Bush’s first months in office were unfocused, desultory, and involved clearing brush at his ranch in Texas. He pushed for tax and educational reforms. Then the terrorist attacks of September 11, 2001, drew the world’s eyes to the smoking towers of the World Trade Center and the ruined face of the Pentagon. For the ensuing eight years, the nation’s attention was almost entirely focused on the issues of war and terrorism—issues that seemed to pose an existential threat to the nation.
Beneath the smoke and noise of international conflict, the wheels of the economy continued to grind, and the structure of the economy was remade under the Bush administration. Bush and his vice president, Dick Cheney, both moved to Washington from Texas, where they had deep roots in the fossil fuel industry. They brought with them more than just an affinity for the big energy companies of their home state, such as Exxon and Enron. They also brought a governing philosophy that reflected the antiregulatory sentiment of the Lone Star State.
The Bush era would be regarded as a time of deregulation, when rules were stripped away from the private marketplace, and the reach of the federal government over corporations was curtailed. In reality, the Bush presidency only accelerated the trends begun under Reagan and continued under Clinton—and it pushed these trends to an obscene extreme by the end of the 2000s. The government grew larger, more complex, and more intrusive than at any point in history, giving rise to a hyperregulatory state. At the same time, rules were dissolved and enforcement was dropped at key pressure points in the economy, where only a handful of giant companies could operate. The paradoxes of neoliberalism were in full bloom.
Bush cut taxes in a way that primarily benefited the richest taxpayers and financial firms that earned money from capital gains. This caused federal revenue to crash, particularly during times of economic downturn. While the government was cut in some ways, it was enlarged in others. Bush pushed for, and received, a new Medicare program that paid for the costs of prescription drugs, costing tax payers tens of billions of dollars each year. In the wake of 9/11, Bush dramatically expanded national security spending while spending trillions of dollars on wars in Afghanistan and Iraq, which would later be referred to as “credit card wars” for their effect on the federal debt.
In this environment, corporations that could manage complexity, in both the markets and in regulatory affairs, were the economic winners. And among these companies, a certain kind did better than all the others. There was one sector of the economy that grew far faster than the rest: the financial sector. The decade of the 2000s was defined by the financialization of everything. The financial deregulation acts passed by Bill Clinton launched an industry of trading and speculation activities that dwarfed anything even during the Reagan era, when Wall Street gained the reputation as a greed machine that produced multimillion-dollar paydays for a handful of financiers. Banks started trading exotic instruments based on the value of homes, crops, metals, stocks, and energy. The smartest college graduates went straight from top-tier schools like MIT and Harvard to the trading floors of Wall Street.
Koch Industries, an industrial conglomerate based in Kansas, seemed particularly unsuited to thrive in this environment. The company seemed confined to the business of making things and processing raw materials in complex, expensive facilities. A Koch engineer in Texas didn’t seem to have anything in common with a banker in New York.
In fact, while the world was looking elsewhere, Koch Industries built a financial trading desk that rivaled anything operated by Goldman Sachs or Lehman Brothers. Koch Industries, known for crude oil and natural gas, became a world leader in making and trading some of the most complex financial instruments in the world.
Koch’s trading business was a strategic centerpiece of the company’s growth strategy over the next decade. It was also the most striking example of Koch’s ability to amass and exploit information asymmetries, learning more than everyone else and turning huge profits from this advantage. There were no markets more complex and more opaque than the trading markets born during the Bush administration, and Koch Industries mastered them. To understand how Koch Industries more than tripled in size in ten short years, it is critical to understand Koch’s trading operations.
When the era of financialization began, Koch Industries was already poised to exploit it. Koch had been building expertise in the field for decades. Unsurprisingly, Koch Industries first entered the world of exotic financial instruments when it started trading in the one commodity Koch knew best: crude oil.
Koch began trading crude oil in the earliest days of the modern market, back in the 1970s. To understand the world of derivatives and futures markets that Koch later came to dominate, it is helpful to go back to that moment when the markets were newly born, and Koch was just starting to build its beachhead in the financial world.
Koch’s earliest trading desk was based in Houston. And it was run by a young man who started as a clerk for the company. His name was Ron Howell.
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In the late 1970s, Ron Howell made one of the most significant investments in the history of Koch Industries. He went to an office supply store and bought a big oak conference table. It had a leaf in it, so that it could expand and make room to seat about six people. This table was a major advancement in Koch’s trading operations. Howell bought it because he could see that the world of oil trading was transforming, and Koch Industries was poised to dominate the new markets.
Back then, Ron Howell’s job might have seemed easy enough: he sold the gasoline and other fuels that Koch Industries produced at its refineries. As the senior vice president of supply and trading at Koch, Howell made sure that Koch’s fuel went straight from the refineries to the highest-paying customer. Gasoline was the kind of product that seemed to sell itself—there was always demand for fuel. People at Koch referred to Howell’s job as the “dispossession of molecules,” meaning that he simply had to find a home for the various fuels that Koch produced. This seemed straightforward. But Howell’s job was the kind of job that produced insomnia and ulcers. It forced him to retire when he was in his thirties before the job killed him.
When he talked about oil trading, even decades later, Howell often used words like whippin’ and savage. The savagery of Howell’s average workday began when he walked into the office in Houston every morning and picked up the phone to sell the first barrel of gasoline or diesel fuel. The stomach acids started to boil the instant Howell tried to establish what might seem like a basic, simple fact: the price of oil that day.
Determining the price of oil at any given minute was an arcane art practiced by a network of traders around the world. They spent their days on the phone with one another, arguing, cajoling, bluffing, and bullying. The fact is that nobody really knew the price of a barrel of oil, or gasoline, or diesel fuel. Everybody had to guess, and the person who could guess with the most precision walked away with profits that were almost limitless. The person who guessed wrong faced instant, brutal downsides in the market.
There was a common misperception that the price of oil floats up and down on a global market. Every day, business commentators and journalists talked about the “price of oil” as if it were like the price of General Electric stock—a price that was determined by millions of buyers and sellers who traded on large, open exchanges.