Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right (43 page)

The broader news media also echoed Ryan’s claim that the federal deficit was the most pressing economic issue facing the country. As Freeland noted in
Plutocrats
, in April and May the five largest papers in the country published over three times more stories about the deficit than they did about jobs, even though unemployment was at 9 percent. “
The right had succeeded in setting the terms of the economic debate. A good outcome for the 1 percent,” she writes.

Ryan’s success in convincing much of the Washington media establishment that he was tackling hard problems, showing leadership, and bravely putting forth a plan to rescue entitlement programs while also fixing the country’s daunting deficit threw the White House into a tailspin. It scrambled to put forth its own new alternative plan, which to the dismay of liberals called for additional cuts in spending beyond those the administration had already offered. Top political advisers to the president, like David Plouffe and Bill Daley, had long been preoccupied with looking centrist and winning independent voters, rather than catering to their liberal base, whom Plouffe had memorably dismissed as “bedwetters.”

President Obama now proposed $4 trillion in spending cuts over the next twelve years, not all that far from the $4.4 trillion that Ryan had proposed. The proposal so distressed Hillary Clinton, then secretary of state, a colleague said, she had to go outside to get some air.

Then, in what came to be known as “the ambush,” the White House invited Ryan to Obama’s speech unveiling his counterproposal. With the congressman sitting in front of him, Obama lambasted Ryan’s plan as “a vision that says we can’t afford to keep the promises we made to our seniors…Put simply, it ends Medicare as we know it.” Obama accused the Republicans of giving “more than $1 trillion in new tax breaks to the wealthy” and argued that it was “less about reducing the deficit than it’s about changing the basic social compact in America.”

Ryan was affronted at being attacked so publicly and personally. The breach of decorum became a mini-flap in Washington. Obama later told Bob Woodward that he hadn’t known Ryan was there in the auditorium when he delivered his pointed speech. “
We made a mistake,” he confessed.

Out in the country, where people were less concerned with political etiquette than whether their benefits were about to be slashed, Ryan’s proposed Medicare makeover proved immediately toxic.
A Democratic underdog in a special congressional election in upstate New York clobbered the expected Republican winner by campaigning against Ryan’s Medicare plan.

But the House Republicans were jubilant anyway. They had forced Obama to play their budget game. Instead of talking about jobs and spending, he was talking about the deficit and bargaining with them over how many trillions to cut.
“
We
led.
They
reacted to us,” exalted Kevin McCarthy, the House Republican whip.
The donors were excited, too. Just the fact that Obama had been thrown on the defensive convinced those whose fortunes had helped pay for the Ryan plan that their investment was worth it.

B
y the late spring, the House Republicans had Obama in a bind on another issue as well. No sooner had the president reached a temporary budget agreement with the Republicans—one that included large Democratic concessions—than the self-styled “Young Guns,” backed by the Tea Party faction in the House, forced a fight over raising the debt ceiling, a pro forma measure long used to authorize payment of the country’s financial obligations. It looked as if the Tea Party radicals were protesting profligate spending, but in fact all they were doing was refusing to formally authorize payment of funds that Congress had already appropriated, in essence refusing to pay Congress’s credit card bill after the previous year’s shopping spree. In the end, their self-destructive fight hurt themselves more than anyone else, but meanwhile the radicals’ willingness to pitch the U.S. government into default created a national crisis. The increasingly desperate standoff might produce chaos and dysfunction, but that prospect merely served the conservatives’ antigovernment agenda. In the words of Mike Lofgren, a longtime Republican congressional aide, his party was becoming like “
an apocalyptic cult.”

If Congress failed to pay its bills, the country’s AAA credit rating would be downgraded, potentially rocking markets, shaking business confidence, and worsening the painful recession. No one knew exactly how bad the consequences of default would be. Ordinarily, it would be unthinkable. Boehner had warned the insurgents in his caucus that they needed to “
deal with it as adults.” But Eric Cantor, the House majority leader and a founder of the Young Guns, seized on the debt ceiling vote as what he called “a leverage moment.”

By 2011, the extremist upstarts had formed a powerful clique within the party’s leadership and appeared itching to challenge Boehner’s authority. Many owed more to the Kochs and other radical rich backers than they did to the party. The White House was under the misimpression that stolid business forces within the Republican Party would see the threat to the economy and force the radicals back from the edge. But while more traditional business interests, as represented by the U.S. Chamber of Commerce, took this stance, the right flank of the donor base was urging the Young Guns on to a showdown. In
The Wall Street Journal
, Stanley Druckenmiller, a billionaire hedge fund manager, described government default as less “catastrophic” than “
if we don’t solve the real problem,” by which he meant government spending. And Charles Koch made clear in a March 2011 op-ed piece in
The Wall Street Journal
that he regarded any raise of the debt ceiling as simply a way to “
delay tough decisions.”

