Freemarket Failures: Investors Prefer Doing Business With Hugo Chavez Over Billionaire Koch Brothers

Investigative Report / January 5, 2011

By Yasha Levine

You didn’t hear this on Fox News or the Drudge Report, but on October 10 Venezuela seized and nationalized a massive fertilizer plant part-owned by Koch Industries. The media silence is a bit puzzling. You’d think that the seizure of property belonging to America’s second-largest private company, owned by one of the most powerful families in the country and the bankrollers of today’s libertarian/Tea Party revolution—the billionaire brothers Charles and David Koch–would be considered newsworthy. But no, even though their Venezuela plant was nationalized a whole three months ago, other than a handful of short business-wire dispatches, this has yet to make the news. Even Koch Industries has been suspiciously silent on the matter.

One reason why the Kochs could be keeping the news under wraps is that the nationalization of the fertilizer plant may appear to be bad news for Charles and David Koch, but here’s the big surprise: the Kochs made hundreds of millions on every end of this deal…and even more surprising, bond markets cheered the nationalization. In other words, the free markets championed by the Kochs gave a big thumbs-down to Kochs’ negative influence on the value of the business, while at the same time, the free-market Kochs earned huge windfalls doing business with socialists. No wonder this story hasn’t made the rounds.

Here’s what happened: When Chavez’s nationalization of the plant took Koch Industries out of the picture, bond investors responded by driving up the value of the company’s bond debt by a whopping 33 percent. That means they had a lot more confidence that the debts would be paid back AFTER the free-market Kochs were out of the picture. As every business school flunky knows, price fluctuations of bonds are very much like those of stocks: the more they cost, the higher the confidence in a given company. And that means investors had less faith in the ability of the Kochs to run a tight business operation than they did in a bunch of Venezuelan socialist bureaucrats.

For a free-market family like the Kochs, such a big pro-nationalization thumbs up from the Invisible Hand isn’t just bad PR, it’s downright embarrassing.

Here’s a dispatch filed by United Arab Emirates-based Gulf Today describing the nationalization:

Koch Industries awaits Venezuela takeover
October 18, 2010
CARACAS: Koch Industries said it had received no word that Venezuela nationalised Fertinitro, a large fertilizer maker in which the US-based group has a substantial stake.
Venezuela’s President Hugo Chavez announced that the takeover of Fertinitro, one of the world’s main producers of nitrogen fertilizer, days after vowing to radicalize his socialist “revolution” following legislative elections last month.
Koch has a 35 per cent stake in Fertinitro and Venezuelan state-run petrochemicals company Pequiven has 35 per cent. Saipem, a unit of Italy’s Eni, holds 20 per cent and local brewer and food company Polar has the rest.
“Koch Fertilizer has not received any official or informal notice, nor have we received any notification from Fertinitro regarding any disruption,” a Koch spokeswoman told Reuters by email. “We are attempting to obtain details and information.”

What were true-believer libertarians like the Kochs doing running a fertilizer plant in Venezuela with two state-run companies, anyway? After all, Charles Koch’s own Cato Institute brain trust has been writing for decades that government-owned enterprises are less efficient and productive than private companies. The answer is simple: they were there for the subsidies.

As I revealed last September, the Kochs have a long history of tapping into socialist programs, despite their staunch libertarian rhetoric. Starting with their father, Frederick C. Koch, who amassed the family fortune building up Soviet oil infrastructure in the 1930s during Stalin’s first Five Year Plan, the family has been sucking on the big government teat for as long as they’ve been in business, using government subsidies to maximize their own profits, even while funding the libertarian movement and trying to deny government spending on anyone or anything else.

Here are just a few of Charles and David Koch’s socialist business deals and schemes from the past few decades: they enrolled their Matador Cattle operation in a New Deal program that allows ranchers to use federal land basically for free, log public forests for private gain and have taxpayers cover the operating costs, and routinely use the government’s power of eminent domain to forcibly seize private property on behalf of Koch Industries’ various oil and gas pipeline subsidiaries, which stretch from Texas all the way up to the border with Canada.

Fertinitro, where the Kochs come to get their welfare checks…

Their venture in Venezuela followed the same old corporate welfare business strategy. Even as Charles Koch was publicly blaming the Venezuela’s poverty and economic woes on the country’s socialist policies, his company was taking advantage of the country’s heavily subsidized natural gas. Fertilizer production requires massive amounts of natural gas, which can account for 50 percent of operating costs and seriously eat into profit margins—unless, of course, the natural gas is subsidized by the state. And that is exactly why, in 1998, Koch Industries partnered up with two state-owned companies to build one of the biggest nitrogen-based fertilizer plants in the world. By investing $100 million—or just 10% of the $1 billion project—the Kochs were able to tap into a guaranteed supply of cheap natural gas, courtesy of the socialist Venezuelan government.

