Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty

by Daniel Schulman

  “What I learned is, never piss off a billionaire,” Crane joked at a Cato gala years later, according to one think tank staffer, who said his boss occasionally made light of his bitter falling-out with Charles.

  If only Crane had actually learned his lesson.

  The bad blood between Crane and Koch was decades in the past, but a recent episode had reopened old wounds. The New Yorker’s Jane Mayer, in her August 2010 article about the Koch brothers, quoted a “top Cato official” disparaging Charles and Market-Based Management, a point of pride for the CEO who considered this philosophy the source of his company’s success and the bedrock of his legacy. Charles “thinks he’s a genius,” this official said. “He’s the emperor, and he’s convinced he’s wearing clothes.”

  The remark infuriated Charles, and he and David were convinced they knew its source. The month after the story ran, David confronted Crane during a phone call. Was he Mayer’s “top Cato official”? Crane eventually fessed up. “Charles is really upset,” David told him during the call, according to Crane.

  The brothers’ next move wasn’t subtle. That December, Charles called a Cato stockholders meeting, and the brothers invoked their shares for the first time anyone at the think tank could remember to appoint two new board members—Nancy Pfotenhauer, the former Koch lobbyist, and Kevin Gentry, the brothers’ chief fund-raiser and the organizer of their donor conferences. Both were Koch loyalists and neither was considered much of a libertarian (though Pfotenhauer, at least, had studied at George Mason University, under libertarian economist Walter Williams). “Anybody who even suggests that they are libertarians has got their head somewhere where the sun isn’t shining,” Cato chairman Bob Levy fumed. Crane stewed over the board appointments.

  Crane possessed a legendary temper, and his fury over the Kochs’ power play finally erupted. In March 2011, during a board dinner held on the last Thursday of the month, Crane discussed Cato’s ongoing capital fund-raising campaign. Pfotenhauer, a petite and telegenic blonde who started her career as a Republican National Committee economist, chimed in with a question. Crane had detailed plans for expanding Cato’s physical facilities, but what was his vision for the think tank’s policy team? she wondered.

  Crane’s short fuse turned to ash before everyone’s eyes. “Let me say something about these two new Koch operatives who have been placed on this board,” he snarled, crimson-faced, from his seat at the head of the table. He pointed to Kevin Gentry: “Kevin Gentry seated over there, has never once—never once!—invited me or any Cato scholar to speak at the donor conferences he organizes for Charles Koch.”

  He rounded on Pfotenhauer. “How would you ever know anything about Cato’s policy priorities?”

  Crane stomped off, as slack-jawed board members and Cato executives looked on.

  “This was the accumulation of lots of things that were done by the Koch faction that Ed both thought were wrong as a management matter, and took personally,” said Bob Levy, who was present. “You certainly could say that Ed was provoked over a period of time, and this really was sort of the straw that broke the camel’s back.”

  Later that year, when William Niskanen died suddenly, tensions between Crane and the Kochs reached a boiling point.

  The week after Niskanen’s funeral, Levy flew from his home in Naples, Florida, to Dulles Airport, in the Virginia exurbs outside Washington DC. The seventy-year-old Cato chairman had requested an audience with David Koch. At the busy billionaire’s request, they arranged to meet at the airport, in a bland conference room attached to the hangar where David’s jet was parked.

  Levy was a self-made millionaire who had started and subsequently sold a financial research firm, reinventing himself in his fifties as a lawyer and constitutional scholar. Levy hoped to avert a clash between the Crane and Koch camps over Niskanen’s shares. He wanted to gauge where both sides stood and see if there was any common ground on which to build an agreement.

  Richard Fink and Kevin Gentry accompanied David to the meeting. The mood was tense from the outset. Crane’s belligerent treatment of Pfotenhauer and Gentry had angered David, who informed Levy bluntly that he and his brother wanted Crane gone within eight weeks, preferably sooner. Cato wouldn’t get a penny of his money, David said, until he felt it was back on the right path and under responsible leadership.