Pushing the Young Guns forward toward the financial cliff was Americans for Prosperity, the Kochs’ political arm. Some forty other Tea Party and antitax groups also clamored for all-out war. Among the most vociferous was the Club for Growth, a small, single-minded, Wall Street–founded group powerful for one reason: it had the cash to mount primary challenges against Republicans who didn’t hew to its uncompromising line. The club had developed the use of fratricide as a tactic to keep officeholders in line after becoming frustrated that many candidates it backed became more moderate in office. It discovered that all it had to do was threaten a primary challenge, and “
they start wetting their pants,” one founder joked. Its top funders included many in the Koch network, including the billionaire hedge fund managers Robert Mercer and Paul Singer and the private equity tycoon John Childs.

The Young Guns portrayed their opposition to compromise as a matter of pure principle, but beneath the surface huge vested interests were at play.
The president and Boehner were close to negotiating what they called a “grand bargain” that anticipated closing some tax loopholes. The Young Guns were categorically opposed to reforms that might cut into the profits of hedge funds and private equity firms.

Cantor was especially protective of the carried-interest tax loophole. For him, the happiness of hedge fund and private equity titans was personal.
He was among the House’s top recipients of contributions from securities and investment firms. Three of the largest contributors to Cantor’s two campaign funds in 2010 were financiers affiliated with the Koch network: Steven Cohen, the billionaire founder of the hugely lucrative hedge fund SAC Capital; Paul Singer, the multimillionaire head of the so-called vulture fund Elliott Management; and Stephen Schwarzman, the billionaire co-founder of the Blackstone Group.
So although one study showed that the top twenty-five hedge fund managers earned an average of nearly $600 million a year and that closing this one loophole would raise $20 billion over the next decade, Cantor and the other rebels in the House who professed concern over the deficit “crisis” refused to back Boehner’s proposed “grand bargain.”

As tensions built in the increasingly calamitous debt ceiling stalemate, two sources say, Boehner traveled to New York to personally beseech David Koch’s help. One former adviser to the Koch family says that “
Boehner begged David to ‘call off the dogs!’ He pointed out that if the country defaulted, David’s own investments would tank.” A spokeswoman for Boehner, Emily Schillinger, confirmed the visit but insisted, “Anyone who knows Speaker Boehner knows he doesn’t ‘beg.’ ” But the spectacle of the Speaker of the House, who was among the most powerful elected officials in the country, third in line in the order of presidential succession, traveling to the Manhattan office of a billionaire businessman to ask for his help in an internecine congressional fight captures just how far the Republican Party’s fulcrum of power had shifted toward the outside donors by 2011.

In the final days of July, with default looming, Obama thought he was close to reaching a deal with Boehner. It was an abomination in the eyes of many Democrats because, among other features, it included cuts in projected Medicare and Medicaid spending. Obama had bought into the idea that cutting the deficit was of paramount importance and believed that the deal was necessary to stabilize the economy. He started preparing Democrats on the Hill for the painful news. Yet when the president called Boehner to formalize the agreement the night of July 21, to Obama’s growing fury, with the clock ticking dangerously toward default, the Speaker didn’t call him back. The president made multiple calls. He left messages. Almost an entire day passed. Finally, when Boehner called, it was to break off the talks, walk away, and then denounce Obama publicly.

“
With no basis in fact,” according to Thomas Mann and Norman Ornstein’s study of congressional dysfunction,
It’s Even Worse Than It Looks
, Boehner claimed that the president had reneged on the terms of their agreement. “I gave it my all,” Boehner proclaimed. “Unfortunately, the president would not take yes for an answer.”

Cantor later told the real story to Ryan Lizza of
The New Yorker
. Blowing up the grand bargain had been his idea. He said it was a “fair assessment” to say that in the critical final moments he had talked Boehner out of accepting the deal for purely political reasons. Cantor had argued, why give Obama a win? Why aid his reelection campaign by helping him look competent? It would be more advantageous for the Republicans to sabotage the talks, regardless of the mess it left the country in, and wait to see if the next year’s presidential election brought them a Republican president who would give them a better deal.

The eventual result was what Lizza described as a “byzantine” arrangement in which in order to forestall default, both parties agreed to automatic spending cuts, imposed indiscriminately across the whole budget. No one believed the mindless cuts, which were called a “sequester,” would ever get enacted. But in fact, when no other resolution could be reached, they were. The mechanism placed Obama in a fiscal straitjacket indefinitely. The chairman of the Congressional Black Caucus, Emanuel Cleaver, denounced the deal as “a sugarcoated Satan sandwich,” which the House minority leader, Pelosi, amended to “a Satan sandwich with Satan fries on the side.”

