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  Bill Koch’s pitch was simple. Koch Industries would buy out Roskind’s company and create a new chemical trading company inside Koch Industries, with Roskind as its head. He would get a 20 percent ownership stake in the trading company, and Koch would invest money to make the firm much larger. Roskind would be able to open a new office, hire more traders, and do more business than he’d ever done before.

  Roskind went to Wichita to iron out the details, and that’s where he met Bill Koch’s older brother, Charles. Charles Koch ate with Roskind at the Koch Industries cafeteria and discussed the deal. The differences between Charles and Bill were stark. Charles wore a coat and tie. There was not even a hint of carefree campus life about him. He had an engineer’s mind and an engineer’s demeanor. Charles drove an older car, too, but there wasn’t a hole in the floor. Charles was low-key, but his ambitions were apparent. Roskind asked Charles Koch how his company was doing, and he remembers Koch saying: “Well, we’re the second-largest privately held company in America. . . . We’ll be going to the first largest if we can do it,” Roskind recalled.

  “I thought that was a pretty good answer,” Roskind said. He agreed to become part of Koch Industries.

  Roskind quickly opened an office, hired traders, and installed a telex machine that could send written messages instantly to almost anywhere in the world. His new division was called Koch International Trading Company, and it did not operate a single production facility. It didn’t make a pound of sulfur or chlorine, but instead it arranged deals for the transfer of countless tons of commodities.

  Bill Koch called Roskind and told him that he wanted a job. He wanted to be a chemical trader. Roskind had his doubts.

  “I said, ‘Well, Bill, I’ll be honest with you,’ ” Roskind recalled. “I know you have a PhD in chemistry, but we need a PhD in chemical trading. And they don’t offer those. You’d be welcome to work with us, but I’m going to have to treat you like I treat almost everybody else. And that is, I have to pay you a modest salary and see how well you do.”

  Roskind pointed out that in the trading business, volatility had its upside. Bill Koch’s salary might be low, but just one or two good trades might easily double or triple his pay. A trader’s income swung wildly, but the payoffs could be enormous.

  Bill Koch’s answer was immediate. “I’ll take it.”

  * * *

  Roskind’s office opened at eight thirty in the morning, and the trading began almost immediately. Roskind often arrived early, but the other employees drifted into work, and most of them were not seated and ready to go until around nine. One morning, Roskind was alone in the office at eighty thirty when the phones began ringing. He went from desk to desk, answering the calls because he didn’t want to miss a potential deal or give his customers the idea that nobody was home. In the chemical trading business, where written contracts were rare, reputation meant everything. A phone ringing with no answer sent the wrong message.

  Later that morning, Roskind called all his employees into the office, including Bill Koch. He tore into them.

  “I said, ‘I want to tell you something: this office opens at eight thirty. That doesn’t mean you walk in at eight thirty. That means you’re ready to do business at eight thirty. You’re at your desks and you’re doing business at eight thirty! Don’t be late again.’ ”

  The employees filed out of his office and got back to work. About an hour later, Roskind’s phone rang. The call was from Wichita. It was Charles Koch.

  Roskind’s first thought was that his short career at Koch Industries was now finished. He had just chewed out his boss’s little brother. Charles Koch’s first words affirmed his fears.

  “He says, ‘I understand you publicly humiliated my brother,’ ” Roskind said.

  “I said, ‘Well, I didn’t mean to. I had a meeting of the entire staff, and I laid down the law about how this company was going to be run. And your brother was part of the staff.’ ”

  Charles Koch’s response was chilling: “You know, no one’s ever talked like that to a Koch.”

  “I said, ‘Well, Charles, I’m really sorry that that’s upset you.’ ”

  Then Charles told him: “It’s about time someone did that.”

  * * *

  Bill Koch was a very fast learner. He sought out Roskind’s advice, and once he heard the advice, he followed it. Bill Koch also had one of the most important skills a trader needed: he was very good at dealing with people. Bill Koch was not warm or charming, but he was an expert at listening. He quickly absorbed what the client wanted—and what the client was willing to give up to get it.

