Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right (4 page)

Poised on the other side of the moderator was the South Carolina senator Jim DeMint, a conservative provocateur who defined the outermost antiestablishment fringe of the Republican Party and who in the words of one admirer was “the leader of the Huns.” Fifty-seven at the time, he was five months older than Cornyn, but his dark hair, lean build, and more casual, aw-shucks style made him appear years younger. Before his election to Congress, DeMint had run an advertising agency in South Carolina.
He understood how to sell, and what he was pitching that night was an approach to politics that according to the historian Sean Wilentz would have been recognizable to DeMint’s forebears from the Palmetto State as akin to the radical nullification of federal power advocated in the 1860s by the Confederate secessionist John C. Calhoun.

The two Republican senators had been at loggerheads for some time. That night they gave opposing opening statements. Cornyn spoke in favor of the Republican Party fighting its way back to victory by broadening its appeal to a wider swath of voters, including moderates. “He understands that Republicans in Texas and in Maine aren’t necessarily exactly alike,” the former aide explained. “He believes in making the party a big tent. You can’t win unless you get more votes.”

In contrast, DeMint portrayed compromise as surrender. He had little patience for the slow-moving process of constitutional government. He regarded many of his Senate colleagues as timid and self-serving. The federal government posed such a dire threat to the dynamism of the American economy, in his view, that anything less than all-out war on regulations and spending was a cop-out. DeMint was the face of a new kind of extremism, and he spoke that evening in favor of purifying, rather than diluting, the Republican Party. He argued that he would rather have “thirty Republicans who believed in something than a majority who believed in nothing,” a line that was a mantra for him and that brought cheers and applause from the gathered onlookers. Rather than compromising their principles and working with the new administration, DeMint argued, Republicans needed to take a firm stand against Obama, waging a campaign of massive resistance and obstruction, regardless of the 2008 election outcome.

As the participants continued to cheer him on, in his folksy, southern way, DeMint tore into Cornyn over one issue in particular. He accused Cornyn of turning his back on conservative free-market principles and capitulating to the worst kind of big government spending, with his vote earlier that fall in favor of the Treasury Department’s massive bailout of failing banks. The September 15, 2008, failure of Lehman Brothers, one of the nation’s largest investment banks, had triggered a stunning run on financial institutions and the beginning of a generalized panic. The Federal Reserve chairman, Ben Bernanke, warned congressional leaders that “it is a matter of days before there is a meltdown in the global financial system.”
In hopes of staving off economic disaster, Bush’s Treasury Department begged Congress to approve the massive $700 billion emergency bailout known as the Troubled Asset Relief Program, or TARP.

Both Obama and the Republican presidential nominee, John McCain, supported the emergency measure in the run-up to the 2008 election. But ever since, outraged opposition to the bailouts had built both from the public and from antigovernment, free-market conservatives like DeMint. Having expected a gentlemanly debate over the future of the Republican Party, Cornyn suddenly found himself on the defensive as the donors jeered and the moderator, Stephen Moore, a free-market gadfly and contributor to
The Wall Street Journal
’s editorial page, egged them on. The room started to explode. Rebuking Cornyn, one donor, Randy Kendrick, said, “You just keep electing RINOs!”—invoking the slur that Moore was said to have coined for squishy moderates who were, in his phrase, “Republicans in Name Only.”

Sitting silently at a table in the front row through all of this were Charles Koch and his wife, Liz. No one came to Cornyn’s defense. It was widely assumed that the Kochs, as hard-core free-market enthusiasts, had opposed the huge government bailouts of the private sector. Later, many reporters assumed this too, ascribing the Kochs’ opposition to Obama as stemming from their principled disagreement over issues such as the TARP bailouts. But none of this was true. Had people checked the record carefully, they would have found it quite revealing. At first, the Kochs’ political organization, Americans for Prosperity (AFP), had in fact taken what appeared to be a principled libertarian position against the bailouts. But the organization quickly and quietly reversed sides when the bottom began to fall out of the stock market, threatening the Kochs’ vast investment portfolio. The market began to collapse on Monday, September 29, when, in the face of heavy opposition from conservatives, the House unexpectedly failed to pass the federal rescue plan. By the end of the day, the Dow Jones Industrial Average had fallen 777 points, losing 6.98 percent of its value. It was the stock market’s largest one-day point drop ever.

