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  Now Charles Koch was boring into him with question after question, and Franklin realized that the CEO wasn’t just necessarily concerned about the market forces at play behind Franklin’s losses. Charles Koch was trying to determine Franklin’s character. He seemed interested in making sure, above all, that he could trust Franklin to carry on trading. Were Franklin’s losses the result of hubris or short-term greed? Was Franklin trying to dodge responsibility or shade the truth? Franklin explained his reasoning behind the trades he made, his understanding of interest rates and currency markets, and why he believed that Koch should stay in the business of trading there.

  The one thing that Franklin did not observe in Charles Koch was panic. There was nothing desperate in the way Charles Koch was questioning the team from Houston. He was questioning what Koch’s future trading strategies should be, and didn’t seem flustered by the amount of money they’d already lost. At one moment, Charles Koch simply went silent. “I do remember Charles Koch at one point, at the end of the meeting, kind of just sitting there and thinking . . . you know, processing if he was going to allow us to go on,” Franklin recalled. “He was essentially weighing what was he willing to invest, based on his confidence.”

  During the weeks of the crisis, others who worked with Charles Koch saw him behave in the same way. He seemed calm and analytical. He wasn’t shaken, as he had been after the collapse of Purina Mills. He wasn’t despondent, as he was back in the early 1970s, when he worried that the OPEC embargo might sink his company. He was steady now, during the greatest economic crisis since the Great Depression. Charles Koch seemed to view the unfolding calamity as if it were a massive trade. He was weighing what he was willing to invest, weighing what he needed to cut.

  A senior employee named Jeremy Jones came into frequent contact with Charles Koch during this period. Jones was an engineer and financier from Boston who was running a venture capital group inside Koch Industries, called Koch Genesis. The small venture was the kind of thing that was near and dear to Charles Koch’s heart. Jones and his team found new technologies for Koch Industries to invest in, such as biofuels and nanomaterials, that could provide the company with years of growth. Now that the horizon was on fire, it was time to retrench rather than expand. Charles Koch seemed to make that shift effortlessly.

  “He goes back to his core thinking of: What’s our point of view around what’s going to happen? How long is this downturn going to take? How is that going to affect people’s buying patterns?” Jones recalled. “And how long is it going to take—given this housing crisis—to get through this deleveraging?”

  If Charles Koch was more confident in his company’s future, he had reason to be. The company he oversaw in 2008 was larger, more diverse, and more adaptable than it had ever been before. It was built to withstand market shocks. Some divisions were hit hard, such as Koch’s building products divisions and its carpet fiber factories. But other divisions fared much better, such as its oil refineries and trading desks. The financial pain was very real, but there never seemed to be any doubt that Koch Industries would come out the other side as a healthy and profitable enterprise.

  The company’s survival, of course, did not ensure the survival of any given job at Koch Industries. The employees in Wichita felt this fact in their bones. Dread permeated the hallways at Koch Industries, and in offices across the country, fed by the knowledge that every job was now considered expendable. It was not a happy occasion, then, when employees were told that there would be a companywide meeting held in a large auditorium in Koch headquarters just before Christmas.

  Such annual meetings were usually a time to celebrate the upcoming holidays and reflect on the good fortune of the year that had passed. They were a time for Charles Koch to wear a goofy Christmas sweater or perform a skit involving Georgia-Pacific products. This year, as Jeremy Jones and his coworkers filed into the auditorium, they knew that they might be hearing the worst.

  Charles Koch took the stage, and his mood was somber. As he stood in front of the crowd, he described the severity of the economic downturn. He didn’t try to varnish the ugly truth or avoid stating directly what many of them knew was coming. Charles Koch walked through each division of the company and explained the damage that was being done. There was less demand for construction materials at Georgia-Pacific. There was less demand for carpeting and clothing at Invista. There was less demand for fertilizer, less demand for gasoline from the refineries. Not everyone at the company would come back from the holidays to a job.

  “He was standing up there in front of probably two thousand people, saying, ‘Look, we’re obviously going to get through this. But I’m going to be very honest with you folks. We’re going to have to make some very serious adjustments to get through it,” Jones recalled.

  One of the adjustments hit Jones. His venture fund, Koch Genesis, was shut down. Other adjustments had already begun to ripple quickly through Koch’s operations across the country. In early October, Koch closed a Georgia-Pacific plywood mill in Whiteville, North Carolina, eliminating 400 jobs. Two weeks later, Koch cut 400 jobs at an Invista plant in Seaford, Delaware. Then 395 jobs were cut with the closure of a petrochemical plant in Odessa, Texas. Three hundred more jobs were cut at a Georgia-Pacific plant in Alabama. In early December, 575 jobs were cut at Invista in Virginia. Another 70 Georgia-Pacific jobs were cut in New York. In January of 2009, 150 jobs were cut at Koch Industries headquarters in Wichita. Within a few months of Lehman Brothers’ bankruptcy, Koch cut at least 2,000 jobs.

  The bloodletting at Koch, while rapid and unprecedented in size, was mild compared with what happened in the rest of the economy. In September of 2008, US employers cut 159,000 jobs, the worst monthly purge in five years. But even those cuts were shallow and didn’t reflect the depth of the downturn. In October, 240,000 jobs were cut. Then 524,000 in December. Then 598,000 the next month. Then 651,000. Then 663,000.

