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

What I learned from reading The Match King: Ivar Kreuger, The Financial Genius Behind a Century of Wall Street Scandals by Frank Partnoy. ---- Relationships run the world: Build relationships at Founders events ---- Get access to the World’s Most Valuable Notebook for Founders You can read, reread, and search all my notes and highlights from every book I've ever read for the podcast. You can also ask SAGE any question and SAGE will read all my notes, highlights, and every transcript from every episode for you. A few questions I've asked SAGE recently: What are the most important leadership lessons from history's greatest entrepreneurs? Can you give me a summary of Warren Buffett's best ideas? (Substitute any founder covered on the podcast and you'll get a comprehensive and easy to read summary of their ideas) How did Edwin Land find new employees to hire? Any unusual sources to find talent? What are some strategies that Cornelius Vanderbilt used against his competitors? Get access to Founders Notes here. ---- Make yourself easy to interface with: Scribe helps entrepreneurs, consultants, executives, and other professionals publish a book about their specific knowledge. Mention you heard about Scribe on Founders and they will give you these discounts: Guided Author - $1,000 offScribe Professional - $1,000 offScribe Elite Ghostwriting - $3,000 off ---- Vesto helps you see all of your company's financial accounts in one view. Connect and control all of your business accounts from one dashboard. Tell Ben (the founder of Vesto) that David sent you and you will get $500 off. ---- Join my personal email list if you want me to email you my top ten highlights from every book I read ---- Buy a super comfortable Founders sweatshirt (or hat) here ! ---- Episode Outline: 1. Ivar was charismatic. His charisma was not natural. Ivar spent hours every day just preparing to talk. He practiced his lines for hours like great actors do. 2. Ivar’s first pitch was simple, easy to understand, and legitimate: By investing in Swedish Match, Americans could earn profits from a monopoly abroad. 3. Joseph 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. — The Days of Duveen by S. N. Behrman. (Founders #339 Joseph Duveen: Robber Baron Art Dealer) 4. Ivar studied Rockefeller and Carnegie: Ivar's plan was to limit competition and increase profits by securing a monopoly on match sales throughout the world, mimicking the nineteenth century oil, sugar, and steel trusts. 5. When investors were manic, they would purchase just about anything. But during the panic that inevitably followed mania, the opposite was true. No one would buy. 6. The problem isn’t getting rich. The problem is staying sane. — Charlie Munger 7. Ivar understood human psychology. If something is limited and hard to get to that increases desire. This works for both products (like a Ferrari) and people (celebrities). Ivar was becoming a business celebrity. 8. 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. — The Essays of Warren Buffett by Warren Buffett and Lawrence Cunningham. (Founders #227) 9. Great ideas are simple ideas: Ivar hooked Durant with his simple, brilliant idea: government loans in exchange for match monopolies. 10. Ivar wrote to his parents, "I cannot believe that I am intended to spend my life making money for second-rate people. I shall bring American methods back home. Wait and see - I shall do great things. I'm bursting with ideas. I am only wondering which to carry out first." 11. Ivar’s network of companies was far too complex for anyone to understand: It was like a corporate family tree from hell, and it extended into obscurity. 12. “Victory in our industry is spelled survival.” —Steve Jobs 13. Ivar's financial statements were sloppy and incomplete. Yet investors nevertheless clamored to buy his securities. 14. As more cash flowed in the questions went away. This is why Ponzi like schemes can last so long. People don’t want to believe. They don’t want the cash to stop. 15. A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market by Ed Thorp. (Founders #222) 16. A summary of Charlie Munger on incentives: 1. We all underestimate the power of incentives.2. Never, ever think about anything else before the power of incentives.3. The most important rule: get the incentives right. 17. This is nuts! Fake phones and hired actors! Next to the desk was a table with three telephones. The middle phone was a dummy, a non-working phone that Ivar could cause to ring by stepping on a button under the desk. That button was a way to speed the exit of talkative visitors who were staying too long. Ivar also used the middle phone to impress his supporters. When Percy Rockefeller visited Ivar pretended to receive calls from various European government officials, including Mussolini and Stalin. That evening, Ivar threw a lavish party and introduced Rockefeller to numerous "ambassadors" from various countries, who actually were movie extras he had hired for the night. ---- Get access to the World’s Most Valuable Notebook for Founders at Founders Notes ---- “I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — Gareth Be like Gareth. Buy a book: All the books featured on Founders Podcast ---- Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work. Get access to Founders Notes here. ---- “I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — Gareth Be like Gareth. Buy a book: All the books featured on Founders Podcast

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Senra?

