Koch Brothers Wealth: Historical Net Worth 1984-2012

Being the researcher that I am I was curious to know what the Koch brother’s net worth has been historically. Through some painstaking research via library databases (NewsBank, Forbes, and USA Today) I found the net worth of both Charles and David Koch dating back to 1984. The chart shows the net worth of each Charles and David Koch individually and not there combined net worth. The scale is in billions. Since they own the same percentage of Koch Industries their net worth is equal every year.

The growth in net worth is astonishing. In 1984, the net worth was only $375 million each. Brothers William and Frederick also had the same net worth as well. However, over time David and Charles seemed to increase their net worth at a faster rate than their brothers. The last year I could find for both William and Fredrick Koch was 1990 when William was worth $650 million and Frederick was worth $500 million. William didn’t appear back on the charts until 2007 when his net worth was $2 billion (his net worth is around $4 billion these days). What is interesting is that William actually worked for Koch Industries from 1968-1980 and was fired. William went to go on to start his own company The Oxbow Group in 1983 and this is what helped him become wealthy. Frederick on the other hand likes to buy castles, villas, and estates which doesn’t seem like a cheap hobby.

There is no doubt that Charles and David have been superstars with increasing their net worth. On a compound annual rate the Koch brothers have increased their net worth at a rate of close to 17% per year which would outperform the S&P 500 or Dow Jones Industrial Average. What is interesting however is the standard deviation or risk of their net worth is 44%. People often talk about how well off the rich are. However, the only way they can get that way is by taking risk. In fact, I would argue they have to take above average risk in order to the place they are.  The Koch’s have a substantial part of their net worth within Koch Industries which leaves little room for diversification. On the spending side the Koch’s don’t really seem to spend that much personally.  David Koch did own a Ferrari in the late 1980’s according to this article. The Koch brothers have supported their own charitable foundations which primarily try to spread free markets and the message of limited government.

Personally, I hope the Koch brothers reach 1 and 2 on the Forbes list. Given Charles Koch is 76 and his brother David is 72 it can be said that the Koch brothers are getting up there in age. Hopefully they will continue to live a long time to continue to spread the ideas of free markets and liberty and also serve their fellow man to increase their net worth. 

War on Drugs and Increasing Prison Population

From this chart it is clear that the since President Nixon launched the war on drugs it has been an utter failure. Not only are we locking up more people for non-violent behavior but preventing them from being productive members of society. It is really sad to lock people up who are really going about their own business and not harming anyone else. If anything I would argue that Twinkies are much more dangerous than drugs. I remember going through the now defunct D.A.R.E. program in elementary school and learning about alcohol and just saying no. However, I honestly believe this program made people want to try alcohol and drugs more. People forget that alcohol is much more dangerous than most if not all drugs. Every day people die in car accident from drunk driving. I have yet to see an epidemic of people dying from using illegal drugs. Also what about the medical benefits. Many people suffer from chronic illnesses could be using these drugs to help their symptoms. Making the drugs illegal makes it harder to study the very drugs that can help people. The true test of whether people own their own bodies is if they can do with it as they please (as long as they don't harm other people). 

CEO Compensation in Options 1965-2011

The following chart shows the relationship between CEO-worker compensation in the form of options (H/T Greg Mankiw). Usually executives and sometimes employees are granted stock options so the company can tie performance to how well the company is doing. The idea is that if that people are given stock options they will want to work hard to increase the value of the company thereby increasing their own compensation.

Options are granted by the company to the employee. However, the employee must wait a period of time before they can actually exercise or have the right to buy the options. I have a feeling many people think executives can just cash out there options whenever they want however the board of directors and shareholders are not stupid. The employee has to wait until the vesting period is over. The vesting period is the amount of time the employee has to wait before he or she sells their options. Typically the average amount of time is between 4-5 years. So really management or employees can’t have a short term view since they can’t even cash out their options until the 4 or 5 year period is over.

