Talk:Kochland (Book)

Snippets

In fact, while the world was looking elsewhere, Koch Industries built a financial trading desk that rivaled anything operated by Goldman Sachs or Lehman Brothers. Koch Industries, known for crude oil and natural gas, became a world leader in making and trading some of the most complex financial instruments in the world. (sounds a lot like enron around this time)
AFP chapters in New Jersey and elsewhere offered free chartered bus rides to protestors to attend a rally in Washington, DC, that summer. Once in Washington, protestors were given free box lunches and glossy protest signs. The protestors were joined by Tim Phillips, AFP’s president, who gave rousing rally speeches. (not so different from India then)
The entire economy depends on refined oil, but no one has built a new oil refinery in the United States since 1977.
By the time the whole mess had settled in 1974, oil prices had risen from $3 a barrel to $12 a barrel.
To keep things moving up and to the right, Charles Koch had an unwavering philosophy about debt. He was rigid in his belief that debt should be kept as low as possible so that interest payments didn’t eat up Koch’s cash. The reasons for this were strategic. Every downturn brought opportunities for companies that were prepared. Downturns weakened competitors and made them ripe for takeover. Downturns made assets cheaper to buy. For this reason, Markel and his team were discouraged from borrowing large sums even if banks were more than willing to lend it.
This expansion helped make Koch the single largest purchaser of crude oil in the United States by the 1980s.
He realized that there were not two separate spheres of American life: the public sphere of government action and the private sphere of business enterprise. Instead, there was only one tangled web of a nation’s political economy, the deeply interlaced workings of government policy and corporate structures. One intimately affected the other. This reality was painfully apparent in the oil business. Government intervention affected every aspect of the industry. And the intervention reached its peak as Charles Koch was building his company.
But the markets to buy PVC were just as confusing and opaque as its chemical formula. The deals were too specialized for open exchanges, and they were often done one-on-one, confidentially, over the phone.
Roskind taught Bill Koch that trading was about one thing. “The idea of trading is to take what we have and get what we want,” he said.
Chemical trading wasn’t a simple matter of buying low and selling high.
Roskind and Bill Koch heard from clients that there was very strong demand in East Asia for a chemical called acetic acid, which was in tight supply. The companies that made acetic acid were aware of the supply crunch, and they were not about to let go of their product easily. This made it almost impossible to buy acetic acid at a price that would make it profitable to turn around and sell it in Asia. But a good trader knows what is happening simultaneously in different markets. Bill Koch knew that the companies that made acetic acid often used corn as a feedstock for the product. Bill Koch also knew how to get corn at a cheap price on the futures market in Chicago. So Koch Trading bought corn on the futures market and bartered it with acetic acid manufacturers for large quantities of their product. Then they sold the acetic acid at a much higher price in Asia.
But going public would destroy the machine that Charles Koch had built. It would also mean that Charles Koch would lose control. Shareholders would have a vote. A new board of directors might have the power to fire him. Koch’s business strategy revolved around rapid decision-making: managers brought a plan to Charles Koch and Sterling Varner, and they had the authority to approve it on the spot. Publicly traded firms had to take their shareholders into account, leading to the proliferation of the kinds of committees and review groups that Charles despised.
Antitrust laws were an economic foundation of the New Deal; a critical counterbalance to the power of monopolistic corporations like Standard Oil. Baxter issued a memo to his legal staff telling them not to worry so much about the concentration of corporate power but to focus instead on efficiency and prices. This subtle change ushered in a wave of consolidation that swept across virtually every sector in the economy.
One of Clinton’s first acts was to pass the North American Free Trade Agreement, a pact that opened markets in Mexico and Canada. NAFTA dramatically weakened America’s labor unions. Companies once avoided unions by moving to southern, right-to-work states; in the 1990s, they began moving to Mexico. At the end of Clinton’s presidency, he signed a law bestowing permanent normal trade relations on China, opening the gates yet wider for companies to shift jobs overseas. Clinton also repealed key banking regulations from the New Deal, like the 1933 Glass-Steagall Act, which created a division between commercial banks that took deposits and investment banks that gambled through speculation.