  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. Panicked selling reduced them to dust. Less than two weeks after the public learned of Ivar's death, investigators from Pricewaterhouse declared that his companies were insolvent. The Swedish committee investigating his construction firm concluded

• 0:39David Senra?

  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 and arranged for dubious inter-company 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,

• 1:22David Senra?

  Ivar Kreuger was one of the richest men in the world. 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.

• 2:03David Senra?

  That was an excerpt from the book that I'm going to talk to you about today, which is "The Match King: Evr Kruger, the Financial Genius Behind a Century of Wall Street Scandals," and is written by Frank Partnoy. So there is a pretty amazing story 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 Ek, 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.

• 2:45David Senra?

  He goes on other podcasts and mentions founders' podcasts. And so during the dinner, when Daniel asked, "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 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 Evr Kruger 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.

• 3:27David Senra?

  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 any time you read about him or you search about him, 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 Evr's Wikipedia page that explains why that comparison is not 100% accurate. It says, "Kroger's financial empire has been described 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-

• 4:12David Senra?

  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 Morse, the gigantic tobacco company, launched a takeover bid for Swedish Match. And they actually took it private. They took it, they delisted it from the Swedish stock market. That just happened a few years ago.

• 4:55David Senra?

  And so when the book starts, Evar 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. But one of the most surprising things about this guy is just how simply hell 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.

• 5:39David Senra?

  And the end result is a bunch of descriptions of Evar in the book, such as, "He spoke in beautifully constructed paragraphs." When Evar 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 gonna 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.

• 6:22David Senra?

  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 gonna talk about a lot today when you analyze the career of Ivor Kroger. And so Ivor's on this boat, and he's like, listen, I have a product to sell. I need to go to where the money is. A few weeks ago, I did this episode on this guy named Joseph DuVine. This is episode 339. Joseph DuVine was the art dealer to the robber barons.

• 7:05David Senra?

  And in that episode, there's a line that says, DuVine 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. Ivor did the exact same thing. Instead of bringing European art to America, he's bringing European match monopolies. 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.

• 7:50David Senra?

  At the time, matches were a staple. People used matches to light kerosene lamps, gas heaters, stoves, and tobacco. 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? And he's like, oh, OK, I can take those exact same principles and I'll apply it, right?

• 8:33David Senra?

  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's actually has a really, 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, he gets more interested in constructing, constructing companies. And so he starts branching out to 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 with really smart. This guy's a likely a legit genius.

• 9:18David Senra?

  And so what he notices is there's a lot of characteristics in the Swedish match industry that's very similar, similar to the early American oil industries. Essentially, if you wanted oil, open an oil refinery in Rockefeller's day, there was almost no barrier to entry. And so in Rockefeller's opinion, that industry is only going to survive if it's under the complete control of one formidable individual. Yvar 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

• 10:02David Senra?

  by securing a monopoly on match sales throughout the world, mimicking the 19th century oil, sugar, and steel truss. 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 perfunctory."

• 10:22David Senra?

  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 and 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, his career, is that too much finance ruined a legit business. His two companies are 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. When investors learned that Kruger and Toll had been paying 25% dividends each year, they simply went mad. And this is an important point.

• 11:06David Senra?

  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, I always say that learning is not memorizing information. Learning is changing behavior. So he studied this, but it never affected his behavior. So 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.

• 11:48David Senra?

  When investors were manic, they would purchase just about anything. But during the 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. 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. Evar was not able to stay sane.

• 12:33David Senra?

  And so when he gets to America, Evar starts to target several different investment banks. And what he does is really smart. He doesn't, 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 Evar, 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. Evar just had this, 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,

• 13:18David Senra?

  who's going to be his main banker throughout this entire thing. And so as he's on his way to America, he starts seeding this. They're, 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 his, of Evar's trip to America. All these people around him are telling him, hey, Kruger and Toll and Swedish Match are the two hottest companies outside the United States. The colleagues, there is a branch of Higginson and Company in London. His colleagues in London reported that Evar already had made them a fortune on a highly unusual and complex swap transaction. And the end of this sentence is really important, that even the sharpest investment bankers could not understand.

• 14:03David Senra?