  Roskind taught Bill Koch that trading was about one thing. “The idea of trading is to take what we have and get what we want,” he said. Roskind’s metaphor was that the trader begins his day with pennies, and he ends his day with a sirloin steak. Bill Koch was able to turn pennies into sirloin not just because he listened closely to his clients, but because he had the keen mind of an engineer. He saw commodities markets as a complex game board with several dimensions, and he was able to triangulate between the needs of people scattered around the globe, making them meet in a way that produced a profit.

  Chemical trading wasn’t a simple matter of buying low and selling high. One of Bill Koch’s more successful trades shows just how complicated the business could be. Roskind and Bill Koch heard from clients that there was very strong demand in East Asia for a chemical called acetic acid, which was in tight supply. The companies that made acetic acid were aware of the supply crunch, and they were not about to let go of their product easily. This made it almost impossible to buy acetic acid at a price that would make it profitable to turn around and sell it in Asia. But a good trader knows what is happening simultaneously in different markets. Bill Koch knew that the companies that made acetic acid often used corn as a feedstock for the product. Bill Koch also knew how to get corn at a cheap price on the futures market in Chicago. So Koch Trading bought corn on the futures market and bartered it with acetic acid manufacturers for large quantities of their product. Then they sold the acetic acid at a much higher price in Asia.

  Roskind said he made $1 million off that single trade. Charles Koch called him personally to express surprise that a single deal could be worth so much.

  “I said. ‘I’m sorry we couldn’t make more,’ ” Roskind told him.

  * * *

  Like all senior executives at Koch Industries, Bill Koch and Herbert Roskind often traveled to Wichita to provide updates on their business division to Charles Koch. These quarterly meetings were also attended by a small coterie of executives like Sterling Varner and Bernard Paulson. Roskind enjoyed being around Charles Koch—it was impressive to see this tremendously wealthy man eating in the company cafeteria with the rest of the employees.

  Yet Roskind noticed that his traveling companion wasn’t enjoying himself nearly so much. Bill Koch resisted going to Wichita.

  When Bill was at company headquarters, he was tense. And it was easy to spot the source of his irritation: there was something about Charles that put Bill Koch on edge. Just being in the same room with Charles seemed to darken his mood. Roskind didn’t understand why Charles Koch irritated his little brother so much. Charles wasn’t domineering. His demeanor was placid; his tone was always cordial. Charles Koch didn’t insult people and didn’t pound his fist on the desk. But even Charles’s smallest comments caused an oversized reaction in Bill.

  “I didn’t fully understand what the tensions were,” Roskind said. “It never was over money, I don’t believe.”

  * * *

  After his successes in the chemical trading division, Bill Koch got a promotion. Or, because of how things worked at Koch Industries, it’s more appropriate to say that Bill Koch was promoted by his older brother, Charles.

  Bill Koch was made vice president of a new division called Koch Carbon, which was typical of the kinds of businesses that Charles Koch and Sterling Varner liked to pursue: it pushed the company int
o new territory and new markets by building on what Koch already knew. Koch Carbon was branching out into the coal mining and processing industries, which built on Koch’s knowledge of the fossil fuel business. As head of the division, Bill Koch would have been encouraged to act like Bernard Paulson or Roger Williams: as an entrepreneur in charge of his own business.

  Bill Koch did this, but in his own way. He built a staff in Wichita, many of them originally hired by Charles. One of Bill’s staffers was a young finance guy named Brad Hall, who was a prototypical Koch man, cut from the same mold as Lynn Markel. Brad Hall had been an athlete in college, played baseball at Wichita State University, and knew how to be part of a team. He had the kind of humility that was so deeply baked into his character that he didn’t even know he was humble. He was one of those middle-class kids from Wichita who intuitively knew that the world didn’t owe them a thing. Hall was also startlingly intelligent—he had the neural processing ability of a skilled engineer and a methodical approach to problem solving. He was a natural acolyte of Charles Koch’s, in other words. But shortly after he was hired, Hall was informed he would not be working for Charles. He would report directly to Bill and would help him build up the carbon division.

