At the Fox News Chrismas party the year the network overtook arch-rival CNN in the cable ratings, tipsy employees were herded down to the basement of a midtown bar in New York. As they gathered around a television mounted high on the wall, an image flashed to life, glowing bright in the darkened tavern: the MSNBC logo. A chorus of boos erupted among the Fox faithful. The CNN logo followed, and the catcalls multiplied. Then a third slide appeared, with a telling twist. In place of the logo for Fox News was a beneficent visage: the face of the network's founder. The man known to his fiercest loyalists simply as "the Chairman" – Roger Ailes.

"It was as though we were looking at Mao," recalls Charlie Reina, a former Fox News producer. The Foxistas went wild. They let the dogs out. Woof! Woof! Woof! Even those who disliked the way Ailes runs his network joined in the display of fealty, given the culture of intimidation at Fox News. "It's like the Soviet Union or China: People are always looking over their shoulders," says a former executive with the network's parent, News Corp. "There are people who turn people in."

The key to decoding Fox News isn't hosts Bill O'Reilly or Sean Hannity. It isn't even News Corp chief Rupert Murdoch. To understand what drives Fox News, and what its true purpose is, you must first understand Chairman Ailes. "He is Fox News," says Jane Hall, a Fox commentator for 10 years, who defected over Ailes's embrace of the fear-mongering Glenn Beck. "It's his vision. It's a reflection of him."

Ailes runs the most profitable – and therefore least accountable – head of the News Corp hydra. Fox News reaped an estimated profit of $816m last year – nearly a fifth of Murdoch's global haul. The cable channel's earnings rivalled those of News Corp's entire film division, which includes 20th Century Fox, and helped offset a slump at Murdoch's beloved newspapers unit, which took a $3bn writedown after acquiring the Wall Street Journal. With its bare-bones newsgathering operation – Fox News has one-third of the staff and 30 fewer bureaus than CNN – Ailes generates profit margins above 50%. Nearly half comes from advertising and the rest is fees from cable companies. Fox News now reaches 100m households, attracting more viewers than all other cable news outlets combined, and Ailes aims for his network to "throw off a billion in profits".

The outsize success of Fox News gives Ailes a free hand to shape the network in his own image. "Murdoch has almost no involvement with it at all," says Michael Wolff, who spent nine months embedded at News Corp researching a biography of the Australian media giant. "People are afraid of Roger. Murdoch is, himself, afraid of Roger. He has amassed enormous power within the company – and within the country – from the success of Fox News."

Fear, in fact, is precisely what Ailes is selling: his network has relentlessly hyped phantom menaces such as the planned "terror mosque" near Ground Zero, inspiring Florida pastor Terry Jones to torch the Qur'an. Privately, Murdoch is as impressed by Ailes's business savvy as he is dismissive of his extremist politics. "You know Roger is crazy," Murdoch recently told a colleague, shaking his head in disbelief. "He really believes that stuff."

To watch even a day of Fox News – the anger, the bombast, the virulent paranoid streak, the unending appeals to white resentment, the reporting that is held to the same standard of evidence as a political campaign attack ad – is to see a refraction of its founder, one of the most skilled and fearsome operatives in the history of the Republican party. As a political consultant, Ailes repackaged Richard Nixon for television in 1968, papered over Ronald Reagan's budding Alzheimer's in 1984, shamelessly stoked racial fears to elect George Bush in 1988, and waged a secret campaign on behalf of Big Tobacco to derail healthcare reform in 1993. "He was the premier guy in the business," says former Reagan campaign manager Ed Rollins. "He was our Michelangelo."

In the fable Ailes tells about his own life, he made a clean break with his dirty political past long before 1996, when he joined forces with Murdoch to launch Fox News. "I quit politics," he has claimed, "because I hated it." But an examination of his career reveals that Ailes has used Fox News to pioneer a new form of political campaign – one that enables the Republican party to bypass sceptical reporters and wage an around-the-clock, partisan assault on public opinion. The network, at its core, is a giant soundstage created to mimic the look and feel of a news operation, cleverly camouflaging political propaganda as independent journalism.