The political damage stretched far and wide. The nonpartisan Congressional Budget Office estimated that the sequester would cost the economy 750,000 jobs a year and hurt millions of Americans who were reliant on public services. Standard & Poor’s downgraded America’s credit rating for the first time in the country’s history. The stock market plummeted, falling 635 points on the spot. The public, meanwhile, was so disgusted with Congress that polls registered the lowest approval rating in the history of such measurements. Obama’s popularity also took a hit, dropping below the all-important 50 percent threshold for the first time. He was derided and belittled by both the Left and the Right. Internal polls called him “weak.”

A political minority, responding to the interests of its extreme sponsors, had succeeded in rendering the most powerful democracy in the world dysfunctional. Thirty years after the Libertarian Party platform called for the “abolition of Medicare and Medicaid,” the “repeal…of the increasingly oppressive Social Security System,” and “the eventual repeal of all taxation,” its billionaire backers had the upper hand.

At this point, Neera Tanden believes, the president finally understood what he was up against. “
I think he came in truly trying to be post-partisan,” she said. “I think it took the debt ceiling fight to make him see that they hated him more than they wanted to succeed. It was an irrational deal, driven by their funders.” Two and a half years into his presidency, she said, “he finally realized they would rather kill him than save themselves.”

On a soft, summery night in Beaver Creek, Colorado, at the end of June 2011, the Kochs mustered their troops once again for what Charles described as “the Mother of All Wars.” The phrase, borrowed from the Iraqi dictator Saddam Hussein, hinted at the level of martial ferocity with which the billionaire brothers planned to approach the coming 2012 presidential campaign.

It would be the first presidential race after the Supreme Court’s
Citizens United
decision. For those with the requisite financial resources, political spending was now as limitless as the open sky above the Bachelor Gulch Ritz-Carlton. Three hundred or so participants were there for the semiannual seminar, whose theme was “Understanding and Addressing Threats to American Free Enterprise and Prosperity.” This time, the planners took extra precautions to keep the proceedings secret. A series of loudspeakers formed a fence around an outdoor pavilion in which the donors met, emitting static toward the outside world, to prevent eavesdropping.
Or so they thought until a reporter for
Mother Jones
, Brad Friedman, obtained an audio recording of the weekend’s highlights and published a transcript.

As they gathered in the foothills of the Rockies, the donors had ample reason for optimism.
The New York Times
’s resident number cruncher, Nate Silver, who handicapped political odds with the unsentimental eye of a racetrack bookie, was openly asking, “Is Obama toast?” After analyzing Obama’s sagging approval rating and the economy’s lagging indicators, he concluded that Obama had gone from “a modest favorite to win re-election to, probably, a slight underdog.” If the Republicans chose a weak candidate or the economy miraculously revived, he noted, this could change. But if the challengers played it right, he predicted, Obama would go the way of the recent reelection losers Jimmy Carter and George H. W. Bush.

The choice of a strong Republican candidate, however, fifteen months before the next presidential election, was far from assured. Behind the scenes, Sean Noble, with the assent of the Kochs, had been furtively trying for months to persuade Paul Ryan to run for the White House. The billionaire backers were eager for him to apply his “sharp knives” to the federal budget. But Ryan had demurred. Neither he nor his wife relished a presidential marathon. “
Wouldn’t it be easier just to be picked as vice president?” he asked an emissary from the Kochs, in a meeting in the congressman’s Washington office. “Because then it’s only, like, two months.”

With Ryan declining to run, the Kochs and their operatives searched anxiously for an alternative. Mitt Romney was obviously a serious contender, but they worried that he couldn’t relate well enough to ordinary people to get elected. Polls showed that Romney, who had made a fortune in finance before his stint as governor of Massachusetts, fared dismally when voters were asked if he “cares about people like you.” The search for a more promising candidate set off a torrid courtship of Chris Christie, the tough-guy governor of New Jersey. David Koch invited Christie to his Manhattan office, where the two spent almost two hours bonding over Christie’s brawls with the unions and other liberal forces. The governor’s scrappy blue-collar style, combined with his plutocrat-friendly economic policies, made him an almost irresistible prospect. By June, the Kochs had given Christie the keynote speaker slot at their seminar, where he could audition for his party’s leading role in front of the people who could pay his way.

