Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty (13 page)

Hoots and applause echoed in the ballroom as David nervously strolled in to claim the nomination. He broke the ice with a joke. “Delegates and visitors, my speech today will be like my candidacy—short but very valuable.”

“As I said in my letter to you announcing my candidacy,” David went on, over peals of laughter, “you have done an incredibly good job in bringing the Libertarian Party from obscurity to the point where today we represent the best hope for human freedom since the American Revolution.… I feel particularly as a businessman, who’s run a successful company, who’s had to deal with the harassment and the ridiculous interference of government in the affairs of my business, that I can be particularly effective at communicating the libertarian ideas and concepts to businessmen.

“With Ed Clark as our standard-bearer,” he concluded, “the
two-party system is in grave danger.” Smiling broadly, David raised his right fist aloft and locked hands with his running mate, who had joined him on the stage.

Winning wasn’t the point. No one was that naïve. The real goal of the endeavor was taking on the entrenched political system and using the presidential campaign, and accompanying media attention, to disseminate the libertarian message. “Before you can teach, you have to get people’s attention,” David told a group of Texas Libertarian Party members as the campaign got under way. “The ideas are so persuasive that once people hear about them they will be willing to accept them.”

When it came to selling the libertarian brand, the Clark-Koch campaign, and its chief architect, Cato’s Ed Crane, understood that Americans might have difficulty wrapping their minds around their radical ideas in undiluted form. This was an ongoing and thorny debate within the movement—how to stick to their core principles and expand their base, while neither selling out libertarianism nor scaring the American electorate.

Crane himself had declared in 1974: “The real threat to the [Libertarian Party] lies in the temptation to make the big time through compromise of our principles to gain votes immediately. The fact is that the only hope we have for continued success is to stick to our principles and never compromise.”

During a 1978
Reason
magazine roundtable, Charles expressed a similar view: “Our greatest strength is that our philosophy is a consistent world view and will appeal to the brightest, most enthusiastic, most capable people, particularly young people.” He worried that watering down their “radical philosophy” would “destroy the movement.”

As the 1980 campaign wore on, it began to seem to libertarian purists that the Clark-Koch campaign had taken precisely the path that Crane and Charles Koch had once warned against. Ed Clark,
for instance, had stopped short of calling for the wholesale abolition of the income tax. And he was flirting dangerously with the Left on the subject of opposing nuclear power.

Halfway through the campaign, David Nolan, one of the Libertarian Party’s founders, sent a terse missive to Clark begging for a course correction. Though just thirty-six, the mustachioed activist was one of the movement’s elder statesmen, driven to cofound the party in 1971 by outrage over Richard Nixon’s imposition of wage and price controls and abandonment of the gold standard. Before the nominating convention convened, Clark met with Nolan and other influential party leaders to lock down their support; the candidate had assured them of the ideological purity of his platform—and his running mate. Nolan had therefore not opposed David’s vice presidential nomination, though he and other prominent libertarians had doubts about the businessman’s libertarian bona fides. Now, Nolan fumed, the Clark-Koch faction was “pushing the party into a stance which is radically different from the traditional libertarian posture on certain key issues, and which is dangerously out of touch with the temper of the times.”

Rothbard, increasingly agitated by the direction Charles Koch and Ed Crane were taking his beloved movement, had come to a similar conclusion. He sensed “a paradigm shift in all parts of the ‘Kochtopus,’ ” he told a libertarian colleague. “Koch,” he said, “explicitly wants to run the movement like a corporation, where orders are given, dissidents are fired, etc. Crane ditto.”

As Election Day neared, Rothbard’s private denunciations about the movement’s ideological drift exploded into open hostility. He reached his breaking point in the final weeks of the election. Clark had landed a primetime appearance on ABC’s
Nightline
, a key opportunity to expose millions of TV viewers to libertarianism. Yet instead of articulating their core beliefs, Clark had described their philosophy as “low-tax liberalism” and said “we want to get
back immediately to the kind of government that President Kennedy had back in the early 1960s.”
Low-tax liberalism? Kennedy?
Rothbard and his loyal followers boiled over.