The result is one of the most powerful political machines in American history. One that plays a leading role in defining Republican talking points and advancing the agenda of the far right. Fox News tilted the electoral balance to George W Bush in 2000, prematurely declaring him president in a move that prompted every other network to follow suit. It helped create the Tea Party, transforming it from the butt of late-night jokes into a nationwide insurgency capable of electing US senators. Fox News turbocharged the Republican takeover of the House last autumn, and even helped elect former Fox News host John Kasich as the union-busting governor of Ohio – with the help of $1.26m in campaign contributions from News Corp. And by incubating a host of potential Republican contenders on the Fox News payroll – including Sarah Palin, Mike Huckabee, Newt Gingrich and Rick Santorum – Ailes seems determined to add a fifth presidential notch to his belt in 2012. "Everything Roger wanted to do when he started out in politics, he's now doing 24/7 with his network," says a former News Corp executive. "It's come full circle."

The 71-year-old Ailes presents the classic figure of a cinematic villain: bald and obese, with dainty hands, Hitchcockian jowls and a lumbering gait. Friends describe him as loyal, generous and funny. But Ailes is also, by turns, a tyrant: "I only understand friendship or scorched earth," he has said. One former deputy pegs him as a cross between Don Rickles, the venomous comic, and Don Corleone. "What's fun for Roger is the destruction," says Dan Cooper, a key member of the team that founded Fox News. "When the lightbulb goes on and he's got the trick to outmanoeuvre the enemy – that's his passion." Ailes is also deeply paranoid. Convinced that he has personally been targeted by al-Qaida for assassination, he surrounds himself with an aggressive security detail and is licensed to carry a concealed handgun.

Ailes was born in 1940 in Warren, Ohio, a manufacturing outpost near Youngstown. His father worked at the Packard plant producing wiring for GM cars, and Roger grew up resenting the abuse his father had to take from the "college boys" who managed the line. Roger spent much of his youth in convalescence. A sickly child – haemophilia forced him to sit out breaktime at school – he had to learn to walk again after getting hit by a car aged eight. His mother worked, so he was raised in equal measure by his grandmother and TV. "Television and I grew up together," he later wrote.

A teenage booze hound – "I was hammered all the time" – Ailes said he "went to state school because they told me I could drink". In fact, his father kicked him out of the house when he graduated from high school. During his stint at Ohio University, where he studied radio and television, his parents divorced and left the house where he had spent so much of his childhood recovering from illness and injury. "I went back, the house was sold, all my stuff was gone," he recalled. "I never found my shit!" The shock seems to have left him with an almost pathological nostalgia for the trappings of small-town America.

In college, Ailes tried to join the Air Force reserve officer training corps but was rejected because of his health. So he became a drama geek, acting in college productions. The thespian streak never left Ailes: His first job out of college was as a gofer on The Mike Douglas Show, a nationally syndicated daytime variety show that featured ageing stars such as Jack Benny and Pearl Bailey in a world swooning for Elvis and the Beatles. In many ways, Ailes remains a creature of that earlier era. His 1950s manners, martini-dry ripostes and unreconstructed sexism give the feeling, says one intimate, "like you're talking to someone who's been under a rock for a couple of decades".

Ailes found his calling in television. He proved to be a TV wunderkind, charting a meteoric rise to executive producer by the age of 25. Ailes had an uncanny feel for stagecraft and how to make conversational performances pop on live television. But it was behind the scenes at Mike Douglas in 1967 that Ailes met the man who would set him on his path as the greatest political operative of his generation: Richard Milhous Nixon. The former vice-president – whose stilted and sweaty debate performance against John F Kennedy had helped doom his presidential bid in 1960 – was on a media tour to rehabilitate his image. Waiting with Nixon in his office before the show, Ailes needled his powerful guest. "The camera doesn't like you," he said. Nixon wasn't pleased. "It's a shame a man has to use gimmicks like television to get elected," he grumbled. "Television is not a gimmick," Ailes said. "And if you think it is, you'll lose again."

The exchange was a defining moment for both men. Nixon became convinced that he had met a boy genius who could market him to the American public. Ailes had fallen hard for his first candidate. He soon abandoned his high-powered job producing Mike Douglas and signed on as Nixon's "executive producer for television". For Ailes, the infatuation was personal – and it is telling that the man who got him into politics would prove to be one of he most paranoid and dirty campaigners in the history of American politics. "I don't know anyone else around that I would have done it for," Ailes has said, "other than Nixon."

Like Nixon, Rupert Murdoch found Ailes captivating: powerful, politically connected, funny as hell. By the time the two men teamed up in 1996 both had been married twice and both shared an open contempt for the traditional rules of journalism. Murdoch also had a direct self-interest in targeting regulation-minded liberals, whose policies threatened to interfere with his plans for expansion.

