Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty (35 page)

When Cato was founded in 1977, Charles had pressed for this shareholder structure, believing it would provide an additional lever of control. Even as the composition of Cato’s board changed over time, its shareholders could ensure that the institute never drifted from its founding mission of advancing libertarianism. Charles later organized the Council for a Competitive Economy
in the same way. “We want to make sure that we’re not investing in something for ideological reasons that changes its focus,” Richard Wilcke recalled Charles telling him of the shareholder arrangement.

For close to two decades, Crane and other Cato officials had tried to persuade Charles to reorganize the institute under a more traditional scheme of nonprofit governance. Each time the subject came up, Charles refused. But the issue could no longer be ignored.

Crane feared Charles would use Niskanen’s death to make a play for control of the think tank. Charles and David had become politically toxic. The notion that they “owned” the think tank would soil its independent reputation. “Who the hell is going to take a think tank seriously that’s controlled by billionaire oil guys?” Crane wondered.

Relations between Ed Crane and Charles Koch had frayed dramatically since Cato’s founding. Before Richard Fink became Charles’s ideological soul mate, Crane had occupied this place in the CEO’s life. Crane called himself a “genetic libertarian.” He and Charles held nearly identical beliefs on personal liberties and free markets. Crane didn’t suck up to anyone—not politicians, not billionaires. Charles must have found this refreshing—at least at first. In the early years, as Cato got off the ground, the pair consulted by phone daily and they traveled together in the early 1980s to the Soviet Union and China to see the depredations of communism up close. But by 1991, their fifteen-year friendship had fallen apart. Charles resigned from Cato’s board and cut off his financial support. David, who joined the board in the 1980s, remained a director. The year Charles departed, he became a Cato shareholder.

Charles framed his split with Crane as a divergence of visions. He told libertarian historian Brian Doherty: “I have strong ideas, I want to see things go in a certain direction, and Crane has strong ideas. I concluded, why argue with Ed? Rather than try to modify his strategy, just go do my own thing and wish him well.”

The sudden unraveling of their friendship perplexed Crane: “I’ll go to my grave not knowing what happened.”

One Cato scholar described their rift this way: “It’s like a breakup. You kind of know what the reason was, but maybe you don’t really understand why it ended.”

Their friendship suffered a series of fractures before the final break. One came in the mid-1980s, when Charles was beginning to formalize his Market-Based Management theories and tried to implement them at Cato. At one point, Charles dispatched a team of Koch engineers to Washington to school Cato’s staff in his management practices.

“We’re all just looking at each other like, ‘What the hell is this about?’ ” Crane recalled. “These guys were engineers, and you could tell that they didn’t even understand what they were supposed to be teaching.” Crane resisted the Market-Based Management regime, and Charles grudgingly let the matter drop.

In September 1990, during a second trip to the Soviet Union, Crane and Koch had another run-in. Cato was holding a landmark conference in Moscow at the Academy of Sciences’ Uzkoe Hotel, where prominent Soviet scientists stayed during visits to the capital. The hotel was grim and worn, like a cut-rate college dormitory. Members of the Cato delegation were surprised to learn that the bedraggled building—which had three floors but whose elevator had buttons for ten—was less than two years old.

The signature event of the conference, dubbed “Transition to Freedom,” was an open forum for Soviet citizens. At least 1,000 people attended, crowding into a room with a capacity of 700. The atmosphere was electric, charged with a sense of dawning freedom. In Crane’s telling, the scene moved Charles so deeply that he approached Crane at the last minute to ask if he could speak at the event. Crane, who’d painstakingly choreographed the program, was brusque. “Charles, we have negotiated every 30 seconds here,” Crane recalled telling him. “I can’t do that.”

Charles and Liz, who was traveling with her husband, departed Moscow the next day, cutting their trip short without explanation.

In Charles’s version of this story, he never asked to speak, though he did pull Crane aside with concerns about the conference agenda—that it didn’t delve deeply enough into the difficult transition from state-planned society to free-market economy. Crane, according to Charles, brushed these concerns aside.