  Many of the jobs lost in 2008 never came back. Between 1948 and 2007, only about 13 percent of people who lost their jobs could not find a new job within six months. By 2010, that number would soar to 45 percent. Unemployment became a way of life rather than a temporary setback. The desperation that these workers felt would transform the next decade of American political life.

  But the desperation was not felt evenly. Things looked very different from Charles Koch’s office. The downturn was painful—David Koch estimated publicly that Koch Industries’ profit in 2009 was half of what it was the previous year. But even in light of these diminished profits, the downturn presented opportunity for Koch Industries. After forty years of living and working in the volatile world of commodities markets, Charles Koch had finally built a machine that was poised to thrive, even profit, in the midst of violent market corrections. This capability derived, in part, from something that Charles Koch called “the trading mentality.” This mentality held that it didn’t matter so much if markets were going up or down; what mattered was that the traders could see ways to exploit large shifts in the markets. During volatile times, companies and governments and competing traders were thrown off balance. Prices diverged. Supplies were interrupted. Gaps emerged between market prices and underlying values. Koch became nimble, even expert, at exploiting those gaps for its gain.

  “When the market is constant, traders don’t make money,” explained Melissa Beckett, the star trader who’d once traded electricity futures. “Traders make money on change.”

  Because of its trading mentality and capabilities, Koch Industries could seize opportunities during the crash that were unattainable to most companies, and certainly to most households. This opportunity was most evident in the oil markets, where Koch’s traders spotted a trading opportunity that would be worth millions of dollars in pure profit.

  They seized it.

  * * *

  For the first time since World War II, the economies of Japan, Europe, and the United States entered into a recession simultaneously. The impact on global oil markets was immediat
e and catastrophic. Oil fell from nearly $145 a barrel to roughly $35 a barrel in a matter of months. The reason was oversupply. When prices were high, oil companies ran at full throttle to produce as much crude as possible. When demand collapsed, all that oil was stranded, with no one to buy it. This oversupply created an obscure follow-on effect that was only visible to people like Koch’s oil traders in Houston. The markets entered a rare period that the traders called “contango.” Koch looked for gaps in the market, and this was one of the biggest in years.

  It’s difficult for outsiders to even understand the nature of a contango market. In essence, the price of oil in spot markets, which reflect the price of oil today, tends to be lower than the price of oil to be delivered in the future. This is attributable to a host of complex reasons.I In the relatively rare scenario when oil today is cheaper than oil in the future, the markets are said to be in contango, and it doesn’t tend to last very long. Usually the market reverts to its normal state of cheaper oil in the future.

  When the market goes into contango, it presents a whole host of ways for Koch’s traders to profit. In late 2008, the potential profits were extraordinary. The size of the contango became enormous—the gap between oil sold today and oil sold for delivery a few months out became roughly $8 a barrel. A more common level of contango would be in the range of $2 or $4 a barrel. And the gap wasn’t just wide, it was long-lasting. The markets remained in contango for several months.

  Koch Industries, and a handful of other giant oil producers, were able to exploit this gap in a special way. Because Koch Industries traded in both the futures markets and the physical markets, it could execute something called the “contango storage play.” One former senior trader within Koch Supply & Trading called the contango storage play a “bread-and-butter” strategy for Koch’s crude oil department.

  The mechanics of the contango storage play seem deceptively simple. A trader at Koch Industries buys oil in the spot markets, where it is cheap. Then, the trader sells oil for delivery in the futures markets, where oil is more expensive. When the contango gap is $8, it is easy to picture how quickly the profits pile up. The trader can buy oil for $35 and sell it for $43, almost instantly.

  There is a catch, however. To execute the contango storage play, the trader must be able to do something that most traders can’t do—they must be able to deliver the actual, physical oil in that future month. If a typical oil speculator—who did not own an oil refinery, storage tanks, or an oil tanker ship—tried to execute the contango storage trade, they could find themselves shut out. Executing the contango storage trade didn’t just require deep knowledge of arcane shipping markets and transportation law; it also required deep relationships in the private world of oil production. “You have to have a lot of support systems to take advantage of it,” Beckett said. Koch had that support system. Koch could deliver the oil.

  Outsiders who tried to get in on the trade during 2009 were denied. A commodities trader in St. Louis, named S. A. Johnson, complained to the Kansas City Star that he couldn’t execute a contango storage play. Johnson said the math behind the trade was blindingly obvious. But making the trade required signing deals with supertanker companies, large oil producers, and even pipeline owners. Johnson could not get these parties to return his calls. “They don’t want me to play,” he said.

  During the early months of 2009, Koch’s traders piled into the contango storage play. Koch bought the cheap oil and sold the more expensive futures. It stored the oil for future delivery in tanks that Koch already leased. The trade was so profitable that Koch began to lease supertankers filled with oil, using them as temporary, floating storage units. The tankers floated in the Gulf of Mexico, waiting for their moment to deliver, allowing Koch to increase its trade without fear of a squeeze. The handful of other companies that could execute this trade, such as BP and ConocoPhillips, also leased supertankers and kept them floating on the sea, waiting to deliver their cargo. BP told its investors that the contango storage play earned the company roughly $500 million in the first quarter of 2009 alone.