A libertarian group called the Competitive Enterprise Institute marked the increase by tallying the number of pages in the Federal Register, which records rules and regulations. In 1986, there were just more than forty-seven thousand pages. By 1995, there were more than sixty-seven thousand. The burden of these rules fell disproportionally on smaller companies, the CEI found.
Neoliberal policies sought free-market reforms like NAFTA but retained federal entitlement programs and heavy defense spending. Its hallmarks were massively complex laws and programs that tried to thread the needle of unshackling markets while preserving a role for the state.
After the Watergate scandal of the early 1970s, Congress enacted a strict and complicated set of rules around campaign donations. Individuals and companies were capped in how much they could give to any candidate in an election cycle. Donations had to be disclosed publicly, potentially embarrassing both the donor and the politician. Koch Industries circumvented this system in ways that would become widely imitated. In 1996, Koch Industries created a nonprofit group called the Economic Education Trust. The group did not need to disclose its donors because it was not ostensibly a lobbying or campaign finance organization. Koch funneled money through the Economic Education Trust to state and federal campaigns in Kansas and other states where it did business.
Triad was a new kind of campaign finance machine. It acted as a third party that didn’t directly donate money to politicians. Triad hired consultants who created attack ads for Republicans in tight races. Triad was careful in its language. It never used words like “vote for,” “support,” or “defeat” that might have triggered oversight from campaign regulators like the Federal Election Commission.
Employees didn’t have responsibilities, they had “decision rights.” They weren’t managers anymore, but “process owners.” The vocabulary was drilled into everybody.
Rapid prototyping was the process of trying new ventures on a small scale to see how they worked. It was the method that Koch used to branch out into different industries. Failure would be part of the process, so Koch kept its initial ventures small. Divisions like the fertilizer business were all learning laboratories. Koch Industries learned a lot with its fertilizer business. Among other things, the company learned that American agriculture had slowly and quietly turned into a fossil fuel business. This strange fact would launch the largest expansion effort in Koch’s history. It was nothing less than a play to take over a vast portion of America’s food system.
Koch’s fertilizer plant was basically an oil refinery, but instead of transforming crude oil into gasoline, it transformed natural gas into nitrogen-based fertilizer.
The entire food system appeared to be one immense machine that laundered energy from fossil fuels into food calorie energy that humans could eat.
Koch was able to offer a surprisingly giant sum of money for Purina. Dean Watson and others offered a price for Purina Mills that included the value Koch thought it would produce after its improvements had taken hold. Purina itself was worth about $109 million. Koch would pay $670 million to buy it.
Farmers had production limits, but the limits were voluntary. The guidelines were encouraged by subsidies. Many farmers got checks in the mail to ensure they let part of their land lay fallow—they got money for nothing. In 1996, Congress passed a bill called “Freedom to Farm” that largely abolished the New Deal farm programs.
Purina Mills had hatched a plan to boost hog feed sales by purchasing baby pigs and then providing them to farmers to raise. The farmers agreed to feed the pigs Purina products. The company had locked in guaranteed sales, and it was easy money for a while. So Purina expanded the program. It provided more pigs under contract to big companies like Tyson Foods, selling more feed and then buying even more pigs. By the end of 1997, Purina effectively owned six million pigs, making it one of the largest hog producers in the nation.
Market-Based Management might have fostered business failures, but it had achieved one thing: It gave all of Koch’s employees a common language. It gave them a common mission, and this is more important than it might sound.
When the development board saw a deal it liked, it moved with stunning speed. There were no layers of bureaucracy between the board and Charles Koch—there was only a short walk down the hallway. There were no public shareholders to consult, only Charles and David Koch. Again and again, Koch exploited these advantages. The development board recommended acquisitions, and Koch Industries acted before its competitors even seemed aware of what was happening.
The Bush era would be regarded as a time of deregulation, when rules were stripped away from the private marketplace, and the reach of the federal government over corporations was curtailed. In reality, the Bush presidency only accelerated the trends begun under Reagan and continued under Clinton—and it pushed these trends to an obscene extreme by the end of the 2000s.
The decade of the 2000s was defined by the financialization of everything. The financial deregulation acts passed by Bill Clinton launched an industry of trading and speculation activities that dwarfed anything even during the Reagan era
In 1978, President Jimmy Carter stripped away the price controls to unleash market forces that might encourage new supplies. But Carter’s “deregulation” was hardly a libertarian dream. It created a wildly complex set of rules and price controls that sought to let the wholesale price rise and fall while protecting consumers from the highest price spikes. This was a Faustian bargain that would play out repeatedly in US policy making from the 1980s on. Lawmakers repeatedly passed deregulation measures that only went halfway, stripping away some controls while trying to shield average people from the true volatility of the market. The ensuing market structures were usually defined by complexity and dysfunction, and the natural gas industry was no different.
Stephens, who traded at Koch Gateway’s connection to the “Henry Hub,” a Louisiana pipeline distribution complex that became a major market for gas sales. The Henry Hub was one of the industry’s price setting markets, and in the late 1990s Stephens seemed to be single-handedly brokering most deals on the hub. “He was the Henry Hub cash market,” O’Neill recalled.
The new commodity in this market was called a megawatt-hour. This was a basic unit of power that could be bought and sold like an oil futures contract.I The size of this new market was breathtaking. The national electricity market was worth roughly $215 billion a year, making it more than twice the size of the airline or telephone industries.
There were whole continents of public policy where even the most hardened lawmakers didn’t dare to tread, areas that were so tedious and so complicated and so lacking in public exposure that they promised to swallow public-service careers whole. Regulating public utilities was one of these areas. Just the phrase “regulating public utilities” was enough to make a citizen change the channel or skip to the next news article. It was one of those ironic facts of America life: very few issues affected people more deeply than providing them with electricity, but very few issues drew less public interest.
ALEC’s mission, and its organization, was a novel innovation. State legislatures were often seen as policy backwaters. ALEC stepped into the breach by giving much-needed resources to overworked and underpaid state lawmakers. This innovation was born of necessity in 1973, when liberal politics dominated Washington. ALEC’s founder, a religious conservative activist named Paul Weyrich, felt it would be far more effective to push policy ideas on the state level. He was right.
One division DuPont was keen to unload was one of its oldest and best known: the synthetic materials unit that made products like Lycra and Stainmaster carpet. The synthetic fibers helped make DuPont a household name, but global competition turned Lycra into a commodity, and, like most commodities, it was suffering from booms and busts in the market.
Similarly, DuPont had expanded a boiler in Seaford, Delaware, without getting the proper permits and was running the boiler without the proper pollution control technology. In the past, Koch had tried to solve such problems on its own, before regulators discovered what was happening. This time Koch reported everything to the EPA, disclosing nearly seven hundred violations to the agency just months after Koch took ownership of the new factories. Koch entered into an agreement with the EPA that gave the agency power to audit Koch every quarter to ensure that it was complying with a schedule of improvements. Koch spent about $140 million to get everything up to code. Then it sued DuPont for $800 million in damages.
After forty years of living and working in the volatile world of commodities markets, Charles Koch had finally built a machine that was poised to thrive, even profit, in the midst of violent market corrections. This capability derived, in part, from something that Charles Koch called “the trading mentality.” This mentality held that it didn’t matter so much if markets were going up or down; what mattered was that the traders could see ways to exploit large shifts in the markets. During volatile times, companies and governments and competing traders were thrown off balance. Prices diverged. Supplies were interrupted. Gaps emerged between market prices and underlying values. Koch became nimble, even expert, at exploiting those gaps for its gain.
“When the market is constant, traders don’t make money,” explained Melissa Beckett, the star trader who’d once traded electricity futures. “Traders make money on change.”
This economic stagnation wasn’t unique to the Georgia-Pacific warehouse workers. Between 1948 and 1973, American workers’ productivity rose steadily, and their wages rose with it. But in the early 1970s, as the age of volatility shook apart the New Deal policy infrastructure, the rise in productivity broke free from the wages that were paid for it. Productivity rose 74.4 percent from 1973 until 2013. Wages rose only 9.2 percent.
Early data from the experiment suggested that it might be impossible to beat a holdout. Different strategies could undermine the holdout’s leverage, but the holdout couldn’t be eliminated. There was, however, one strategy that nearly decimated the holdout problem. The data was just astonishing on this point. The best way to destroy a holdout’s position was to make them expendable. Winn discovered this fact when his experiments divided the virtual landowners into groups and then made it clear that some of them might be cut loose if they bargained too hard. In this scenario, the pipeline company was looking to buy up land on which to build a route, but it could take alternative paths. It wasn’t necessary in this case to get all of the landowners to sell in order to build the pipeline. The company could assemble a path while excluding some landowners.
The libertarian Cato Institute think tank, which Charles Koch cofounded and continued to support
It’s common to think of the US House of Representatives as a single organization with 435 members who propose laws and then vote on them. In fact, the House is a collection of smaller governing bodies, each with its own authority, called committees. There’s a committee to write tax law and another to write environmental law, for example. Each committee has a chairperson, who acts as the committee’s CEO. Bills in the House are written by committees, then passed by a vote of the committee members. This structure gives tremendous power to committee chairs
Cap-and-trade gained support after Bush imposed it on power plants that released sulfur dioxide, which created acid rain. By 2008, emissions were 60 percent lower than they had been in 1980. More importantly, the cuts were made at much lower costs than people had predicted. The cap and trade system on sulfur dioxide was imposed in 1990.
They focused on three factors that could sway the legislator’s thinking. The factors were: 1. The Preferences of a Legislator’s Voters. This was the most important factor to a lawmaker. A legislator cares, more than anything, about winning the next election. They seek to stay safely within the zone of voter approval. 2. The Broader Political Impact of the Vote. Because every legislator belongs to a political party, they also obsess about their standing within the party and their political future. A good lobbyist points out how any given vote fits into the party’s goals. 3. The Personal Convictions and Idiosyncrasies of the Legislator. This was the most frustrating and most ambiguous factor. Legislators are only people, at the end of the day. Most of them ran for office for deeply personal, and sometimes irrational, reasons. It could not be overestimated how profoundly these personal motivations play into a legislator’s votes. Good lobbyists were intimately familiar with a lawmaker’s personal quirks and convictions.
In March of 2010, Greenpeace released its forty-three-page report entitled Koch Industries: Secretly Funding the Climate Denial Machine, which detailed Koch’s extensive giving to groups like the Mercatus Center, the Cato Institute, and the Competitive Enterprise Institute.
The publicity culminated in August of 2010 when the New Yorker magazine published a detailed report of Koch’s political history, with contemporary accounts of Americans for Prosperity’s coordination with Tea Party activists. The article, “Covert Operations: The Billionaire Brothers Who Are Waging a War Against Obama,” was written by Jane Mayer, one of the most prominent investigative reporters in America.
The previous two years had been wildly unstable. In 2007 and 2008, crude oil prices spiked to record highs. Natural gas followed crude oil upward, as it tends to do. Energy prices crashed during the recession due to weak demand, which was predictable. But then something strange happened: oil prices started to climb again, but natural gas prices didn’t follow them upward. Instead, gas prices started to slide. Then fall. Then collapse.
During the 1980s, ownership of the nation’s refineries consolidated into fewer and fewer hands. After the Reagan administration loosened antitrust enforcement, a wave of mergers swept through the industry. The mergers accelerated during the Clinton administration. Between 1991 and 2000, there were 338 mergers among oil refiners. The consolidation continued through the Bush administration.
By 2016, US refineries ran at an average of 90 percent of their total capacity, compared to the global average of 83 percent. Only India ran its oil refineries at a tighter capacity.
In 2010, the average profit margin to refine a barrel of crude oil in the United States was roughly $6 a barrel, by far the highest in the world. The next-highest profit margin was in Europe, where it was about $4 a barrel. One year later, US refining profit margins had swelled to over $16 per barrel—nearly triple the next-highest rate of almost $6 a barrel in Europe.
O’Neill found Chase Koch to be a surprisingly normal teenager. Chase wanted to make friends and spent a lot of time working on his car, installing a souped-up stereo and speaker system during his free time.
Chase also worked in a group of tax and accounting analysts. This might sound arcane and boring. Nobody grows up dreaming that they’ll become a tax analyst. But Chase would have discovered that these skills were just as critical to Koch’s success as was the company’s expertise in managing complex pipeline and refinery systems. There was virtually no terrain in the American economy that was more complex, more prone to manipulation, and more financially valuable than the American tax code.