[News] Inside the Koch Brothers' Toxic Empire
Anti-Imperialist News
news at freedomarchives.org
Wed Sep 24 19:19:54 EDT 2014
Inside the Koch Brothers' Toxic Empire
By Tim Dickinson
<http://www.rollingstone.com/contributor/tim-dickinson>| September 24, 2014*
http://www.rollingstone.com/politics/news/inside-the-koch-brothers-toxic-empire-20140924*
The enormity of the Koch fortune is no mystery. Brothers Charles and
David are each worth more than $40 billion. The electoral influence of
the Koch brothers is similarly well-chronicled. The Kochs are our
homegrown oligarchs; they've cornered the market on Republican politics
and are nakedly attempting to buy Congress and the White House. Their
political network helped finance the Tea Party and powers today's GOP.
Koch-affiliated organizations raised some $400 million during the 2012
election, and aim to spend another $290 million to elect Republicans in
this year's midterms. So far in this cycle, Koch-backed entities have
bought 44,000 political ads to boost Republican efforts to take back the
Senate.
What is less clear is where all that money comes from. Koch Industries
is headquartered in a squat, smoked-glass building that rises above the
prairie on the outskirts of Wichita, Kansas. The building, like the
brothers' fiercely private firm, is literally and figuratively a black
box. Koch touts only one top-line financial figure: $115 billion in
annual revenue, as estimated by /Forbes/. By that metric, it is larger
than IBM, Honda or Hewlett-Packard and is America's second-largest
private company after agribusiness colossus Cargill. The company's stock
response to inquiries from reporters: "We are privately held and don't
disclose this information."
But Koch Industries is not entirely opaque. The company's troubled legal
history -- including a trail of congressional investigations, Department
of Justice consent decrees, civil lawsuits and felony convictions --
augmented by internal company documents, leaked State Department cables,
Freedom of Information disclosures and company whistle-blowers, combine
to cast an unwelcome spotlight on the toxic empire whose profits finance
the modern GOP.
Under the nearly five-decade reign of CEO Charles Koch, the company has
paid out record civil and criminal environmental penalties. And in 1999,
a jury handed down to Koch's pipeline company what was then the largest
wrongful-death judgment of its type in U.S. history, resulting from the
explosion of a defective pipeline that incinerated a pair of Texas
teenagers.
The volume of Koch Industries' toxic output is staggering. According to
the University of Massachusetts Amherst's Political Economy Research
Institute, only three companies rank among the top 30 polluters of
America's air, water and climate: ExxonMobil, American Electric Power
and Koch Industries. Thanks in part to its 2005 purchase of paper-mill
giant Georgia-Pacific, Koch Industries dumps more pollutants into the
nation's waterways than General Electric and International Paper
combined. The company ranks 13th in the nation for toxic air pollution.
Koch's climate pollution, meanwhile, outpaces oil giants including
Valero, Chevron and Shell. Across its businesses, Koch generates 24
million metric tons of greenhouse gases a year.
For Koch, this license to pollute amounts to a perverse, hidden subsidy.
The cost is borne by communities in cities like Port Arthur, Texas,
where a Koch-owned facility produces as much as 2 billion pounds of
petrochemicals every year. In March, Koch signed a consent decree with
the Department of Justice requiring it to spend more than $40 million to
bring this plant into compliance with the Clean Air Act.
The toxic history of Koch Industries is not limited to physical
pollution. It also extends to the company's business practices, which
have been the target of numerous federal investigations, resulting in
several indictments and convictions, as well as a whole host of fines
and penalties.
And in one of the great ironies of the Obama years, the president's
financial-regulatory reform seems to benefit Koch Industries. The
company is expanding its high-flying trading empire precisely as Wall
Street banks -- facing tough new restrictions, which Koch has largely
escaped -- are backing away from commodities speculation.
It is often said that the Koch brothers are in the oil business. That's
true as far as it goes -- but Koch Industries is not a major oil
producer. Instead, the company has woven itself into every nook of the
vast industrial web that transforms raw fossil fuels into usable goods.
Koch-owned businesses trade, transport, refine and process fossil fuels,
moving them across the world and up the value chain until they become
things we forgot began with hydrocarbons: fertilizers, Lycra, the
innards of our smartphones.
The company controls at least four oil refineries, six ethanol plants, a
natural-gas-fired power plant and 4,000 miles of pipeline. Until
recently, Koch refined roughly five percent of the oil burned in America
(that percentage is down after it shuttered its 85,000-barrel-per-day
refinery in North Pole, Alaska, owing, in part, to the discovery that a
toxic solvent had leaked from the facility, fouling the town's
groundwater). From the fossil fuels it refines, Koch also produces
billions of pounds of petrochemicals, which, in turn, become the
feedstock for other Koch businesses. In a journey across Koch
Industries, what enters as a barrel of West Texas Intermediate can exit
as a Stainmaster carpet.
Koch's hunger for growth is insatiable: Since 1960, the company brags,
the value of Koch Industries has grown 4,200-fold, outpacing the
Standard & Poor's index by nearly 30 times. On average, Koch projects to
double its revenue every six years. Koch is now a key player in the
fracking boom that's vaulting the United States past Saudi Arabia as the
world's top oil producer, even as it's endangering America's
groundwater. In 2012, a Koch subsidiary opened a pipeline capable of
carrying 250,000 barrels a day of fracked crude from South Texas to
Corpus Christi, where the company owns a refinery complex, and it has
announced plans to further expand its Texas pipeline operations. In a
recent acquisition, Koch bought Frac-Chem, a top provider of hydraulic
fracturing chemicals to drillers. Thanks to the Bush administration's
anti-regulatory agenda -- which Koch Industries helped craft --
Frac-Chem's chemical cocktails, injected deep under the nation's
aquifers, are almost entirely exempt from the Safe Drinking Water Act.