Whatever took place, the conference formed a line of demarcation in their friendship. Political scientist Charles Murray, who presented there, recalled his surprise at Charles’s sudden departure. Members of the Cato group had planned a sightseeing trip to Leningrad, where Murray hoped to introduce some Russian acquaintances to a real American billionaire. “They really wanted to see the billionaire,” he recalled. Instead, he was forced to point out another wealthy member of their party: “That guy’s worth about $600 million.”

Murray remembered spending the evening before the citizens’ forum locked in boisterous debate with Ed Crane and Charles Koch over Saddam Hussein’s invasion of Kuwait the previous month. Crane and Koch, as usual, were simpatico: “I was being backed into a corner by both Charles and Ed because I was not as unequivocally anti-retaking Kuwait as they were.” He added, “Charles and Ed were as I had always seen them, which was a very joking, very warm relationship.… They were completely as they had always been.”

After Moscow, their relationship never recovered. By late 1990, the
Rothbard-Rockwell Report
, a libertarian newsletter authored by Murray Rothbard and former Ron Paul chief of staff Lew Rockwell, was gleefully reporting that Crane’s star had sunk within the Kochtopus, while Richard Fink’s had risen. “Richie, under Charles, now holds total power in Wichita,” Rothbard’s newsletter reported. It had to be true—Charles was no longer taking Crane’s calls.

“What I learned is, never piss off a billionaire,” Crane joked at a Cato gala years later, according to one think tank staffer, who said his boss occasionally made light of his bitter falling-out with Charles.

If only Crane had actually learned his lesson.

The bad blood between Crane and Koch was decades in the past, but a recent episode had reopened old wounds.
The New Yorker
’s Jane Mayer, in her August 2010 article about the Koch brothers, quoted a “top Cato official” disparaging Charles and Market-Based Management, a point of pride for the CEO who considered this philosophy the source of his company’s success and the bedrock of his legacy. Charles “thinks he’s a genius,” this official said. “He’s the emperor, and he’s convinced he’s wearing clothes.”

The remark infuriated Charles, and he and David were convinced they knew its source. The month after the story ran, David confronted Crane during a phone call. Was he Mayer’s “top Cato official”? Crane eventually fessed up. “Charles is really upset,” David told him during the call, according to Crane.

The brothers’ next move wasn’t subtle. That December, Charles called a Cato stockholders meeting, and the brothers invoked their shares for the first time anyone at the think tank could remember to appoint two new board members—Nancy Pfotenhauer, the former Koch lobbyist, and Kevin Gentry, the brothers’ chief fund-raiser and the organizer of their donor conferences. Both were Koch loyalists and neither was considered much of a libertarian (though Pfotenhauer, at least, had studied at George Mason University, under libertarian economist Walter Williams). “Anybody who even suggests that they are libertarians has got their head somewhere where the sun isn’t shining,” Cato chairman Bob Levy fumed. Crane stewed over the board appointments.

Crane possessed a legendary temper, and his fury over the Kochs’ power play finally erupted. In March 2011, during a board
dinner held on the last Thursday of the month, Crane discussed Cato’s ongoing capital fund-raising campaign. Pfotenhauer, a petite and telegenic blonde who started her career as a Republican National Committee economist, chimed in with a question. Crane had detailed plans for expanding Cato’s physical facilities, but what was his vision for the think tank’s policy team? she wondered.

Crane’s short fuse turned to ash before everyone’s eyes. “Let me say something about these two new Koch operatives who have been placed on this board,” he snarled, crimson-faced, from his seat at the head of the table. He pointed to Kevin Gentry: “Kevin Gentry seated over there, has never once—never once!—invited me or any Cato scholar to speak at the donor conferences he organizes for Charles Koch.”

He rounded on Pfotenhauer. “How would you ever know anything about Cato’s policy priorities?”

