http://www.guardian.co.uk/Print/0,3858,4288516,00.html
The ex-presidents' club
Oliver Burkeman and Julian Borger
Wednesday October 31, 2001
The Guardian
It is hard to imagine an address closer to the heart
of American power. The offices of the Carlyle Group
are on Pennsylvania Avenue in Washington DC, midway
between the White House and the Capitol building, and
within a stone's throw of the headquarters of the FBI
and numerous government departments. The address
reflects Carlyle's position at the very centre of the
Washington establishment, but amid the frenetic
politicking that has occupied the higher reaches of
that world in recent weeks, few have paid it much
attention. Elsewhere, few have even heard of it.
This is exactly the way Carlyle likes it. For 14 years
now, with almost no publicity, the company has been
signing up an impressive list of former politicians -
including the first President Bush and his secretary
of state, James Baker; John Major; one-time World Bank
treasurer Afsaneh Masheyekhi and several south-east
Asian powerbrokers - and using their contacts and
influence to promote the group. Among the companies
Carlyle owns are those which make equipment, vehicles
and munitions for the US military, and its celebrity
employees have long served an ingenious dual purpose,
helping encourage investments from the very wealthy
while also smoothing the path for Carlyle's defence
firms.
But since the start of the "war on terrorism", the
firm - unofficially valued at $3.5bn - has taken on an
added significance. Carlyle has become the thread
which indirectly links American military policy in
Afghanistan to the personal financial fortunes of its
celebrity employees, not least the current president's
father. And, until earlier this month, Carlyle
provided another curious link to the Afghan crisis:
among the firm's multi-million-dollar investors were
members of the family of Osama bin Laden.
The closest the Carlyle Group has previously come to
public attention was last May, when a Seoul-based
employee called Peter Chung was forced to resign from
his �100,000-a-year job after sending an email to
friends - subsequently forwarded to thousands of
others - boasting of his plans to "fuck every hot
chick in Korea over the next two years". The more
business-oriented activities of Carlyle's staff have
been conducted much more quietly: since it was founded
in 1987 by David Rubenstein, a policy assistant in
Jimmy Carter's administration, and two lawyer friends,
the firm has been dispatching an array of former world
leaders on a series of strategic networking trips.
Last year, George Bush Sr and John Major travelled to
Riyadh to talk with senior Saudi businessmen. In
September 2000, Carlyle hired speakers including Colin
Powell and AOL Time Warner chair Steve Case to address
an extravagant party at Washington's Monarch Hotel.
Months later, Major joined James Baker for a function
at the Lanesborough Hotel in London, to explain the
Florida election controversy to the wealthy attendees.
We can assume that Carlyle pays well. Neither Major's
office nor Carlyle will confirm the details of his
salary as European chairman - an appointment announced
shortly before he left the House of Commons after the
election - but we know, for the purposes of
comparison, that he is paid �105,000 for 28 days' work
a year for an unrelated non-executive directorship.
Bush gives speeches for the company and is paid with
stakes in the firm's investments, believed to be worth
at least $80,000 per appearance. The benefits have
attracted political stars from around the world:
former Philippines president Fidel Ramos is an
adviser, as is former Thai premier Anand Panyarachun -
as well as former Bundesbank president Karl Otto Pohl,
and Arthur Levitt, former chairman of the SEC, the US
stock market regulator.
Carlyle partners, who include Baker and the firm's
chairman, Frank Carlucci - Ronald Reagan's defence
secretary and a former deputy director of the CIA -
own stakes that would be worth $180m each if each
partner owned an equal slice. As in many areas of its
work, though, Carlyle is not obliged to reveal the
details, and chooses not to.
Among the defence firms which benefit from Carlyle's
success is United Defense, a Virginia-based contractor
which makes vertical missile launch systems currently
on board US Navy ships in the Arabian sea, as well as
a range of other weapons delivery systems and combat
vehicles. Carlyle's other holdings span an improbable
range, taking in the French newspaper Le Figaro and
the company which bottles Dr Pepper.