Koch is also long on the richest -- but also the dirtiest and most
carbon-polluting -- oil deposits in North America: the tar sands of
Alberta. The company's Pine Bend refinery, near St. Paul, Minnesota,
processes nearly a quarter of the Canadian bitumen exported to the
United States -- which, in turn, has created for Koch Industries a
lucrative sideline in petcoke exports. Denser, dirtier and cheaper than
coal, petcoke is the dregs of tar-sands refining. U.S. coal plants are
largely forbidden from burning petcoke, but it can be profitably shipped
to countries with lax pollution laws like Mexico and China. One of the
firm's subsidiaries, Koch Carbon, is expanding its Chicago terminal
operations to receive up to 11 million tons of petcoke for global
export. In June, the EPA noted the facility had violated the Clean Air
Act with petcoke particulates that endanger the health of South Side
residents. "We dispute that the two elevated readings" behind the EPA
notice of violation "are violations of anything," Koch's top lawyer,
Mark Holden, told /Rolling Stone/, insisting that Koch Carbon is a good
neighbor.
Over the past dozen years, the company has quietly acquired leases for
1.1 million acres of Alberta oil fields, an area larger than Rhode
Island. By some estimates, Koch's direct holdings nearly double
ExxonMobil's and nearly triple Shell's. In May, Koch Oil Sands Operating
LLC of Calgary, Alberta, sought permits to embark on a
multi-billiondollar tar-sands-extraction operation. This one site is
projected to produce 22 million barrels a year -- more than a full day's
supply of U.S. oil.
Charles Koch, the 78-year-old CEO and chairman of the board of Koch
Industries, is inarguably a business savant. He presents himself as a
man of moral clarity and high integrity. "The role of business is to
produce products and services in a way that makes people's lives
better," he said recently. "It cannot do so if it is injuring people and
harming the environment in the process."
The Koch family's lucrative blend of pollution, speculation, law-bending
and self-righteousness stretches back to the early 20th century, when
Charles' father first entered the oil business. Fred C. Koch was born in
1900 in Quanah, Texas -- a sunbaked patch of prairie across the Red
River from Oklahoma. Fred was the second son of Hotze "Harry" Koch, a
Dutch immigrant who -- as recalled in Koch literature -- ran "a modest
newspaper business" amid the dusty poverty of Quanah. In the family
legend, Fred Koch emerged from the nothing of the Texas range to found
an empire. But like many stories the company likes to tell about itself,
this piece of Kochlore takes liberties with the truth. Fred was not a
simple country boy, and his father was not just a small-town publisher.
Harry Koch was also a local railroad baron who used his newspaper to
promote the Quanah, Acme & Pacific railways. A director and founding
shareholder of the company, Harry sought to build a rail line across
Texas to El Paso. He hoped to turn Quanah into "the most important
railroad center in northwest Texas and a metropolitan city of first
rank." He may not have fulfilled those ambitions, but Harry did build up
what one friend called "a handsome pile of dinero."
Harry was not just the financial springboard for the Koch dynasty, he
was also its wellspring of far-right politics. Harry editorialized
against fiat money, demanded hangings for "habitual criminals" and
blasted Social Security as inviting sloth. At the depths of the
Depression, he demanded that elected officials in Washington should stop
trying to fix the economy: "Business," he wrote, "has always found a way
to overcome various recessions."
In the company's telling, young Fred was an innovator whose inventions
helped revolutionize the oil industry. But there is much more to this
story. In its early days, refining oil was a dirty and wasteful
practice. But around 1920, Universal Oil Products introduced a clean and
hugely profitable way to "crack" heavy crude, breaking it down under
heat and heavy pressure to boost gasoline yields. In 1925, Fred, who
earned a degree in chemical engineering from MIT, partnered with a
former Universal engineer named Lewis Winkler and designed a near carbon
copy of the Universal cracking apparatus -- making only tiny,
unpatentable tweaks. Relying on family connections, Fred soon landed his
first client -- an Oklahoma refinery owned by his maternal uncle L.B.
Simmons. In a flash, Winkler-Koch Engineering Co. had contracts to
install its knockoff cracking equipment all over the heartland,
undercutting Universal by charging a one-time fee rather than ongoing
royalties.
It was a boom business. That is, until Universal sued in 1929, accusing
WinklerKoch of stealing its intellectual property. With his domestic
business tied up in court, Fred started looking for partners abroad and
was soon doing business in the Soviet Union, where leader Joseph Stalin
had just launched his first Five Year Plan. Stalin sought to fund his
country's industrialization by selling oil into the lucrative European
export market. But the Soviet Union's reserves were notoriously hard to
refine. The USSR needed cracking technology, and the Oil Directorate of
the Supreme Council of the National Economy took a shining to
Winkler-Koch -- primarily because Koch's oil-industry competitors were
reluctant to do business with totalitarian Communists.
Between 1929 and 1931, Winkler-Koch built 15 cracking units for the
Soviets. Although Stalin's evil was no secret, it wasn't until Fred
visited the Soviet Union, that these dealings seemed to affect his
conscience. "I went to the USSR in 1930 and found it a land of hunger,
misery and terror," he would later write. Even so, he agreed to give the
Soviets the engineering know-how they would need to keep building more.
Back home, Fred was busy building a life of baronial splendor. He met
his wife, Mary, the Wellesley-educated daughter of a Kansas City
surgeon, on a polo field and soon bought 160 acres across from the
Wichita Country Club, where they built a Tudorstyle mansion. As
chronicled in /Sons of Wichita/, Daniel Schulman's investigation of the
Koch dynasty, the compound was quickly bursting with princes: Frederick
arrived in 1933, followed by Charles in 1935 and twins David and Bill in
1940. Fred Koch lorded over his domain. "My mother was afraid of my
father," said Bill, as were the four boys, especially first-born
Frederick, an artistic kid with a talent for the theater. "Father wanted
to make all his boys into men, and Freddie couldn't relate to that
regime," Charles recalled. Frederick got shipped East to boarding school
and was all but disappeared from Wichita.
With Frederick gone, Charles forged a deep alliance with David, the more
athletic and assertive of the young twins. "I was closer with David
because he was better at everything," Charles has said.
Fred Koch's legal battle with Universal would drag on for nearly a
quarter-century. In 1934, a lower court ruled that Winkler-Koch had
infringed on Universal's technology. But that judgment would be vacated,
after it came out in 1943 that Universal had bought off one of the
judges handling the appeal. A year later, the Supreme Court decided
that Fred's cracker, by virtue of small technical differences, did not
violate the Universal patent. Fred countersued on antitrust grounds,
arguing that Universal had wielded patents anti-competitively. He'd win
a $1.5 million settlement in 1952.