  The Kochs didn’t just want a management change. The brothers and their advisors believed the think tank should do more to advance their political agenda in the upcoming election. The Republican Party, for all its flaws, offered the best hope for halting the country’s slide to socialism, David told Levy. Cato, he said, needed to start translating “esoteric concepts into concrete deliverables.”

  What in the world did this even mean? Levy wondered.

  “We would like you to provide intellectual ammunition that we can then use at Americans for Prosperity and our allied organizations,” David explained, according to Levy.

  Levy was puzzled. Cato produced plenty of intellectual ammo, if that’s how you wanted to view the position papers and policy recommendations its scholars produced. Americans for Prosperity and any other outfit was free to use Cato’s materials to blast away at Obama and the Democrats.

  “What gives you the impression that we aren’t providing intellectual ammunition?” Levy inquired. He never got a straight answer. After the meeting, Levy flew back home to Florida with a foreboding feeling.

  The hostilities escalated throughout the winter of 2012, as both sides fruitlessly tried to reach a compromise. In return for eliminating the shareholder agreement, Levy offered to begin a search for Crane’s successor and give the brothers veto power over his replacement—the Koch brothers rejected the proposal. The Kochs proposed entering nonbinding mediation and later floated a plan for a “standstill agreement” until after the presidential election—Crane and Levy declined both offers.

  In March 2012, the internal struggle leapt into public view. Crane had scheduled a shareholders meeting on March 1, where he planned to recognize Niskanen’s widow. Charles and David responded with a lawsuit to force Kathryn Washburn to relinquish her husband’s shares. And they used their Cato stock to install four handpicked board members, including Charles himself, displacing four existing directors.

  “They thought we would back down rather than risk additional criticism from them and others on top of the many attacks we already face from opponents of a free society,” Charles said in a rare public statement. “They thought wrong.”

  On the afternoon of March 2, Crane convened about a dozen mostly senior Cato officials in a conference room on the seventh floor of the institute’s headquarters, where its executives have their offices. One attendee described it as a “war meeting” that was led by Crane’s fastidious number two, David Boaz, who’d worked for the think tank since the salad days on San Francisco’s Montgomery Street. When Cato’s strange corporate structure was explained, there was a moment of surprise among staffers, who assumed the institute had been set up like any other nonprofit. “A lot of us had no idea we had shareholders,” the attendee recalled. But the meeting quickly turned pragmatic, he said, into “how do we stop this.” They discussed the coming news onslaught, and later a multipage internal memo of talking points was distributed to participants. It read in part:

  Charles and David Koch have told Cato chairman Robert A. Levy that they intend to use their legal powers to remove Ed Crane, pack Cato’s board of directors, and coordinate Cato’s activities more closely with organizations that have political agendas. Predictably, their plans and motivations are not open and transparent. Charles Koch, David Koch and their representatives have publicly and privately declared their admiration for Ed Crane’s achievements which they describe as “remarkable” and “incredibly effective over the years.” Nevertheless David Koch told Bob Levy that the Koch family could only support Cato if Crane were removed as president. Koch offered no substantive reason for that demand. In a separate conversation Levy asked Charles Koch w
hy he insisted on removing Crane after 35 years against the will of the board. Koch had no explanation other than that the two had a falling out some 20 years ago. The Kochs told Levy that they focused on defeating President Obama in 2012 and to that end they would like Cato to be the source of intellectual ammunition on key issues, advancing the efforts of Americans for Prosperity and allied groups by providing position papers, a media presence, and speakers on hot button issues.

  Around Cato’s Massachusetts Avenue offices, in a modernistic cube of a building with a glass façade, staffers expressed anger but also befuddlement. Many scholars owed their careers, at least in part, to Charles and David’s philanthropy. They had done internships or fellowships sponsored by Charles’s foundation, participated in seminars or summer programs held by the Koch-funded Institute for Humane Studies, worked their way up through any number of nonprofits that received backing from the brothers, or all of the above.