Steven Bodzin, a former Bloomberg journalist, found that “just on the natural gas, never mind the electricity or water subsidies, Koch profits from a direct Venezuelan government subsidy of $1.23 for every thousand cubic feet of gas consumed at Fertinitro.” For Koch Industries, whose role in the partnership is to unload half of the 6 million tons of fertilizer produced by Fertinitro every year on the American market, that equals up to $123.6 million in subsidies every year–which means that the Kochs recouped their investment after just one year.

It’s clear why Koch Industries went to business with Venezuela (who wouldn’t sign up for a deal where they can make 1.2 times their investment just in the first year?) The question is: Why did Venezuela needed to sign up for such a shitty deal with Koch Industries?

Let’s look back at the history of this project.

Planning for the Fertinitro project started a few years before Hugo Chavez became president in 1999, and at a time when Venezuela was being subjected to brutal IMF’s “structural reforms”, which included the usual painful “austerity” cuts in social programs, and privatization of state industries:

During the 1990s, under the second term of President Carlos Andres Pérez, neoliberal reforms were introduced. In his February 2, 1989, inauguration speech, the newly elected Pérez riled against the International Monetary Fund (IMF) and other international lending organizations, but just a few weeks later he announced a neoliberal policy packet known as El Gran Viraje—the great turnaround. Under pressure from foreign creditors to implement an IMF-style austerity program, he dismantled protections, deregulated prices, and reduced social spending.

IMF “reforms” allowed foreign companies to siphon off Venezuela’s vast resource wealth. It was not “wholly unusual for the government of Rafael Caldera to sign contracts that were wholly injurious to the national interest—hence the backlash that led to the election of Chavez and then the latter’s sweeping nationalization strategies,” said Dr Julia Buxton, of University of Bradford. At the time, Venezuela sold oil to foreign companies at below the costs of production and handed out state assets to foreign corporations for free, like when Venezuela sold off the entire information-technology division of PDVSA, one of the world’s leading oil companies, for $1,000 to US defense contractor and Fortune 500 company SAIC.

As one of the world’s biggest fertilizer middlemen, Koch Industries—which seems to control about 5% of the global fertilizer market and is the world’s third-largest marketer of the stuff—was the sort of multinational American company well positioned to take advantage of these harsh IMF reforms, whereby wealth would be transferred out of impoverished Venezuela and into the Kochs’ libertarian coffers.

Unfortunately for the Kochs, the subsidized racket didn’t last forever. In October 2010, a full 11 years of having the libertarian billionaire brothers draining hundreds of millions of dollars of Venezuela’s wealth into their pockets, Chavez finally put an end to their relationship.

“The Koch company grabbed all our fertilizer and was selling it abroad at speculative prices,” Venezuela’s Oil Minister Rafael Ramirez told workers at the fertilizer plant. “The future is for the workers, for you who build socialism, for the men and women working in our national industries, to safeguard for our people, our communities, the benefits of worker control over such important companies.”

A few weeks after Venezuela announced the nationalization, The Economist predicted that it would have dire consequences for Venezuela’s economy, and warned that the government might not honor the fertilizer plant’s several hundred million dollars in debt obligations. But according to Bloomberg, the price of the plant’s bond notes didn’t go down at all—it went up by 33 percent! That’s right, as soon as Hugo Chavez announced the takeover, the bonds became more valuable, meaning that bond holders believed that the business was worth more with Koch Industries out of the picture.

This is important and worth repeating: Koch Industries’ involvement in the fertilizer plant was actually a drag on the operation and investor confidence. Getting rid of the Koch’s stake in Fertinitro had the effect of boosting the value of the company, which is funny considering the fact that Koch Industries was the only major private investor in the fertilizer plant.

But it makes perfect sense. Who would want to invest in a company owned by a billionaire freeloader like Charles Koch, who siphons funds out of other people’s pockets and into his personal bank account, while adding nothing of value? No wonder bond holders reacted so positively to the nationalization.