Around that time, Fred had built a domestic oil empire under a new
company eventually called Rock Island Oil & Refining, transporting crude
from wellheads to refineries by truck or by pipe. In those later years,
Fred also became a major benefactor and board member of the John Birch
Society, the rabidly anti-communist organization founded in 1958 by
candy magnate and virulent racist Robert Welch. Bircher publications
warned that the Red endgame was the creation of the "Negro Soviet
Republic" in the Deep South. In his own writing, Fred described
integration as a Red plot to "enslave both the white and black man."
Like his father, Charles Koch attended MIT. After he graduated in 1959
with two master's degrees in engineering, his father issued an
ultimatum: Come back to Wichita or I'll sell the business. "Papa laid it
on the line," recalled David. So Charles returned home, immersing
himself in his father's world -- not simply joining the John Birch
Society, but also opening a Bircher bookstore. The Birchers had high
hopes for young Charles. As Koch family friend Robert Love wrote in a
letter to Welch: "Charles Koch can, if he desires, finance a large
operation, however, he must continually be brought along."
But Charles was already falling under the sway of a charismatic radio
personality named Robert LeFevre, founder of the Freedom School, a
whites-only libertarian boot camp in the foothills above Colorado
Springs, Colorado. LeFevre preached a form of anarchic capitalism in
which the individual should be freed from almost all government power.
Charles soon had to make a choice. While the Birchers supported the
Vietnam War, his new guru was a pacifist who equated militarism with
out-of-control state power. LeFevre's stark influence on Koch's thinking
is crystallized in a manifesto Charles wrote for the /Libertarian
Review/ in the 1970s, recently unearthed by Schulman, titled "The
Business Community: Resisting Regulation." Charles lays out principles
that gird today's Tea Party movement. Referring to regulation as
"totalitarian," the 41-year-old Charles claimed business leaders had
been "hoodwinked" by the notion that regulation is "in the public
interest." He advocated the "barest possible obedience" to regulation
and implored, "Do not cooperate voluntarily, instead, resist whenever
and to whatever extent you legally can in the name of /justice/."
After his father died in 1967, Charles, now in command of the family
business, renamed it Koch Industries. It had grown into one of the 10
largest privately owned firms in the country, buying and selling some 80
million barrels of oil a year and operating 3,000 miles of pipeline. A
black-diamond skier and white-water kayaker, Charles ran the business
with an adrenaline junkie's aggressiveness. The company would build
pipelines to promising oil fields without a contract from the producers
and park tanker trucks beside wildcatters' wells, waiting for the first
drops of crude to flow. "Our willingness to move quickly, absorb more
risk," Charles would write, "enabled us to become the leading
crude-oilgathering company."
Charles also reconnected with one of his father's earliest insights:
There's big money in dirty oil. In the late 1950s, Fred Koch had bought
a minority stake in a Minnesota refinery that processed heavy Canadian
crude. "We could run the lousiest crude in the world," said his business
partner J. Howard Marshall II -- the future Mr. Anna Nicole Smith.
Sensing an opportunity for huge profits, Charles struck a deal to
convert Marshall's ownership stake in the refinery into stock in Koch
Industries. Suddenly the majority owner, the company soon bought the
rest of the refinery outright.
Almost from the beginning, Koch Industries' risk-taking crossed over
into recklessness. The OPEC oil embargo hit the company hard. Koch had
made a deal giving the company the right to buy a large share of Qatar's
export crude. At the time, Koch owned five supertankers and had
chartered many others. When the embargo hit, Koch had upward of half a
billion dollars in exposure to tankers and couldn't deliver OPEC oil to
the U.S. market, creating what Charles has called "large losses." Soon,
Koch Industries was caught overcharging American customers. The Ford
administration in the summer of 1974 compelled Koch to pay out more than
$20 million in rebates and future price reductions.
Koch Industries' manipulations were about to get more audacious. In the
late 1970s, the federal government parceled out exploration tracts,
using a lottery in which anyone could score a 10-year lease at just $1
an acre -- a game of chance that gave wildcat prospectors the same shot
as the biggest players. Koch didn't like these odds, so it enlisted
scores of frontmen to bid on its behalf. In the event they won the
lottery, they would turn over their leases to the company. In 1980, Koch
Industries pleaded guilty to five felonies in federal court, including
conspiracy to commit fraud.
With Republicans and Democrats united in regulating the oil business,
Charles had begun throwing his wealth behind the upstart Libertarian
Party, seeking to transform it into a viable third party. Over the
years, he would spend millions propping up a league of affiliated think
tanks and front groups -- a network of Libertarians that became known as
the "Kochtopus."
Charles even convinced David to stand as the Libertarian Party's
vice-presidential candidate in 1980 -- a clever maneuver that allowed
David to lavish unlimited money on his own ticket. The Koch-funded 1980
platform was nakedly in the brothers' self-interest -- slashing federal
regulatory agencies, offering a 50 percent tax break to top earners,
ending the "cruel and unfair" estate tax and abolishing a $16 billion
"windfall profits" tax on the oil industry. The words of Libertarian
presidential candidate Ed Clark's convention speech in Los Angeles ring
across the decades: "We're sick of taxes," he declared. "We're ready to
have a very big tea party." In a very real sense, the modern Republican
Party was on the ballot that year -- and it was running against Ronald
Reagan.
Charles' management style and infatuation with far-right politics were
endangering his grip on the company. Bill believed his brothers'
political spending was bad for business. "Pretty soon, we would get the
reputation that the company and the Kochs were crazy," he said.
In late 1980, with Frederick's backing, Bill launched an unsuccessful
battle for control of Koch Industries, aiming to take the company
public. Three years later, Charles and David bought out their brothers
for $1.1 billion. But the speed with which Koch Industries paid off the
buyout debt left Bill convinced, but never quite able to prove, he'd
been defrauded. He would spend the next 18 years suing his brothers,
calling them "the biggest crooks in the oil industry."
