Inside the Koch Brothers’ Toxic Empire
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 economy-endangering 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.”
UPDATE: Koch Industries Responds to Rolling Stone — And We Answer Back
Inside the Koch Brothers’ Toxic Empire, Page 6 of 6