Dark Money

by Jane Mayer

  The most fateful Mercatus Center hire might have been Wendy Gramm, an economist and director at the giant Texas energy company Enron who was the wife of Senator Phil Gramm, the powerful Texas Republican. In the mid-1990s, she became the head of Mercatus’s Regulatory Studies Program. There, she pushed Congress to support what came to be known as the Enron Loophole, exempting the type of energy derivatives from which Enron profited from regulatory oversight. Both Enron and Koch Industries, which also was a major trader of derivatives, lobbied desperately for the loophole. Koch claimed there was no need for government policing because corporations’ concern for their reputations would cause them to self-regulate.

  Some experts foresaw danger. In 1998, Brooksley Born, chair of the Commodity Futures Trading Commission, warned that the lucrative but risky derivatives market needed more government oversight. But Senator Gramm, who chaired the Senate Banking Committee, ignored such warnings, crafting a deregulatory bill made to order for Enron and Koch, called the Commodity Futures Modernization Act. Despite Born’s warning, the Clinton administration embraced the exemptions too, swayed by Wall Street pressure.

  In 2001, Enron collapsed in a heap of bogus financial statements and fraudulent accounting practices. But Wendy Gramm had pocketed up to $1.8 million from Enron the year after arguing for the loophole. And it emerged that before going under, Enron had made substantial campaign contributions to Senator Gramm, while its chairman, Kenneth Lay, had given money to the Mercatus Center.

  By the end of 2002, the Gramms had gone into semiretirement, but at the Mercatus Center the zeal to exempt enormously risky markets, including energy derivatives favored by Koch Industries, lived on. The consequences wouldn’t become fully visible until the economic crash of 2008. By then, George Mason University was both the largest single recipient of Koch funds for higher education and the largest research university in Virginia.

  George Mason was the Kochs’ largest libertarian academic project but far from the only one. By 2015, according to an internal list, the Charles Koch Foundation was subsidizing pro-business, antiregulatory, and antitax programs in 307 different institutions of higher education in America and had plans to expand into 18 more. The schools ranged from cash-hungry West Virginia University to Brown University, where the Kochs, in the tradition of the Olin Foundation, established an Ivy League “beachhead.”

  At Brown, which is often thought of as the most liberal of the Ivy schools, Charles Koch’s foundation gave $147,154 in 2009 to the Political Theory Project, a freshman seminar in free-market classics taught by a libertarian, Professor John Tomasi. “After a whole semester of Hayek, it’s hard to shake them off that perspective over the next four years,” Tomasi confided “slyly,” according to a conservative publication. Charles Koch’s foundation gave additional funds to Brown to support faculty research and postdoctoral candidates in such topics as why bank deregulation is good for the poor.

  At West Virginia University, the Charles Koch Foundation’s donation of $965,000 to create the Center for Free Enterprise came with some strings attached. The foundation required the school to give it a say over the professors it funded, in violation of traditional standards of academic independence. The Kochs’ investment had an outsized impact in the small, poor state where coal, in which the Kochs had a financial interest, ruled. One of the WVU professors approved for funding, Russell Sobel, edited a 2007 book called Unleashing Capitalism: Why Prosperity Stops at the West Virginia Border and How to Fix It, arguing that mine safety and clean water regulations only hurt workers. “Are workers really better off being safer but making less income?” it asked. Soon, Sobel was briefing West Virginia’s governor and cabinet, as well as a joint session of the Senate and the House Finance Committees. The state Republican Party chairman declared Sobel’s antiregulatory book the blueprint for its party platform.

  In 2014, a sparsely regulated West Virginia company, Freedom Industries, spilled ten thousand gallons of a mysterious, foul-smelling chemical into the drinking water of Charleston, the state’s largest city, triggering panic in 300,000 residents, whom authorities ordered away from their taps. It was just another in a seemingly endless history of tragic industrial disasters afflicting West Virginia. By then, though, Sobel was long gone. He was listed as a visiting scholar at the Citadel in South Carolina, and an expert at the Mercatus Center at George Mason University.