  As news of this trading tactic became public in mid-2009, it prompted allegations that Koch and other traders were manipulating oil markets by keeping supplies off the market and raising prices at the pump. This was true, but only to an extent. It was the global recession that caused demand to disappear, which in turn caused near-term oil prices to collapse. Without that oil glut, the contango storage trade would have been impossible. Traders in Koch’s oil department saw themselves as reacting to market conditions, not manipulating them. By holding oil for later delivery, Koch Industries was helping correct a gap in the market, even if it was profiting by doing so.

  “The market’s really wanting you to do it,” Beckett said. “The market is oversupplied in the front, today, which is why the price is low. So, they’re wanting some supply to disappear. The market is communicating there is too much of something.” Koch was listening to the market, buying up oil today and holding off delivery of oil until tomorrow when demand was higher.

  The contango storage trade helped Koch cover its losses through the darkest period of 2009, as the firm cut jobs and idled its factories.

  * * *

  During the winter of 2008, even David Koch was forced to adjust his behavior and his outlook. He was getting more requests for big donations after his previous gifts had been publicized. But David Koch didn’t think this was the time to make new donations. There were other concerns that weighed on his and Charles’s minds. Koch Industries would weather the economic downturn. But another crash was taking place that could be far more dangerous. It was the crash of American conservatism and Koch’s political agenda. Even as he held meetings to address the economic crisis, Charles Koch was contemplating this political crisis as well.

  One evening in Houston, Cris Franklin and his wife prepared for an exclusive social event. They were invited to the home of Koch Supply & Trading president Steve Mawer for a dinner party, along with other senior managers and traders. There was a special guest that evening. Charles Koch was in town, and he wanted to address the group.

  It wasn’t unusual for Charles Koch to come to Houston and meet with traders. Charles Koch didn’t get involved in the minutiae of day-to-day trading, but he liked to meet with supervisors like Franklin and talk through their strategies. Tonight’s dinner seemed to be different. It seemed unlikely that Charles Koch would talk about trading strategies at a dinner party. He apparently had something else he wanted to discuss.

  Franklin had reason to be in good spirits when he and his wife arrived at the party. After his visit to Wichita, Franklin learned that Charles Koch had approved Franklin’s request for more money. The currency and interest rate trading group would stay in business. This was, as it turned out, a wise decision. Franklin and his team plunged into the wreckage of the currency markets and found new opportunities for trading on the volatility, just as Koch’s oil traders managed to do with the contango storage trade. Franklin’s team became profitable again. Within a matter of a few years, their profits would hit record highs.

  Franklin and his wife walked inside Mawer’s home to join the guests who were standing in clusters, enjoying a social hour before dinner. The house was filled with conversation among traders and their spouses. Franklin spotted Charles Koch in the crowd.

  Charles Koch stood and smiled, chatting with guests as if he were a visiting dignitary. There was something about Charles Koch that made him approachable at this stage in his life. He resembled a professor of economic philosophy as much as a hard-charging CEO. His youthful competitiveness, which once had a hard edge to it, seemed to have softened. Franklin told his wife that he wanted to say hello to the CEO and introduce her. They walked across the room and waited to shake the hand of one of the richest men in the world.

  As he waited to meet Charles Koch, Franklin decided to make a joke. His wife’s maiden name also happened to be Koch, although he knew she was of no relation to Charles Koch’s family. No
t only was his wife unrelated to the Koch family, she pronounced her last name as “cook,” rather than “coke.” Franklin decided he’d make sport of the difference when he introduced her to Charles.

  “I said, ‘You know, Charles, my wife, her maiden name’s spelled K-o-c-h, and she says that you’re aren’t pronouncing it correctly,” Franklin said. “He looks at me, and he’s like, ‘Oh, really?’ He’s totally lighthearted and fun about it.”

  Charles Koch told the young couple a story that had become family lore in the Koch household. He said that his father, Fred, had grown up pronouncing his last name in the Dutch manner, with a guttural ch sound at the end. But once, when sitting in a train station, Fred Koch was paged over the loudspeaker and the announcer mispronounced his name as “coke.” Fred decided he liked that version much better, and it became the family name going forward.

  Koch never managed to fully adopt the easy familiarity with people that he’d so admired in Sterling Varner. But he had managed to build his own way of bonding with people. The self-deprecating humor, the avuncular manner, the low-key button-down shirt and jacket with no tie—all of it helped. The crowd of traders around Charles Koch were willing to follow him, and they were keen to hear what he wanted to say.

  After dinner, the guests retired to a large living room, where chairs were circled around a spot where Charles Koch stood to address them. The meeting was more like a talk at a literary salon than a business presentation. Charles Koch didn’t want to talk about Market-Based Management, the state of oil markets, or even Koch’s business strategy. There were larger, more pressing issues on his mind. He wanted to talk about the state of the country, the state of political parties, and “the current of America,” as Franklin recalled it.