On Election Day, the nation decisively swept Ronald Reagan into power and the Clark-Koch campaign claimed a little under 1 million votes, about 1 percent of the total cast. Thanks largely to repeated cash infusions from David, who ended up larding his campaign coffers with a little more than $2 million, the Libertarian Party made it on the ballot in all fifty states and the District of Columbia. The 1980 campaign would later be viewed as a high water mark for the Libertarian Party, which only during the 2012 election surpassed the Clark-Koch ticket’s vote tally (though not its share of the popular vote) in a presidential campaign. David reflected on the campaign as a personal triumph, listing his vice presidential candidacy years later under “proudest achievement” on an MIT alumni questionnaire.

But the outcome at the time was viewed as a disappointment, since the campaign had early on estimated that the Libertarian Party ticket would garner 4 or 5 percent of the electorate, on par with Ed Clark’s showing in the California gubernatorial race. The campaign’s lackluster performance frustrated Charles, according to Clark. “He was not awfully pleased,” he recalled. “I think he thought it could have been better in the number of votes and building the movement.”

Rothbard penned a scathing postmortem after the election in a newsletter he edited called
The Libertarian Forum
. “The Clark/Koch campaign was a fourfold disaster, on the following counts: betrayal of principle; failure to educate or build cadre; fiscal irresponsibility; and lack of votes.” Far from taking libertarianism to new heights, the 1980 election reduced it to new lows as infighting and factional feuds engulfed the movement.
SMASH THE CRANE MACHINE
buttons now adorned the jackets of some Libertarian Party activists.

Adding insult to injury, the ringleader of the revolt was Rothbard, for whom Charles had built a comfortable academic perch and whose strategy he had tried to put into play. Tensions between Rothbard and Ed Crane—or as the economist preferred, Boss Crane—had begun to flare by the spring of 1979, and relations between the men had rapidly devolved from there. Even so, in early March 1981, Rothbard was floored to reach into his mailbox and retrieve a letter from Crane requesting that he relinquish his shares in the Cato Institute. Citing Rothbard’s “deep-seated” antagonism, Crane wrote that “we believe it would be difficult, if not impossible, for you to objectively evaluate ongoing and future Cato projects as a Board member.”

A few weeks later, when Cato held its quarterly board meeting, Rothbard, still seething, entered the think tank’s conference room with a lawyer in tow. When the meeting began, Rothbard’s attorney addressed the group, arguing for his client’s right to continue serving on the board.

Charles coolly explained that Cato’s shareholders—meaning himself and Crane—had convened the previous night and dissolved the board, re-forming it minus Rothbard. The irascible economist, his fury building, objected. He was, after all, a Cato shareholder, yet had not been informed of the session.

Charles told Rothbard that he was, in fact, no longer a Cato shareholder either. His shares had been canceled. “This action is illegal,” Rothbard sputtered as he and his lawyer stormed out. “Therefore any further decisions taken at this meeting are illegal!”

Following the 1980 election and amid the intraparty feuding, other big changes were under way within the Kochtopus. In his ongoing mission to create social change, Charles rethought his strategy, shutting down some of his libertarian projects. He cut off funding to Students for a Libertarian Society, which had angered its benefactor with the publication of a monograph that glorified San Francisco’s White Night riots—a series of violent uprisings
in reaction to the lenient sentence given to Dan White, the San Francisco Board of Supervisors member who assassinated Mayor George Moscone and fellow supervisor Harvey Milk. Titled “In Praise of Outlaws: Rebuilding Gay Liberation,” its cover featured a row of burning police cars—precisely the type of radical imagery that relegated libertarianism to the fringe. Hemorrhaging money and making little inroads in movement building,
Libertarian Review
was folded into
Inquiry
, which itself ceased publication after a couple of years.

By late 1981, as if fleeing the upheaval on Montgomery Street, Cato uprooted from San Francisco to a historic town house on Capitol Hill. Rothbard, who had taken a position with the newly founded Ludwig von Mises Institute, saw the move as a sign that he’d been right all along, that Ed Crane and Charles Koch were willing to sell out libertarianism if it brought them closer to mainstream acceptance and political influence. “The massive shift of the Kochtopus to D.C. symbolized and physically embodied the shift of the Kochtopusian Line toward the State and toward Respectability,” wrote Rothbard, the embers of his grudge still smoldering.