The blue line in the graph shows the ratio between the options that were granted and when the options were actually exercised by the employee. What is interesting is nearly every year from 1998 to around 2003 the options or the money that employees got was actually worth less than when they were granted. One reason for this is because the stock could actually decrease in value which decreases the value of the shares. Also the relative pay of CEOs increased dramatically in the 90’s and then fell by half. I have a feeling though people will point out the factor of how much CEOs make compared to workers. There are a couple of points I would bring up. The first is that employees often times don’t in the same position forever. Especially early on in their career they are trying to move up and get a higher paying job. By moving up this would decrease the factor of what CEO’s make compared to employees. Some people who start at the bottom of the company reach an executive level position before their career is over. Other people may get promotions however not want to take them due to family responsibilities, illness, or may not want the increased responsibility and pressure. Executives have extremely stressful jobs. They essentially spend their whole life at the company (or many different companies). Another point that is important to point out is that executives often pay ordinary income on their options which in places like New York City (city, state, and federal taxes) can easily exceed 50%.

I honestly believe only a few people really want to be executives. Everyone claims they want to get to the top but when you look at who wants to and actually can make it to the top it is only a very small percentage of people. Maybe next time when people complain about CEO compensation they should first understand what it is like to be a CEO.

Mark Holden General Counsel for Koch Industries on MSNBC

General counsel for Koch Industries Mark Holden recently went on MSNBC and talked to Martin Bashir and was asked questions by Bashir about Charles and David Koch’s involvement about ALEC’s involvement in the Trayvon Martin shooting. Did Bashir think Charles and David Koch were spokesmen for the organization simply because they donated money? I thought Holden handled the questions pretty well. Bashir really did seem to have many loaded questions with false premises.

Many people in the media seem to blame ALEC for the Trayvon Martin shooting when in fact. The Florida “Stand Your Ground” law was passed in 2005  yet I don’t remember hearing a mention of the Koch brothers from the mainstream media until 2008. What is really curious is how is when private citizens donate to money to a charity or organization they somehow have to agree with every single principal that the organization or charity stands for. The same could be said for politicians. When people vote for politicians essentially they are voting for a basket of goods. What is also interesting is that somehow people seem to think that the Koch brothers run ALEC, Americans for Prosperity, and Club for Growth, when in fact these gentlemen spend the majority of their time running the company. Yes, the Koch brothers donate money however my question would be what percent of their money makes up all donations? Americans for Prosperity has 1.9 million members. Club for Growth also has Thousands of Members.

I wouldn’t mind seeing Charles Koch or/and David Koch on television for an interview to really explain their belief in free markets and freedom. Also a autobiography would be great and really settle many of the misconceptions people have about the Koch brothers. Of course, both of these gentlemen are very busy. As Holden pointed out the Koch brothers work basically every day of the work. As Walter E. Williams would say “The rich didn’t get rich by being stupid”.

Billionaire hedge fund manager at 38 retires

Recently, John Arnold announced that he would close his hedge fund Centauras Energy and return money to investors. Arnold is pretty young being only 38 and has been an energy trader for 17 years. Apparently, the fund only made a 4% return for advisors which is not the typical double digits return that John Arnold would return. Last year he returned 9% and made $360 in the process. In 2006 Centauras Advisors earned 300% which was much better than in 2005 when they earned 150% (mostly due to the blow up of Amaranth Advisors).

Arnold got his start at the now defunct Enron. He went to Vanderbilt University where he earned an economics degree and even his professors weren’t surprised when they heard he was earning billions. When he worked at Enron Arnold was a natural gas trader and did very well. In 2011 alone he earned $750 million. Many people and politicians complain that traders create little to no value. However, this is not true. Traders don’t increase prices because they are responding to the fundamental market conditions. In order for a trade to be made there has to be both a buyer and seller. People get enraged when prices of oil increases however don’t even talk when the prices go down which is due to traders like John Arnold.

Arnold is setting off into the sunset quite early. He mainly wants to depend his time and resources with the Laura and John Arnold Foundation which has around $700 million. In 2011 alone John and his wife Laura donated $100 million to various different causes. Really John Arnold is saying is that he does believe he can’t earn the great returns he has been making. Usually financial planning professionals say that you can withdraw up to 4% of your income and still be able to retire. So essentially John Arnold could withdraw $120 million per year which is a substantial amount of money (this would vary depending on how much he gave to charity). Clearly, though there an opportunity cost for Arnold not running a hedge fund. He could be helping other people get rich but has decided that philanthropic pursuits are worth then what he can make in the future. I have a feeling that after a while John Arnold will want to get back in the investing game in some way in the future.