Even before he hired Ailes, Murdoch had several teams at work on an early version of Fox News that he intended to air through News Corp affiliates. The false starts included a 60 Minutes-style programme that, under the guise of straight news, would feature a weekly attack-and-destroy piece targeting a liberal politician or social programme. "The idea of a masquerade was already around prior to Roger arriving," says Dan Cooper, managing editor of that first iteration of Fox News. Murdoch envisioned his new network as a counterweight to the "leftwing bias" of CNN. "There's your answer right there to whether Fox News is a conventional news network or whether it has an agenda," says Eric Burns, who served for a decade as media critic at Fox News. "That's its original sin."

Before signing on to run the new network, Ailes demanded that Murdoch get "carriage" – distribution on cable systems nationwide. In the normal course of business, cable outfits such as Time Warner pay content providers such as CNN or MTV for the right to air their programmes. But Murdoch turned the business model on its head. He didn't just give Fox News away – he paid the cable companies to air it. To get Fox News into 25m homes, Murdoch paid cable companies as much as $20 a subscriber. "Murdoch's offer shocked the industry," writes biographer Neil Chenoweth. "He was prepared to shell out half a billion dollars just to buy a news voice." Even before it took to the air, Fox News was guaranteed access to a mass audience, bought and paid for. Ailes hailed Murdoch's "nerve", adding: "This is capitalism and one of the things that made this country great."

Ailes was also determined not to let the professional ethics of journalism get in the way of his political agenda. To secure a pliable news staff, he led what he called a "jailbreak" from his old employers, NBC, bringing dozens of top staffers with him to Fox News.

Ailes then embarked on a purge of existing staffers at Fox News. "There was a litmus test," recalled Joe Peyronnin, whom Ailes displaced as head of the network. "He was going to figure out who was liberal or conservative when he came in, and try to get rid of the liberals." When Ailes suspected a journalist wasn't far enough to the right for his tastes, he'd spring an accusation: "Why are you a liberal?" If staffers had worked at one of the major news networks, Ailes would force them to defend working at a place such as CBS – which he spat out as "the Communist Broadcast System". To replace the veterans he fired, Ailes brought in droves of inexperienced up-and-comers – enabling him to weave his own political biases into the network's DNA. Reporters understood that a rightwing bias was hard-wired into what they did from the start. "All outward appearances were that it was just like any other newsroom," says a former anchor. "But you knew that the way to get ahead was to show your colour – and that your colour was red." Red state, that is.

Befitting his siege mentality, Ailes housed his newsroom in a bunker. Reporters and producers at Fox News work in a vast, windowless expanse below street level, a gloomy space lined with video-editing suites along one wall and cubicle offices along the other. In a separate facility on the same subterranean floor, Ailes created an in-house research unit – known at Fox News as the "brain room" – that requires special security clearance to gain access. "It's where the evil resides," says Cooper, who helped design its specs.

It was the election of Bush in 2000 that revealed the true power of Fox News as a political machine. According to a study of voting patterns by the University of California, Fox News shifted roughly 200,000 ballots to Bush in areas where voters had access to the network. But Ailes, ever the political operative, didn't leave the outcome to anything as dicey as the popular vote. The man he tapped to head the network's "decision desk" on election night – the consultant responsible for calling states for either Gore or Bush – was none other than John Prescott Ellis, Bush's first cousin.

In any newsroom worthy of the name, such a conflict of interest would have immediately disqualified Ellis. But for Ailes, loyalty to Bush was an asset. "We at Fox News," he would later tell a House hearing, "do not discriminate against people because of their family connections." On election day, Ellis was in constant contact with Bush himself. After midnight, when a wave of late numbers showed Bush with a narrow lead, Ellis jumped on the data to declare Bush the winner – even though Florida was still rated too close to call by the vote-tracking consortium used by all the networks. Fox News called the election for Bush at 2.16 am – a move that spurred every other network to follow suit, and led to "Bush Wins" headlines in the morning papers.

"We'll never know whether Bush won the election in Florida or not," says Dan Rather, who was anchoring the election coverage for CBS that night. "But when you reach these kinds of situations, the ability to control the narrative becomes critical."