Even as the libertarian movement imploded, devolving into internecine battles and turning some of Charles’s onetime allies into lifelong enemies, conflict brewed on another front, this one much closer to home.

On Christmas Day 1979, the four Koch brothers gathered in the wood-paneled dining room of their childhood home, where their mother had set the long table with lace placemats, gold-rimmed crystal wineglasses, and an arrangement of white poinsettias. Also at the table were Charles’s wife, Liz, and Joan Granlund, the ex-model who doubled as Bill’s secretary and live-in girlfriend.

Mary was hosting Christmas dinner, as was the family custom, and the Koch patriarch was never far from mind as he peered down from an oil painting on a nearby wall. Over the course of the evening, the festive mood evaporated thanks to Bill, who chose the occasion to unload years of emotional baggage.

Bill was Mary’s
enfant terrible
. As long as anyone could remember, he’d been excitable and tempestuous. He never outgrew the feeling of being slighted by Charles. Since joining the firm in 1974, he’d felt like the third and lesser wheel in the brotherly triumvirate that controlled Koch Industries. He brooded over his role within the company, as well as over how Mary, who had just turned seventy-two, planned to distribute her estate among her sons. As in his boyhood, Bill’s inner swirl of emotions whipped into a maelstrom with little warning. This storm had been building for some time.

Seated across from his mother, Bill vented a series of grievances.

Growing up, he had perceived Mary as cool and distant, more interested in society gatherings than child rearing. He now blamed
her for laying the foundation for the emotional turmoil that had ebbed and flowed throughout his life. She had not loved him as she did his brothers; she had treated him unfairly. According to Charles, Bill also pressed her on the disposition of the family’s art collection. Their father had given Charles some paintings before his death; Bill insisted Mary “equalize” the brothers by leaving more of the art collection to him in her will.

“Billy,” Charles said, “just leave her alone.” Charles tried to calm his brother down. “I’m not going to fight you over any property, but just leave Mama alone.”

Bill laid into Charles, too, whom he faulted for running their father’s company like a dictator. Fred may have selected Charles as his successor, but Koch Industries belonged to all of them. One recent episode in particular had made Bill suspicious of his brother’s motives. That November, at Charles’s request, a company lawyer had presented Bill with a draft estate plan. It specified that on his death, Bill’s stock in Koch Industries would automatically be sold back to the company at a predetermined—and in Bill’s view, laughably discounted—price. Under the plan, the IRS might wipe out much of his wealth, while Koch Industries took control of his lucrative holdings. It was a plan designed to further the company’s interests, not his. Bill had no heirs yet (though he and Joan would later have a son), but he viewed the episode as symbolic of Charles’s controlling nature. His brother was trying to cheat him out of his birthright, even in death.

Mary struggled to hold back tears. The discord, occurring on one of the few occasions when the Kochs still gathered as a family, finally overcame her. Sobbing, she pushed back from the table and hurried from the room.

It was the last Christmas the Kochs spent together.

Bill lingered at MIT long after his brothers entered the working world, spending a leisurely eight years completing his doctoral
work. He finally received his degree at age thirty-one. During that time, David had begun referring to his twin as “the student,” and Charles had started to wonder whether their wayward brother would ever enter the real world. “He had a country-club attitude,” David told an interviewer. “Boston was a wonderful place to be. Billy got distracted. He lost his direction.”

In 1968, as Bill completed his Ph.D., Charles began easing him into the family business, asking him to establish a small venture capital fund to both invest in high-tech start-ups and identify potential acquisitions for Koch Industries. MIT’s Cambridge campus, a hub of innovation, seemed an ideal perch from which to do this. But the endeavor was ultimately a bust, eventually bleeding $90,000, according to Charles. Mistakes and occasional bad investments were part of doing business, but what bothered Charles more was the feeling that Bill didn’t approach the project with the drive he expected from Koch employees. “Bill couldn’t get to work on time,” he said. “Couldn’t get himself out of bed.” In 1973, Charles shut down the operation.

