The Match King

by Frank Partnoy

  The Time cover story appeared anyway, even though no one at the magazine had spoken to Ivar. The article concluded with a cribbed quote from Marcosson’s interview, the only time Ivar had spoken to a journalist that year. Ivar said,There is not a single competitor with sufficient influence upon the different markets to cause us any really serious harm. No market is sufficiently significant to be of importance to us. The reason is that the whole world is our field.59

  By the time investors read this bold statement, on October 28, the markets would be in a full-blown panic. Ivar’s words, like his face on the cover of Time, would seem to float above the fray. That week, finally, he would achieve true greatness.

  9

  A WEEKEND IN GERMANY

  As part of the Treaty of Versailles of 1919, the Allies had required that Germany pay billions of dollars of reparations from the world war. But the fragile German economy couldn’t handle the burden, and Germany defaulted in 1923. Because of hyperinflation, leading to a dramatic increase in local prices, German currency was virtually worthless by then - a postage stamp had a face value of 50 billion marks. According to John Maynard Keynes, the world’s leading economist at the time, given the weak financial situation, it would have been impossible for Germany to make all of its reparations payments. The German Weimar Republic could not have printed enough money to meet even one day’s interest.

  The Dawes Plan, for which Charles G. Dawes, Coolidge’s vice president, received the Nobel Peace Prize, was an attempt to ease Germany’s burden. In October 1924, the Allies reduced Germany’s annual obligations and extended an additional 25-year loan of almost $200 million at 7 percent interest.1 The initial payments were low, but stepped up rapidly. The central assumption of the Dawes Plan was that Germany would recover quickly enough to support increased payments.

  Although the Germany economy improved somewhat, it soon became apparent that the tax revenues Dawes had assumed would materialize to cover the increased payments were not coming. Germany could not meet the stepped-up Dawes Plan payments, any more than it could have met its previous obligations. By 1928, the Dawes Plan was in shambles.

  In response, Owen D. Young, the founder of RCA, assembled a group of businessmen, including Jack Morgan. Jack Morgan was no fan of Germany, but he saw the need to participate in negotiations to reset the country’s reparation payments. Small American lenders had been financing Germany’s obligations under previous plans, and another German default could bankrupt them and precipitate a financial crisis. In August 1929, as Ivar was preparing for his first meeting with President Hoover, the group finalized the Young Plan, which reduced Germany’s unconditional obligations to roughly 150 million dollars per year, a fraction of the reparations payments that had been called for in the post-war treaty.

  Still, Germany’s economy remained weak in 1929. Adolf Hitler had become more than just a minor political figure in the fringe Nazi party, and his 1925 autobiography, Mein Kampf, which initially sold poorly, had suddenly hit a nerve of discontent among German nationalists. German officials had become desperate for funding and were no longer looking past the next year. Now, they were just trying to come up with the next 150 million dollar payment, which would be due soon.

  During the Young Plan negotiations, Ivar came to Germany to discuss a loan-for-monopoly solution. He had been lobbying German government officials for more than a decade, so they knew him well. Ivar already controlled 70 percent of German match output and he also held interests in several German banks and three-quarters of the German ball-bearing industry. Many German steel plants depended on buying ore from mines Ivar controlled. He was an important figure in Germany, and held a strong negotiating position.2

  Ivar’s first stab at a match monopoly in Germany had failed several years earlier, even after he offered a substantial “side payment” to one official if a monopoly law were passed within a specified time.3 More recently, though, the balance of negotiating power was shifting. Cheap imports from Russia, which had large timber reserves, had hurt the Germans. Competition among match producers was increasing, and prices were falling. Germany was running out of options.

