by Tim Shorrock
By hiring enough former officials to
fill a permanent shadow cabinet, Carlyle has brought political
influence to a new level and created a twenty-first-century version
of capitalism that blurs any line between politics and business.
William Conway, managing director and co-founder of the Carlyle
Group, was talking recently about the media coverage of his bank and
the cast of ex-Presidents and former officials, including George H.W.
Bush, James Baker III and Frank Carlucci, on its payroll.
"One of the words that has recently
cropped up as an adjective around us --and I love this
adjective-- is the 'secretive' Carlyle Group," he said in an
interview in his offices overlooking Pennsylvania Avenue in
downtown Washington. "What's the secret? I don't think we have
many secrets. The reality is, we're a group of businessmen who
have made an enormous amount of money for our investors by
making good investments over the past fifteen years."
To give Conway his due, Carlyle has done
exceedingly well for the 435 pension funds, banks and investment
funds--40 percent from overseas--that have entrusted their money to
one of the world's largest private equity funds. Under the
leadership of Carlucci, a former CIA deputy director who was Defense
Secretary in the Reagan Administration, Carlyle has become the
nation's eleventh-largest defense contractor, a major arms exporter
to Saudi Arabia and Turkey, one of the biggest foreign investors in
South Korea and Taiwan, and a key player in global
telecommunications, wireless, real estate and healthcare markets.
Since 1987 it has invested $6.4 billion in 233 transactions, with a
rate of return of 36 percent on its completed investments.
Carlyle currently has $12.5 billion
"Their basic nature is not to be a
long-term investor but buy low and sell high," said Philip
Finnegan, an analyst with the Teal Group, a Beltway company that
tracks the aerospace industry. "They always look for an exit
strategy in whatever they buy. They have a sense of the
stability of the business because of the accumulated expertise
That's where Carlyle's global network of
statesmen and former officials comes in. Bush is Carlyle's senior
adviser on Asia and makes his money by giving speeches at Carlyle's
investment conferences. Baker, who was Bush's Secretary of State, is
Carlyle's senior counselor and a member of the firm's Asia, Europe
and Japan advisory boards. John Major, the former British prime
minister, was named chairman of Carlyle Europe last year.
Carlyle's advisory boards are peppered
with corporate executives from Boeing, BMW, Toshiba and other big
multinationals, and men of influence like former Bundesbank
president Karl Otto Pohl, former Thai prime minister Anand
Panyarachun and former US ambassador to Japan (and former Speaker of
the House) Thomas Foley. Carlyle's new asset management group is run
by Afsaneh Beschloss, the former treasurer and chief investment
officer of the World Bank.
By hiring enough former officials to fill a permanent shadow
cabinet, Carlyle has brought political influence to a new level and
created a twenty-first-century version of capitalism that blurs any
line between politics and business. In a sense, Carlyle may be the
ultimate in privatization: the use of a private company to nurture
public policy--and then reap its benefits in the form of profit.
Although the fund claims to operate like
any other investment bank, it's undeniable that its stable of
statesmen-entrepreneurs have the ability to tap into networks in
government and commerce, both at home and abroad, for advance
intelligence about companies about to be sold and spun off, or
government budgets and policies about to be implemented, and then
transform that knowledge into investment strategies that dovetail
nicely with US military foreign and domestic policy.
Carlyle System Works
A good analogy to the Carlyle system is a Japanese tradition known
as amakudari (literally, "descent from heaven"). Under this system,
senior officials from Japanese ministries retire, only to be
instantly hired as senior advisers by the companies and industry
groups they were paid to regulate.
"What we're really talking about is
a systematic merging of the private and public sectors to the
point where the distinctions get lost," said Chalmers Johnson,
president of the Japan Policy Research Institute and author of
two acclaimed books on the Japanese system of governance.
"The Carlyle Group is a perfect
example. It's the use of former government officials for their
access to government bureaucracies to determine contractual
relations. It's inside knowledge - knowing where the government
is going to spend money and then investing in it."
In turn, Carlyle executives influence
policy - sometimes profoundly. On March 12 Carlucci, who is chairman
of the US-Taiwan Business Council, a coalition of US multinationals
doing business in Taiwan, invited Tang Yao-Ming, Taiwan's Defense
Minister, to attend a closed-door summit of US and Taiwanese defense
officials sponsored by the council and key US military contractors,
including Carlyle's United Defense Industries.