Bill officially joined the family company, in 1974, as a salesman for a Wellesley, Massachusetts–based Koch subsidiary that specialized in buying and selling agricultural chemicals and other products in China. Affable and able to dial up the charm with customers, he displayed a talent for sales and deal making. In a complex transaction that impressed Charles and Koch Industries’ upper management, Bill, on his own initiative, engineered a deal to provide Louisiana natural gas to a Texas sulfur plant, and Texas sulfur to the company’s Chinese customers. The deal netted Koch $5 million. Charles soon promoted Bill to run the subsidiary. By 1976, Bill was running Koch Carbon, the company’s newly established mining and petroleum coke subsidiary.

Still, Bill’s style at times clashed with the aggressive, streamlined ethos that Charles cultivated. Koch had grown into a large company, but its success lay in the fact that it could still operate like
a small one, without the layers of cumbersome bureaucracy that hindered its competitors. Where its rivals lumbered along, Koch moved swiftly and decisively. Part of this was because it was a private company and largely family owned, meaning deals and strategic decisions didn’t require a laborious board approval process.

Like Charles, Bill was highly analytical. But in meticulously studying every facet of an issue, Koch executives felt he could waffle. He sought the opinions of high-priced consultants, commissioned studies, and snowed Koch managers in with reports and memoranda. He asked endless questions, many of them astute, but to what end? At Koch, it was results that mattered. Profits. And under Bill’s leadership, according to Charles, Koch Carbon did not fare well.

Bill nevertheless pressed for more and more responsibility, petitioning Charles to elevate him to vice president for corporate development in charge of identifying strategic acquisitions. “Bill was never happy running a division,” Sterling Varner, who’d risen to company president, once observed. “He wanted to get more involved in the overall management of the company.”

William Hanna, the Koch Industries executive to whom Bill reported (and who later succeeded Varner), noted: “It was important for Bill to be important.”

Charles reluctantly gave Bill the promotion, despite doubts about whether he deserved it. Once in his new position, Bill pushed for more, requesting a large budget and a sizable staff to analyze potential deals. “He wanted unilateral authority to spend $25 million a year investing in acquisitions and other deals of his choice,” David recalled. “And Charles and Sterling felt, as I did, that this was way too excessive. He hadn’t proved that he could manage investments of that magnitude properly.” As part of his new position, which hadn’t existed at the company previously, Bill also requested to undertake evaluations of Koch business units in order to identify their strengths and weaknesses.

Ahead of a March 1980 board meeting, Bill flew in from his home in Massachusetts to plead his case to Charles. The evaluations seemed to Charles like a surefire morale killer—his managers would feel as if they were being second-guessed. Charles’s management philosophy centered on investing his employees with as much decision-making authority as they could handle and letting the results speak for themselves. Charles considered the acquisition budget Bill proposed overkill. He told Bill he couldn’t endorse the proposal and urged his brother to start small, go slow: “We don’t want to go out and acquire the world.”

But when the board meeting arrived, Bill bypassed Charles, handing out bound copies of his proposal and appealing directly to the company’s seven directors, which in addition to the three Koch brothers, included Sterling Varner; Tom Carey, the company’s chief financial officer; Texas oilman J. Howard Marshall II, who’d helped Charles gain control of the Great Northern Oil Company; and Fred Koch’s cousin Marjorie Simmons Gray, the daughter of L. B. Simmons, whose Oklahoma-based refinery and pipeline Fred had acquired in 1946.

The directors were dubious of Bill’s proposal and ultimately sided with Charles. Struggling to persuade them, Bill grew more and more distraught. David, who was in town from New York for the board meeting, recalled him beginning to sob; he cringed at the sight of his brother embarrassing himself. “He was very upset, and I thought he presented his case tremendously badly,” David said.

Bill’s behavior concerned David, and after the meeting ended, he pulled his twin aside.

“Bill, you didn’t handle that at all well,” David said.

By then Bill had regained his composure. “Yeah, I was too emotional, I agree with you,” he responded, according to David. “I just didn’t do a good job. My emotions carried me away.”

By college, the boyhood animosities between Bill and Charles had largely dissipated. Or so Charles thought. Beginning in late 1979 and continuing through 1980, tensions between the brothers built, then built some more until relations between them were worse than ever. Bill was openly dismissive of Charles in front of David and, worse, other Koch employees. Behind his back, Bill referred to him as “Prince Charles” and derisively compared his stewardship of Koch to a member of royalty lording over his court and kingdom. Over dinner at Boston’s Algonquin Club with David and Wichita real estate developer and family friend George Ablah in early 1980, Bill trashed Charles. The Kochs had recently joined with Ablah in a $195-million deal to purchase Chrysler’s real estate holdings. As the three men sat beneath the pewter chandelier in the dining room of the McKim, Mead & White clubhouse, Bill commented that Koch had a reputation for screwing over its business partners, David recalled. David was outraged. “You’ve got to retract that statement,” he said.

Bill was not terribly discreet. Nor did he seem to care. Word of his belligerent comments soon got back to Charles, who in late April 1980 angrily scrawled out a note to his brother: “What is the purpose of these attacks on me? I hear from all over the country that you’re constantly criticizing me.” Lately, Charles went on, Bill had gone out of his way to criticize his management during reports to the board and his memos carried “accusatory” undertones. Charles warned his brother that he was on a “destructive” path. “Whatever I’ve done to make you so bitter toward me is in the past,” he wrote, adding that if the brothers could not work together “in friendship,” they should at least do so “civilly.”

Bill’s criticisms of Charles—intemperate as they could sometimes be—were not merely rooted in sour grapes or in a bitter sibling rivalry. Bill and other Koch Industries shareholders had developed some legitimate worries about the direction the company had taken under Charles’s management.

Koch’s record of growth was unassailable. That wasn’t the issue. What concerned Bill and other shareholders was the company’s increasing run-ins with the government. Lately Koch Industries had managed to run afoul of agencies ranging from the Department of Energy to the Internal Revenue Service. The company faced not just civil penalties, but criminal prosecution.

In early 1980, the Justice Department empaneled a federal grand jury to investigate whether Koch Industries and a half-dozen employees of Koch’s oil exploration division, based in Denver, had conspired to rig a Bureau of Land Management lottery for federal oil and gas leases. By June, the grand jury had returned criminal indictments against Koch Industries and its employees.

The Department of Energy, meanwhile, was auditing Koch (along with other oil and gas companies) for violating federal controls on the price of oil and overcharging customers. In the worst-case scenario, the company’s top accountant confided to Bill, Koch could be liable for more than $1 billion. Perhaps enough to sink the company. (Just a few years earlier, federal regulators had accused Koch of overcharging on sales of propane by $10 million.)

Bill initially supported Charles’s libertarian projects, but he had grown troubled by the increasing amounts of company money Charles diverted to his “libertarian revolution causes”—causes Bill now considered loony.

“No shareholders had any influence over how the company was being run and large contributions and corporate assets were being used to further the political philosophy of one man,” Bill said later.

Charles’s activism had drawn unwanted attention to the company and the family. Their father had loathed publicity, scrupulously guarding the family’s privacy, especially after his John Birch Society involvement landed his name in the paper. Now that Charles had coaxed David into running as the Libertarian Party’s vice presidential candidate, the family was in the media spotlight as never before.

Bill and other Koch shareholders—who by now included Marjorie Simmons Gray’s daughters, second cousins to the Koch brothers, and the two sons of J. Howard Marshall II—also had concerns about liquidity. Bill was one of the richest men in America, worth hundreds of millions of dollars. But only on paper. He had needed to borrow money to buy a mansion in the tony town of Dover, on Massachusetts’s South Shore, which seemed ludicrous given the scale of his wealth. Nearly all of his net worth was locked up in a closely held, private company. Unlike a publicly traded company, the market value of Koch stock was opaque and there were strict rules over to whom the shares could be sold. If any of Koch’s shareholders wanted to cash in their holdings, they would likely be forced to do so at an extreme discount.

Koch shares did pay a dividend (about 6 percent of the company’s earnings), but Bill considered it stingy. The growth-obsessed operating style of Charles and his right-hand man, Sterling Varner, called for plowing almost all of Koch Industries’ earnings back into the company. “That was our religion… to make things grow… to push, push, push,” according to Varner. This strategy expanded Koch Industries, though not the bank accounts of its shareholders, at least not immediately.