  That is another main theme that he got away with that made this, this scheme of his successful. 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, Evar pays a Swedish stockbroker, this guy named Lagerkrantz, to set an appointment with Durant to inquire about syndicating some investments for some of his Swedish clients. That was the stated goal. This is what I meant. This guy's like a, like an international man of mystery. Nothing that like appears, nothing is as it appears with Evar Kroger. So he sends Lagerkrantz before he gets there. He says, hey, go, I'm going to pay, he actually pays him to do this. Go and have this meeting with Durant.

• 14:46David Senra?

  Under this false pretense and then happened to mention me and what I'm up to. And the fascinating thing is this appeared as just, you know, an aside, just something that casually came up in conversation. Durant never imagined that Evar had arranged it all the entire time. And so by this point, news about Evar 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 Evar and he's like, let's please have a meeting. Now, this is what I meant that Evar 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, Evar made himself a business celebrity.

• 15:28David Senra?

  And so even though he wanted to meet Durant the whole time, when Durant asked to meet him, Evar's like, no, I'll try to fit it in. Let's see what I can do. You know, 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 100 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, 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 and is like, I don't understand, like, why did you tell that him behind the factory? We have a parking lot full of unsold Ferraris.

• 16:11David Senra?

  And Enzo said, yeah, but Ferrari has to be desired. It can't be something that you can, that's readily available. He understood that at the very beginning, in the very early days of the history of Ferrari, that fundamental understanding of human psychology, that like genius level of understanding of human psychology that Ferrari had, you see that Evar Kroger had as well. And so it says, when Durant requests a meeting, Evar 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. 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 Evar is going to take down.

• 16:54David Senra?

  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 Evar'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, for some 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 Evar winds up doing to this, you know, taking

• 17:37David Senra?

  a good plan and destroying it reminded me of something that Warren wrote about on the importance of using debt sparingly and to 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 Founder's 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 de Gaulle, and this is what Warren Buffett says in his shareholder letters. "We use debt sparingly. We will reject interesting opportunities rather than over-leverage our balance sheet."

• 18:18David Senra?

  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 is about to tell us, what Warren Buffett's about to tell us that he never believed in, is exactly what Evar Kruger, the mistake that he made. This is what I mean. Learning is not just memorizing behavior. Learning is not just memorizing information. Learning is changing your behavior. Evar 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 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."

• 19:05David Senra?

  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, you know, they'd broken up trusts like Standard Oil and Steel and everything else. Anti-trust laws prohibited a match monopoly in the United States, but nothing prevented American investors from buying into monopolies abroad. And the smart thing that Evar does, again, he's a student of history. He's like, oh, this idea worked. I'll just, 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 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.

• 19:47David Senra?

  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 Evar 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 Evar 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. 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

• 20:28David Senra?

  benefit from a similar compact, anytime, anywhere, with any product. Evar's idea was to do just what Harley had done, except with matches instead of South Sea trade. Evar 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. Evar didn't have enough money to lend millions of dollars to foreign governments. Evar 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

• 21:11David Senra?

  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. 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.

• 21:54David Senra?

  And that's why it's, I think, so important to spend time talking about. Most of this book is just about 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 EVAR. 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 lacked the intellect and ambition of the stadium's namesake, John D. Archbold, the great capitalist, oil refiner, and philanthropist.

• 22:38David Senra?

  EVAR wrote to his parents, "I cannot believe that I am intended to spend my life 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 am 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 EVAR to another Swedish engineer named Paul Toll. And that is when EVAR leaves America, goes back, and founds, him and Paul Toll together, form this company, this very legitimate and winds up being very profitable construction

• 23:23David Senra?

  company called Kreuger & Toll.

• 23:26David Senra?

  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 Yvar, young Yvar, 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 Yvar Kroger, right? The supporting character is the superpower 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 in actually the method of constructing buildings, right?

• 24:11David Senra?

  But maybe even more important than that, he's able to take customers from other existing businesses by realigning their incentives. 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 Yvar 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, you know, these timetables, most times they're late, they're like, 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

• 24:53David Senra?

  risk associated with delays because that's every day, my, 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 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. Yvar 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. Yvar 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 and the ability to speed up a project.

• 25:35David Senra?

  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, 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,

• 26:17David Senra?

  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 schedule. Within a few years, Kruger and Toll was regarded as the best building company in Sweden. A few years later, is 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

• 27:01David Senra?

  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'm going to, 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. 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 or 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,

• 27:46David Senra?