Crane stomped off, as slack-jawed board members and Cato executives looked on.

“This was the accumulation of lots of things that were done by the Koch faction that Ed both thought were wrong as a management matter, and took personally,” said Bob Levy, who was present. “You certainly could say that Ed was provoked over a period of time, and this really was sort of the straw that broke the camel’s back.”

Later that year, when William Niskanen died suddenly, tensions between Crane and the Kochs reached a boiling point.

The week after Niskanen’s funeral, Levy flew from his home in Naples, Florida, to Dulles Airport, in the Virginia exurbs outside Washington DC. The seventy-year-old Cato chairman had requested an audience with David Koch. At the busy billionaire’s request, they arranged to meet at the airport, in a bland conference room attached to the hangar where David’s jet was parked.

Levy was a self-made millionaire who had started and subsequently sold a financial research firm, reinventing himself in his fifties as a lawyer and constitutional scholar. Levy hoped to avert a clash between the Crane and Koch camps over Niskanen’s shares. He wanted to gauge where both sides stood and see if there was any common ground on which to build an agreement.

Richard Fink and Kevin Gentry accompanied David to the meeting. The mood was tense from the outset. Crane’s belligerent treatment of Pfotenhauer and Gentry had angered David, who informed Levy bluntly that he and his brother wanted Crane gone within eight weeks, preferably sooner. Cato wouldn’t get a penny of his money, David said, until he felt it was back on the right path and under responsible leadership.

The Kochs didn’t just want a management change. The brothers and their advisors believed the think tank should do more to advance their political agenda in the upcoming election. The Republican Party, for all its flaws, offered the best hope for halting the country’s slide to socialism, David told Levy. Cato, he said, needed to start translating “esoteric concepts into concrete deliverables.”

What in the world did this even mean? Levy wondered.

“We would like you to provide intellectual ammunition that we can then use at Americans for Prosperity and our allied organizations,” David explained, according to Levy.

Levy was puzzled. Cato produced plenty of intellectual ammo, if that’s how you wanted to view the position papers and policy recommendations its scholars produced. Americans for Prosperity and any other outfit was free to use Cato’s materials to blast away at Obama and the Democrats.

“What gives you the impression that we aren’t providing intellectual ammunition?” Levy inquired. He never got a straight answer. After the meeting, Levy flew back home to Florida with a foreboding feeling.

The hostilities escalated throughout the winter of 2012, as both sides fruitlessly tried to reach a compromise. In return for eliminating the shareholder agreement, Levy offered to begin a search for Crane’s successor and give the brothers veto power over his replacement—the Koch brothers rejected the proposal. The Kochs proposed entering nonbinding mediation and later floated a plan for a “standstill agreement” until after the presidential election—Crane and Levy declined both offers.

In March 2012, the internal struggle leapt into public view. Crane had scheduled a shareholders meeting on March 1, where he planned to recognize Niskanen’s widow. Charles and David responded with a lawsuit to force Kathryn Washburn to relinquish her husband’s shares. And they used their Cato stock to install four handpicked board members, including Charles himself, displacing four existing directors.

“They thought we would back down rather than risk additional criticism from them and others on top of the many attacks we already face from opponents of a free society,” Charles said in a rare public statement. “They thought wrong.”

On the afternoon of March 2, Crane convened about a dozen mostly senior Cato officials in a conference room on the seventh floor of the institute’s headquarters, where its executives have their offices. One attendee described it as a “war meeting” that was led by Crane’s fastidious number two, David Boaz, who’d worked for the think tank since the salad days on San Francisco’s Montgomery Street. When Cato’s strange corporate structure was explained, there was a moment of surprise among staffers, who assumed the institute had been set up like any other nonprofit. “A lot of us had no idea we had shareholders,” the attendee recalled. But the meeting quickly turned pragmatic, he said, into “how do we stop this.” They discussed the coming news onslaught, and later a multipage
internal memo of talking points was distributed to participants. It read in part: