Today, the Carlyle Group is such a well-known player in global commerce, boasting a roster of talent studded with world leaders, that it is easy to forget that the company was once merely a prescient idea. On a bright summer afternoon in 2003, David Rubenstein, the creator of that idea, sits behind his desk at 1001 Pennsylvania Avenue in Washington. [1] As founding partner and managing director of Carlyle, one of the world's biggest private equity firms, the fifty-two-year-old Rubenstein works out of an elegant but Spartan office. A scale model of a fancy corporate jet someone is trying to sell him occupies an otherwise barren and nondescript conference table. But it has been left there as an oversight, not to impress. Rubenstein's office is a study in anonymity. It has virtually no personal effects on display -- not even the requisite photos of his wife and three children. He inhabits it, and his somewhat rumpled pin-striped suit, as a driven man, an ascetic workaholic. He does not golf. He works. The Carlyle Group is not just his job. It is his life.
Rubenstein is now rich and powerful -- though he bristles at such notions -- but in some ways he has not changed much since he was a lowly $48,000-a-year domestic policy adviser in Jimmy Carter's White House. Back then, Rubenstein was the subject of one profile after another in which he was consistently characterized as the archetypal Beltway grind who was legendary for putting in eighteen-hour days and subsisting on vending-machine cuisine. He still uses his most famous quote from back then with reporters today: "Machine food is underrated." [3]
But the days of being a poorly paid, junk-food-ingesting policy wonk are long gone for Rubenstein. [4] For more than a decade, he has been consorting with multibillionaires and world leaders daily. In some measure, geography is metaphor, and as a result Rubenstein is deeply chagrined about the location of Carlyle's Washington offices midway between the White House and the Capitol, close to the center of power of the Western world. The reason is simple. Carlyle, a company that didn't even exist until 1987, in an industry that, in this form at least, is relatively new, has gone from zero to $16 billion in assets under management, making it one of the fastest-growing companies in the world. The people tied to Carlyle as partners, advisers, counselors, or directors of its companies have included the most powerful people in the world: former president George H. W. Bush, former secretary of state James Baker, former prime minister John Major of Great Britain, former secretary of defense Frank Carlucci, and former head of the Office of Management and Budget Richard Darman. There are or have been former heads of state from the Philippines, South Korea, and Thailand, former cabinet officials, ambassadors, heads of government regulatory agencies such as the Securities and Exchange Commission and the Federal Communications Commission, directors of stock exchanges, and the like. Even the current president of the United States, George W. Bush, was a director of a Carlyle company at one time.
All of which has led critics to conclude what may seem woefully obvious: Carlyle is spectacularly well-connected politically. Yes, the firm has made lots of smart business decisions, but ultimately it is Carlyle's seemingly unfettered access to power that makes it so distinctive. Carlyle has what everyone wants: the luxury of being able to make decisions -- multibillion-dollar decisions, at that -- with a reasonable certainty that it knows the outcome of its decisions in advance. If defense companies are on sale at depressed prices, for example, Carlyle knows there is a good chance that it can line up billions of dollars of military contracts for them. As a result, it can parlay its political connections into vast amounts of equity.
That's the conventional wisdom about the Carlyle Group. David Rubenstein abhors it. And when he meets the press, he goes to Herculean lengths to put that conceit to rest. Rubenstein once even invited a Washington Post reporter into the wood- paneled den of his Bethesda, Maryland, home and fairly shouted at him, "We're not that well connected!" At the time, Rubenstein was surrounded by candid photos of himself and his buddies, including one of him on a plane with George W. Bush; another of him with former president George H. W. Bush and his wife, Barbara; another with Mikhail Gorbachev; with Jimmy Carter; and of course, Rubenstein with his close personal friend the pope. [5]
On this particular day, however, Rubenstein tries a softer sell. "By focusing on Bush, James Baker, and John Major, the press has missed the real story about Carlyle," he says. "They would have you believe that James Baker is sitting in his office calling the chairman of General Motors and saying Carlyle wants you to buy this or buy that. It just doesn't happen that way."
