-Caveat Lector-
The Carlyle Group - Crony Capitalism Goes Global
By Tim Shorrock The Nation.com
3-26-2
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 invested.
"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
they have."
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.
How the 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
airline parts.
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
telecommunications group. 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
www.thenation.com].
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 Places
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 auto
firms.
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.'"
Carlyle's Structure
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 include
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; and 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 PrivateEquityCentral.net, an 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 advisers.
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 government
supervision.
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 too).
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."
Looking East
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
Advisory Board.
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 steal."
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 disaster.
So far, Carlyle's Asia fund has made four acquisitions:
KorAm Bank,
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; and 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 and China.
China, in fact,
may be where Carlyle is heading in the long term. "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 in January.
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. But 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.
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