Although some conservative groups and politicians such as DeMint still opposed the bailout, the market panic was enough to change many minds. Among those who flipped during the next forty-eight hours were the Kochs. Two days after the unexpected House vote, as the measure was about to be considered by the Senate, a list of conservative groups now supporting the bailouts was circulated behind the scenes to Republican legislators, in hopes of persuading them to vote for the bailouts.
Among the groups now listed as supporters was Americans for Prosperity. Soon after, the Senate passed TARP with overwhelming bipartisan support, including that of John Cornyn.
A source familiar with the Kochs’ thinking says that Americans for Prosperity’s flip-flop mirrored their own.

But if the Kochs’ personal interest in protecting their portfolio had trumped their free-market principles, they weren’t about to mention it in front of a roomful of fired-up libertarians whose cash they wanted to combat Obama. So, although they could have changed the dynamic in the room instantly by speaking up, no one defended Cornyn or the idea of acting responsibly within the bounds of traditional, reasonable political opposition.

Instead, the sentiment among the donors as the first Koch seminar of the Obama era came to an end was, as one witness put it, “like a bunch of gorillas beating their chests.” After hearing both sides out, the assembled guests chose the path of extremism.

The Kochs had already concluded that they would need to resort to extraordinary political measures to achieve their goals. A few days before the January 2009 donor seminar, Charles and David Koch had privately weighed their options with their longtime political strategist in a meeting inside the black-glass fortress that served as Koch Industries’ corporate headquarters in Wichita, Kansas.

As they later revealed in an interview with Bill Wilson and Roy Wenzl in
The Wichita Eagle
, after hearing Obama’s inauguration address, they agreed with their political adviser, Richard Fink, that America was on the road to ruin. Fink reportedly told the billionaire brothers, whose wealth, when combined, put at their disposal the single largest fortune in the world, that if they wanted to beat back the progressive tide that Obama’s election represented, it would take “
the fight of their lives.”

“If we’re going to do this, we should do it right, or not at all,” Fink said, according to the Wichita newspaper account. “But if we don’t do it right, or we don’t do it at all, we will be insignificant and we will just waste a lot of time, and I would rather play golf.”

If the Kochs decided that they did want “to do it right,” however, as Fink put it, they should be prepared, he warned, because “it is going to get very, very ugly.”

Advisers to Obama later acknowledged that he had no inkling of what he was up against. He had campaigned as a post-partisan politician who had idealistically taken issue with those who he said “
like to slice and dice our country into red states and blue states.” He insisted, “We are one people,” the United States of America. His vision, like his own blended racial and geographic heredity, was of reconciliation, not division. Echoing these themes in his first inaugural address, Obama had chided “cynics,” who, he said, “fail to understand…that the ground has shifted beneath them—that the stale political arguments that have consumed us for so long no longer apply.”

The sentiment was laudable but, alas, wishful thinking. Had the newly sworn-in president looked down at the ground directly beneath his polished shoes as he delivered these optimistic words, he might have been wise to take note. The red-and-blue carpet on which he was standing, which had been custom made in accordance with a government contract, had been manufactured by Invista, a subsidiary of Koch Industries. In American politics, the Kochs and all they stood for were not so easy to escape.

The War of Ideas, 1970–2008

Oddly enough, the fiercely libertarian Koch family owed part of its fortune to two of history’s most infamous dictators, Joseph Stalin and Adolf Hitler. The family patriarch, Fred Chase Koch, founder of the family oil business, developed lucrative business relationships with both of their regimes in the 1930s.