Rick Perry, the governor of Texas, who preceded Christie as a speaker, provided a perfect foil. In a prelude to Perry’s later “oops” moment during the Republican debates, the governor made a poor impression on the numerically minded businessmen in the audience by displaying five fingers to illustrate a four-point plan, only to be left with one digit still waving in the air, programmatically unaccounted for.

In comparison, Christie was the political equivalent of his idol, Bruce Springsteen. David Koch personally introduced him, showering him with praise as not just a “true political hero” who “tells it like it is” but also “my kind of guy.” Koch was especially effusive about the “courage and leadership” Christie showed in forging a bipartisan deal to cut future pension and benefit payments to New Jersey’s unionized public sector employees. In exchange for these concessions, the Democrats and their union allies had obtained a promise from Christie to increase payments into the ailing funds. This tough-minded seeming “fix” vaulted Christie to national prominence.
Four years later, a judge would rule that it was more like a bait and switch. The workers’ benefits were cut, but the state, which was in an economic slump, reneged on its end of the bargain. In 2011, however, for the Kochs and their assembled allies, Christie was the cherished face of the future. “
Who knows?” Koch teased, as the donors cheered, whistled, and hooted their approval during his introduction. “With his enormous success in reforming New Jersey, some day we might see him on a larger stage where, God knows, he is desperately needed!”

Christie soon brought the well-heeled crowd to its feet by casting low taxes on high-income earners as a populist cause. In a bravura performance, he described going to battle against what he called a “Millionaires Tax”—a 1 percent income tax increase on the state’s top earners. “Take this back where it came from, ’cuz I ain’t signin’ it,” he recounted telling the Democrats as the donors cheered.
Christie had campaigned on making his state a superpower in wind energy, but his reversal and withdrawal from a regional program to reduce greenhouse gas emissions also drew cheers. When it came time for questions from the audience, the first speaker voiced the excitement in the room, saying, “You’re the first guy I’ve seen who I know could beat Barack Obama,” and then, amid laughter and applause, begged Christie to run.

But the dinner’s main course was the fund-raising session led by Charles Koch. In a folksy midwestern voice, he appealed for contributions as if America’s survival depended on it. After invoking Saddam Hussein’s famous battle cry from the first Gulf War, Koch struck a more alarmist note. The stakes in the coming presidential campaign, he warned, were nothing short of “the life or death of this country.” Not, he added with good humor, that he was trying to “put any pressure on anyone here, mind you. This is not pressure. But if this makes your heart feel glad and you want to be more forthcoming, so be it.” Then, in a move guaranteed to put the squeeze on everyone else, he publicly identified and commended the largest donors to date. “What I want to do is recognize not all our great partners, but those partners who have given more than a billion—a mill—no, billion,” at which point he caught and corrected himself. As the wealthy crowd knowingly guffawed at the easy confusion over a few extra zeros, Charles ad-libbed, “Well, I was thinking of Obama and his billion dollar campaign, so I thought we gotta do better than that.” He went on, “If you want to kick in a billion, believe me, we’ll have a special seminar just for you.”

Charles then ticked off the names of the thirty-two donors who had contributed a million dollars or more during the previous twelve months. Nine were billionaires whose fortunes had landed them on
Forbes
’s list of the four hundred wealthiest Americans. Some, like the finance stars Charles Schwab, Ken Griffin, and Paul Singer, as well as Amway’s Richard DeVos and the natural gas entrepreneur Harold Hamm, were fairly well-known. Many others, though, were members of the invisible rich—owners of enormously profitable private enterprises that rarely drew public attention. Two among the nine billionaires, for instance, John Menard Jr., whose fortune
Forbes
estimated at $6 billion, and Diane Hendricks, whose fortune the magazine valued at $2.9 billion, owned private building and home supply companies in Wisconsin and were not well-known outside the state, let alone in it. Many of the non-billionaires whom Charles recognized were familiar faces in the Kochs’ circle. There were the Popes from North Carolina, the Friess family from Wyoming, and the Robertsons of the Texas oil clan, as well as coal barons like Joe Craft and the Gilliams and members of the Marshall family, the only significant outside owners of Koch Industries’ stock.

Charles then added, “Ten more will remain anonymous, including David and me. So we’re very humble in that,” he joked. More seriously, though, he declared that “the plan is, the next seminar, I’m going to read the names of the
ten
million”—not mere one million—dollar donors.

As he read the names of the generous, he made clear what he expected their money to buy. He promised those he referred to as his “partners” that “we are absolutely going to do our utmost to invest this money wisely and get the best possible payoff for you in the future of the country.”

