life.20 It broke out the sources of International Match’s income as follows:26 percent France
23 percent Spain
17 percent Italy
11 percent Poland
6 percent Germany
17 percent Other
The list was remarkable. Five countries accounted for 83 percent of International Match’s income, yet Ivar had secured match deals in only two of them (and France was not even a real monopoly). Ivar had mentioned to Berning and Durant that he was talking to officials in Spain, Italy, and Germany, but he hadn’t made loans to any of those countries. In other words, the income described in Berning’s memo couldn’t have been from interest paid by these governments to International Match.
Swedish Match, which was the ultimate source of International Match’s profits, didn’t have monopoly deals in these countries either. It had reported record profits of more than 13 million dollars for 1928, up from less than 11 million dollars the previous year. It now operated in more than thirty-five countries, and the Swedish Match directors were proposing a special additional dividend of 10 percent, given the stellar year. But as impressive as Swedish Match’s deals during 1928 had been, they were not with Spain, Italy, or Germany, either. What, then, was the source of the income from those countries? Were Swedish Match’s sales there that great? Perhaps they were, but it was impossible to tell.
The “17 percent other” listing was odd, too. The “other” countries Ivar had dealt with during 1928 - Estonia, Yugoslavia, and Hungary - were too small to account for a large chunk of International Match’s income or assets. Ivar secured a monopoly in Latvia, in exchange for a 6 million dollar loan, but, even with a few side payments to coax along the Latvian parliament, that deal was not ratified until December 20, 1928.21 A 30 million dollar deal for Romania, which desperately needed funds to stabilize its plunging currency, was not approved until January 30, 1929.22 Those deals were too late to be included in the memo to Met Life. Where, then, could that extra “17 percent other” have come from?
If these questions were not troubling enough, it also was apparent that any money, even for small government loans, could not possibly have come from International Match, for one simple reason: International Match didn’t have any money. Nor did Swedish Match. Any funds must have come from Kreuger & Toll, the largest shareholder of Swedish Match, which was still making money from various businesses, including construction projects.23 But if Kreuger & Toll had been the source of funds, why were the profits reflected in International Match’s list of countries?
The relationship between Kreuger & Toll and International Match was ambiguous, but the dominance of Kreuger & Toll was clear. Like Ivar’s other companies, Kre
uger & Toll had continued raising money throughout the 1920s. According to one source, by early 1929 investments in Kreuger & Toll were the most widely distributed securities in the world.24 Its common shares were selling at 730 percent of par, the stated value when the shares were issued; its convertible debentures were at 863 percent. Kreuger & Toll’s investors had made a fortune, as had Ivar, the company’s major investor. When New York “operators” drove up the prices of Kreuger & Toll on the Curb Market, where it was still traded, Ivar took advantage of the speculative frenzy by buying low and selling high.
If Ivar was concerned that this mania might end soon, like the South Sea Bubble or the Dutch tulip mania, he didn’t show it. Instead, he increased his companies’ payout to investors. He announced plans to increase Kreuger & Toll’s dividend to 30 percent, and Swedish Match’s dividend to 16 percent, although neither increase was yet approved. Those dividends would be sustainable only if Ivar started making significant profits in Spain, Italy, and Germany. Apparently, investors believed he was positioned to do just that.
In any event, Met Life didn’t question Ivar’s list of countries. Met Life simply needed the list; it didn’t care whether it was correct. It didn’t object to Ivar commingling assets, or ask what generated the income. International Match wasn’t about Latvia or Romania - it was a much bigger bet than that. If the company really had a shot at Spain, Italy, and Germany, its preferred shares were a bargain. International Match was a growth company, like RCA or General Motors. Met Life was satisfied to know it would be able to account for its investment in separate categories, even if those categories didn’t match reality. At the end of 1928, it bought into International Match.
Met Life’s inquiry reawakened Donald Durant’s concern that he really didn’t understand Ivar’s companies. In particular, he didn’t know anything about Kreuger & Toll, which seemed to him a black hole. Meanwhile, Ivar wrote to Durant that he planned to expand Kreuger & Toll’s international role “from a comparatively passive holding company into a company actively engaged in financial transactions.”25 That expansion worried Durant.
After Met Life bought participating preferred shares of International Match, Durant told Ivar he wanted to probe some of the details of Kreuger & Toll’s financial statements, with the help of A.D. Berning. Ivar responded in mid-February 1929 that he would “have no objection to your consulting Berning.”26
Durant didn’t doubt that Ivar had secured match deals in numerous countries: Ecuador, Estonia, France, Greece, Hungary, Latvia, Peru, Poland, Portugal, Romania, and Yugoslavia.27 Nor did Durant doubt that Swedish Match was continuing to expand, taking International Match along with it. Most recently, Swedish Match had moved into Brazil, where it now controlled several Brazilian factories and was seeking to buy Companhia Brasileira de Phosphoros, which controlled most of the remaining factories there.28
There was no question that these assets and income were real. But the companies’ liabilities were real, too. Durant wondered how much Ivar’s companies actually were worth. The more he learned from Berning about Ivar’s offshore subsidiaries and off balance sheet accounting, the less he understood how to approach that question. 1928 had been an astonishing year for International Match. But Durant couldn’t understand why. It seemed impossible to get to the bottom of Ivar’s financial statements. And he couldn’t even guess what might happen in 1929.
Durant was particularly concerned that Ivar had reported profits for 1928 that were too high, or at least higher than they needed to be. If investors weren’t paying attention to International Match’s numbers, even as cursory as they were, why should Ivar report such high profits? Investors would be just as happy if reported profits were lower. And even the most sophisticated analysts wouldn’t necessarily appreciate being surprised by unexpectedly high profits; surprises made them look like they didn’t know what they were doing.
After talking to Berning, Durant had a radical idea. Why not report lower profits for 1928 and save the extra for 1929? On February 22, 1929, Berning reported to Ivar that “confidentially Durant believes nineteen twenty eight figures somewhat higher than necessary.”29 Would Ivar be willing to carry some of those profits over to the next year?
The three men began considering whether International Match should conserve some of its income from 1928, to create a kind of “prudency” cushion in case the following year did not turn out as well. Ironically, the financial statements Durant suggested they deflate were the same ones they were sending to the New York Stock Exchange as part of the application for the Swedish Match listing, which they were formally seeking now that the Exchange had agreed to list International Match. Berning was scrambling to prepare that application and needed Ivar to approve the financial statements. He sent Ivar a nine-page telegram filled with new numbers.30 At Durant’s suggestion, Berning had moved nearly a million dollars into a reserve account. Berning wanted to know if this approach was acceptable to Ivar, or if they should account for the additional funds in some other way, perhaps in a surplus fund.
Ivar was in Paris and couldn’t have cared less about these details. He cabled back:We approve of form and contents of Balance Sheet and Profit and Loss account mentioned in your telegram second March. It is immaterial to us if you take the ninehundredfiftysix thousand sevenhundredsixty dollars from Surplus or from Reserve Fund.31
Ivar wasn’t alone. No one cared about these details. The New York Stock Exchange approved Swedish Match’s listing, and investors rushed to buy that company’s securities in addition to those of International Match. Durant abandoned his skepticism for long enough to underwrite yet another of Ivar’s issues, a 26.5 million dollar deal for Kreuger & Toll, which would be listed on the Curb Market. Every major bank except Morgan joined the syndicate for that deal, and no one asked for any additional information.32 Prudent or not, the way Ivar’s companies reported income simply didn’t matter.
Since his negotiations with the Exchange, A.D. Berning had become more anxious about relying on Ivar. Berning was a details man and preferred that every number make sense. But now, nothing added up. Berning would send an urgent request to Ivar for more information, and months would pass in silence. Ivar refused to see Berning, and rarely responded to cables. Yet Berning depended almost entirely on these infrequent communications from Ivar to prepare International Match’s financial statements. It was apparent to Berning that Ivar was playing faster and looser with numbers than he ever had. It wasn’t clear if Ivar was merely becoming more casual or if he actually was hiding bad news. It certainly was possible that Ivar was simply too busy to be bothered with details that no one cared about anyway.
Berning needed - and his wife desperately wanted - a vacation, which Ivar was happy to provide. But when the couple sailed from New York, it was impossible for Berning to unwind, even in first class on a luxury liner. When they arrived in Europe, Berning could not locate Ivar. Ultimately, the stress and uncertainty became too much for him to bear. During the Bernings’ summer trip to Stockholm in 1929, he finally cracked.
Berning’s nervous breakdown finally brought Ivar out of hiding. Ivar was no stranger to mental illness. Both his mother and her father had problems. More recently, Ivar himself had been battling his own bouts of mania and depression while locked in his Silence Room. So he probably could relate to the breakdown.
In any event, Ivar stepped in to arrange for appropriate doctors, and to give Berning some recovery time. Berning was grateful for Ivar’s kindness, and, finally, for some personal attention. He wrote,Upon attempting to settle with the doctors, etc. for my recent “indisposition,” I learned that you had taken care of it all. This was very kind of you, and I appreciate it very much. You have been entirely too good to me, and I do not know how to thank you sufficiently.33
Ivar expected a return favor from Berning, and he got it. Berning persuaded Durant to back down from his accounting inquiries. Berning’s thank you to Ivar included the following pledge of protection:You mentioned the other day that Mr Duran
t had brought up the question as to auditors of Kreuger & Toll. If he should speak to me about it I shall say that we are quite generally informed about this Company’s operations and its relationship with International Match and Swedish Match, and have discussed all relevant matters with you; also, that as Kreuger & Toll is a Swedish company its purely auditing work should probably be carried on by Swedish auditors as in the past, and that should any special occasion arise we can undoubtedly make arrangements to cover the situation. I will take the position that this is a continuation of arrangements which have been in effect for some time.34
In response, Ivar sent Berning an absurdly expensive personal gift; some debentures that amounted to more than a year’s pay. Now, it was Berning’s turn to type out a letter on his own, without anyone else’s knowledge, on a Swedish typewriter. Like Ivar’s earlier letter, this one was filled with overtyping and crossed out words. Apparently, Berning was no better typist than Ivar. Berning noted at the bottom: “Please excuse the typing; I am not a good typist on an American machine, and certainly no better on a Swedish instrument!”35
The Match King Page 17