  Ivor is using Rockefeller-esque domination tactics. I think the... The last time I talked about this was on episode 324, where Rockefeller was writing all those letters to his son. If you really want to go about domination and like his conquering mindset. So this is what he's doing. The next, over the next eight years, Evar 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 Evar's decision to enter the match business seemed foolish. They said the exact same thing about Rockefeller. Evar would continually to vertically integrate. Now he's taking over all the factories because you need all like phosphorus. You need all these other chemicals to make matches.

• 28:31David Senra?

  So he would take over the suppliers and then he would choke off his competitors. So they can no longer buy the 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 & Toll. 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,

• 29:15David Senra?

  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 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.

• 29:59David Senra?

  And so he's selecting these directors that are supposed to, quote unquote, oversee International Match's business. And one of them is the nephew of John D. Rockefeller, which Evar thought that was incredibly cool because he idolized Rockefeller since he was a young man. But why is he, this guy's name is Percy Rockefeller. Why is he picking Percy Rockefeller? Evar 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. This guy's an evil genius. Evar 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.

• 30:42David Senra?

  "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. There's an excellent line. I went and searched all my notes and highlights because I remember he'd said something. So I just put in the type, 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 Evar raise money from American investors. Okay, they had no idea how desperately Evar 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.

• 31:26David Senra?

  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 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, Evar 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. This is crazy. A large portion of the dividends recently paid by Swedish Match and Kruger and Toll came from cash raised by international match in America.

• 32:10David Senra?

  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, Evar's profits were real. Swedish Match made and sold billions of boxes of matches every year. Kruger and Toll built landmark buildings throughout Europe. Evar believed that if he kept raising cash to pay earlier debts, his business would grow fast 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.

• 32:55David Senra?

  He says, "All companies that go out of business do so for the same reason. They run out of money." The minute Evar'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 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 that had found that Swedish Match's finances were so complicated that he could not unravel them. And what he said at the time was that the Swedish Match consortium of companies should

• 33:40David Senra?

  be called the greatest speculation venture in Sweden. And so you have Swedish regulators that are calming 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 EVAR's main banker in Sweden. This guy names Rydebeck. Rydebeck is extremely influential. And so he's able to calm down the regulators. He says, listen, it's in our, it's our interest to survive. We don't need like 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 Swedish Match company, it's, it's phrased as advice from regulators and not, it didn't require any action. And so you're like, I don't understand, like why, why would the bank want to do that if

• 34:23David Senra?

  their main customer is potentially taking risks that could make them lose money? And the answer is incentives. The banks were not only lending money to EVAR, they were his biggest shareholders. So when the bankers help get the regulators off of EVAR, 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. He did something very similar in his early days of his career. The banks that he was borrowing money from to build the early days of Standard Oil, he

• 35:08David Senra?

  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 missing line 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'd raised money from the past, they made him settle their loans and return their money. And they said, hey, you gotta raise funds somewhere else. And so he did just what Duveen did. He says, okay, where's the money? America? Okay, cool. I'll hop on the boat and go over there. And so then we go back to Evar being this evil genius.

• 35:52David Senra?

  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 against Evar. And Evar 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 Evar 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 Evar's numbers, which changed more frequently than a careful

• 36:35David Senra?

  accountant would hope or expect. Everything he did was based solely on information provided by Evar. And yet, he never says anything. Why doesn't he say anything? Again, it goes back to intent, which we'll get to in a minute. At the time, there's no federal member. 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 Evar's auditor, over and over again. It's like, what's going on with this? We need more information. Every time they get more information, like, this isn't good enough. And then this is where Burning should have known.

• 37:19David Senra?

  Burning knows that Evar's a liar. And it's not even that sophisticated. It's 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, Evar sends Burning these financial statements. Listen to this. It was obvious that the statements had been hastily and not very carefully prepared. Why? Evar sent balance sheets for International Match for 1921 and 1922, showing that the company had 1 million shares outstanding.

• 37:53David Senra?

  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 dollars in profits. 1922, 2 million dollars in profits. 1923, 2.1 million dollars in profits. And it goes on and on. Every year, we know what he does. He literally just increases the amount of profits by 100,000 dollars. 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 Evar could control burning is he's like, oh, you obviously made a mistake. Don't worry, I will reconcile.

• 38:36David Senra?