  Defenders of the Kochs’ growing academic influence, like John Hardin, director of university relations at the Charles Koch Foundation, argued that their grants were bringing ideological diversity and debate to campuses. “We support professors who add to the variety of ideas available on college campuses. And in every case the school maintains control over its staffing and teaching decisions,” he wrote in The Wall Street Journal.

  But in the eyes of critics, the Kochs had not so much enriched as corrupted academia, sponsoring courses that would otherwise fail to meet the standards of legitimate scholarship. John David, an economics professor at West Virginia University Tech who witnessed the school’s transformation, wrote in a scathing newspaper column that it had become clear that “entire academic areas at universities can be bought just like politicians. The difference is that universities are supposed to permit open dialogue and exchange of ideas and not be places for the indoctrination of innocent students with dictated propaganda prescribed by outside special interests.”

  The first two steps of Fink’s plan were now complete. Yet the Koch brothers concluded that these steps were still not enough to effect change. Free-market absolutism was still a sideshow in American politics. They needed the third and final phase of Fink’s plan—a mechanism to deliver their ideas to the street and to mobilize the public’s support behind them. “Even great ideas are useless if they remain trapped in the ivory tower,” Charles noted in a 1999 speech. David put it differently. “What we needed was a sales force.”

  Part Two

  Secret Sponsors

  Covert Operations, 2009–2010

  Total liberty for wolves is death to the lambs.

  —Isaiah Berlin

  CHAPTER SIX

  Boots on the Ground

  In his 1976 blueprint for the creation of a libertarian movement, Charles Koch had emphasized the need to use “all modern sales and motivational techniques.” Less than a decade later, in 1984, he set out to launch a private political sales force. On paper, it was yet another Koch-funded conservative nonprofit group fighting for less government. It called itself Citizens for a Sound Economy (CSE). From the outside, it looked like an authentic political group, created by a groundswell of concerned citizens, much like Ralph Nader’s Public Interest Research Groups, which had sprung up all over the country.

  According to the nonpartisan Center for Public Integrity, however, it was in fact a new kind of weapon in the arsenal of several of America’s biggest businesses—a fake populist movement secretly manufactured by corporate sponsors—not grass roots, but “Astroturf,” as such synthetic groups came to be known. Unlike corporate lobbying or campaign spending, contributions to Citizens for a Sound Economy could be kept hidden because it classified itself as a nonprofit “educational” group (as well as having its own charitable foundation and political action committee). By far the largest of the new group’s shadowy sponsors were the Kochs, who provided it with at least $7.9 million between 1986 and 1993.

  The idea of employing a deceptive front group to mask corporate self-interest was not original, even within the Koch family. The same ruse had been used not just by the du Pont family and others during the New Deal years but also by a group to which Fred Koch belonged in the 1950s. He was an early and active member of the Wichita-based DeMille Foundation for Political Freedom, an antilabor union group that was a forerunner of the National Right to Work Legal Defense Foundation. In a revealing private letter, one of its staff members explained the group’s “Astroturf” strategy. In reality, he said, big-business industrialists would run the group, serving as its “anonymous quarte
rbacks,” and “call the turns.” But he said they needed to sell the “yarn” that the group was “composed of housewives, farmers, small businessmen, professional people, wage earners—not big business industrialists.” Otherwise, he admitted, the movement was “almost certainly doomed to failure.”

  Fred Koch’s sons used the same playbook at Citizens for a Sound Economy. Libertarianism remained a lonely crusade, but CSE used corporate treasuries to market its spread and give it the aura of a mass movement. Its mission, according to one early participant, Matt Kibbe, “was to take these heavy ideas and translate them for mass America.” Kibbe explained, “We read the same literature Obama did about nonviolent revolutions—Saul Alinsky, Gandhi, Martin Luther King. We studied the idea of the Boston Tea Party as an example of nonviolent social change. We learned we needed boots on the ground to sell ideas, not candidates.”