Bill also shared these concerns with the federal government. Thanks in
part to his efforts, in 1989 a Senate committee investigating Koch
business with Native Americans would describe Koch Oil tactics as "grand
larceny." In the late 1980s, Koch was the largest purchaser of oil from
American tribes. Senate investigators suspected the company was making
off with more crude from tribal oil fields than it measured and paid
for. They set up a sting, sending an FBI agent to coordinate stakeouts
of eight remote leases. Six of them were Koch operations, and the agents
reported "oil theft" at all of them.
One of Koch's gaugers would refer to this as "volume enhancement." But
in sworn testimony before a Texas jury, Phillip Dubose, a former Koch
pipeline manager, offered a more succinct definition: "stealing." The
Senate committee concluded that over the course of three years Koch
"pilfered" $31 million in Native oil; in 1988, the value of that stolen
oil accounted for nearly a quarter of the company's crude-oil profits.
"I don't know how the company could have figures like that," the FBI
agent testified, "and not have top management know that theft was going
on." In his own testimony, Charles offered that taking oil readings "is
a very uncertain art" and that his employees "aren't rocket scientists."
Koch's top lawyer would later paint the company as a victim of Senate
"McCarthyism."
By this time, the Kochs had soured on the Libertarian Party, concluding
that control of a small party would never give them the muscle they
sought in the nation's capital. Now they would spend millions in efforts
to influence -- and ultimately take over -- the GOP. The work began
close to home; the Kochs had become dedicated patrons of Sen. Bob Dole
of Kansas, who ran interference for Koch Industries in Washington. On
the Senate floor in March 1990, Dole gloatingly cautioned against a
"rush to judgment" against Koch, citing "very real concerns about some
of the evidence on which the special committee was basing its findings."
A grand jury investigated the claims but disbanded in 1992, without
issuing indictments.
Arizona Sen. Dennis DeConcini was "surprised and disappointed" at the
decision to drop the case. "Our investigation was some of the finest
work the Senate has ever done," he said. "There was an overwhelming case
against Koch." But Koch did not avoid all punishment. Under the False
Claims Act, which allows private citizens to file lawsuits on behalf of
the government, Bill sued the company, accusing it of defrauding the
feds of royalty income on its "volumeenhanced" purchases of Native oil.
A jury concluded Koch had submitted more than 24,000 false claims,
exposing Koch to some $214 million in penalties. Koch later settled,
paying $25 million.
Selfinterest continued to define Koch Industries' adventures in public
policy. In the early 1990s, in a high-profile initiative of the
first-term Clinton White House, the administration was pushing for a
levy on the heat content of fuels. Known as the BTU tax, it was the
earliest attempt by the federal government to recoup damages from
climate polluters. But Koch Industries could not stand losing its most
valuable subsidy: the public policy that allowed it to treat the
atmosphere as an open sewer. Richard Fink, head of Koch Company's Public
Sector and the longtime mastermind of the Koch brothers' political
empire, confessed to /The Wichita Eagle/ in 1994 that Koch could not
compete if it actually had to pay for the damage it did to the
environment: "Our belief is that the tax, over time, may have destroyed
our business."
To fight this threat, the Kochs funded a "grassroots" uprising -- one
that foreshadowed the emergence, decades later, of the Tea Party. The
effort was run through Citizens for a Sound Economy, to which the
brothers had spent a decade giving nearly $8 million to create what
David Koch called "a sales force" to communicate the brothers' political
agenda through town hall meetings and anti-tax rallies designed to look
like spontaneous demonstrations. In 1994, David Koch bragged that CSE's
campaign "played a key role in defeating the administration's plans for
a huge and cumbersome BTU tax."
Despite the company's increasingly sophisticated political and
public-relations operations, Charles' philosophy of regulatory
resistance was about to bite Koch Industries -- in the form of record
civil and criminal financial penalties imposed by the Environmental
Protection Agency.
Koch entered the 1990s on a pipeline-buying spree. By 1994, its network
measured 37,000 miles. According to sworn testimony from former Koch
employees, the company operated its pipelines with almost complete
disregard for maintenance. As Koch employees understood it, this was in
keeping with their CEO's trademarked business philosophy, MarketBased
Management.
For Charles, MBM -- first communicated to employees in 1991 -- was an
attempt to distill the business practices that had grown Koch into one
of the largest oil businesses in the world. To incentivize workers, Koch
gives employees bonuses that correlate to the value they create for the
company. "Salary is viewed only as an advance on compensation for
value," Koch wrote, "and compensation has an unlimited upside."
To prevent the stagnation that can often bog down big enterprises, Koch
was also determined to incentivize risk-taking. Under MBM, Koch
Industries books opportunity costs -- "profits foregone from a missed
opportunity" -- as though they were actual losses on the balance sheet.
Koch employees who play it safe, in other words, can't strike it rich.
On paper, MBM sounds innovative and exciting. But in Koch's
hyperaggressive corporate culture, it contributed to a series of
environmental disasters. Applying MBM to pipeline maintenance, Koch
employees calculated that the opportunity cost of shutting down
equipment to ensure its safety was greater than the profit potential of
pushing aging pipe to its limits.
The fact that preventive pipeline maintenance is required by law didn't
always seem to register. Dubose, a 26-year Koch veteran who oversaw
pipeline areas in Louisiana, would testify about the company's lax
attitude toward maintenance. "It was a question of money. It would take
away from our profit margin." The testimony of another pipeline manager
would echo that of Dubose: "Basically, the philosophy was 'If it ain't
broke, don't work on it.'"
When small spills occurred, Dubose testified, the company would cover
them up. He recalled incidents in which the company would use the churn
of a tugboat's engine to break up waterborne spills and "just kind of
wash that thing on down, down the river." On land, Dubose said, "They
might pump it [the leaked oil] off into a drum, then take a shovel and
just turn the earth over." When larger spills were reported to
authorities, the volume of the discharges was habitually low-balled,
according to Dubose.
Managers pressured employees to falsify pipeline-maintenance records
filed with federal authorities; in a sworn affidavit, pipeline worker
Bobby Conner recalled arguments with his manager over Conner's refusal
to file false reports: "He would always respond with anger," Conner
said, "and tell me that I did not know how to be a Koch employee."
