Monday, March 08, 2010 3/8/11 - so much money we can't keep track of it

In today's excerpt - Ivar Kreuger, the Swedish financial genius who built International
Match, the world's largest publicly held company during the 1920s, but who used
deception and massive fraud to achieve his goals. Central to his deceit was withholding
information from his American accounting firm, Ernst & Ernst, regarding how much
money was missing and how dire his cash position routinely was. When Albert Berning,
the Ernst & Ernst accountant assigned to his company, became too insistent on a
more close examination of his books, Ivar came up with an ingenious new method for
evading him. Eventually, International Match suffered a spectacular global collapse
and Kreuger committed suicide:
"Ivar decided he needed to be more forthcoming to Albert Berning about his Swedish
accountants, or at least to appear to be so. ...
"Meeting in Berlin, ... Ivar told Berning a secret. He understood Berning's suspicions,
and he confided that, indeed, the financial statements for International Match were
in error. There were mistakes. But not for the reasons Berning might have imagined.
Instead, the financial statements were wrong because they massively understated
Ivar's profits. Ivar told Berning he was involved in politically sensitive deals
with numerous governments, many of which would generate substantial profits, and
these dealings simply could not be disclosed to anyone. Ivar said Berning should
draw comfort from the safety net of secret deals that were not even mentioned in
his corporate accounts. The International Match financial statements weren't supposed
to accurately reflect the value of Ivar's enterprises. They were merely a floor,
a minimum amount that only hinted at the much higher, true value.
"For example, Ivar showed Berning a copy of what he called the 'Spanish
contract,' which appeared to be signed by Miguel Primo de Rivera, the
Spanish ruler who had taken over from King Alfonso in a recent coup. Ivar
suggested that he had met with King Alfonso in 1923, and he said Primo de
Rivera secretly had agreed to honor the terms of a ... deal between Ivar and the
king. Unfortunately, Primo de Rivera had abandoned his pre-coup promise to rule
for only ninety days, and instead suspended Spain's constitution, established martial
law, and imposed a system of strict censorship. There was no way for Berning, or
anyone, to confirm or deny Ivar's assertions about such a secret deal. Berning
understandably would have been reluctant to travel to Spain to try to verify Primo
de Rivera's signature.
"Ivar also showed Berning a certificate of deposit showing that the Nederlandish
Bank held 400 million francs of French government bonds for the
account of Continental Investment Company, Ivar's Lichtenstein subsidiary.
When Berning said he hadn't heard of the Nederlandish Bank, Ivar explained
that it existed 'in order to keep certain transactions secret from Swedish and
foreign bankers.' ...
"Moreover, Ivar behaved like someone who understated, not overstated, his
income. One time, Ivar sent the money for International Match's dividends to
America early, indicating to Berning that 'we have so much money over here,
you might as well have this now.' Another time, Ivar sent an extra million
dollars, and later responded, 'Oh, we simply made a mistake. We have so
much money here, we just can't keep track of it.' These were either the acts
of a crazed risk taker or a man in such solid financial condition that he really
couldn't be bothered with minor seven-figure details. The latter explanation
seemed more plausible: Ivar, and International Match, must have had substantial
undisclosed assets."
Frank Partnoy, The Match King, Public Affairs, Copyright 2009 by Frank Partnoy,
pp. 100-101.


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