  Bill Koch became enamored of the kind of data-driven analysis that Bernard Paulson relied on to run the Pine Bend refinery. But Bill’s version of data analysis borrowed more from the erudite traditions of MIT and the Ivy League than it did from the oil fields of the Midwest. Shortly after they started working together, Bill Koch sent Brad Hall an article that he’d read in the Harvard Business Review. The article outlined a computer technique that ran a probability analysis on the internal rate of return for potential deals. The model used something called a Monte Carlo simulation to figure out what the rate of return might be in light of a number of variable factors, like different overhead costs. Bill Koch asked Hall to do a Monte Carlo simulation on a major coal industry deal they were exploring.

  Brad Hall’s task was overwhelming. He borrowed time on the mainframe computer that took up a large room in the basement of Koch Industries headquarters. The computer used punch cards that had to be individually tailored to each specific model run in each simulation. Initially, Koch’s computer engineers punched the cards, but the simulation required so many cards that they just let Hall start punching the cards himself. His small office became overcrowded with punch cards. Hall pushed himself hard to meet Bill Koch’s deadline, running simulation after simulation. He came into the office one Sunday morning, skipping church and leaving his family at home so he could work away at the punch cards. Hall knew it wasn’t unusual for Charles Koch to work on Sundays and call in other employees to join him. But Bill Koch wasn’t at the office when Hall arrived and Bill Koch didn’t show up while Hall worked through the day, punching cards and running simulations.

  Early in the afternoon, Bill Koch called the office to check in on Hall’s progress. Hall began explaining to him how the simulations were going, but Bill kept interrupting him, shouting, “Ah! . . . Ah!” Hall couldn’t figure out what was going on, and he asked Bill if something was wrong.

  Bill replied, “I’m watching this Patriots football game,” Hall recalled. After they hung up, Hall returned to the basement to keep running simulations while Bill Koch enjoyed the game.

  * * *

  Hall finished the Monte Carlo simulations and prepared a presentation on the findings for Charles Koch and Sterling Varner. Bill Koch made it clear that he wanted to impress Sterling and Charles, so Hall rushed to a special store in downtown Wichita that rendered his findings onto color slides that could be shown from an overhead projector during the presentation. In the 1970s, this was high technology.

  Hall meticulously arranged the presentation and the overhead projector in the boardroom at Koch headquarters. He was still a new hire, and it was thrilling for him to be in the same room as Charles Koch. He was proud of the work he’d done. The computer simulations were extremely complex, and he’d spent hours memorizing his findings so he’d be ready for any questions.

  When the meeting started, Sterling Varner and Charles Koch sat down and Bill Koch began the presentation with a brief overview. Then Brad Hall went through the slides, laying out the extensive analysis he’d done on Koch’s mainframe computers.

  Hall was only a few minutes into the presentation when Sterling Varner interrupted him.

  Varner said, “Billy, I know that you and Brad understand all this fancy stuff and everything. I know Brad’s done all these calculations. And that’s great. But I just want to know: Is this a good deal?” Hall recalled.

  Hall was frozen in place.

  Is this a good deal? That statement would reverberate in his head many decades later. “It’s like somebody hit me with a sledgehammer,” he said. He called the statement “classic Sterling.” It cut to the quick and exposed how flawed Hall’s presentation really was. Brad Hall realized in an instant that he’d gotten lost in the minutiae of his analysis without thinking about the broader strategy that should have been behind it. He had a thousand computer runs to tell him what the internal rate of return might be under various conditions. But he couldn’t present any critical analysis about why the deal might be a good idea over the next decade, or why Koch Industries more than any other company was the right company to do the deal.