Conner was fired and later settled a wrongful-termination suit with Koch
Gateway Pipeline. Dubose testified that Charles was not in the dark
about the company's operations. "He was in complete control," Dubose
said. "He was the one that was line-driving this Market-Based Management
at meetings."
Before the worst spill from this time, Koch employees had raised
concerns about the integrity of a 1940s-era pipeline in South Texas. But
the company not only kept the line in service, it increased the pressure
to move more volume. When a valve snapped shut in 1994, the brittle
pipeline exploded. More than 90,000 gallons of crude spewed into Gum
Hollow Creek, fouling surrounding marshlands and both Nueces and Corpus
Christi bays with a 12-mile oil slick.
By 1995, the EPA had seen enough. It sued Koch for gross violations of
the Clean Water Act. From 1988 through 1996, the company's pipelines
spilled 11.6 million gallons of crude and petroleum products. Internal
Koch records showed that its pipelines were in such poor condition that
it would require $98 million in repairs to bring them up to industry
standard.
Ultimately, state and federal agencies forced Koch to pay a $30 million
civil penalty -- then the largest in the history of U.S. environmental
law -- for 312 spills across six states. Carol Browner, the former EPA
administrator, said of Koch, "They simply did not believe the law
applied to them." This was not just partisan rancor. Texas Attorney
General John Cornyn, the future Republican senator, had joined the EPA
in bringing suit against Koch. "This settlement and penalty warn
polluters that they cannot treat oil spills simply as the cost of doing
business," Cornyn said. (The Kochs seem to have no hard feelings toward
their one-time tormentor; a lobbyist for Koch was the number-two bundler
for Cornyn's primary campaign this year.)
Koch wasn't just cutting corners on its pipelines. It was also violating
federal environmental law in other corners of the empire. Through much
of the 1990s at its Pine Bend refinery in Minnesota, Koch spilled up to
600,000 gallons of jet fuel into wetlands near the Mississippi River.
Indeed, the company was treating the Mississippi as a sewer, illegally
dumping ammonia-laced wastewater into the river -- even increasing its
discharges on weekends when it knew it wasn't being monitored. Koch
Petroleum Group eventually pleaded guilty to "negligent discharge of a
harmful quantity of oil" and "negligent violation of the Clean Water
Act," was ordered to pay a $6 million fine and $2 million in remediation
costs, and received three years' probation. This facility had already
been declared a Superfund site in 1984.
In 2000, Koch was hit with a 97-count indictment over claims it violated
the Clean Air Act by venting massive quantities of benzene at a refinery
in Corpus Christi -- and then attempted to cover it up. According to the
indictment, Koch filed documents with Texas regulators indicating
releases of just 0.61 metric tons of benzene for 1995 -- one-tenth of
what was allowed under the law. But the government alleged that Koch had
been informed its true emissions that year measured 91 metric tons, or
15 times the legal limit.
By the time the case came to trial, however, George W. Bush was in
office and the indictment had been significantly pared down -- Koch
faced charges on only seven counts. The Justice Department settled in
what many perceived to be a sweetheart deal, and Koch pleaded guilty to
a single felony count for covering up the fact that it had disconnected
a key pollution-control device and did not measure the resulting benzene
emissions -- receiving five years' probation. Despite skirting stiffer
criminal prosecution, Koch was handed $20 million in fines and
reparations -- another historic judgment.
On the day before Danielle Smalley was to leave for college, she and her
friend Jason Stone were hanging out in her family's mobile home.
Seventeen years old, with long chestnut hair, Danielle began to feel
nauseated. "Dad," she said, "we smell gas." It was 3:45 in the afternoon
on August 24th, 1996, near Lively, Texas, some 50 miles southeast of
Dallas. The Smalleys were too poor to own a telephone. So the teens
jumped into her dad's 1964 Chevy pickup to alert the authorities. As
they drove away, the truck stalled where the driveway crossed a dry
creek bed. Danielle cranked the ignition, and a fireball engulfed the
truck. "You see two children burned to death in front of you -- you
never forget that," Danielle's father, Danny, would later tell reporters.
Unknown to the Smalleys, a decrepit Koch pipeline carrying liquid butane
-- literally, lighter fluid -- ran through their subdivision. It had
ruptured, filling the creek bed with vapor, and the spark from the
pickup's ignition had set off a bomb. Federal investigators documented
both "severe corrosion" and "mechanical damage" in the pipeline. A
National Transportation Safety Board report would cite the "failure of
Koch Pipeline Company LP to adequately protect its pipeline from corrosion."
Installed in the early Eighties, the pipeline had been out of commission
for three years. When Koch decided to start it up again in 1995, a
water-pressure test had blown the pipe open. An inspection of just a few
dozen miles of pipe near the Smalley home found 538 corrosion defects.
The industry's term of art for a pipeline in this condition is Swiss
cheese, according to the testimony of an expert witness -- "essentially
the pipeline is gone."
Koch repaired only 80 of the defects -- enough to allow the pipeline to
withstand another pressure check -- and began running explosive fluid
down the line at high pressure in January 1996. A month later, employees
discovered that a key anticorrosion system had malfunctioned, but it
was never fixed. Charles Koch had made it clear to managers that they
were expected to slash costs and boost profits. In a sternly worded memo
that April, Charles had ordered his top managers to cut expenditures by
10 percent "through the elimination of waste (I'm sure there is much
more waste than that)" in order to increase pre-tax earnings by $550
million a year.
The Smalley trial underscored something Bill Koch had said about the way
his brothers ran the company: "Koch Industries has a philosophy that
profits are above everything else." A former Koch manager, Kenoth
Whitstine, testified to incidents in which Koch Industries placed
profits over public safety. As one supervisor had told him, regulatory
fines "usually didn't amount to much" and, besides, the company had "a
stable full of lawyers in Wichita that handled those situations." When
Whitstine told another manager he was concerned that unsafe pipelines
could cause a deadly accident, this manager said that it was more
profitable for the company to risk litigation than to repair faulty
equipment. The company could "pay off a lawsuit from an incident and
still be money ahead," he said, describing the principles of MBM to a T.