"They are big, and they are quiet," says David
Mulholland, business editor of Jane's Defence Weekly.
"But they're not easy to get information out of, [but]
United Defense are going to do well [in the current
conflict]." United also owns Bofors, a Swedish
munitions manufacturer.
Carlyle has said that it does not lobby the federal
government, thus avoiding a conflict of interest when,
for example, Carlucci met Rumsfeld in February when
several important defence contracts were under
consideration. But critics see that as a matter of
definition.
"It should be a deep cause for concern that a closely
held company like Carlyle can simultaneously have
directors and advisers that are doing business and
making money and also advising the president of the
United States," says Peter Eisner, managing director
of the Center for Public Integrity, a
non-profit-making Washington think-tank. "The problem
comes when private business and public policy blend
together. What hat is former president Bush wearing
when he tells Crown Prince Abdullah not to worry about
US policy in the Middle East? What hat does he use
when he deals with South Korea, and causes policy
changes there? Or when James Baker helps argue the
presidential election in the younger Bush's favour?
It's a kitchen-cabinet situation, and the informality
involved is precisely a mark of Carlyle's success."
The world of private equity is an inherently secretive
one. Firms such as Carlyle make most of their money
buying firms which are not publicly traded,
overhauling them and selling them at a profit, so the
process by which likely targets are evaluated is much
more confidential than on the open market. "These
firms certainly don't go out of their way to get into
the headlines," says Steven Bell, chief economist at
Deutsche Asset Management. "They'd rather make a
splash in Institutional Pensions Week. The aim is to
realise very high returns for your investors while
exerting a high degree of control over the company.
You don't want to get into the headlines when you
force the management to fire a director."
The process has worked wonders at United, and this
month the firm announced plans to go public, giving
Carlyle the chance to cash in its investment.
But what sets Carlyle apart is the way it has
exploited its political contacts. When Carlucci
arrived there in 1989, he brought with him a phalanx
of former subordinates from the CIA and the Pentagon,
and an awareness of the scale of business a company
like Carlyle could do in the corridors and
steak-houses of Washington. In a decade and a half,
the firm has been able to realise a 34% rate of return
on its investments, and now claims to be the largest
private equity firm in the world. Success brought more
investors, including the international financier
George Soros and, in 1995, the wealthy Saudi Binladin
family, who insist they long ago severed all links
with their notorious relative. The first president
Bush is understood to have visited the Binladins in
Saudi Arabia twice on the firm's behalf.
The Carlyle Group does not employ anyone at its
Washington headquarters to deal with the press.
Inquiries about the links with the Binladins (as most
of the family choose to spell their name) are instead
referred to someone outside the company, on condition
he is referred to only as "a source familiar with the
relationship". This source says: "I can confirm the
fact that any Binladin Group investment in Carlyle has
been terminated or is being terminated. It amounted to
a $2m investment in the Carlyle II Fund, which was
anyway a very small portion of a $1.3bn fund. In the
scheme of the investments and in the scheme of the
business of either party it was very small. We have to
get this into perspective. But I think there was a
sense that there were questions being raised and some
controversy, and for such a small amount of money it
was something that we wanted to put behind us. It was
just a business decision."
But if the Binladins' connection to the Carlyle Group
lasted no more than six years, the current President
Bush's own links to the firm go far deeper. In 1990,
he was appointed to the board of one of Carlyle's
first purchases, an airline food business called
Caterair, which they eventually sold at a loss. He
left the board in 1992, later to become Governor of
Texas. Shortly thereafter, he was responsible for
appointing several members of the board which
controlled the investment of Texas teachers' pension
funds. A few years later, the board decided to invest
$100m of public money in the Carlyle Group. The firm's
magic touch was already bringing results. Today, it is
proving as fruitful as ever.
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