According to family lore, Fred Koch was the son of a Dutch printer and publisher who settled in the small town of Quanah, Texas, just south of the Oklahoma border, where he owned a weekly newspaper and print shop. Quanah, which was named for the last American Comanche chief, Quanah Parker, still retained its frontier aura when Fred was born there in 1900. Bright and eager to get out from under his overbearing old-world father, Fred once ran away to live with the Comanches as a boy. Later, he crossed the country for college, transferring from Rice in Texas to attend the Massachusetts Institute of Technology. There, he earned a degree in chemical engineering and joined the boxing team. Early photographs show him as a tall, formally dressed young man with glasses, a tuft of unruly curls, and a self-confident, defiant expression.

In 1927, Fred, who was an inveterate tinkerer, invented an improved process for extracting gasoline from crude oil. But as he would later tell his sons bitterly and often, America’s major oil companies regarded him as a business threat and shut him out of the industry, suing him and his customers in 1929 for patent infringement. Koch regarded the monopolistic patents invoked by the major oil companies as anticompetitive and unfair. The fight appears to be an early version of the Kochs’ later opposition to “corporate cronyism” in which they contend that the government and big business collaborate unfairly. In Fred Koch’s eye, he was an outsider fighting a corrupt system.

Koch fought back in the courts for more than fifteen years, finally winning a $1.5 million settlement. He correctly suspected that his opponents bribed at least one presiding judge, an incompetent lush who left the case in the hands of a crooked clerk. “
The fact that the judge was bribed completely altered their view of justice,” one longtime family employee suggests. “They believe justice can be bought, and the rules are for chumps.” Meanwhile, crippled by lawsuits in America during this period, Koch took his innovative refining method abroad.

He had already helped build a refinery in Great Britain after World War I with Charles de Ganahl, a mentor. At the time, the Russians supplied England with fuel, which led to the Russians seeking his expertise as they set up their own oil refineries after the Bolshevik Revolution.

At first, according to family lore, Koch tore up the telegram from the Soviet Union asking for his help. He said he didn’t want to work for Communists and didn’t trust them to pay him. But after securing an agreement to get paid in advance, he overcame his philosophical reservations. In 1930, his company, then called Winkler-Koch, began training Russian engineers and helping Stalin’s regime set up fifteen modern oil refineries under the first of Stalin’s five-year plans. The program was a success, forming the backbone of the future Russian petroleum industry. The oil trade brought crucial hard currency into the Soviet Union, enabling it to modernize other industries. Koch was reportedly paid $500,000, a princely sum during America’s Great Depression.
But by 1932, facing growing domestic demand, Soviet officials decided it would be more advantageous to copy the technology and build future refineries themselves.
Fred Koch continued to provide technical assistance to the Soviets as they constructed one hundred plants, according to one report, but the advisory work was less profitable.

What happened next has been excised from the official corporate history of Koch Industries. After mentioning the company’s work in the Soviet Union, the bulk of which ended in 1932, the corporate history skips ahead to 1940, when it says Fred Koch decided to found a new company,
Wood River Oil & Refining. Charles Koch is equally vague in his book
The Science of Success
. He notes only that his father’s company “
enjoyed its first real financial success during the early years of the Great Depression” by “building plants abroad, especially in the Soviet Union.”

A controversial chapter is missing. After leaving the U.S.S.R., Fred Koch turned to Adolf Hitler’s Third Reich. Hitler became chancellor in 1933, and soon after, his government oversaw and funded massive industrial expansion, including the buildup of Germany’s capacity to manufacture fuel for its growing military ambitions.
During the 1930s, Fred Koch traveled frequently to Germany on oil business.
Archival records document that in 1934 Winkler-Koch Engineering of Wichita, Kansas, as Fred’s firm was then known, provided the engineering plans and began overseeing the construction of a massive oil refinery owned by a company on the Elbe River in Hamburg.