What has really happened and continues to happen merits a chapter somewhere in the history of capitalism and the darker arts of influence peddling. Before Carlyle came along, the so-called revolving door in Washington worked something like this: As every new administration moved into Washington, a coterie of powerful Beltway politicians would move out from the public sector into the private sector, where they cashed in by renting their access to power for $500,000 a year or so as lawyers or lobbyists at huge law firms like Williams & Connolly or Akin Gump Strauss Hauer & Feld, and PR firms like Hill & Knowlton. Everyone did it -- Democrats and Republicans alike.
But after laboring over multibillion-dollar defense contracts, certain politicians began to realize that they could do rather better than a mere half million dollars or so a year. Much better. In an era of trillion-dollar federal budgets, half a million was chump change, proverbial shoe-shine money. How come the guys on Wall Street were Masters of the Universe when the men on Capitol Hill managed so much more money?
As a result, through Carlyle, the most powerful figures of the Reagan-Bush era decided not just to rent their access to the White House, to the Pentagon, to the regulatory agencies, but to transform it into corporate assets -- real equity in publicly held corporations -- stocks worth hundreds of millions of dollars. Carlyle was on its way to perfecting the art of what might be called "access capitalism." [6] [i]
To pull it off, Rubenstein first assembled a critical mass of great international icons in the eighties to form a shadow government of sorts that gave it political clout that was unparalleled among investment firms. These politicians who had forged political power out of capital, particularly in the energy and defense sectors, now could reverse the process and transform their political clout into capital. [ii]
Named after the elegant hotel on New York's fashionable Upper East Side, the Carlyle Group began modestly enough in 1987. Its first success was referred to half-jokingly as the Great Eskimo Tax Scam. At the time, an unusual tax loophole allowed companies in Alaska that were owned by Eskimos to sell their losses to other U.S. companies needing tax write-offs. According to the New Republic, in less than a year Carlyle "shuffled between $1 billion and $2 billion of dubious Eskimo losses into profitable American companies," taking fees of between $10 million and $20 million. [7]
But Rubenstein had more on his mind than Eskimo tax losses. This was the go-go era of leveraged buyouts, and for a couple of years in the late eighties, he participated in the zeitgeist of the LBO frenzy with mixed results. Ultimately, his real goal was far more grandiose -- to create a world-class merchant bank in Washington that could compete with the big Wall Street firms such as the Blackstone Group, Kohlberg Kravis Roberts, and ultimately, even the legendary Goldman Sachs.
As Rubenstein saw it, Carlyle would be different from the flash-and-dash of the eighties leveraged-buyout firms. It would be an institution. For the most part, the LBO firms of that heady era were run by men afflicted with the Master of the Universe Syndrome, men whose egos had become inflated after doing too many $10-billion deals, men who chortled with delight over having their own private Gulfstream G5 jets, or in being a member of Augusta National, the legendary Georgia golf course where the Masters is played each year.
Moreover, many of these firms were almost completely dependent on two or three superstars, but they tended to disintegrate once those stars left. "Most people who start these firms are essentially deal-doers who are not building institutions that will survive them," says Rubenstein. "So most private equity firms don't outlast the founders. We want to build an institution that would survive. Then, we will have created something significant."[8]
In terms of its distinctive corporate culture, Rubenstein admired the intensely competitive white-shoe firm of Goldman Sachs, whose ethos of sobriety and level headedness had helped it avoid some of the excesses of the eighties. But Rubenstein wanted to take Carlyle a step further than Goldman Sachs. His idea was to create a great reputation like Goldman's, a brand, but then to do something Goldman Sachs had never done, to market its brand and put its label on other funds.
It could create real estate, venture-capital, and high-yield funds, then do the same in Europe and Asia. This had been done with mutual funds, but never in the world of private equity. Carlyle would be the first. In the end, it assembled an astoundingly diverse international empire consisting of seventy thousand employees at 165 companies worth $16 billion. It created buyout, venture, and real estate funds in Asia, Europe, and North America. It had investments in aerospace and defense, energy and power, telecommunications and media, financial services and technology. Carlyle owned hotels, soft drink companies, trucking, health care, and real estate. There were holdings in Air Cargo, Inc., the Chicago Marriott hotel, Dr Pepper beverages, United Defense, Vought Aircraft, and much, much more. In defense and aerospace alone, it completed twenty-seven transactions worth $5.8 billion. [9]
Carlyle's first step was to hire former government officials who could help the firm make its reputation in sectors that were tied to the federal government. A company brochure put it best: "We invest in niche opportunities created in industries heavily affected by changes in governmental policies." [10] Its investment strategy was 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." [11] Later, once the company made its name, it would move into automotive, health care, transportation, technology, and other industries.
One of Carlyle's first big hires, at a time when it was still a tiny firm with about ten people, was Fred Malek. [12] A classic Washington insider, Malek had met the elder George Bush when Bush was a congressman in 1970. They became close when Bush ran the Republican Party during the Watergate scandal, [13] Malek worked as an aide to President Nixon at a time when the paranoid president suspected a Jewish cabal was working against him in the Labor Department. At Nixon's request, he had counted up the number of Jews employed in the Bureau of Labor Statistics. Malek had worked on George H. W. Bush's presidential campaign in 1988 but was forced to resign when the Jew-counting scandal finally became public. Malek then became part owner of the Texas Rangers baseball team with, among others, George W. Bush, who had just sold his interest in Harken Energy.
Malek's relationship with the elder Bush had lasted more than twenty years, and Bush stood by Malek even through the Jew- counting scandal, speaking to him several times a week. Through Malek, Carlyle began to bring in people who had real political connections.
The strategy of bringing in politically connected businessmen didn't always work. In 1989, Carlyle acquired Caterair, an airline catering company. [14] "[Malek] came to me and said, 'Look, there is a guy who would like to be on the board,'" Rubenstein told a group of Los Angeles investors. "'He's kind of down on his luck a bit. ... He'll be a good board member and be a loyal vote for the management.'" [15]
Rubenstein was not particularly impressed by Malek's friend, but as a favor, he agreed to put him on the board anyway. The new board member came to meetings for about three years and told a few corny jokes, but showed no interest whatsoever in the company. Finally, Rubenstein confronted him. "I'm not sure this is really for you," he said. "Maybe you should do something else. ... You don't know that much about the company."
"I'm getting out of this business anyway," the board member replied. "And I don't really like it that much. So I'm probably going to resign from the board." Rubenstein thanked him and didn't expect to see him again. His name was George W. Bush. [16] [iii]
Carlyle had better luck when another Republican colleague of Malek's came on board, former secretary of defense Frank Carlucci, who had served during the Reagan administration. Carlucci had one of the most wildly mixed reputations in all of Washington. As the Times of London put it, he was regarded by some Beltway insiders ''as honest, loyal, and extraordinarily efficient ... and by others to be a cunning, devious former CIA operative who was involved in lots of Third World skullduggery." [17] He told the reporter that he had been accused of plotting the 1961 assassination of Patrice Lumumba, who won independence for the Congo; the overthrow of Chilean president Salvador Allende; coups in Brazil and Zanzibar; and numerous other covert actions. Carlucci has denied all the accusations and none have been proven.
As detailed by reporters for the Wall Street Journal and the New York Times, Frank Carlucci, the director of Carlyle, as well as other former Bush administration officials, such as former Secretary of State James Baker who is also on the Carlyle payroll, have "made repeated pilgrimages to the bin Laden family's headquarters in Jeddah, Saudi Arabia. ... As commercial jets slammed into the World Trade Center, Frank Carlucci, James Baker, and others associated with Bush, were celebrating at the Ritz Carlton hotel in Washington, DC with members of the Bin Laden family (11). ... The Bush and bin Laden family, the Saudi royal family, Prince Bandar, as well as Frank Carlucci, James Baker, et al., as part of the Carlyle Group, would earn hundreds of millions of dollars because of the 9/11 attack.
-- America Betrayed, by R. Joseph, Ph.D.
James Baker visited the bin Ladens in 1998 and 1999 with [then] Carlyle CEO Frank Carlucci. ... Armitage and Carlucci are both board members of the influential Washington think-tank, the Middle East Policy Council. [This is the same Middle East Policy Council that receives funding from the bin Laden family.]
-- Crossing the Rubicon, by Michael C. Ruppert
Mr. Baker visited the bin Laden family in both 1998 and 1999, according to people close to the family. In the second trip, he traveled on a family plane. Mr. Baker declined comment, as did Mr. Carlucci, a past chairman of Nortel Networks Corp., which has partnered with Saudi Binladin Group on telecommunications ventures.
-- Aftermath of Terror -- Bin Laden Family Could Profit From a Jump in Defense Spending Due to Ties to U.S. Bank, by Daniel Golden, James Bandler and Marcus Walker
Associated with Meridian's Robert Booth Nichols in a Middle Eastern operation called FIDCO, a company that ran arms into and heroin out of Lebanon's Beqaa (Bekaa) Valley, was Harold Okimoto, a high-ranking member of the Yakuza. Okimoto had longed worked under Frank Carlucci (who served as Secretary of Defense and Deputy Director of the CIA before becoming Chairman of The Carlyle Group). Okimoto owned food concessions in casinos around the world—Las Vegas, Reno, Macao, and the Middle East. (Free drinks and anthrax while you play blackjack, anyone?)
-- When Osama Bin Laden Was Tim Osman, by J. Orlin Grabbe
Still on the Iran-contra list was Gen. Colin Powell, whom Bush appointed as Chairman of the Joint Chiefs of Staff. After Vice Admiral John Poindexter and Oliver North had departed from the Old Executive Office Building in November, 1986, Reagan had appointed Frank Carlucci to lead the NSC. Carlucci had brought along Gen. Powell. With Colin Powell as his deputy, Carlucci cleaned up the stables of Augeias of the OEOB-NSC complex in such a way as to minimize damage to Bush. Powell was otherwise a protege of the very Anglophile Caspar Weinberger, and of Carlucci, a man with strong links to Operation Democracy and to the Sears, Roebuck interests.
-- George Bush: The Unauthorized Biography, by Webster G. Tarpley and Anton Chaitkin
NED Board of Directors: Frank Carlucci, Chairman Emeritus, The Carlyle Group
-- NED Officers and Directors, by ned.org
As will be shown later, the National Endowment for Democracy is not only corporatist, but its board of directors is intended to function as a kind of informal Grand Council of Fascism in the totalitarian one-party state that Project Democracy seeks to create in the United States.
-- Project Democracy's Program, The Fascist Corporate State, by Webster Griffin Tarpley
Carlucci is affiliated with the Project for the New American Century, or PNAC, the neo-conservative thinktank.
-- Frank Carlucci, by NationMaster
The Process of Transformation is Likely to Be a Long One, Absent Some Catastrophic and Catalyzing Event Like a New Pearl Harbor
-- Rebuilding America's Defenses, by The Project for the New American Century
With the outbreak of war, Roosevelt appointed Batt vice-chairman of the War Production Board, whose chairman was Sears, Roebuck's Donald Nelson.
-- Trading With the Enemy, by Charles Higham
On June 10, 1954, Bush received a letter from Connecticut resident H. Smith Richardson, owner of Vick Chemical Company (cough drops, Vapo-Rub):
" ... At some time before Fall, Senator, I want to get your advice and counsel on a [new] subject--namely what should be done with the income from a foundation which my brother and I set up, and which will begin its operation in 1956....'' [fn14 ]
This letter presages the establishment of the H. Smith Richardson Foundation, a Bush family-dictated private slush fund which was to be utilized by the Central Intelligence Agency, and by Vice President Bush, for the conduct of his Iran-Contra adventures.
The Bush family knew Richardson and his wife through their mutual friendship with Sears Roebuck's chairman, Gen. Robert E. Wood. General Wood had been president of the America First organization, which had lobbied against war with Hitler Germany. H. Smith Richardson had contributed the start-up money for America First and had spoken out against the U.S. "joining the Communists'' by fighting Hitler. Richardson's wife was a proud relative of Nancy Langehorne from Virginia, who married Lord Astor and backed the Nazis from their Cliveden Estate.
-- George Bush: The Unauthorized Biography, by Webster Tarpley & Anton Chaitkin
At Charles Lindbergh’s suggestion, Douglas Stuart, Jr. asked General Robert E. Wood (Chairman of the Board of Sears, Roebuck & Co.) to lead America First.
-- Outline/Notes of "Sabotage! The Secret War Against America," by Michael Sayers & Albert E. Kahn by Maebrussel.com
8)(tie) Sears Bankruptcy Recovery Management Services
Type of Crime: Fraud
Criminal Fine: $60 million
13 Corporate Crime Reporter 7(1), February 15, 1999
A unit of Sears, Roebuck and Company pled guilty to bankruptcy fraud and agreed to pay a $60 million fine.
-- Top 100 Corporate Criminals of the Decade, by Russell Mokhiber
Like a molecule at full boil, the Captain moved about at high speeds in all directions. He traveled around the world in his own plane (he was a registered pilot and master of sea vessels), buying up LSD and stashing it, swapping different drugs, and building an underground supply. "I scattered it as I went along," he recalled. With his leather pouch full of "wampum" he rode the circuit, and those on the receiving end were always grateful. "We waited for him like the little old lady on the prairie waiting for a copy of the Sears Roebuck catalogue," said Dr. Oscar Janiger, a Los Angeles psychiatrist.
-- Acid Dreams, by Martin A. Lee
But to the pioneer Father Coughlin, Bishop Paul Peter Prang was as the Ford V-8 to the Model A. Prang was more sentimental than Coughlin; he shouted more; he agonized more; he reviled more enemies by name, and rather scandalously; he told more funny stories, and ever so many more tragic stories about the repentant deathbeds of bankers, atheists, and Communists. His voice was more nasally native, and he was pure Middle West, with a New England Protestant Scotch–English ancestry, where Coughlin was always a little suspect, in the Sears–Roebuck regions, as a Roman Catholic with an agreeable Irish accent.
-- It Can't Happen Here, by Sinclair Lewis
Wackenhut is the largest single company supplying security to U.S. embassies overseas; several of the 13 embassies it guards have been in important hotbeds of espionage, such as Chile, Greece and El Salvador. It also guards nearly all the most strategic government facilities in the U.S., including the Alaskan oil pipeline, the Hanford nuclear-waste facility, the Savannah River plutonium plant and the Strategic Petroleum Reserve. Wackenhut maintains an especially close relationship with the federal government in other ways as well. While early boards of directors included such prominent personalities of the political right as Captain Eddie Rickenbacker; General Mark Clark and Ralph E. Davis, a John Birch Society leader, current and recent members of the board have included much of the country's recent national-security directorate: former FBI director Clarence Kelley; former Defense secretary and former CIA deputy director Frank Carlucci: former Defense Intelligence Agent director General Joseph Carroll; former U.S. Secret Service director James J. Rowley; former Marine commandant P. X. Kelley; and acting chairman of President Bush's foreign-intelligence advisory board and former CIA deputy director Admiral Bobby Ray Inman. Before his appointment as Reagan's CIA director, the late William Casey was Wackenhut's outside legal counsel. The company has 30,000 armed employees on its payroll.
-- Inside the Shadow CIA, by John Connolly
The other person with whom Rogers claims to have discussed Kamal Adham was Sandra Charles, a former staffer on the National Security Council who left the White House at approximately the same time Rogers did in order to work for the International Planning and Analysis Center, a consulting firm headed by Frank Carlucci, the former Deputy Director of the CIA and Secretary of Defense. Like Bamieh, Charles had a background in the Middle East. (16)
-- The BCCI Affair, A Report to the Committee on Foreign Relations
The Carlyle Group, a private massive equity firm, the 12th largest defense business with an obscenely high profit margin, is a business "arrangement" between the Bush and Bin Laden families, wealthy Saudis, former British Prime Minister John Major, James Baker III, Afsaneh Masheyekhi, Frank Carlucci, Colin Powell, other former US Government administrators, and Madeleine Albright’s daughter. The Carlyle Group is the ‘gatekeeper’ to the Saudi investment community. It owns 70 percent of Lockheed Martin Marietta, the largest military contractor in the US, and because Carlyle is privately owned, has no scrutiny or accountability whatsoever. A journalist who calls himself ‘a skunk at the garden party’ described investigating the Carlyle Group, he said ‘it’s like shadow boxing with a ghost’. The Group hires as lobbyists the best known politicians from around the world, in order to influence the politics of war, and privately profit from their previous public policies. The conflict of interest is obvious: President George W. Bush is creating wars as his father, former President George Bush, is globally peddling weapons and "protection". Lockheed Martin Marietta now owns Sandia Laboratories, a private contractor that makes the trigger for nuclear weapons, with a Sandia laboratory facility across the street from Los Alamos and Livermore National Laboratories, where the nuclear bombs are made.