  Finally, as the Young Plan was materializing, the Germans indicated to Ivar that they might be interested in a deal. The Governor of the Reichsbank, Dr Hjalmar Schacht, who had rebuffed Ivar’s initial efforts five years earlier, said he needed a loan with a low interest rate. Specifically, he needed 150 million dollars, to make the first Young Plan payments. Most importantly, Dr Schacht said he was open to Ivar’s request to take over the German factories, sell matches at higher prices, and keep out Russian imports. Now was the time for Ivar to strike. If he really wanted a monopoly deal with Germany, this was his chance.

  Unfortunately, the timing could not have been worse. Global stock markets had declined throughout September, and were continuing to fall in October. Although shares of Ivar’s companies were holding firm, the declining market was dampening investors’ appetite to buy new securities issues. Ivar’s strategy required that he raise money from American investors and then lend that money to a government in exchange for a monopoly. By summer 1929, Ivar’s outstanding securities already were massive; by comparison, they had a higher market value than the value of the entire loan portfolios of all of Sweden’s banks.4 But American investors were hurting, and his sources of funds were drying up. As stocks fell it seemed less likely that Ivar would be able to raise the money he would need to fund a German loan.

  Nevertheless, Ivar pressed forward. He negotiated with Dr Schacht as if a new securities issue in America would be easy to sell. The markets had fallen before, and the declines were always temporary. Ivar wasn’t about to let a few worries at the New York Stock Exchange stop him from closing a once-in-a-lifetime deal. The German loan would be historic. Ivar ignored the faltering markets and marched ahead.

  News of negotiations between Ivar and Dr Schacht was published prematurely in the German press in early October,5 forcing the men to rush through an agreement in principle. It remained unclear whether either side ultimately would sign a fleshed-out contract. Yet because of media leaks, on October 12, 1929, the world knew the basic terms of the deal the men were contemplating.

  Ivar would lend the Reich 125 million dollars at a 6 percent interest rate for fifty years. The German government would create a new company to run a match monopoly, which the Germans would control. The government and Ivar would split profits equally. The government would exclude Russian imports and fix the price of ten boxes of matches at 8.5 cents, up from 6 cents.

  The agreement still needed to be signed by the finance minister and it had to pass the Reichstag, where there was opposition from industrial groups that exported to Russia and feared reprisals.6 Ivar wasn’t sure he would sign it, either. He told an assistant that “a large loan to the German government would be a substantial burden on us, so that I do not think we should hesitate to break off negotiations unless we can obtain conditions which are clearly in our favour.”7 Ivar wanted to close the German deal, but he wasn’t willing to do so at any cost.

  Moreover, Ivar didn’t have 125 million dollars to lend. As with previous deals, he would need to raise that money from American investors. Donald Durant had been working on a new securities issue for Ivar - this time, a debenture issue from Kreuger & Toll. But Durant warned Ivar that the markets were slumping, and now was not the time to try to raise such a large amount of money. When Ivar suggested he planned to go ahead with the deal, either in New York or London, Durant warned him to be careful. Durant wrote on October 4 to discourage Ivar from attempting to raise any money:Our primary concern is the importance of maintaining the unique good will that you have among investors on both continents. A major financial operation, whether undertaken in America or Europe, would do serious damage to this good will. We hope that we and our friends will have the opportunity of discussing this with you in person, before you make a final decision to go ahead.8

  Ivar dismissed Durant’s concerns, and told Lee Higginson
to press ahead. Durant should tell his sales force to inform the firm’s clients that a new deal was coming, backed by a German match monopoly. Ivar may still have had doubts, but he didn’t want to show his bankers any weakness.

  Ivar clearly had impressed the Germans. During the negotiations, he had spent an entire day answering detailed questions in Berlin without once consulting notes or statistics.9 Dr Schacht, the German central bank governor, had solicited other bankers, including Jack Morgan, who was in Europe for the summer. But Jack was less impressive.

  Jack was less interested as well. He saw a German loan deal as too risky, and he put off Dr Schacht while he warned his partners about negotiations with Germany:You will remember that our first and only German business was the Dawes Loan, and that was only undertaken at the request of all the allied Governments, our clients. This business is quite different, and the allied Governments are totally indifferent as to who does it, and it would obviously involve us eventually in competing for German business. For my part I should be very reluctant to abandon our position, which we have held for five years, that all and any German business was open to anybody in America who wanted to do it, and that we were not interested in it at all. From what I see of the Germans they are second-rate people, and I would rather have their business done for them by somebody else.10

  When Jack learned that the “somebody else” was going to be Ivar, the publicity seemed to change his mind. He dispatched his partner, Thomas W. Lamont, to Berlin to discuss a loan with Dr Schacht. Jack also wrote directly to Dr Schacht thatAssuming a reasonably decent Bond market here and proper terms and prices upon the proposed issue we can see no reason why we should not be able to arrange a Syndicate for the issuance of $50,000,000 or $75,000,000 in this market of the proposed new German Government Reparations Bonds. This you understand is not in any sense a commitment. It is simply a guess prompted in part by our natural co-operative desires.11

  On October 16 and 17, Jack and Ivar were both in London, but they were moving in different directions. Ivar was on a fast track, preparing to go to Berlin to lobby the legislature to approve a deal with him right away. In contrast, Jack was noncommittal and seemed skeptical that the Germans would approve a deal with anyone, including Ivar.

  While Ivar frantically cabled various German politicians to arrange meetings, Jack also replied to cables - of a very different kind. These were messages from Jack’s son, Junius, who had just attended a luncheon of their America’s Cup syndicate in New York. Junius had sent word of two matters of apparently more significance to Jack Morgan than a German loan.

  First, Junius had asked whether his father had any thoughts about what name to call their new boat. The consensus among the America’s Cup syndicate members seemed to be that Aurora was the best choice, but everyone wanted to be sure Jack was in accord. Did he have any wisdom on this pick, or any new recommendations?

  The second matter concerned the plans for the newest version of Corsair, the ship Pierpont Morgan had built and rebuilt in sequential models, each larger and more opulent than the last. Jack Morgan scrutinized the plans for the new Corsair design and cabled Junius on October 17 with an urgent question:Have been over CORSAIR furnishings, etcetera. All I think in good shape. One matter disturbs me a little - there is no way from my room to the deck, without going well forward. Would it be possible make door in place of the after window, of course with raised sill? Should greatly prefer this, if it can be done without causing too much delay … In regard to name for our ship, wrote you yesterday suggesting COLUMBIA or SPEEDWELL, but should be quite happy with AURORA, if that appeals to most of them. Father12

  Junius, apparently oblivious to Ivar’s ongoing efforts to close the German loan, immediately cabled back, to the great relief of Jack:Porter tells me door can be arranged direct from your room to deck if you need it. Present arrangement provides for door from your room into vestibule on port side, which in turn opens direct on deck aft. No delay will be caused by this, as window can be converted into door at any stage in the construction.13

  As the Morgans corresponded, Ivar quietly rushed to Berlin, obtained the preliminary agreement of finance minister Rudolf Hilferding, and then quickly returned to London. The cables sent during this time by Jack and his emissary, Tom Lamont, suggest that they were unaware that Ivar had achieved this coup, right under their noses. While Jack Morgan was ensuring that he would have a direct bedroom-to-deck path on his new yacht, Ivar had tiptoed into the deal of the century.

  On Tuesday, October 22, as Ivar arrived back in London, Tom Lamont sent Jack a note of congratulations, but not on the German loan. There previously had been some question about whether Jack would renew his appointment as president of his alma mater’s alumni society. Lamont cabled, “Awfully glad you agreed to be President of Harvard Alumni this year. They are all enormously pleased.”14

  So was Jack, at least for a few days.

  Stocks had been up almost 10 billion dollars during the first eight months of 1929, but after the September reversal they were down overall for the year. During the first three weeks of October 1929, stocks continued to plunge. It was a terrible environment for raising money. Corporations were breaking deals, not issuing new securities. Lee Higginson was having an awful month, and Donald Durant was anxious to close Ivar’s new securities issue, which would generate one of the handful of investment banking fees anyone would earn during the last quarter of 1929.

  When the markets opened on Monday, October 21, so many investors decided to sell that by noon the New York Stock Exchange ticker was a full hour late. Shareholders had to wait until the evening, when the ticker finally caught up, to learn how much their stocks were down. More than 6 million shares were traded, the third highest volume ever. Even after the markets fell again on Tuesday and Wednesday, the experts insisted it was just a blip. National City’s Charles Mitchell observed that “the decline had gone too far.” Yale’s Irving Fisher described the soft markets as just a “shaking out of the lunatic fringe” and insisted that stocks would go higher.15

  Throughout this time, Ivar appeared entirely without concern. Although he sensed the increasing panic, along with everyone else, he didn’t want anyone in New York to see him falter, particularly given the market’s decline. He knew markets reflected emotions and perception. In finance, there was no such thing as reality. There was only, as Pierpont Morgan had intimated, what traders thought of a man’s character. If everyone saw Ivar as a shining beacon of confidence, his securities would maintain their value, even if the rest of the market crashed. He still could point to Marcosson’s article. And in a few days, the Time cover with his photo would be out. He needed to keep up a show of confidence, to persuade American investors to buy the newest issue of Kreuger & Toll’s securities.

  Wednesday was the deadline for that issue, which was being called Kreuger & Toll “American Certificates.” American investors had never seen an investment like this one. It was part bond, part preferred stock, and part profit-sharing option. The certificates enabled them to gain exposure to a foreign company that had been paying dividends of 25 percent. It would be backed by the largest private loan to a foreign government in history. Even in a sharply declining market, investors went crazy for this kind of exposure. They promised to buy 28 million dollars of the new securities backed by Kreuger & Toll.

  There were two major business stories in The New York Times on the morning of October 24, 1929, the day that became known as Black Thursday on Wall Street. The smaller headline was “Warner Bros Deal with Paramount Off.” The much-anticipated merger between the two major movie studios, Warner Brothers Pictures, Inc. and Paramount Famous Lasky Corporation, would have created the largest entertainment company in the world. Now, the merger was dead. Bankers everywhere wondered if the seven-year rush of corporate deals during the 1920s might be coming to an end.

  But the even bigger news was an announcement of the success of Kreuger & Toll’s new issue of American Certificates, which miraculously had close
d Wednesday in the midst of the growing panic. A half-page panel next to the Warner-Paramount story described the terms of the innovative deal, which Lee Higginson had arranged. Each American Certificate of Kreuger & Toll represented a share of the Swedish company’s participating debentures. The certificates would be denominated in US dollars but would carry rights related to securities in Swedish kronor. Investors had bought the certificates, even though neither Ivar nor the German government had yet approved a monopoly deal. The media coverage of Ivar had been enough to spur them on.

  Notwithstanding Ivar’s success, when the markets opened on Thursday, the bottom fell out. Within hours, a record number of shares had traded. Panicked crowds gathered outside the Exchange as share prices collapsed. Rumors spread about brokers jumping from buildings downtown. The New York police commissioner sent a special detail to Wall Street. Eleven well-known speculators killed themselves, and many more were bankrupted.16

  Just after noon, the New York Stock Exchange closed the gallery, and officials escorted the visitors into the teeming crowds outside. The world’s top bankers quickly convened at the offices of J. P. Morgan, down the street at 23 Wall. Jack Morgan was still in London, so Tom Lamont, Jack’s senior partner, presided. The bankers decided to pool resources and support the markets. As their buy orders flooded the floor of the Exchange, Lamont met with reporters and blamed “a technical condition of the market.”17 Their support temporarily stopped the free fall, and the ticker, when it finally caught up, showed that stocks had recovered from their midday lows.