The refinery was a highly unusual venture for Koch to get involved with at that moment in Germany. Its top executive was a notorious American Nazi sympathizer named William Rhodes Davis whose extensive business dealings with Hitler would eventually end in accusations by a federal prosecutor that he was an “
agent of influence” for the Nazi regime. In 1933, Davis proposed the purchase and conversion of an existing German oil storage facility in Hamburg, owned by a company called Europäische Tanklager A.G., or Eurotank, into a massive refinery. At the time, Hitler’s military aims, and his need for more fuel, were already well-known. Davis’s plan was to ship crude petroleum to Germany, refine it, and then sell it to the German military.
The president of the American bank with which Davis dealt refused to have anything to do with the deal, because it was seen as supporting the Nazi military buildup, but others extended the credit. After lining up the American financing, Davis needed the Third Reich’s backing. To gain it, he first had to convince German industrialists of his support for Hitler. In his effort to ingratiate himself, Davis opened an early meeting with Hermann Schmitz, the chairman of I.G. Farben—the powerful and well-connected chemical company that soon after produced the lethal gas for the concentration camps’ death chambers—by saluting him with a Nazi “Heil Hitler.” When these efforts didn’t produce the green light he sought, Davis sent messages directly to Hitler, eventually securing a meeting in which the führer walked in and ordered his henchmen to approve the deal. On Hitler’s orders, the Third Reich’s economic ministers supported Davis’s construction of the refinery. In his biography of Davis, Dale Harrington draws on eyewitness accounts to describe Hitler as declaring to his skeptical henchmen, “
Gentlemen, I have reviewed Mr. Davis’s proposition and it sounds feasible, and I want the bank to finance it.” Harrington writes that during the next few years Davis met at least half a dozen more times with Hitler and on one occasion asked him to
personally autograph a copy of
Mein Kampf
for his wife. According to Harrington, by the end of 1933 Davis was “
deeply committed to Nazism” and exhibited a noticeable “dislike for Jews.”

In 1934, Davis turned to Fred Koch’s company, Winkler-Koch, for help in executing his German business plan. Under Fred Koch’s direction, the refinery was finished by 1935. With the capacity to process a thousand tons of crude oil a day, the third-largest refinery in the Third Reich was created by the collaboration between Davis and Koch. Significantly, it was also one of the few refineries in Germany, according to Harrington, that could “
produce the high-octane gasoline needed to fuel fighter planes. Naturally,” he writes, “Eurotank would do most of its business with the German military.” Thus, he concludes, the American venture became “a key component of the Nazi war machine.”

Historians expert in German industrial history concur. The development of the German fuel industry “
was hugely, hugely important” to Hitler’s military ambitions, according to the Northwestern University professor Peter Hayes. “Hitler set out to create ‘autarchy,’ or economic self-sufficiency,” he explained. “Gottfried Feder, the German official in charge of the program, reasoned that even though Germany would have to import crude oil, it would be able to save foreign exchange by refining the products itself.”

In the run-up to the war, Davis profited richly from the arrangement, engaging in elaborate scams to keep the crude oil imports flowing into Germany despite Britain’s blockade. When World War II began, the high-octane fuel was used in bombing raids by German pilots. Like Davis, the Koch family benefited from the venture. Raymond Stokes, director of the Centre for Business History at the University of Glasgow in Scotland and co-author of a history of the German oil industry during the Nazi years,
Faktor Öl
(The oil factor), which documents the company’s role, says, “
Winkler-Koch benefited directly from this project, which was designed to help enable the fuel policy of the Third Reich.”

Fred Koch often traveled to Germany during these years, and according to family lore he was supposed to have been on the fatal May 1937 transatlantic flight of the
Hindenburg
, but at the last minute he got delayed. In late 1938, as World War II approached and Hitler’s aims were unmistakable, he wrote admiringly about fascism in Germany, and elsewhere, drawing an invidious comparison with America under Franklin Roosevelt’s New Deal. “
Although nobody agrees with me, I am of the opinion that the only sound countries in the world are Germany, Italy, and Japan, simply because they are all working and working hard,” he wrote in a letter to a friend. Koch added, “The laboring people in those countries are proportionately much better off than they are any place else in the world. When you contrast the state of mind of Germany today with what it was in 1925 you begin to think that perhaps this course of idleness, feeding at the public trough, dependence on government, etc., with which we are afflicted is not permanent and can be overcome.”