Tang's visit, which was capped by a
meeting with US Deputy Defense Secretary Paul Wolfowitz, marked the
highest-level defense contacts between Taipei and Washington since
diplomatic relations were severed in 1979 - and paralleled President
Bush's push to expand arms sales to Taiwan, where Carlyle has
significant investments. Carlyle people also testify frequently
before government panels: senior adviser Arthur Levitt, the former
chairman of the Securities and Exchange Commission, has been
ubiquitous before Congressional hearings on Enron.
Carlyle's investment philosophy, as described in its brochures, is
to focus "on industries we know and in which we have a competitive
advantage," in particular "federally regulated or impacted
industries such as aerospace/defense." Its capital is siphoned into
fourteen funds, seven focused on US industries and real estate, four
on Europe and three on Asia. The $1.3 billion Carlyle Partner II
fund is the majority owner of United Defense, maker of the Bradley
Fighting Vehicle and other weapons systems, and owns Vought
Aircraft, the world's largest supplier of commercial and military
Carlyle's largest acquisition took place
two years ago in South Korea, when its $750 million Asia Buyout Fund
invested $145 million to buy a controlling stake in KorAm Bank.
Through United Defense, Carlyle owns Bofors Defense, a Swedish
manufacturer of naval guns and other weapons. In its latest deal,
finalized March 13, Carlyle is investing $50 million in Conexant
Systems, a spinoff from defense giant Rockwell International, to
manufacture silicon wafers for wireless communications and Internet
supply markets around the world.
The Conexant deal illustrates the extraordinary mix of business
acumen and contacts that makes Carlyle tick. Carlyle's entry into
wireless is being led by William Kennard, who regulated the wireless
industry as chairman of the Federal Communications Commission before
being hired as managing director of Carlyle's global
Carlyle's investment will help Conexant
expand its already sizable market in China, where its wireless
division recently won approval to supply a key cell-phone technology
to state-owned China Unicom, the second-largest telecom provider in
the world's largest wireless market. In a convenient twist, China
Unicom's national network is operated by Canada's Nortel Networks
under a contract signed during a visit to Beijing by Carlucci, who
was Nortel's chairman from 2000 to 2001.
A classic example of how Carlyle's political connections work was
the Pentagon's decision last year to develop United Defense's
Crusader mobile artillery system. The decision to fund the Crusader,
which could eventually cost $11 billion, came after years of
strenuous objections from senior military planners, who said it was
outdated, too heavy and of little use in contemporary warfare. But
United Defense's modifications to the system--and a lobbying
campaign by a handful of lawmakers who received a total of $300,000
in donations from a United Defense political action
committee--apparently made the difference.
Then came September 11 and its aftermath. With the Crusader contract
in hand and President Bush's war in Afghanistan well under way,
Carlyle decided the time was ripe to sell some of its United Defense
holdings on the stock market. The initial public offering on
December 14 raised $237 million for Carlyle. In January United
Defense, whose board of directors includes Carlucci and John Shalikashvili, former chairman of the Joint Chiefs of Staff, said
its fourth-quarter profits had risen 62 percent, due in large part
to sales of the Crusader, which received $472 million in the
Pentagon's latest budget.
Those events raised a few eyebrows, particularly at a time when the
media were dishing out daily revelations about Enron's political
influence in Washington. Columnist Paul Krugman described the
Pentagon's policy switch on the Crusader as a "very nice gift" from Rumsfeld to Carlucci, whom
Rumsfeld brought into government, and an
example of "crony capitalism," the Asian model of capitalism scorned
by US economists and the International Monetary Fund [for more on
Carlucci, see "Company Man" at
Conway, who is chairman of United
Defense, scoffed at the speculation.
"Frank [Carlucci] is not going to
lobby somebody in the Defense Department about a program for
Carlyle," he said. As for the timing of the IPO, which was
organized after the hijack attacks, "no one wants to be a
beneficiary of September 11," he said.
Friends in High
Bush Sr., who chairs the annual meeting of Carlyle's Asian Advisory
Board, has not hesitated to communicate with his son regarding
policies that could affect Carlyle and other US investors in the
region - particularly South Korea, where Carlyle could soon have an
investment stake of more than $2 billion. Last spring, after
President Bush stuck a knife in Kim Dae Jung's sunshine policies by
saying North Korea couldn't be trusted, Bush Sr. sent the President
a memo written by Donald Gregg, his former National Security Adviser
who once served as CIA station chief in Seoul, urging the new
Administration to ease its hard-line policies.
