How the Koch Brothers Became Billionaires

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by Robert Wenzel Economic Policy Journal

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Forbes has a cover story puff piece out on the Koch brothers, but it is informative in a number of ways. We learn for example how the Koch brothers became billionaires. Using their father’s asset base, they bought more assets, sometimes using great debt, that then soared in value as a result of Federal Reserve money printing: Over time, Charles says, he learned he could take on profitable risk by investing in long-lived assets that his customers didn’t want to buy themselves. Koch’s father died on a hunting trip in 1967 at age 67, shortly after handing full management control over to Charles, setting in motion the two most momentous turning points in the company’s history. The following year Charles made the riskiest, and likely most profitable, move of his career. His family owned 35% of the Pine Bend refinery outside Minneapolis, with Union Oil of California holding 40% and J. Howard Marshall owning 15%. Koch wanted to buy out Unocal, but the company was asking too much. So he persuaded the older and more experienced Marshall–who later became infamous at age 89 for marrying the young stripper-turned-Playboy-pinup Anna Nicole Smith–to combine his 15% interest with Koch’s 35% to prevent Unocal from assembling a majority stake to sell to outsiders. The risk paid off handsomely. Marshall’s heirs, including the widow of his son, J. Pierce, hold Koch Industries stock worth at least $10 billion. And while Charles took on a potentially crippling $25 million in debt to buy out Unocal–something he has eschewed ever since–Pine Bend evolved into a cash engine that provided Charles the fuel to expand. It wasn’t rocket science, but they did act. Charles was most likely influenced by Murray Rothbard’s What Has Government Done to Our Money, which was published in 1963, five years before the Unocal refinery acquisition. The monograph discussed how the Fed was debasing the currency and how it would lead to major price inflation, which did occur and peaked out in the early 1980s at around 15%. If it wasn’t for that inflation, foreseen by Rothbard, the Koch acquisition of the Unocal asset, with the heavy debt taken on, would have been a bust. Price inflation from 1963 to 1981 In the Forbes profile, we also learn of a very peculiar view Charles holds about democracy:  The goal has always been, Charles says, “true democracy,” where people “can run their own lives and choose what they want to buy, choose how to spend their money.” (“Now in our democracy you elect somebody every two to four years and they tell you how to run your life,” he says.) People running their own lives would be less democracy and more a private property society (i.e., a Rothbardian anarcho-capitalist view), without legislators and other government operators attempting to micro-manage populations. Such a private property society would be a good thing, but it is hard to square Charles’ supposed take on this with the brothers behind the scenes role in propping up various politicians who move in a direction quite different from a private property society. Says Forbes: Mitt Romney’s loss was a huge blow to them, both in terms of likely policy outcomes and personal reputation.[...]“We raised a lot of money and mobilized an awful lot of people, and we lost, plain and simple,” says David. “We’re going to study what worked, what didn’t work, and improve our efforts in the future. We’re not going to roll over and play dead.” Quite instructive in the piece, for which Charles and David were clearly cooperating, is that Friedrich Hayek is mentioned, but not the Austrian economists Rothbard and Ludwig von Mises: Koch Industries essentially applies the ideas of Friedrich Hayek to the art of making money. Hayek, the dean of the so-called Austrian School of economists, celebrated the chaos of decentralized decision-making as a way for every individual to decide what’s in his or her best self-interest. Charles and David know better. The Cato Institute is mentioned in the piece, but not the fact that the idea of the Institute and the early driving force behind it was Rothbard. Rothbard, in fact, came up with the name, Cato, for the Institute. It is named after Cato’s Letters, a series of British essays penned in the early 18th century by John Trenchard and Thomas Gordon expounding the political views of philosopher John Locke, that had a strong influence on the American Revolution’s intellectual environment The essays were named after Cato the Younger, the defender of republican institutions in Rome. As David Gordon once said to me with a laugh, it wasn’t Charles Koch and Ed Crane, who came up with the name based on their deep knowledge of the early 18th century intellectual influences on the American Revolution. Also interesting, in a sidebar to the Forbes piece, we  learn there is a good Koch brother, who is not into manipulating the world:  Frederick, who never got involved with company management, moved to Monaco after selling out to his brothers. The 79-year-old Yale Drama graduate now lives quietly, collecting rare books, fine art and opera manuscripts. He’s also an arts patron: he funded the full refurbishment of Shakespeare’s Swan Theatre in Stratford-upon-Avon in the 1980s and has donated works to permanent collections at the Frick, Morgan and Carnegie libraries. Frederick owns properties across Europe, including an Austrian hunting lodge and French villa.

Reprinted with permission from Economic Policy Journal.

2012 Economic Policy Journal

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