David Koch, Robert Kraft, and Marc Jacobs

I thought this story was pretty interesting. Apparently David Koch and Robert Kraft were at the Met Ball and someone overheard Koch and Kraft discussing Marc Jacob’s attire. The comment was made by Robert Kraft that “I don’t know about the white underpants” and then David Koch responded by saying “I agree, don’t you think he should’ve worn matching black boxers?” People that don’t even like David Koch should agree on this one.

I had no idea who Marc Jacobs was but apparently is a fashion icon within the industry. Although, looking at the photo I posted above I find it interesting that people spend so much money on a guy who doesn't seem to know how to dress himself. David Koch himself from what I have seen seems to dress classy and usually color coordinates with his wife Julia. It seems as if the billionaire is better dressed than the fashion designer. 

David Koch Donates $35 Million to Smithsonian's Natural History

The other day David Koch gave $35 million to the Smithsonian’s National Museum of Natural History in order to build a dinosaur hall. This is not Mr. Koch’s first donation to the museum. In 2006 he gave $20 million to create the David H. Koch Dinosaur Wing and then in 2009 he gave $15 million for the Hall or Human Origins (which now bears his name). No doubt that this money is for a good cause. As I mentioned in this post David Koch is an American hero not only for running a successful company but also for his very generous charitable giving. Nearly every article I have read in some way shape or form mentions how Koch has been a long time donor to the Republican Party. I would be willing to bet that his charitable donations have far surpassed his donations to any political party.

Koch credits his father for taking him and his twin brother Bill at any early age to visit the museum.  It is great that Koch is giving back. Although, you could argue he really doesn’t need to give back considering how many jobs he has created, how much food he has put on the table for Koch employees, and how many retirees are benefiting from working for a company that exploded in value under both David and Charles Koch.  As Walter E. Williams would say the only people that owe anything to society are criminals since they are really the only people who took from society. Koch has not only created wealth for himself and Koch employees but is now using that wealth to give back to charities whom will do far more good than the government. In fact, maybe someone should nominate David Koch for the Nobel Peace Prize by creating thousands of jobs, increasing the standard of living of many more, and giving back to charity. It is really sad when the media vilifies the Koch brothers considering how much they both have benefitted society. 

Hostess vs. Unions

As I mentioned in my previous post Hostess is now going through the bankruptcy process. Recently Hostess is in talks with the Teamsters Union. During the bankruptcy process companies have to create a plan and present it to creditors and get it approved by the courts in order to proceed. One part of the plan calls for Hostess to raise at least $400 million from current lenders and possibly new investors.

Around 83% of Hostess’s employees are unionized. In fact the company has close to 400 different union contracts. Hostess sounds more like a bureaucracy then a business. The company has 40 different pension plans when most companies only have one. Hostess pays about $100 million every year to their multiple pension plans. Speaking of the pensions Hostess has a pension fund that is underfunded by $2 billion. The company also owes pension creditors $950 million. This site has a create run-down of who all Hostess owes. I have seen stories of people complaining about how the executive salaries increased. However when I look at the largest costs I see “Union health and welfare/pension” at over $989 million. The second largest creditor is flour which is a mere $8.53 million. So clearly the labor costs are what have put Hostess in such bad shape and not executive compensation. People forget to that a CEO never sets their pay. Board of directors and the compensation committee of a company decide how much a CEO will earn and usually most executives are paid in the form of stock options not cash. Therefore, the executives total income is mostly tied to how well the company does. The executives at Hostess didn’t want the company to go bankrupt and really lost out of a lot of money since the company is now in bankruptcy

It is tragic that Hostess is now in the bankruptcy process. If there is one root cause of their bankruptcy it would have to be the high cost of labor unions. As I have mentioned before labor unions protect the unproductive. If I were Hostess I would do everything I could to bust up the unions. If that didn’t work I might consider firing everyone and then having a rehiring process with the condition that unions couldn’t be formed. Hostess lost $340 million in their last fiscal year. People have a desire for sugary snacks and goodies. According to data from the CDC around 36% of Americans are obese. Hostess has good products that people enjoy. If you don’t believe me just look at the skyrocketing rate in diabetes.

In 1980 around 153 million people had diabetes. By 2010 that same figure increased 56% to 347 million people. Hostess may get bought out by a private equity company who can attempt to turn around the company. Although, I think these private equity companies would become hesitant with the existing union problems.