A few weeks later, in a decision the New York Times described as
"the first concrete evidence of the elder Bush's hand in a specific
policy arena," George W. said he was willing to talk to the North
"anytime, anyplace." But the President's "axis of evil" speech on
January 29, which North Korea took to be a near-declaration of war,
ended any hopes of rapprochement and led Pyongyang to cancel a
February visit by Gregg and several other former diplomats. Bush Jr.
tried to soften his rhetoric during his late February visit to Seoul
but was met instead by the largest anti-American demonstrations of
his career. Conway, however, was sanguine about the investment
climate in Korea. Bush's axis speech "doesn't add to my level of
concern," he said.
In Europe, Carlyle's strategy is to
invest in companies seeking to become Europewide and global players.
Conway, who attends the annual meetings of the European board, which
are chaired by Britain's Major, described the advisory boards as an
expansive process where advisers strategize about how to create and
nurture companies with a global reach.
At the last meeting of the European
board, the consensus was that,
"all these companies that have been
more single-country companies are going to have to expand onto
the European stage and ultimately a global stage," he said.
"Frankly, if they don't, they'll have a tough time competing
with the Americans and the Asians."
To implement the strategy, Carlyle
acquired and combined three companies, from Italy, Germany and the
United States; in another case, it combined two German and Canadian
In buying Bofors, Carlyle and United Defense crossed into an
extremely sensitive policy area. To smooth the process, a member of
Carlyle's European board,
"helped us on that even though it
was an acquisition by a US company of a Swedish company," said
Conway. "Most people, when you talk about defense assets, tend
to get a little bit sensitive, just as we do in this country."
Sensitivity is one lesson Carlyle has
learned the hard way. Last September, less than three weeks after
the attacks on the twin towers and the Pentagon, the Wall Street
Journal disclosed that the bin Laden family of Saudi Arabia had
committed at least $2 million to one of Carlyle's funds. Carlyle
quickly returned the money. Conway, in the bank's first public
comments on the incident, said the decision to part ways with the
bin Ladens was made at the senior partnership level.
"Anything that had the word bin
Laden in it, you just didn't want to be associated with it," he
said. "Its not that the people we were dealing with had done
anything wrong." But in the end, "we said, 'Gee whiz, we'll buy
you out at fair market value and get on with our life.'"
The Carlyle Group is owned by forty-nine managing partners, who hold
94.5 percent of Carlyle's private stock. (They include Baker and
Major, whose Carlyle holdings are worth at least $200 million if the
stock is equally divided.) The remaining 5.5 percent is held by the
California Public Employees Retirement System [see "CalPERS and
Carlyle," page 15].
The investors in Carlyle's various funds
US investment banks Goldman
Sachs and Salomon Smith Barney
investment authorities in Abu
Dhabi, Kuwait and Brunei
giant insurers like American
International Group and the labor-oriented Union Labor Life
public pension funds in Ohio,
Florida, Michigan and New York
the corporate pension funds of
American Airlines, Boeing, BP Amoco, GM and the World Bank
Carlyle has distinguished itself from
competitors like Kohlberg Kravis Roberts and Donaldson, Lufkin &
Jenrette by branding its name on its fourteen investment funds, as
Fidelity does with mutual funds. David Snow, editor of
industry newsletter that recently named Carlyle its "deal team of
the year," said the innovation was the inspiration of David
Rubenstein, the lone Democrat among Carlyle's founding partners.
"They've taken the name they built
in defense and are stamping it on funds with different
expertise," he said. "That's the direction the private equity
industry is moving in."