Nope, you won’t find it here…

So for all the enterprising Americans out there wondering “What’s the secret to the Kochs’ success?” The answer isn’t pretty—especially if you’re one of the gullible Tea Party libertarians who believe the Kochs practice the free-market libertarianism that they preach. Their ability to reap billions and billions in profits year after year isn’t about buying low and selling high, but about buying subsidized-by-the-state, and selling subsidized-by-the-state. Using taxpayer money to cover the costs and ensure profits every time—that’s the simple formula to the Kochs’ success.

Yasha Levine is an editor of The eXiled. Levine and co-editor Mark Ames first broke the connection between the Tea Party and the billionaire Koch brothers in Playboy.com in February 2009, sparking lawsuit threats, and causing CNBC’s Rick Santelli to publicly distance himself from the Tea Party movement and cancel his Daily Show appearance.

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30 Comments

Add your own

1. Jack | January 5th, 2011 at 2:20 pm
Seems that you are only ones saying what you are saying as loudly as you are saying it. Why isn’t Going Postal a best seller? I read it and it was better than all the drugs I’m taking and I’m taking a lot. The drugs just numb the anger and hatred and stop some of the pain. Writing like Exiled and Going Postal affirm the anger and hatred as totally fucking justified and transform it into joy.
2. Aaron | January 5th, 2011 at 2:45 pm
Robber barons also hypocrites! Film at eleven.
3. Aaron | January 5th, 2011 at 2:47 pm
Jack: Watch out. That joy might not last.
4. John Many Jars | January 5th, 2011 at 2:48 pm
Another great article from Yasha Levine, but it needs a little clean-up before the majors can pilfer it.
I’m with Jack (above). Going Postal is a heavily kick-ass book about work, culture, and the economy. Mark, how about an update regarding the new edition?
5. andrew | January 5th, 2011 at 2:57 pm
are we supposed to be copy editing this?
“When Chavez nationalization the plant to took Koch Industries out of the picture”
“a New Deal program that allows ranchers to use federal land basically for free for his Matador Cattle operation”
because it needs some copy editing.
6. andrew | January 5th, 2011 at 2:58 pm
i meant proofreading not copy editing. clearly.
7. Zirb | January 5th, 2011 at 8:02 pm
Koch bros are just like Milton Friedman- corporate fascists that pretend to be morally superior
8. Victorvalley Villain | January 5th, 2011 at 8:46 pm
@Jack, I would trade that joy a hundred times over for some kind of productive action.
9. Ally | January 6th, 2011 at 1:47 am
Be very, very careful quoting Gulf Today. Even by the horrendous standards of Middle East media, it’s a truly appalling rag.
Run out of Sharjah by badly paid, poorly educated Indian labor.
10. Oxygen Plants | January 6th, 2011 at 3:42 am
Oxyplants India deals mainly with Oxygen plants, Nitrogen plants. We are renowned as the Manufacturer of Oxygen Plants, Nitrogen Plants and Acetylene plants.
11. az | January 6th, 2011 at 7:29 am
Cool article but this comments section is no fun. Where are the Kochsucker libertarian trolls?
12. Derp | January 6th, 2011 at 10:02 am
Derp derp derp! The dumb Commies funded the Tea Party movement, derp derp derp! Good for the Koch bros for fleecing ol’ Hugo Santa, derp derp! Why isn’t this on Fox News? Wily Tea Partiers fleece idiot Commies, derp derp derp!
13. Zirb | January 6th, 2011 at 1:36 pm
@az I’ve been previously called the libertarian troll on this site, but I stand by my comment #6 that Koch bros, Milton Friedman, Hayek and the like are all corporate fascists. This article proves that point very well.
14. Victorvalley Villain | January 6th, 2011 at 3:04 pm
@12 Zirb,
Do you have any ideas on how we the people can successfully combat what you call “corporate fascists?”
Is it safe to assume that you are an agorist of some sorts, and opposed organized collective responses such as industrial unions, or renters strikes, and the such?
15. myffie | January 7th, 2011 at 2:54 am
I really appreciate what you’re doing, Yasha
16. ohwow | January 7th, 2011 at 11:13 am
what kind of name is yasha though? Sounds downright communist. Wouldn’t be surprised if the next article is about praising dear leader.
17. enemy2k | January 7th, 2011 at 11:55 pm
Of course, #16 attacks the messanger and not the message.
18. Arch Stanton | January 8th, 2011 at 2:57 pm
“Using taxpayer money to cover the costs and ensure profits every time—that’s the simple formula to the Kochs’ success.”
Are you implying there’s a better use for taxpayer money, commie?
19. Zhu Bajie | January 9th, 2011 at 12:43 am
“Dear Leader” = Pres. Jeb Bush (coming soon to an ex-republic near you!)
20. rosemerry | January 9th, 2011 at 12:48 pm
