- 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
- 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
- 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,"
- 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
- 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
- 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
- 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,"
- 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