After Bush took office, Ailes stayed in frequent touch with the new Republican president. "The senior-level editorial people believe that Roger was on the phone every day with Bush," a source close to Fox News tells me. "He gave Bush the same kind of pointers he used to give [his father] – delivery, effectiveness, political coaching." In the aftermath of 9/11, Ailes sent a back-channel memo to the president through Karl Rove, advising Bush to ramp up the war on terror. As reported by Bob Woodward, Ailes advised Bush that, "the American public would tolerate waiting and would be patient, but only as long as they were convinced that Bush was using the harshest measures possible".

Fox News did its part to make sure that viewers lined up behind those harsh measures. The network plastered an American flag in the corner of the screen, dolled up one female anchor in a camouflage-print silk blouse, and featured Geraldo Rivera threatening to hunt down Osama bin Laden with a pistol. The militarism even seemed to infect the culture of Fox News. "Roger Ailes is the general," declared Bill O'Reilly. "And the general sets the tone of the army. Our army is very George Patton-esque. We charge. We roll."

Ailes likes to boast that Fox News maintains a bright, clear line between its news shows, which he touts as balanced, and primetime hosts such as O'Reilly and Hannity, who are given free rein to voice their opinions. "We police those lines very carefully," Ailes has said. But after Bush was elected, Ailes tasked John Moody, his top political lieutenant, to keep the newsroom in lockstep. Early each morning, Ailes summoned Moody into his office and provided his spin on the day's news. Moody then posted a daily memo to the staff with explicit instructions on how to slant the day's news coverage according to the agenda of those on "the second floor", as Ailes and his loyal cadre of vice-presidents are known. "There's a chain of command, and it's followed," says a former news anchor. "Roger talks to his people, and his people pass the message on down." (Ailes and Fox News declined repeated requests for an interview for this piece.)

The more profits soared at Fox News, the more Ailes expanded his power and independence. In 2005, he staged a brazen coup within the company, conspiring to depose Murdoch's son Lachlan as the anointed heir of News Corp. Ailes not only took over Lachlan's portfolio – becoming chair of Fox Television – he even claimed Lachlan's office on the eighth floor. In 2009, Ailes earned a pay package of $24m – a deal slightly larger than the one enjoyed by Murdoch himself. He brags privately that his contract also forbids Murdoch – infamous for micromanaging his newspapers – from interfering with editorial decisions at Fox News.

Many within Murdoch's family have come to viscerally hate Ailes. Murdoch's third wife, Wendi, has worked to soften her husband's politics, and his son James has persuaded him to embrace the reality of global warming – even as Ailes has led the drumbeat of climate deniers at Fox News. PR man Matthew Freud, Murdoch's son-in-law, recently told reporters: "I am by no means alone within the family or the company in being ashamed and sickened by Roger Ailes's horrendous and sustained disregard of the journalistic standards that News Corporation, its founder and every other global media business aspires to."

"Rupert is surrounded by people who regularly, if not moment to moment, tell him how horrifying and dastardly Roger is," says Wolff, Murdoch's biographer. "Wendi cannot stand Roger. Rupert's children cannot stand Roger. So around Murdoch, Roger has no supporters, except for Roger himself."

Ailes begins each workday buffered by the elaborate private security detail that News Corp pays to usher him from his $1.6m home in New Jersey to his office in Manhattan. Travelling with the Chairman is like a scene straight out of 24. A friend recalls hitching a ride with Ailes after a power lunch: "We come out of the building and there's an SUV filled with big guys, who jump out of the car when they see him. A cordon is formed around us. We're ushered into the SUV, and we drive the few blocks to Fox's offices, where another set of guys come out of the building to receive 'the package'. The package is taken in, and I'm taken on to my destination."

Ailes is certain that he's a top target of al-Qaida terrorists. Inside his blast-resistant office at Fox News headquarters, he keeps a monitor on his desk that allows him to view any activity outside his closed door. Once, after observing a dark-skinned man in what Ailes perceived to be Muslim garb, he put Fox News on lockdown. "What the hell!" Ailes shouted. "This guy could be bombing me!" The suspected terrorist turned out to be a janitor. "Roger tore up the whole floor," recalls a source close to Ailes. "He has a personal paranoia about people who are Muslim – which is consistent with the ideology of his network."