  He fixes them to the best of his ability on the very limited knowledge that he has, 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 Evar is perpetuating in the book, it sounds ridiculous. Like, who... How is this possible? And it's... But he 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 the information was incomplete.

• 39:19David Senra?

  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, interest, or a share of the profits.

• 40:02David Senra?

  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 Evar 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? 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.

• 40:43David Senra?

  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. 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. Glauckwacki's signature in the future.

• 41:27David Senra?

  That is the senior finance ministry of Poland who he's doing this deal with. So he gets 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, but I don't want to 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

• 42:10David Senra?

  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. 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. He's like, "Man, this is kind of weird." So then he goes and talks to Burning and Ernst & Ernst. You're supposed to be the auditor. You're like, "Are you okay with these numbers? Like, what's going on here?" But then what happened? It's incentives. It

• 42:52David Senra?

  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's just like, "Oh, well, the money's coming in." He says, "Everything worked just as Ivor said it would. International match began receiving quarterly interest payments of about a million dollars each quarter, just as the agreement with Poland said. As more cash flowed in, the directors' questions went away." And I think that sentence, so I double-underlined that sentence. "As more cash flowed in, the

• 43:34David Senra?

  directors' questions went away." I think that double-underlined sentence is why these Ponzi-esque deals last a long time, rather. I remember Ed Dorp'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 has just lived a remarkable life. Listen to episode 222 if you haven't listened. It's just remarkable. Like, this guy's like the financial history Forrest Gump. Started the first quantitative hedge fund, created the world's first wearable computer with Claude Shannon, figured out the counting 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.

• 44:19David Senra?

  But in addition to that, back in 1991, Ed Thorp 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 Thorp presents, he's like, "No, this guy is clearly a fraud. This is clearly a Ponzi scheme." You know, this is 20, almost 20 years before Bernie Madoff actually gets caught. 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 Thorp in 1991.

• 45:03David Senra?

  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 Evar 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. 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.

• 45:47David Senra?

  And Evar knew that because Evar was a director of the bank.

• 45:53David Senra?

  And so he knowingly, 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 it's 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. Evar showed Lang 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 Evar, he's like, well, I need to look over the balance sheet as huge sums are involved. According to one account, Evar stared at him, stone-faced in response. When Lang mumbled that it would be nice to know where all the money was going, Evar said it was being spent secretly in Poland, and this should not be mentioned.

• 46:37David Senra?

  Evar then told Lang, if you don't believe me, you can go to Poland and see for yourself. Lang nodded and then signed. And then we get to the part where I've already been exposed to Evar, all the machinations that this guy does. And this is the first time that I mention something that I've mentioned to you over and over again. 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 even back and forth, back again and again. And what he does is like, he'll raise money, take the money, sign one legitimate deal, then go back, exaggerate everything else to raise another money. It's like, 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.

• 47:21David Senra?

  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 any documents. And so there was an important fundraiser 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 Evar had spent on the Burning's vacation was well worth it. As the details of the new preferred issue were being finalized, Evar's auditor, the one man who might have asked penetrating questions about the accounting details of the deal,

• 48:06David Senra?

  had been just where Evar 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. From 1923 to 1929, Evar tripled his funds raised from American investors, persuaded the New York Stock Exchange to list his securities, pulled even with JP Morgan as a leading lender to Europe by securing match 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.

• 48:49David Senra?

  And so the next time, the last time he tapped American investors, he's got his auditor, his auditor, Berning, walking around Paris, right? The next year, he has to sell another 450,000 shares. And so Berning is in New York when this is happening. He's obviously very important in this deal, and he's noticing some odd things that he says nothing about. Let's get into it. While Berning was updating International Match's reports to reflect this new share issue, he discovered a reference to this thing called Garanta, this Dutch hidden company. Berning was surprised to see that Garanta owned, that owed International Match $17 million. He asked Evar for some assurances about Garanta. What was it? Did this company make any profits or have any assets?

• 49:33David Senra?

  Why hadn't he told him about this existence? Evar reassured Berning 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 Evar is saying. He's just saying, no, this is, I can write it down on a piece of paper, but this is what it is. It's in my head. Now, you're like, this is ridiculous. Like, why isn't Berning doing anything? And the author asked the same question. What was Berning supposed to do? Should he be suspicious of Evar? Should Berning accuse his most important client of hiding crucial information? Would this accusation then destroy Berning's relationship with Evar? And the destruction of that relationship?

• 50:16David Senra?