Carlyle's practice of hiring influential
statesmen and politicians has also inspired imitation. Al Gore, for
example, was recently hired by Metropolitan West Financial of
California to start a private equity practice, and Forstmann Little,
a fund co-managed by Erskine Bowles, President Clinton's former
Chief of Staff, lists Newt Gingrich and Henry Kissinger among its
Carlyle doesn't provide investment figures by industry. But its
focus on military and government-regulated industries is illustrated
by the breakdown of Carlyle's Partner II fund, its primary vehicle
for US manufacturing, which has 24 percent of its capital in
defense-related companies, 23 percent in commercial aerospace and 24
percent in telecommunications and energy. Similarly in its Asia
fund, 52 percent of Carlyle's investments are in financial services,
where governments are deeply involved in restructuring the region's
banks; 17 percent are in telecommunications; and 31 percent are in
cable TV, industries that are being privatized and are under strict
Carlucci, the mastermind of the bank's defense investments, came on
board in 1989 after serving in the Reagan Administration. Carlyle
says that Carlucci has never lobbied the government. He does,
however, get invited to government events of great use to Carlyle
simply because he is Frank Carlucci. According to recently
declassified documents from the Office of the Secretary of Defense,
Carlucci met with Rumsfeld twice last year--not as a representative
of Carlyle but as a former Defense Secretary and National Security
Adviser. The meetings, on February 9 and October 19, were organized
by Rumsfeld to discuss defense issues and the war on terrorism, and
included other luminaries from the national security establishment,
including Kissinger and Caspar Weinberger (Shalikashvili was there
Rumsfeld's correspondence and Carlucci's subsequent comments
underscore the utility of such meetings to Carlyle. After the
February event, Carlucci and Rumsfeld agreed to follow up with
discussions on how "to cut the cost of defense infrastructure and
reinvest the savings in modernization and other priority
programs"--key issues for United Defense.
Ten days after the October 19 session,
which included Wolfowitz, Carlucci offered an assessment of the
situation in Afghanistan that exactly reflects the Bush
Administration's endless-war scenario.
"We as Americans have to recognize
that [terrorism] is more or less a permanent position," Carlucci
told a New York audience of business executives and labor
leaders that included AFL-CIO president John Sweeney. "We're
going to have to live with this kind of phenomenon for the rest
of our lives."
Where Carlucci has led Carlyle's foray into defense, Bush Sr. and
Baker have helped the bank forge deep ties with the Middle East.
Just after his son was sworn into office, Bush was invited by Saudi
ambassador Prince Bandar bin Sultan bin Abdulaziz to speak to
potential US investors in Saudi Arabia at a two-day conference in
Houston. Bandar, who is close to the Bush family, was not relying
purely on friendship, however: The Washington Post recently
disclosed that Bandar has invested in Carlyle, along with his
father, Prince Sultan, the Saudi defense minister. (Bush Jr. also
has a Carlyle connection: In the early 1990s he was on the board of
Caterair, a Carlyle company that provided in-flight food services to
airlines but never made a profit.)
Through a 51 percent joint venture with the Saudi government,
Carlyle's United Defense provides tactical training and maintenance
for the thousands of Bradley Fighting Vehicles purchased by the
Royal Saudi Land Forces after the Gulf War. Carlyle had a long
relationship with Saudi Arabia through BDM Corporation and Vinnell
Corporation, which train the Saudi National Guard and were sold to
TRW in 1998. In the early 1990s Carlyle advised Al-Waleed bin Talal--the
Saudi prince whose $10 million donation to the World Trade Center
victims' fund was rejected by Rudy Giuliani--on his US investments,
including a $600 million bailout of Citicorp, now Citigroup.
Last April, Bush Sr. led a Carlyle delegation to Turkey, where
Rubenstein negotiated a joint venture with the Koc Group, Turkey's
largest conglomerate, which has holdings in energy,
telecommunications and defense. During a dinner with Turkish
business executives, Bush reminded the audience of Turkey's support
during the Gulf War and promised to "help Turkey as we did in the
past." FNSS, a joint venture between United Defense and the Nurol
Group, is Turkey's largest manufacturer of armored vehicles and
exports to Malaysia and other nations.
Over the past three years, in addition to visiting Turkey, Bush has
been to South Korea, Saudi Arabia, Australia, France, Thailand and
Hong Kong on Carlyle's behalf. In his speeches to investment
conferences, said Conway, Bush "talks about the world, what he sees,
what he thinks. Period." Carlyle's newly hired spokesperson, Chris Ullman, would not discuss Bush's compensation or his schedule, but
added that Bush,
"does not and has never represented
Carlyle before other governments or government officials. He has
made no business deals for Carlyle."