  Within a few years, the group had mobilized fifty paid field workers, in twenty-six states, to rally voters behind the Kochs’ agenda of lower taxes, less regulation, and less government spending. CSE, for instance, pushed to abolish progressive taxes in favor of a flat tax and to “privatize” many government programs, including Social Security. “Ideas don’t happen on their own,” noted Kibbe. “Throughout history, ideas need patrons.”

  Although the Kochs were the founders and early funders of the group, it soon served as a front for dozens of the country’s largest corporations. Its head denied that it was a rent-a-movement. But private records obtained by The Washington Post showed that a procession of large companies ranging from Exxon to Microsoft had made contributions to the organization after which it had mobilized public support for their agendas. Many of the companies were embroiled in fights against the government. Microsoft, for instance, was trying to stave off an antitrust suit. It reportedly made a contribution to the foundation set up by Citizens for a Sound Economy that was aimed at reducing the Justice Department’s antitrust work.

  The group’s unorthodox practices occasionally stirred controversy. In 1990, the organization created a spin-off, Citizens for the Environment, which called acid rain and other environmental problems “myths.” When the Pittsburgh Post-Gazette investigated the matter, it discovered that the spin-off group had “no citizen membership of its own.”

  One insider said the main organization’s membership claims were deceptive as well. “They always said they had 250,000 members,” he later recalled, but when he asked if that meant they carried cards or paid dues, he was told no, it just meant they’d contributed money at one point, no matter how long ago or how small an amount. “It was intellectually dishonest,” he maintains.

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  By the time Bill Clinton became president, Citizens for a Sound Economy had become a prototype for the kinds of corporate-backed opposition campaigns that would proliferate after Obama was elected. In 1993, it waged a successful assault on Clinton’s proposed tax on energy, which would have taxed fossil fuel use but exempted renewable energy sources. In a show of force, without revealing its corporate sponsors, CSE ran advertisements, staged media events, and targeted political opponents. It also mobilized noisy, grassroots-seeming antitax rallies outside the Capitol—which NPR described as “designed to strike fear into the hearts of wavering Democrats.”

  Dan Glickman, one of the Democrats who supported the energy tax and who formerly represented the Kochs’ hometown of Wichita, believes that secret money they funneled against him ended his eighteen-year congressional career. “I can’t prove it, but I think I was probably their victim,” he said. Having come from Wichita, he had friends in common with the Kochs who vouched for their ideological sincerity, yet to him it seemed obvious that sincere though they may be, “Their political theory is nothing more than a rationalization for self-interest.”

  Fink later gave credence to Glickman’s suspicions. After the election, he admitted that their campaign to defeat the energy tax had been motivated by their bottom line. “Our belief is that the tax, over time, may have destroyed our business,” he told The Wichita Eagle.

  CSE’s success in helping to kill Clinton’s energy tax emboldened the group. Next, it went after his proposed tax increase on high earners. According to The Wall Street Journal, however, CSE’s ads were deeply misleading, focusing on owners of car washes and other mom-and-pop small businesses, implying that the tax was aimed at the middle class when in fact it would affect only the wealthiest 4 percent. It was the kind of exaggerated scare tactic that would become a Koch trademark during the Obama years. The secret corporate donors, though, were ecstatic about Citizens for a Sound Economy. “They can fly under the radar screen…There are no limits, no restrictions and no disclosure,” one exalted.

  But at the end of 2003, internal rivalries caused Citizens for a Sound Economy to split apart. “The split was about control,” recalled Dick Armey, the former Republican House majority leader from Texas who chaired the organization after leaving Congress. “I never totally understood it, and I’m not sure I understand it now.” He believed the Kochs wanted to use the group “to push their business interests; they wanted CSE to lobby on those issues,” he said. Others have suggested it was Armey who was pushing the interests of his law firm’s clients, a charge Armey denies. There was another factor, too, behind the split, Armey suggested. “I saw it as a power grab by Richard Fink. He was trying to get a greater place in the sun to maintain his standing and his good living with the Koch family.”