At trial, Danny Smalley asked for a judgment large enough to make the
billionaires feel pain: "Let Koch take their child out there and put
their children on the pipeline, open it up and let one of them die," he
told the jury. "And then tell me what that's worth." The jury was
emphatic, awarding Smalley $296 million -- then the largest
wrongful-death judgment in American legal history. He later settled with
Koch for an undisclosed sum and now runs a pipeline-safety foundation in
his daughter's name. He declined to comment for this story. "It upsets
him too much," says an associate.
The official Koch line is that scandals that caused the company millions
in fines, judgments and penalties prompted a change in Charles' attitude
of regulatory resistance. In his 2007 book, /The Science of Success/, he
begrudgingly acknowledges his company's recklessness. "While business
was becoming increasingly regulated," he reflects, "we kept thinking and
acting as if we lived in a pure market economy. The reality was far
different."
Charles has since committed Koch Industries to obeying federal
regulations. "Even when faced with laws we think are counterproductive,"
he writes, "we must first comply." Underscoring just how out of bounds
Koch had ventured in its corporate culture, Charles admits that "it
required a monumental undertaking to integrate compliance into every
aspect of the company." In 2000, Koch Petroleum Group entered into an
agreement with the EPA and the Justice Department to spend $80 million
at three refineries to bring them into compliance with the Clean Air
Act. After hitting Koch with a $4.5 million penalty, the EPA granted the
company a "clean slate" for certain past violations.
Then George W. Bush entered the White House in 2001, his campaign
fattened with Koch money. Charles Koch may decry cronyism as "nothing
more than welfare for the rich and powerful," but he put his company to
work, hand in glove, with the Bush White House. Correspondence, contacts
and visits among Koch Industries representatives and the Bush White
House generated nearly 20,000 pages of records, according to a /Rolling
Stone/ FOIA request of the George W. Bush Presidential Library. In 2007,
the administration installed a fiercely anti-regulatory academic, Susan
Dudley, who hailed from the Koch-funded Mercatus Center at George Mason
University, as its top regulatory official.
Today, Koch points to awards it has won for safety and environmental
excellence. "Koch companies have a strong record of compliance," Holden,
Koch's top lawyer, tells /Rolling Stone/. "In the distant past, when we
failed to meet these standards, we took steps to ensure that we were
building a culture of 10,000 percent compliance, with 100 percent of our
employees complying 100 percent." To reduce its liability, Koch has also
unwound its pipeline business, from 37,000 miles in the late 1990s to
about 4,000 miles. Of the much smaller operation, he adds, "Koch's
pipeline practice and operations today are the best in the industry."
But even as compliance began to improve among its industrial operations,
the company aggressively expanded its trading activities into the Wild
West frontier of risky financial instruments. In 2000, the Commodity
Futures Modernization Act had exempted many of these products from
regulation, and Koch Industries was among the key players shaping that
law. Koch joined up with Enron, BP, Mobil and J. Aron -- a division of
Goldman Sachs then run by Lloyd Blankfein -- in a collaboration called
the Energy Group. This corporate alliance fought to prohibit the federal
government from policing oil and gas derivatives. "The importance of
derivatives for the Energy Group companies . . . cannot be
overestimated," the group's lawyer wrote to the Commodity Futures
Trading Commission in 1998. "The success of this business can be
completely undermined by . . . a costly regulatory regime that has no
place in the energy industry."
Koch had long specialized in "over-the-counter" or OTC trades --
private, unregulated contracts not disclosed on any centralized
exchange. In its own letter to the CFTC, Koch identified itself as "a
major participant in the OTC derivatives market," adding that the
company not only offered "risk-management tools for its customers" but
also traded "for its own account." Making the case for what would be
known as the Enron Loophole, Koch argued that any big firm's desire to
"maintain a good reputation" would prevent "widespread abuses in the OTC
derivatives market," a darkly hilarious claim, given what would become
not only of Enron, but also Bear Stearns, Lehman Brothers and AIG.
The Enron Loophole became law in December 2000 -- pushed along by Texas
Sen. Phil Gramm, giving the Energy Group exactly what it wanted. "It
completely exempted energy futures from regulation," says Michael
Greenberger, a former director of trading and markets at the CFTC. "It
wasn't a matter of regulators not enforcing manipulation or excessive
speculation limits -- this market wasn't covered at all. By law."
Before its spectacular collapse, Enron would use this loophole in 2001
to help engineer an energy crisis in California, artificially
constraining the supply of natural gas and power generation, causing
price spikes and rolling blackouts. This blatant and criminal market
manipulation has become part of the legend of Enron. But Koch was caught
up in the debacle. The CFTC would charge that a partnership between Koch
and the utility Entergy had, at the height of the California crisis,
reported fake natural-gas trades to reporting firms and also "knowingly
reported false prices and/or volumes" on real trades.
One of 10 companies punished for such schemes, Entergy-Koch avoided
prosecution by paying a $3 million fine as part of a 2004 settlement
with the CFTC, in which it did not admit guilt to the commission's
charges but is barred from maintaining its innocence.
Trading, which had long been peripheral to the company's core
businesses, soon took center stage. In 2002, the company launched a
subsidiary, Koch Supply & Trading. KS&T got off to a rocky start. "A
series of bad trades," writes a Koch insider, "boiled over in early 2004
when a large 'sure bet' crude-oil trade went south, resulting in a
quick, multimillion loss." But Koch traders quickly adjusted to the
reality that energy markets were no longer ruled just by supply and
demand -- but by rich speculators trying to game the market. Revamping
its strategy, Koch Industries soon began bragging of record profits.
From 2003 to 2012, KS&T trading volumes exploded -- up 450 percent. By
2009, KS&T ranked among the world's top-five oil traders, and by 2011,
the company billed itself as "one of the leading quantitative traders"
-- though Holden now says it's no longer in this business.