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

• 50:51David Senra?

  In other words, Berning is incentivized to believe Evar because if he's not, if he's wrong, if he's lying, all the overtime, all the extra money. And I forgot, Evar is also paying him for consulting fees and paying him on the side and everything else, paying for trips to his, 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 Almanack. 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, the most important rule in management, get the incentives right. As usual, Charlie Munger describes it in a beautiful way.

• 51:34David Senra?

  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 I've 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 the federal, 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 customers if the night work shift cannot accomplish its assignment fast. FedEx had one hell of a time getting the right, the night shift to do the right thing.

• 52:18David Senra?

  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.

• 52:34David Senra?

  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 low 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, 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.

• 53:16David Senra?

  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 many, many ways. He's constantly fighting off. Remember, I think I've said this multiple times. Over a decade, people are like, this is weird. The books seem funny. There's no detail. The numbers change. What the hell's going on here? And he's got other ways. 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 was 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.

• 54:00David Senra?

  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. 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 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, delude 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 Evar 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

• 54:45David Senra?

  scan through the list of what was at the office. More insane shenanigans. You're not gonna believe what I'm about to read to you. You're just not gonna believe it. He has this, he builds this 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, the 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? He's 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 Evar could cause to ring by stepping on a button under the desk. He used it for two purposes.

• 55:29David Senra?

  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 or 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. 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. Are you like, wait till we get to what's next. That evening, he threw a lavish party and introduced Rockefeller to numerous ambassadors.

• 56:11David Senra?

  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.

• 56:27David Senra?

  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 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, Evar had become one of the firm's biggest clients and Burning deserved the credit. You are now resident partner. Mrs. Berning certainly was proud of her husband. Now they could afford a new apartment at 40th and 5th Avenue in Greenwich Village. They could afford a new social circle as well.

• 57:09David Senra?

  The Bernings 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. 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 loan, 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 the crazy, one of the craziest things. I know I keep saying that because this is 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 stock, in US stock market history. At the same weekend, he's signing the biggest deal of his life. And I think this is just great writing.

• 57:54David Senra?

  I'm going to read this paragraph to you. "On Saturday, Ivor 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 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. "Ivor imagined the buzz spreading 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."

• 58:39David Senra?

  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 freefall continued." What a line this is. "Ivor's greatest triumph was immediately followed by the most spectacular two-day decline in the history of financial markets. This time, there would be no recovery."

• 59:07David Senra?

  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's 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, "Listen, 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 Evar's securities entirely. Another bank, Credit Suisse, declared Evar a "very dangerous person" and said it would not lend to any of his companies. Evar finally conceded that he could not afford to pay shareholders

• 59:48David Senra?

  of Swedish Match. Evar's companies would soon be in default. If Evar goes down, so does the bank Lee Higginson. So two of the partners go to Evar's apartment in New York to try to see what's going on. He's in a full collapse and breakdown. They're 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. He prescribed some sedatives. During the next three days, Evar 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

• 1:00:33David Senra?

  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 doubt he's under stress. He's gonna wind up shooting himself. But this mania, this like, "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. Saying this ambassador from Germany. The guy that made rubber stamps of every single government official's 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,

• 1:01:17David Senra?

  sitting in his pajamas. Now, I think he's faking it. That would 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 11:00 a.m. the next day. That guy leaves Yvar at 6 o'clock that night. Later that same night, the night before he's supposed to meet these bankers, investors at 11:00 a.m., he walks into a gun shop in Paris and

• 1:02:00David Senra?

  buys a gun and a bunch of ammunition. The next day in this hotel in Paris, a dozen anxious men are pacing the floor while Yvar's employees are assuring everyone that Yvar would be there soon. But Oscar Riedbeck and Donald Durant were concerned, these are his two main bankers, because it was the first time they could remember Yvar being late. After several hours, a few of them go to Yvar'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."

• 1:02:44David Senra?

  They rush back to the hotel to tell the bankers that Yvar Kroger had committed suicide. Yvar's death confirmed everyone's worst fears about the man and his finances. The investment bankers from Lee Higginson, which had sponsored Yvar 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 Murnane, the senior partner, later told investigators what he thought when he heard the news. "I suddenly knew that we had all been idiots."

• 1:03:17David Senra?

  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 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 in your podcast player or available at founderspodcast.com, you'll be supporting the podcast at the same time. That is 348 books down, 1,000 ago, 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 Founder's Notes. Founder's Notes is the personal tool that I have built. 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

• 1:04:02David Senra?