  “You’re talking about people at Cato who are big fans of Charles and David Koch,” Levy said, “so it’s inexplicable to them that the Kochs would do what they’re doing.”

  The Kochs might as well have taken a bat to this hive of libertarian thought. Within days of the lawsuit, Catoites set up a “Save Cato” Facebook page and took to an assortment of blogs and news outlets to decry the alleged coup. “I don’t think they expected the Institution itself would reject their move,” said a Cato scholar. “When you take over an oil company, people might be scared they’re going to be fired, but you’re not going to have principled opposition. It’s not a question of whether you have a business when you’re done.”

  If the Kochs gained control, Cato scholars and executives privately discussed resorting to the “Taiwan option”—forming a new think tank with the backing of Cato donors who remained loyal to Crane.

  The Kochs and Crane, meanwhile, traded barbs in the press and via terse public statements. Crane accused the Kochs of an effort to “turn the Cato Institute into some sort of auxiliary for the GOP.” And he doubled down on his comments about Market-Based Management, calling Charles’s Science of Success, in an interview with Slate, “one of the worst books ever written.” David, resurrecting a charge once lobbed at Bill Koch during the brothers’ legal entanglements, blasted Crane for pursuing a “rule or ruin” strategy.

  The Kochs’ reputation in libertarian and conservative circles for attempting to foist control over organizations they funded left them with scarce allies. Breitbart, the right-wing website founded by the late conservative firebrand Andrew Breitbart, emerged as one of their few defenders. It ran a series of unbylined articles that portrayed Ed Crane as a petulant, power-mad tyrant willing to burn the think tank to the ground if he could not run it. The eponymous website also floated thinly sourced allegations of sexual harassment by Crane, rumors amplified by websites associated with members of a libertarian faction loyal to the late Murray Rothbard.

  Meanwhile, libertarian scholars and other allies on the Right closed ranks around their Cato comrades, pleading with the brothers publicly to back down, lest they do “irreparable harm to the credibility of Cato” and “undermine our community’s intellectual defenses” at the worst possible time, as the leadership of FreedomWorks said in a statement. Liberals, usually only too glad to pillory Cato, joined in the anti-Koch pile-on. The enemy of their enemy was their friend.

  The Kochs expected the wrath of the Left. Little did they imagine that as the 2012 presidential election loomed, they would take heavy fire from within the movement they had helped to create.

  The Cato conflagration distracted from the main battle the Kochs were fighting against the Obama administration. When the president’s reelection campaign unleashed its first ad of the general election in mid-January 2012, the spot didn’t trifle with Mitt Romney, Newt Gingrich, or any of the other Republican contenders; they were doing a good enough job of eviscerating one another without outside help. Team Obama, rather, directed its fire at the Koch brothers, whom David Axelrod, the president’s chief political strategist, had dubbed “contract killers in super-PAC land.”

  “Secretive oil billionaires attacking President Obama with ads fact checkers say are ‘not tethered to the facts,’ ” the ad’s narrator intoned. A still frame of an Americans for Prosperity issue ad, targeting Obama for his support of the bankrupt solar company Solyndra, flashed on the screen.

  The president’s political advisors devised the “secretive oil billionaires” ad as part of a carefully calibrated strategy to defang the Kochs and neutralize the impact of their attack ads. “Given the experience of 2010, at the outset of 2011 we were scared to death that between the Koch brothers and [Karl Rove’s American] Crossroads that the campaign would be outspent by hundreds of millions of dollars,” recalled Ben LaBolt, the Obama campaign’s press secretary.