Since Koch Industries aggressively expanded into high finance, the net
worth of each brother has also exploded -- from roughly $4 billion in
2002 to more than $40 billion today. In that period, the company
embarked on a corporate buying spree that has taken it well beyond
petroleum. In 2005, Koch purchased Georgia Pacific for $21 billion,
giving the company a familiar, expansive grip on the industrial web that
transforms Southern pine into consumer goods -- from plywood sold at
Home Depot to brand-name products like Dixie Cups and Angel Soft toilet
paper. In 2013, Koch leapt into high technology with the $7 billion
acquisition of Molex, a manufacturer of more than 100,000 electronics
components and a top supplier to smartphone makers, including Apple.
Koch Supply & Trading makes money both from physical trades that move
oil and commodities across oceans as well as in "paper" trades involving
nothing more than high-stakes bets and cash. In paper trading, Koch's
products extend far beyond simple oil futures. Koch pioneered, for sale
to hedge funds, "volatility swaps," in which the actual price of crude
is irrelevant and what matters is only the "magnitude of daily
fluctuations in prices." Steve Mawer, until recently the president of
KS&T, described parts of his trading operation as "black-box stuff."
Like a casino that bets at its own craps table, Koch engages in
"proprietary trading" -- speculating for the company's own bottom line.
"We're like a hedge fund and a dealer at the same time," bragged Ilia
Bouchouev, head of Koch's derivatives trading in 2004. "We can both make
markets and speculate." The company's many tentacles in the physical oil
business give Koch rich insight into market conditions and disruptions
that can inform its speculative bets. When oil prices spiked to record
heights in 2008, Koch was a major player in the speculative markets,
according to documents leaked by Vermont Sen. Bernie Sanders, with
trading volumes rivaling Wall Street giants like Citibank. Koch rode a
trader-driven frenzy -- detached from actual supply and demand -- that
drove prices above $147 a barrel in July 2008, battering a global
economy about to enter a free fall.
Only Koch knows how much money Koch reaped during this price spike. But,
as a proxy, consider the $20 million Koch and its subsidiaries spent
lobbying Congress in 2008 -- before then, its biggest annual lobbying
expense had been $5 million -- seeking to derail a raft of
consumer-protection bills, including the Federal Price Gouging
Prevention Act, the Stop Excessive Energy Speculation Act of 2008, the
Prevent Unfair Manipulation of Prices Act of 2008 and the Close the
Enron Loophole Act.
In comments to the Federal Trade Commission, Koch lobbyists defended the
company's right to rack up fantastic profits at the expense of American
consumers. "A mere attempt to maximize profits cannot constitute market
manipulation," they wrote, adding baldly, "Excessive profits in the face
of shortages are desirable."
When the global economy crashed in 2008, so did oil prices. By December,
crude was trading more than $100 lower per barrel than it had just
months earlier -- around $30. At the same time, oil traders anticipated
that prices would eventually rebound. Futures contracts for delivery of
oil in December 2009 were trading at nearly $55 per barrel. When future
delivery is more valuable than present inventory, the market is said to
be "in contango." Koch exploited the contango market to the hilt. The
company leased nine supertankers and filled them with cut-rate crude and
parked them quietly offshore in the Gulf of Mexico, banking virtually
risk-free profits by selling contracts for future delivery.
All in, Koch took about 20 million barrels of oil off the market,
putting itself in a position to bet on price disruptions the company
itself was creating. Thanks to these kinds of trading efforts, Koch
could boast in a 2009 review that "the performance of Koch Supply &
Trading actually grew stronger last year as the global economy
worsened." The cost for those risk-free profits was paid by consumers at
the pump. Estimates pegged the cost of the contango trade by Koch and
others at up to 40 cents a gallon.
Artificially constraining oil supplies is not the only source of dark,
unregulated profit for Koch Industries. In the years after George W.
Bush branded Iran a member of the "Axis of Evil," the Koch brothers
profited from trade with the state sponsor of terror and reckless
would-be nuclear power. For decades, U.S. companies have been forbidden
from doing business with the Ayatollahs, but Koch Industries exploited a
loophole in 1996 sanctions that made it possible for foreign
subsidiaries of U.S. companies to do some business in Iran.
In the ensuing years, according to Bloomberg Markets, the German and
Italian arms of Koch-Glitsch, a Koch subsidiary that makes equipment for
oil fields and refineries, won lucrative contracts to supply Iran's
Zagros plant, the largest methanol plant in the world. And thanks in
part to Koch, methanol is now one of Iran's leading non-oil exports.
"Every single chance they had to do business with Iran, or anyone else,
they did," said Koch whistle-blower George Bentu. Having signed on to
work for a company that lists "integrity" as its top value, Bentu added,
"You feel totally betrayed. Everything Koch stood for was a lie."
Koch reportedly kept trading with Tehran until 2007 -- after the regime
was exposed for supplying IEDs to Iraqi insurgents killing U.S. troops.
According to lawyer Holden, Koch has since "decided that none of its
subsidiaries would engage in trade involving Iran, even where such trade
is permissible under U.S. law."
These days, Koch's most disquieting foreign dealings are in Canada,
where the company has massive investments in dirty tar sands. The
company's 1.1 million acres of leases in northern Alberta contain
reserves of economically recoverable oil numbering in the billions of
barrels. With these massive leaseholdings, Koch is poised to continue
profiting from Canadian crude whether or not the Keystone XL pipeline
gains approval, says Andrew Leach, an energy and environmental economist
at the business school of the University of Alberta.
Counterintuitively, approval of Keystone XL could actually harm one of
Koch's most profitable businesses -- its Pine Bend refinery in
Minnesota. Because tar-sands crude presently has no easy outlet to the
global market, there's a glut of Canadian oil in the midcontinent, and
Koch's refinery is a beneficiary of this oversupply; the resulting
discount can exceed $20 a barrel compared to conventional crude. If it
is ever built, the Keystone XL pipeline will provide a link to Gulf
Coast refineries -- and thus the global export market, which would erase
much of that discount and eat into company profit margins.
Leach says Koch Industries' tar-sands leaseholdings have them hedged
against the potential approval of Keystone XL. The pipeline would
increase the value of Canadian tar-sands deposits overnight. Koch could
then profit handsomely by flipping its leases to more established
producers. "Optimizing asset value through trading," Koch literature
says of these and other holdings, is a "key" company strategy.