  “I had no idea what I was doing. I was all tied up in these details and everything. And there’s this whole other spectrum of strategy” that Varner employed when considering a deal, Hall said.

  Almost right away, Charles Koch began asking questions about other competitors in the business and the marginal suppliers in the industry. They were strategic questions, and they cut to the bone.

  For Brad Hall, these questions cemented one realization. Hall knew whom he wanted to work for, and that person was not Bill Koch.

  The message could not have been lost on Bill Koch himself.

  * * *

  Like all vice presidents at Koch Industries, Bill Koch had to periodically answer a battery of probing questions from Charles that evaluated how well he was doing. But Bill was different from other executives in one vital way: he owned a big chunk of stock in the company.

  Charles, Bill, and David had very large numbers of shares, each son with roughly a 20 percent share of the company that had been left to them by their father. Their older brother, Frederick, also had shares, even though he wasn’t involved in operations. J. Howard Marshall II, the former co-owner of the Pine Bend refinery, owned another large piece of the company. Marshall gave some of these shares to his son, J. Howard Marshall III. There was a smattering of other small shareholders, including cousins from Fred Koch’s side of the family who were simply referred to as the “other Kochs.”

  Being a major stockowner complicated Bill Koch’s standing with Charles.

  As a vice president, Bill reported to Charles. But as a major shareholder, he was, in many ways, Charles’s equal. As Bill Koch spent more time at the company, he started to focus more on his role as a shareholder—the one role in which he could contend with Charles on equal footing.

  Bill’s stock gave him a seat on a special executive committee of the board of directors, a committee that included only himself, Charles, and David, with Sterling Varner as an alternate. Starting in the late 1970s, Bill began to pursue his role on the executive committee aggressively. He peppered Charles Koch with questions about his decision-making and about the company’s operations. Charles complied with Bill’s questions and sent him reams of documents, only to find new requests were waiting behind them.

  Bill’s requests started to focus on one issue, and they started to take an accusatory tone. Why, Bill wondered, wasn’t Charles reporting certain developments to the entire board of directors?

  There was a problem at a Koch Industries office in Denver, for example. Employees there had been indicted for rigging a government lottery system used to disburse energy leases. Why hadn’t Charles Koch told the board about this proble
m earlier, before the indictments were issued? Bill also asked about a pending US Department of Energy inquiry. The department was investigating several companies for possibly violating federal energy price controls. The alleged violations went back many years. The parameters of the investigation were unclear, but someone in Koch finance who studied the issue said that, theoretically, the government might demand as much as $1 billion to compensate for overcharges. Bill Koch asked Charles why he had not reported this fact to the board of directors. Wasn’t a potential $1 billion fine worth reporting?

  Charles said the $1 billion figure wasn’t significant; it was just a theoretical data point. Nobody in the company seriously believed that a fine that large would be imposed. It simply wasn’t worth reporting to the board.

  Bill Koch was doing more than asking questions. Soon he was using his questions to tell a story to the company’s board of directors. He painted a picture of his older brother as an autocrat, a “dictator” who ruled the family company with no tolerance for dissent and a penchant for secrecy. Bill even coined a nickname for his brother, “Prince Charles,” and he began dropping it in conversations with coworkers. Charles became aware of the nickname, and did not seem amused.

  Bill did more than subtly accuse Charles of wrongdoing. He began to openly challenge him. The biggest challenge that he pursued was against one of Charles Koch’s most important business strategies: the use of dividends. Bill pointed out that dividends at Koch Industries were exceptionally low when compared with those of other companies. He argued that this punished Koch’s shareholders, what few of them there were. The Koch brothers were tremendously wealthy, but that wealth existed mostly on paper; their access to their wealth was extremely limited. Bill wanted higher dividend payments—he wanted cash up front from his father’s inheritance. He complained that he was “one of the wealthiest men in America,” but still he had to borrow money to buy a house.