Investors, however, recognize that the
Bush name--and the many contacts Bush developed as President, CIA
director and ambassador to the UN--carry tremendous weight as he
travels around the world on behalf of Carlyle. "Nothing beats the
ability to have George Bush call up some contact he's known for the
last twenty years to comment on the worthiness of a particular
deal," said Pat Macht, a spokesperson for CalPERS, after consulting
with investment managers about Bush's role in Carlyle. That is
particularly true in Asia, where personal relationships are key to
business deals and Bush chairs the annual meeting of Carlyle's Asian
Carlyle started its $750 million Asia fund three years ago to invest
in countries trying to recover from the Asian financial crisis.
Under pressure from the IMF and the US Treasury, the structure of
Asian capitalism has been changing from family-controlled
conglomerates, such as the Korean chaebols Daewoo and Hyundai, to
leaner companies run by professional managers, hired in many cases
by foreign owners. Governments, meanwhile, have abandoned social
policies that once guaranteed a portion of the work force lifetime
jobs and made it difficult to fire workers.
That's even true in Korea, where
militant unions have given the country a bad reputation in the eyes
of foreign investors.
"Contrary to popular belief, major
layoffs are being done in Korea," Jonathan Colby, a former aide
to Kissinger who is one of Carlyle's managing directors for
Asia, told a recent Asian investors conference in New York.
With Asian banks holding billions of
dollars in bad loans,
"being able to tap private equity is
crucial to long-term growth in Asia," Ray Hood, director of
Asian investments for State Street Bank, said at the same event.
For companies like Carlyle, Asia "is where the rewards will be
in the next few years. Investment returns will be a complete
In Japan, Carlyle is positioning itself
alongside Goldman Sachs, Newbridge Capital, the Ripplewood Group and
other US investment banks in buying up nonperforming loans and
distressed assets, which are valued at more than $1 trillion.
"Just as in Korea you can make some
investments by taking a piece of the chaebols, I think the same
thing is true in Japan, where you have these overleveraged,
underperforming companies," said Conway.
These investment strategies mesh with
policies of financial deregulation, structural reform and
privatization, which have been publicly endorsed by President Bush,
whose Administration is deeply concerned that a collapse of Japan's
financial system could imperil the US-Japan security alliance. Last
July, when Japanese Prime Minister Junichiro Koizumi visited Bush to
seek his help in resolving Japan's financial woes, Japanese
reporters blinked in astonishment as George W. explained at some
length the importance of restructuring bad loans and banks from his
experience as an oil executive and Texas governor during the S&L
So far, Carlyle's Asia fund has made four acquisitions:
whose value has almost doubled since it was purchased in 2000
Taiwan Broadband, that country's fourth-largest cable company, in
which Carlyle has invested $187 million
Mercury Communications, a
telecom manufacturer recently spun off from the bankrupt Daewoo
Group, for $49 million
Pacific Department Stores, a joint
venture with a Taiwan group that operates a chain of retail stores
in mainland China, for $43 million
Carlyle's Japan fund recently agreed to
make its first acquisition, a 90 percent stake, worth $28 million,
in the security trucking subsidiary of the bankrupt Daiei Group,
Japan's largest retailer. Carlyle Asia is about to close its third
acquisition in Korea, where Carlyle and J.P. Morgan have reportedly
offered $1.2 billion to buy Kumho Industrial, the world's
tenth-largest tire maker and a major exporter to the United States
China, in fact, may be where Carlyle is heading in the
"We are very focused on South Korea
today, but China is our priority market of tomorrow," Michael
Kim, Carlyle's managing director in Seoul, told the Daily Deal
All of this is good news for Carlyle's
family of investors, who seem nonplussed by the questions swirling
around the firm.
"I don't see what the issue is with Carlyle, except
that there are some people who just don't like President Bush," said
Michael Flaherman, chairman of the CalPERS investment committee.
as America has learned from the Enron fiasco, the mix of big
business and politics can lead to disastrous investments, poor
public policy and further erosion of the democratic process.
The Carlyle system, where former
Presidents, prime ministers, diplomats and industry regulators
capitalize on their careers to make money for themselves and their
clients, may be perfectly legal. Yet as Japan's experience over the
past decade shows, even the most vaunted economies can sink - and
sink fast - when the line between public interest and private profit
disappears. Outside of the conservative Judicial Watch and the
muckraking Center for Public Integrity, there has been little public
interest in the Carlyle system of capitalism and where it is going.
Congress, meanwhile, is too busy seeking Carlyle's advice even to
ask the question.
The people who run Carlyle may hate the
word secrecy, but their words and actions make it impossible to know
where the policy-making ends and the money-making begins.