  The fear of being outspent by the Kochs and their allies drove the Obama campaign, already known as pioneers in the use of microtargeting and voter analytics, to become that much more data-focused. “You can count the concern about the Koch brothers and the outside groups” in the dozens of staffers the campaign allocated to its analytics department, said Larry Grisolano, who oversaw the Obama campaign’s advertising. Heading into the election, there remained only a small sliver of the electorate—perhaps 15 percent—who could be swayed left or right. Plans by the Kochs to dump hundreds of millions of dollars into the election motivated the Obama campaign to strive for ruthless efficiency in its own expenditures. The campaign developed a system called “the Optimizer,” which mingled voter and TV viewer data and guided its hypertargeted ad strategy. The campaign couldn’t play “the traditional advertising game of casting a really broad net and hoping that you get the fish,” Grisolano said. “We wanted to basically have a very laser-like focus on where those targets were and have as little spillage into inefficient targets as possible. It was all because of our pre-occupation with spending by the Koch brothers and other outside groups.”

  The “secretive oil billionaires” ad was born of the Obama team’s realization that it could not refute Americans for Prosperity ad for ad. When the campaign focus-grouped possible responses to Americans for Prosperity’s attack ads, it found that viewers often disregarded the group’s message once they became aware of AFP’s connection to the billionaire Koch brothers. “If you just outlined who the Koch brothers were in that response ad,” said LaBolt, “then people tended to discredit the argument. You could educate people about what AFP was, so that they would remember when they saw subsequent advertisements who was behind it.”

  The Obama campaign’s debut ad reminded voters—as it would do over and over again throughout the election—that a pair of petrochemical billionaires lurked behind many of the political ads attacking the president. According to Grisolano, the campaign found that the name “Americans for Prosperity” itself made some voters suspicious. It sounded like a front group. “They kind of helped us in this idea of the secretive oil billionaires by the ambiguity of the name and what their aims were.”

  The Obama campaign’s opening salvo touched a nerve. Former George W. Bush administration solicitor general Ted Olson, who represented Koch Industries, fired back in a Wall Street Journal op-ed that accused President Obama and his reelection team of engaging in Nixonian tactics against the Koch brothers in a “multiyear, carefully orchestrated campaign of vituperation.”

  The Obama campaign had no plans of retreating. In February, Obama’s campaign manager Jim Messina invoked the brothers in a fund-raising appeal, noting that Mitt Romney, who was scheduled to appear at an Americans for Prosperity event, was courting men “whose business model is to make millions by jacking up prices at the pump” and “who bankrolled Tea Party extremism.”

  By March, as the Cato feud went public, the Obama team and Koch Industries were dueling in deliciously passive-aggressive open letters. “It is an abuse of the President’s position and does a disservice to our nation for the President and his campaign to criticize private citizens s
imply for the act of engaging in their constitutional right of free speech about important matters of public policy,” chided Philip Ellender, the president of Koch Industries’ government and public affairs division.

  Messina, who carefully tracked Americans for Prosperity’s spending on a whiteboard in his Chicago office, only too gladly replied: “It is a cynical stretch to describe the political activities of your employers as furthering democracy when they are courting huge checks from special interest donors to pay for negative ads, with no public disclosure of the identity of those donors.” He challenged the Kochs to disclose Americans for Prosperity’s contributors, who, the brothers’ representatives insisted, disingenuously, were largely average citizens from “across the country and from all walks of life.”

  By May, the tit-for-tat graduated to web videos, each side responding acidly to the latest provocation.

  “You may have heard of the Koch brothers,” Obama’s deputy campaign manager Stephanie Cutter said, speaking directly into the camera and betraying more than a tinge of annoyance. “… These guys are going to say whatever it takes to tear down the president. They will literally say anything.… So we’re going to call their BS when we see it.”

  Koch Industries’ PR shop retorted with its own slickly produced video: “Yet again, low-minded invective aimed at job creators. The president and his campaign offer no solutions and no principled discussion.”

  While the bitter Republican primary campaign slogged on, it was as if President Obama were running against the Koch brothers.

  While Charles and David fought for the political soul of the country and did battle over Cato, their brother Bill was busy waging wars of his own—against such evildoers as shady wine dealers and Oxbow employees he suspected of fraud. These fights, as usual, involved high-priced lawyers, shadowy investigators, and made-for-TV-movie-style intrigue.