  Armey didn’t know the Kochs well, but he had talked with Charles before joining the organization and found him “a little peculiar. Charles seemed half-mysterious,” he said. “He was half-secretive. He’d speak in cryptic tones. You’d have to think, ‘What does he mean?’ He’d talk about this business of trying to ‘save the country’ and all that.” It seemed to Armey that Charles had conflicting aims. “Charles wanted to be more in control, but he also wanted to be more behind the scenes. I don’t get it.” Another veteran of Citizens for a Sound Economy concluded that while the Kochs loved liberty as an abstraction, “they were very controlling, very top-down. You can’t build an organization with them. They run it.”

  Armey went on to start another conservative free-market group, FreedomWorks, with a few other renegades from the organization. It was at this moment, in 2003, that the Kochs inaugurated the first of their twice-a-year donor summits, which, according to one insider, were originally designed as a means of off-loading the costs of Koch Industries’ environmental and regulatory fights onto others. The first conference was a fairly dismal affair, with fewer than twenty participants, mostly from Charles’s social circle. The lectures were painfully dull, according to one insider.

  Meanwhile, David Koch and Richard Fink created a new nonprofit advocacy group out of the remaining shards of Citizens for a Sound Economy. They called their new organization Americans for Prosperity. Like CSE, it would be accused by critics of using the guise of nonprofit status to work, behind a screen of anonymity, on behalf of the Kochs’ corporate and political interests. Like Citizens for a Sound Economy, the new group had several different divisions, with different tax statuses. One wing of the new organization was the Americans for Prosperity Foundation, whose board members included both David Koch and Richard Fink. The foundation was a 501(c)(3) educational organization, so donations to it could be written off as tax-deductible charitable gifts. But while it could “educate” the public, it could not participate in electoral politics. The other division was an advocacy organization, just called Americans for Prosperity. Under the tax code, it was a 501(c)(4) “social welfare” group, which meant that it could participate in electoral politics so long as this was not its “primary” activity. Donations to this side of the organization could also be made in secret but were not tax deductible.

  To run this more political side of the operation, the Kochs hired Tim Phillips, a political veteran who had worked with Ralph Reed, the former head of the Christian Coalition. Reed was regarded as the religious Right’s savviest poli
tical operative. He and Phillips had co-founded Century Strategies, a dynamo of a campaign-consulting firm that became notorious for its close and lucrative business ties to Jack Abramoff, a lobbyist who went to prison for defrauding millions of dollars from Native American casino owners, among other clients. Phillips was not charged in connection with the scandal but had helped create a religious-sounding organization that in fact handled casino cash for Abramoff.

  Phillips was part of a tough, hardball-playing group, far from the wonky, intellectual mists of Charles Koch’s early libertarian musings. Both Reed and Abramoff were early protégés of Grover Norquist, the influential Washington-based antitax activist famous for proclaiming his hope of shrinking government to the size where he could “drown it in the bathtub.” Norquist had confided once that he regarded Reed and Abramoff as his two greatest students. “Grover told me Ralph was his Trotsky, and Abramoff was his Stalin,” recalls Bruce Bartlett, the conservative economist.

  Phillips had grown up poor in South Carolina in a family of Democrats so ardent that his father, who worked in the textile mills before becoming a bus driver, was named Franklin Delano Roosevelt and his grandfather had worked in Roosevelt’s WPA. But in what Phillips recalled as one of the most “traumatic” moments of his adolescence, he was mesmerized one evening in 1980 by Ronald Reagan while watching the television news. He told his father, “I’m gonna be for that guy.” Shocked, his father turned off the television, called his mother into the room, and warned him sternly that the Republicans “are for the rich man, Son. Come on, are you kidding me?”