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. Not 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.
Charles Koch addressed a question that had worried him since the 1970s: “Where is free capitalism at risk?”
After the crash, it seemed as if capitalism was at risk across the United States. The dominant public narrative blamed the crash on a failure of the free market and private enterprise: greedy bankers had been given free rein and taken down the economy. When it looked for a solution to the problem, the American public turned to the federal government, not the free enterprise system.