Great article, Yasha , not seen elsewhere. Hugo Chavez is not allowed to have any credit for any good action n any of the MSM, and even supporters now say he is not leftist enough and will lose poor people’s votes. Maybe they want another Perez . Ugh
21. Doug | January 9th, 2011 at 8:52 pm
Since I’m a suckup to the Kochs and live off their crumbs, here’s my troll comment: “This article is moronic. No shit the bond yields were super-high. The market was scared shitless Chavez was going to seize the plant and immediately default on the bonds. He seized it and didn’t totally fuck over the bondholders.”
This is like saying that Mugabe totally rocks at running Zimbabwe because the country is slightly less of a shithole now then it was 3 years ago.
Except that this isn’t like that at all because anyone not on the Koch payroll understands how fucked up it is that the Kochs are making all this money off socialist/statist subsidies and ruining companies.
I should learn basic logic.
22. Jack Boot | January 17th, 2011 at 9:11 am
Good article; but I have a token niggle:
Whatever else the Tea-Baggers might be, they’re not libertarians. When it comes to such issues as abortion, stem cell research, non-procreative sex, recreational drug use and assisted suicide, they’re passionate interventionists.
They don’t want to abolish Big Government; only to redirect it…
23. Phoenix Woman | January 17th, 2011 at 10:03 pm
Jack Boot @22: Those are the Kochified teabaggers he paid Dick Armey to corral.
The original Teeps were indeed libertarians, and Koch and Armey were tasked by the GOP to Borg (co-opt) the movement before it could turn into a serious third-party threat to the Republicans (in other words, to reabsorb them back into the GOP before they could do to the Republicans what the GOP-funded Greens and Nader do to the Democrats). However, doing this came at a price, which was jettisoning all that was actually libertarian and embracing the Religio-Racist Right to such an extent that it now has a stranglehold on the party.
This is not a good thing for the GOP: Tea Party candidates in the House lost three seat races for every one they won, and their Senate record was a mediocre 50-50; Harry Reid owes his seat to the fact that the Nevada Republicans gifted him with Tea Party favorite Sharron Angle for an opponent. Yet instead of blaming the teabaggers for keeping the Republicans from winning both Houses, they instead blamed the guy the teabaggers hate more than President Obama — Michael Steele — and made a sacrifice of him. (Of course, Steele was doomed months ago, the moment he dared say what we all know but which Republicans almost never admit, that the Southern Strategy far outlasted Richard Nixon.)
24. Jack Boot | January 19th, 2011 at 7:14 am
@ Phoenix Woman
Quite so; at their (apparently spontaneous) beginning, the Teabaggers criticized both ends of the Washington/Wall Street Axis of Weevil.
But after a while, they mysteriously began to concentrate their outrage on Washington only. Let’s hear it for co-optation! “Hey, those are cool hats you’re wearing, boys! Can we talk? We’re in trouble, all right; but in your fat-laden hearts, you know it’s all the fault of that jigaboo in the White House! By the way, d’you need some travel money?”
But, to paraphrase Machiavelli: A prince who allies himself with lunatics is a fool…
25. Jack Boot | January 21st, 2011 at 7:09 am
To shift gears for a moment; did y’all notice that fire-stick Chavez is totin’?
Unless I miss my guess, it’s an AK-101 – the new look for the new century.
It combines the virtues of the M-16 (light weight, low recoil, accuracy to 400m) with world-beating Kalashnikov reliability.
And for added convenience, it’s chambered for NATO-standard 5.56 x 45mm ammo.
Good choice, Hugo!
26. Barack Obama | April 6th, 2011 at 2:37 am
25 comments!!! NEW ROCORD WOOHOO!!! phucking lame as marxist scumbags. I don’t care which side your on, the truth wins every time. lmao, Justin Bieber gets 25 comments in the first 2 minutes a story is up. That’s right, and since Justin Bieber gets the most comments, I’m totally into Justin Bieber!
p.s. Next time you all migrate to one spot like you did in wisconsin, someone should drop a nuke.
27. NorskeDivision | May 17th, 2011 at 7:31 pm
Whoa dude! Check me out! I’m a sock puppet that went into a coma about a year and a half ago! And just woke up, thinking I’m the shit. But everyone can see I’m just a sad little sock puppet. Man are my troll strategies like so 2010! New Media Strategies went through like 15 new troll evolutions! And I’m still using the beta Sock Puppet 0.5–the beta version! Man, how can I do my job sucking up to rightwing billionaires without proper suck up equipment?