None of these thoughts were shared with the rest of the country. Far from the Supreme Court majority’s assumption in the
Citizens United
case that political spending would be transparent, the Kochs and their partners took great pains to hide what they were up to. Indeed this was a selling point. Kevin Gentry, vice president of Koch Industries for special projects, who had overseen fund-raising for the brothers for years and who played the role of master of ceremonies at the seminars, assured the donors that weekend, “There is anonymity we can protect.”

The Kochs had recently come up with a new and even cleverer way of masking the money. Rather than simply directing the funds through the maze of secretive nonprofit charities and social welfare groups that they had used during the 2010 campaign, they now established a more efficient method. They pooled much of the cash first in a form of nonprofit corporation that the tax code defined as a 501(c)(6), or a “business league.” The advantage of this umbrella organization, which they named the Association for American Innovation (AAI), was that donations to it could be classified as “membership dues” and to some extent get deducted as business expenses. As with contributions to a 501(c)(4), the law protected the donors’ anonymity. But as a business league, it fell outside the charitable trust purview of state attorneys general, further safeguarding the secrecy.

By the time the Beaver Creek seminar adjourned, the Kochs had collected some $70 million in new pledges. There is no public record showing specifically how these new funds were spent, but it appears that much of the money was directed into the new “business league,” the Association for American Innovation. During 2011 alone, tax records show, the AAI, which soon changed its name to Freedom Partners, accumulated over a quarter of a billion dollars.

The new business league, which was at first run by Wayne Gable, the head of lobbying for Koch Industries, was less than candid with the Internal Revenue Service about its intentions. According to its founding documents, it told the IRS it “does not currently plan to attempt to influence any election” and in the future might do so but only to “an insubstantial” extent.
From the start, however, the organization financed many of the same political front groups that the Kochs had mobilized in the 2010 midterms. This time, though, their underground guerrilla war against Obama was waged by a “business league” and treated as a partially tax-deductible business expense. From November 2011 to October 2012, the Kochs’ new “business league” transferred $115 million to Sean Noble’s Center to Protect Patient Rights and $32.3 million to
David Koch’s group, Americans for Prosperity.

In October 2011, Christie announced definitively that 2012 was not his year. The truism about the two parties was that when it came to choosing candidates, “Democrats fall in love, while Republicans fall in line.” But 2012 was shaping up to be the exception. With power shifting from the centralized party professionals to rogue billionaires, top-down consensus was giving way to warring factions. Even within the Koch camp, there were divergent opinions. After the infatuation with Ryan, David Koch liked Christie. Charles Koch admired Mike Pence, then a congressman and later governor of Indiana. When Pence declined to get in the race, the Kochs hired his former chief of staff, Marc Short, as yet another political adviser. The donors, meanwhile, were all over the Republican lot. Noble was trying hard to herd everyone in one direction but failing.

Unsure what else to do, in late 2011 the Koch operatives made one of the first attack ads of the general election season. Sponsored by Americans for Prosperity, it slammed Obama as corruptly showering his friends with “green giveaways” such as Solyndra. AFP spent $2.4 million running the ad thousands of times in the key states of Florida, Michigan, Nevada, and Virginia. Sean Noble had sold the idea as a clean shot. But it caused a little problem. One of the Koch donors turned out to have invested in Solyndra and was not happy.

A subsequent Koch-created ad, aired by the American Future Fund, also proved problematic. The mysterious Iowa-based front group was a favorite choice for messages from which the Koch camp preferred to distance itself. Shot as populist rage against the “1 percent” was coalescing in the Occupy movement and protesters were marching on David Koch’s apartment, the ad slyly attacked Obama for being too cozy with Wall Street. After quoting Obama calling Wall Street bankers “fat cats,” it asked, “Guess who voted for the Wall Street bailout? His White House is full of Wall Street executives,” it went on, as mug shots of Obama’s advisers flashed by. The Kochs’ political operatives tested the ad in fifteen separate focus groups. Once aired, it seemed to be a great success, getting over five million hits on YouTube. But some of the finance industry executives in the donor group were not amused by the political misdirection. “Why attack Wall Street?” they asked.

One donor, Peter Schiff, an attendee at the June Koch seminar, evidently didn’t receive the new, populist talking points. A Connecticut financial analyst and broker, he barged into the midst of the Occupy movement’s Manhattan encampment in October with a sign proclaiming, “I am the 1%. Let’s talk.” Subsequent video footage of him arguing in favor of eliminating the minimum wage and paying “mentally retarded” people $2 an hour made him a laughingstock on Jon Stewart’s
Daily Show
. The Kochs’ “Mother of All Wars” wasn’t starting out all that much better than Saddam Hussein’s.