When the United States entered World War II in 1941, family members say that Fred Koch tried to enlist in the U.S. military. Instead, the government directed him to use his chemical engineering prowess to help refine high-octane fuel for the American warplanes. Meanwhile, in an ironic turn, the Hamburg refinery that Winkler-Koch built became an important target of Allied bombing raids. On June 18, 1944, American B-17s finally destroyed it. The human toll of the bombing raids on Hamburg was almost unimaginable. In all, some forty-two thousand civilians were killed during the long and intense Allied campaign against Hamburg’s crucial industrial targets.

Fred Koch’s willingness to work with the Soviets and the Nazis was a major factor in creating the Koch family’s early fortune. By the time he met his future wife, Mary Robinson, at a polo match in 1932, the oilman’s work for Stalin had put him well on his way to becoming exceedingly wealthy.

Robinson, a twenty-four-year-old graduate of Wellesley College, was tall, slender, and beautiful, with blond hair, blue eyes, and an expression of amusement often captured in family photographs. The daughter of a prominent physician from Kansas City, Missouri, she had grown up in a more cosmopolitan milieu. Koch, who was seven years older than she, was so smitten he married her a month after they met.

Soon, the couple commissioned the most fashionable architect in the area to build an imposing Gothic-style stone mansion on a large compound on the outskirts of Wichita, Kansas, where Winkler-Koch was based. Reflecting their rising social status, the estate was baronial despite the flat and empty prairie surrounding it, with stables, a polo ring, a kennel for hunting dogs, a swimming pool and wading pool, a circular drive, and stone-terraced gardens. Some of the best craftsmen in the country created decorative flourishes such as wrought-iron railings and a stone fireplace carved with a whimsical snowflake motif. Within a few years, the Kochs also purchased the sprawling Spring Creek Ranch near Reece, Kansas, where Fred, who loved science and genetics, bred and raised cattle. Family photographs show the couple looking glamorous and patrician, hosting picnics and pool parties, and riding on horseback, dressed in jodhpurs and polo gear, surrounded by packs of jolly friends.

In the first eight years of their marriage, the couple had four sons: Frederick, known by the family as Freddie, was born in 1933, Charles was born in 1935, and twins, David and William, were born in 1940. With their father frequently traveling and their mother preoccupied with social and cultural pursuits, the boys were largely entrusted to a series of nannies and housekeepers.

It is unclear what Fred Koch’s views of Hitler were during the 1930s, beyond his preference for the country’s work ethic in comparison with the nascent welfare state in America. But he was enamored enough of the German way of life and thinking that he employed a German governess for his first two sons, Freddie and Charles. At the time, Freddie was a small boy, and Charles still in diapers.
The nanny’s iron rule terrified the little boys, according to a family acquaintance. In addition to being overbearing, she was a fervent Nazi sympathizer, who frequently touted Hitler’s virtues. Dressed in a starched white uniform and pointed nurse’s hat, she arrived with a stash of gruesome German children’s books, including the Victorian classic
Der Struwwelpeter
, that featured sadistic consequences for misbehavior ranging from cutting off one child’s thumbs to burning another to death. The acquaintance recalled that the nurse had a commensurately harsh and dictatorial approach to child rearing. She enforced a rigid toilet-training regimen requiring the boys to produce morning bowel movements precisely on schedule or be force-fed castor oil and subjected to enemas.

The despised governess ruled the nursery largely unchallenged for several years. In 1938, the two boys were left for months while their parents toured Japan, Burma, India, and the Philippines. Even when she was home, Mary Koch characteristically deferred to her husband, declining to intervene. “
My father was fairly tough with my mother,” Bill Koch later told
Vanity Fair
. “My mother was afraid of my father.” Meanwhile, Fred Koch was often gone for months at a time, in Germany and elsewhere.