The one truly bad outcome for Koch would be if Keystone XL were to be
defeated, as many environmentalists believe it must be. "If the signal
that sends is that no new pipelines will be built across the U.S. border
for carrying oil-sands product," Leach says, "that's going to have an
impact not just on Koch leases, but on everybody's asset value in oil
sands." Ironically, what's best for Koch's tar-sands interests is what
the Obama administration is currently delivering: "They're actually
ahead if Keystone XL gets delayed a while but hangs around as something
that still might happen," Leach says.
The Dodd-Frank bill was supposed to put an end to economyendangering
speculation in the $700 trillion global derivatives market. But Koch has
managed to defend -- and even expand -- its turf, trading in largely
unregulated derivatives, once dubbed "financial weapons of mass
destruction" by billionaire Warren Buffett.
In theory, the Enron Loophole is no longer open -- the government now
has the power to police manipulation in the market for energy
derivatives. But the Obama administration has not yet been able to come
up with new rules that actually do so. In 2011, the CFTC mandated
"position limits" on derivative trades of oil and other commodities.
These would have blocked any single speculator from owning futures
contracts representing more than a quarter of the physical market --
reducing the danger of manipulation. As part of the International Swaps
and Derivatives Association, which also reps many Wall Street giants
including Goldman Sachs and JPMorgan Chase, Koch fought these new
restrictions. ISDA sued to block the position limits -- and won in court
in September 2012. Two years later, CFTC is still spinning its wheels on
a replacement. Industry traders like Koch are, Greenberger says,
"essentially able to operate as though the Enron Loophole were still in
effect."
Koch is also reaping the benefits from Dodd-Frank's impacts on Wall
Street. The so-called Volcker Rule, implemented at the end of last year,
bans investment banks from "proprietary trading" -- investing on their
own behalf in securities and derivatives. As a result, many Wall Street
banks are unloading their commodities-trading units. But Volcker does
not apply to nonbank traders like Koch. They're now able to pick up
clients who might previously have traded with JPMorgan. In its marketing
materials for its trading operations, Koch boasts to potential clients
that it can provide "physical and financial market liquidity at times
when others pull back." Koch also likely benefits from loopholes that
exempt the company from posting collateral for derivatives trades and
allow it to continue trading swaps without posting the transactions to a
transparent electronic exchange. Though competitors like BP and Cargill
have registered with the CFTC as swaps dealers -- subjecting their
trades to tightened regulation -- Koch conspicuously has not. "Koch is
compliant with all CFTC regulations, including those relating to swaps
dealers," says Holden, the Koch lawyer.
That a massive company with such a troubling record as Koch Industries
remains unfettered by financial regulation should strike fear in the
heart of anyone with a stake in the health of the American economy.
Though Koch has cultivated a reputation as an economically conservative
company, it has long flirted with danger. And that it has not suffered a
catastrophic loss in the past 15 years would seem to be as much about
luck as about skillful management.
The Kochs have brushed up against some of the major debacles of the
crisis years. In 2007, as the economy began to teeter, Koch was gearing
up to plunge into the market for credit default swaps, even creating an
affiliate, Koch Financial Products, for that express purpose. KFP
secured a AAA rating from Moody's and reportedly sought to buy up toxic
assets at the center of the financial crisis at up to 50-times leverage.
Ultimately, Koch Industries survived the experiment without losing its
shirt.
More recently, Koch was exposed to the fiasco at MF Global, the
disgraced brokerage firm run by former New Jersey Gov. Jon Corzine that
improperly dipped into customer accounts to finance reckless bets on
European debt. Koch, one of MF Global's top clients, reportedly told
trading partners it was switching accounts about a month before the
brokerage declared bankruptcy -- then the eighth-largest in U.S.
history. Koch says the decision to pull its funds from MF Global was
made more than a year before. While MF's small-fry clients had to pick
at the carcass of Corzine's company to recoup their assets, Koch was
already swimming free and clear.
Because it's private, no one outside of Koch Industries knows how much
risk Koch is taking -- or whether it could conceivably create systemic
risk, a concern raised in 2013 by the head of the Futures Industry
Association. But this much is for certain: Because of the loopholes in
financial-regulatory reform, the next company to put the American
economy at risk may not be a Wall Street bank but a trading giant like
Koch. In 2012, Gary Gensler, then CFTC chair, railed against the very
loopholes Koch appears to be exploiting, raising the specter of AIG.
"[AIG] had this massive risk built up in its derivatives just because it
called itself an insurance company rather than a bank," Gensler said.
When Congress adopted Dodd-Frank, Gensler added, it never intended to
exempt financial heavy hitters just because "somebody calls themselves
an insurance
In "the science of success," Charles Koch highlights the problems
created when property owners "don't benefit from all the value they
create and don't bear the full cost from whatever value they destroy."
He is particularly concerned about the "tragedy of the commons," in
which shared resources are abused because there's no individual
accountability. "The biggest problems in society," he writes, "have
occurred in those areas thought to be best controlled in common: the
atmosphere, bodies of water, air. . . ."
But in the real world, Koch Industries has used its political might to
beat back the very market-based mechanisms -- including a cap-and-trade
market for carbon pollution -- needed to create the ownership rights for
pollution that Charles says would improve the functioning of capitalism.
In fact, it appears the very essence of the Koch business model is to
exploit breakdowns in the free market. Koch has profited precisely by
dumping billions of pounds of pollutants into our waters and skies --
essentially for free. It racks up enormous profits from speculative
trades lacking economic value that drive up costs for consumers and
create risks for our economy.
The Koch brothers get richer as the costs of what Koch destroys are
foisted on the rest of us -- in the form of ill health, foul water and a
climate crisis that threatens life as we know it on this planet. Now
nearing 80 -- owning a large chunk of the Alberta tar sands and using
his billions to transform the modern Republican Party into a protection
racket for Koch Industries' profits -- Charles Koch is not about to see
the light. Nor does the CEO of one of America's most toxic firms have
any notion of slowing down. He has made it clear that he has no
retirement plans: "I'm going to ride my bicycle till I fall off."
From The Archives Issue 1219: October 9, 2014
--
Freedom Archives 522 Valencia Street San Francisco, CA 94110 415
863.9977 www.freedomarchives.org
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