Charles Koch, CEO of the private firm Koch Industries and his twin brother David are known for donating millions of dollars to political organizations that support Republican and Tea Party politicians and dispute man-made causes of climate change.
Rolling Stone published a Sept. 24 article by Tim Dickinson called “Inside the Koch Brothers’ Toxic Empire,” about Koch’s tactics. Koch did not agree to requests for interviews before the article, but responded in a subsequent article to which Dickinson responded.
My column is focused regulating Koch Supply and Trading that has been spectacularly successful trading oil and gas futures since 2000, according to Dickinson. The Koch brothers’ wealth exploded from $4 billion each in 2002 to $40 billion each today. Their $80 billion total rivals that of the richest individual on earth.
Koch Industries does not reveal its finances but is a major transporter, refiner, and producer of products from fossil fuels. It is also owner of companies such as Georgia-Pacific. The University of Massachusetts Amherst’s Political Energy Research Institute lists Koch, Exxon and American Electric Power as the only firms in the top 30 polluters of air, water and climate change carbons.
Koch Industries increased trading when trading in energy futures was exempted in the 2000 Commodities Futures Modernization Act regulated by the Commodities Futures Trading Commission (CFTC).
“The Act completely exempted energy futures from regulation,” said Michael Greenburger with the CFTC. “This market wasn’t covered at all.”
Energy futures were aggressively opposed by lobbyists for Koch Industries, the now defunct Enron and other energy firms and traders.
Dickinson’s article describes how Enron escaped detection while promoting false information about trades for natural gas that allowed it to manipulate prices and cause serious losses for California taxpayers in 2004.
Koch Industries was charged with knowingly participating with false information. It agreed to pay a $3 million fine to avoid confessing guilt, but “is barred from maintaining its innocence,” said Dickinson.
The exemption of energy derivatives is now referred to as the Enron Loopholes.
Consumer protection laws in 2008 were proposed to close the Enron Loopholes.
That year Koch Industries spent $20 million in lobbying fees to keep the energy derivatives unregulated, four times its normal $5 million per year. Twenty-million dollars allows 18 days of lobbying per member of Congress assuming a $250 per hour average cost.
Congress passed legislation closing the Enron loophole in 2008. Nevertheless, no regulations currently exist.
Koch Industries and other energy traders used the Enron loophole in the oil market in 2008-09 according to Dickinson and undisputed by Koch. They bought massive oil supplies which they stored in supertankers in the Gulf of Mexico for future trades. Koch Industries was one of the top five oil traders in the world in 2009. They held back supplies until consumers like you and I paid up to 40 cents per gallon more than we would have under free market conditions.
Traders in regulated commodities prevent firms from buying excessive supplies so markets function competitively.
The Obama administration proposed regulations to close the Enron loophole in 2011, but a lawsuit from Koch Industries and other traders in the International Swaps and Derivatives Association successfully blocked the regulations. Koch Industries and others operate without regulations despite legislation requiring them.
The unregulated energy trading is financially dangerous according to industry financial leaders. A past-president of the Futures Industry Association and the 2012 Chair of the CFTC have raised concerns about the systemic risk that could lead to another meltdown.
Analysts and regulators can’t accurately assess the extent of the Koch Industries risk since it doesn’t report transactions and volumes on trades. Nor does it report whether it has collateral to protect against failed transactions that impact other firms.
Super banks like Goldman Sachs and JPMorgan/Chase report their transactions and positions. Even private trading giant Cargill voluntarily reports.
Legal counsel for Koch Industries told Dickinson it was complying with the law.
Dickinson concluded his article by saying “It appears the very essence of the Koch business model is to exploit breakdowns in the free market.”
Koch Industries energy trades need more regulation in order for you and I and the country to trust our free markets, but at present that means defeating the company’s defenders in Congress.