Firstly I’m no fan of the Koch Brothers. But whether someone who is for against “socialism” is willing to take government subsidies doesn’t prove anything. Communists were more than willing to sell natural resources at a profit to capitalist countries. The lesson there is not that communism or socialism is better, but that people will do what is in there interests. In the end, everyone is a capitalist and a socialist when it’s respectively in their interest to be such. That Koch is willing to take a government handout from the government of Venezuela hardly proves the superiority of socialism, if anything, it underlines the importance of real free market competition, which would eliminate preferential subsidies. (To be clear, I’m not a free market fundamentalist, I believe the government should work to counter monopolistic practices by business and focus on doing things a government can do efficiently). Some de-regulation is good, for example, the regulations in the 1970s that insured high airline ticket prices were a handout to the industry, and Reagan’s deregulation in that arena was beneficial.
Also, with the tea party movement, a good bit is born out of concern about the rising debt, and it has been successful in getting Washington to take it seriously. I agree that corporate interests are happy to to try to subvert it into something for corporate welfare, Democracy is a constant battle against such subversion and for making a fair playing field. Authoritarian systems, like the Soviet Union, on the other hand get captured by a parasitic bureaucratic class and once that happens that’s the end of it.
Also, where did you get information about the bond values for Fertinitro? I’m assuming you are in fact not confusing yield with value (a higher yield would indicate less confidence they will ever be paid back). The only information I have been able to find is that the they remain rated CCC. Also, bond ratings have little or nothing to do with how efficiently a business is being run anyway! If anything, this would be a reflection of the fact Venezuela (a country) is less likely to default than a single company.
And the record for nationalized businesses in Venezuela is absolutely horrible. Oil production is down. Cemex in Venezuela has a fraction of its production prior to nationalization. Sure, there are some badly run private industries. But eventually they go bankrupt, the state can keep running a loss at nationalized industries forever. That is the biggest argument against nationalizing industries which don’t need to be. This is the point that seems lost in the Manichean debate between free market fundamentalists like some in the tea party and state socialists like you.
28. NorskeDivision | May 17th, 2011 at 7:35 pm
Here I am again, using my outdated sock puppet program, thinking that I’m invisible to all you netizens out there. Ahoy! I’m just a regular guy who just happens to be writing pro-Koch comments. I’m pleased to meet you. I’m just a regular guy. I love freedom. I love liberty. That is why I am here commenting. How are you? I am good. Fine. Also, any comment on Venezuela’s pathetic GDP growth? Electricity shortages? Are these all a result of Stalin’s famed “wreckers?” Maybe the Kulaks and Wreckers made their way from the Soviet Union to Venezuela? Just how many decades to State Socialists need to ferret out all the traitors undermining their revolution?
29. NorskeDivision | May 21st, 2011 at 1:38 am
Whoa hey guys regular guy commeter who loves liberty n donuts is baaaaack and I got a new schtick for y’all, homeeez. Check it, cuz us trolls are like bacteria, we go through a million mutations in a just few hours, so I got a few Sock Puppet v1.7 tricks for y’all. Check this, peeps: I don’t get it, why didn’t you just replace my comment wholesale with something to discredit critics of this article. Why just append something to the beginning? Interesting as well, someone who complains about Corporate media censorship feels the need to discredit critical responses to their own articles. On top of that, you can’t even differentiate between anyone who disagrees with you. I clearly stated I’m no fan of the Koch Brothers, yet for state socialist Chavistas like you, anyone to the right of Chavez is a running dog of the imperialists. You probably think luis miquilena is a chain dog of the Bourgeoisie.
But of course, you’re just an unpaid lackey of Chavez, oh no, the author of this article received no money to be an apologist for Chavez (Unlike, say, Gregory Wilpert who is paid handsomely by Venezuela). Nope, you’re such a dupe, you do it for free.
I’m Charles Koch and I approve this message. Created with Sock Puppet Control Room iPad Edition v1.7® All rights reserved 2011
30. Joel | September 15th, 2013 at 1:27 pm
Ha! Great, the smart capitalist makes use of the conditions (even those skewed by socialists) to maximize profit.
Bravo!