Ailes knows exactly who is watching Fox News each day, and he is adept at playing to their darkest fears in the age of Obama. The network's viewers are old, with a median age of 65. Ads cater to the immobile, the infirm and the incontinent, with appeals to join class action hip-replacement lawsuits, commercials for products such as Colon Flow and testimonials for the services of Liberator Medical ("Liberator gave me back the freedom I haven't had since I started using catheters"). The audience is also almost exclusively white – only 1.38% of viewers are African-American. "Roger understands audiences," says Rollins, the former Reagan consultant. "He knew how to target, which is what Fox News is all about." The typical viewer of Sean Hannity's show, to take the most stark example, is a pro-business (86%), Christian conservative (78%), Tea Party-backer (75%) with no college degree (66%), who is over 50 (65%), supports the NRA (73%), doesn't back gay rights (78%) and thinks government "does too much" (84%). "He's got a niche audience and he's programmed to it beautifully," says a former News Corp colleague. "He feeds them exactly what they want to hear."

From the time Obama began contemplating his candidacy, Fox News went all-out to convince its white viewers that he was a Marxist, a Muslim, a black nationalist and a 1960s radical. In early 2007, Ailes joked about the similarity of Obama's name to a certain terrorist's. "It is true that Barack Obama is on the move," Ailes said in a speech to news executives. "I don't know if it's true that President Bush called Musharraf and said: 'Why can't we catch this guy?'" References to Obama's middle name were soon being bandied about on Fox & Friends, the morning happy-talk show that Ailes uses as one of his primary vehicles to inject his venom into the media bloodstream.

The Obama era has spurred sharp changes in the character and tone of Fox News. "Obama's election has driven Fox to be more of a political campaign than it ever was before," says Burns, the network's former media critic. "Things shifted," agrees Jane Hall, who fled the network after a decade as a liberal commentator. "There seemed suddenly to be less of a need to have a range of opinion. I began to feel uncomfortable."

Most striking, Ailes hired Glenn Beck away from CNN and set him loose on the White House. During his contract negotiations, Beck recounted, Ailes confided that Fox News was dedicating itself to impeding the Obama administration. "I see this as the Alamo," Ailes declared. Leading the charge were the ragtag members of the Tea Party uprising, which Fox News propelled into a nationwide movement. In the buildup to the initial protests on 15 April 2009, the network went so far as to actually co-brand the rallies as "FNC Tax Day Tea Parties."

According to recent polls, Fox News viewers are the most misinformed of all news consumers. They are 12 percentage points more likely to believe the stimulus package caused job losses, 17 points more likely to believe Muslims want to establish Sharia law in America, 30 points more likely to say that scientists dispute global warming, and 31 points more likely to doubt President Obama's citizenship. At the height of the healthcare debate, more than two-thirds of Fox News viewers were convinced Obamacare would lead to a "government takeover", provide healthcare to illegal immigrants, pay for abortions and let the government decide when to pull the plug on grandma. In fact, a study by the University of Maryland revealed that ignorance of Fox viewers actually increases the longer they watch the network. That's because Ailes isn't interested in providing people with information, or even a balanced range of perspectives. Like his political mentor, Richard Nixon, Ailes traffics in the emotions of victimisation.

"What Nixon did – and what Ailes does today in the age of Obama – is unravel and rewire one of the most powerful of human emotions: shame," says Perlstein, the author of Nixonland. "He takes the shame of people who feel that they are being looked down on, and he mobilises it for political purposes. Roger Ailes is a direct link between the Nixonian politics of resentment and Sarah Palin's  politics of resentment. He's the golden thread."

Fox News stands as the culmination of everything Ailes tried to do for Nixon back in 1968. He has created a vast stage set, designed to resemble an actual news network, that is literally hard-wired into the homes of millions of America's most conservative voters. Republican candidates then use that forum to communicate directly to their base, bypassing the professional journalists Ailes once denounced as "matadors" who want to "tear down the social order" with their "elitist, horse-dung, socialist thinking". Ironically, it is Ailes who has built the most formidable propaganda machine ever seen outside of the Communist bloc, pioneering a business model that effectively monetises conservative politics through its relentless focus on the bottom line. "I'm not in politics," Ailes recently boasted. "I'm in ratings. We're winning."

The only thing that remains to be seen is whether Ailes can have it both ways: reaching his goal of $1bn in annual profits while simultaneously dethroning Obama with one of his candidate-employees. Either way, he has put the Republican party on his payroll and forced it to remake itself around his image. Ailes is the Chairman, and the conservative movement now reports to him. "Republicans originally thought that Fox worked for us," said David Frum, the former Bush speechwriter. "Now we're discovering that we work for Fox."