  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 Founder's Notes exists is because he said that learning from history is a form of leverage. And I think Founder's Notes is a tool that enables you to do so. He said, "I read Barron's magazine for 50 years. In 50 years, 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 Lee Liu, 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 Founder's Notes, you can read my notes and highlights on a different book every single day. And over the lifetime of your

• 1:04:46David Senra?

  career, the idea that you're not going to find one idea in there that's not additive and helpful and actually improves the odds of your success in business is the probability that is as close to zero as possible. And when I reread that note about Charlie saying that he made $400 or $500 million from one idea of reading this magazine for 50 years, I was thinking about a few weeks ago when I did that Tarantino episode. If you listen 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, 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 information that's in his head and then use it in his work later on. And so there's many examples

• 1:05:30David Senra?

  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. 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 a Zoom with the team at Readwise because I built this product in partnership with Readwise. I've been using Readwise since 2018. I, you know, I mentioned it. You can go back and listen to past episodes to talk about how great this app is. Had no idea they'd be partnering with them. Go on other people's podcasts, talk about it. But there was a multiple time. So the reason

• 1:06:14David Senra?

  I bring that up is because there's a lot of different ways to use Founder's 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. 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 Founder's Notes. It is super fast now. And so we were talking about that yesterday. And I had noticed it because this week, so I type in, let me give you an example, a real world example. I would type in power of incentives. So actually, I'm going to do this with you live, okay?

• 1:06:59David Senra?

  So what you do is when you subscribe to Founder's Notes, and if you already have subscription, try this, okay? So once you log into Founder's Notes, you'll see search highlights, right? And in that box, it's the very top page, I put in power of incentives. I press enter. Two seconds later, it's showing me, it shows you anytime 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, Founder's 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,

• 1:07:44David Senra?

  Twenty six, twenty seven, if I'm counting correct, twenty seven 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. 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 a lot, many, many hours on listening to founders. This allows you, 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 and you find it. Like, that's it, that's valuable, that's worth 100 times the cost right there.

• 1:08:23David Senra?

  But I was blown away by just this, the horrible position that Evra Kroger put himself in. So I just searched debt. That is the one key word 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, 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 leary 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. 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.

• 1:09:08David Senra?

  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 are interested, and if you're already running a successful company, I would 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 past. You get probably 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 foundersnotes.com. That is founders with an S, just like podcast foundersnotes.com. Second thing I want to tell you about is I'm working on.

• 1:09:49David Senra?

  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 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, when it's finished. But essentially I'm going around. This is, this is also is related to why I'm doing events. And this, this idea that comes up over and over again, that relationships run the world. So I am going to friends of mine, right? 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, it's, it's, I don't think it's up there yet, but it'll be on my website.

• 1:10:33David Senra?

  It'll be a part of their like deals or something like that. I'll let you know what the name, uh, when I do it. But essentially I'm saying, hey, you're building a service, like 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 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 haven't 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 their 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.

• 1:11:18David Senra?

  One is in direct relation to a main theme of the podcast you just listened to. So my friend Eric Jorgensen is, he, how I met him, uh, in addition, he, in addition to being a fan of founders, he wrote one of my favorite books, which is the Almanac of Naval Ravikant. 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. And so the reason it relates to what we just went over, it's like I mentioned the fact that Evar did something really smart, which is he made it a point to become well-known because becoming well-known helped serve his business,

• 1:12:01David Senra?

  like his needs in business. Now, obviously, we don't want to run Ponzi schemes and all of our 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 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 for $38 billion, but he was talking about some of the best investments he ever made came because he was writing op-eds and 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.

• 1:12:43David Senra?

  And so he was 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 implore you, I implore you, Tyler, 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. And so what Scribe Media does, and the reason I'm telling you about it is because there's a,

• 1:13:24David Senra?

  think about all the founders, investors, executives, consultants, all these other professionals that 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 and you can go to scribe media.com/ 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 talk to Eric about this idea this is not like a high margin business but he

• 1:14:09David Senra?

  gave you discounts that are available nowhere else and so I'll list them down below a thousand dollars off of guided author a thousand dollars off of scribe professional and $3,000 off of scribe elite ghostwriting so that's scribe media.com/ 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 idle cash and then all these listeners

• 1:14:54David Senra?

  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 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 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 or 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