-- Depleted Uranium: The Trojan Horse of Nuclear War, by Leuren Moret
Frank C. Carlucci: Then: former secretary of defense, national security advisor; Now: chairman, Carlyle Group; ex-chairman, BDM
-- Slick Deals: Bush Advisers Cashed In on Saudi Gravy Train, by Maggie Mulvihill, Jack Meyers and Jonathan Wells
A collegiate wrestler at Princeton, class of 1952, with his slight frame and competitive spirit, Carlucci was, in the words of his father, "a tough little monkey." On the Princeton wrestling team, he met Donald Rumsfeld, with whom he forged a longtime friendship. Another classmate was none other than James Baker. [18] Both Carlucci and Rumsfeld went on to become secretaries of defense, Carlucci after having been brought in by Ronald Reagan as assistant to the president for national security affairs to clean up the Iran-contra scandal.
By the time Carlucci joined Carlyle in 1989, the Cold War was drawing to a close and the entire defense industry was contracting rapidly, thereby earning the disfavor of Wall Street. Dozens of large firms were for sale, their stock prices weak. Even Carlyle's critics acknowledge that Carlucci's decision to move into the defense sector at this time was a brilliant piece of contrarian strategy. Still, Carlyle was not the only firm bidding for defense companies, and if a buyout firm really wanted to make money, it had to avoid getting caught up in Wall Street feeding frenzies with lots of bidders jacking up the price. "Get into auctions -- that's the way to lose a lot of money," Rubenstein explained. [19]
Fortunately for Carlyle, Carlucci sat on the boards of no fewer than thirty-two companies and organizations [20] and thus enjoyed the inside track over an ordinary executive to reach a CEO interested in selling parts of his company. "Frank gave us the credibility to avoid full-scale auctions," Rubenstein says. [21] Thanks to the influential friends of Carlucci, Baker, and Darman, more than 60 percent of Carlyle's transactions through 1998 were handled on a proprietary basis rather than through auctions. [22] Whether it was as a board member, a friend, or a former customer, Carlucci had had a close relationship with many of the companies in question. As Frank Gaffney, a former Defense Department official, put it, "The one thing that people like Frank Carlucci know how to do is to work the system." [23]
And so, over the next decade, with Carlucci leading the way, one by one Carlyle began wolfing down bargains in the defense industry. In 1990, Carlyle bought BDM, a McLean, Virginia, military consulting firm that was run by a close friend of Carlucci's named Earle Williams, for $115 million in cash and $15 million in notes and other securities. [24] In 1992, while still under Carlyle's ownership, BDM bought the Vinnell Corporation, a professional and technical services company that, among other things, trained the seventy-five-thousand-man Saudi Arabian National Guard to protect the royal family and its oil installations. [iv]
In August 1992, Carlyle bought Vought Aircraft, which makes parts for the B-2 bomber and the C-17 transport plane, for $215 million. Two months later, Carlyle bought the electronics division of General Dynamics, GDE. Less than a year after that, Carlyle purchased the military electronics division of Phillips, Magnavox, for $400 million. In 1997, it bought United Defense, the enormous manufacturer of combat vehicles, artillery, naval guns, missile launchers, and munitions, for $850 million, and in 2000, Northrop Grumman's jet parts unit. [25]
Carlyle had come from nowhere to become one of the largest defense contractors in the world. By 1993, each of its partners was making $2 million to $3 million a year. [26] [v] And along the way, David Rubenstein and two other founding partners, Dan D' Aneillo and William Conway, were becoming enormously wealthy.
***
But that was just the beginning. Now that the Reagan-Bush era had come to an end, David Rubenstein had his eyes on another highly prized acquisition: James A. Baker III. Carlucci had brought great stature to Carlyle, but Baker was in another league altogether. Whether it was heads of state or CEOs, there wasn't a person in the world who would refuse a call from Baker. "I admired Jim Baker," says Rubenstein. "I thought since World War II, he was one of the two most successful people in a nonelective position -- the other being Henry Kissinger. He had held three jobs and he had done all of them spectacularly well. I knew he could give us credibility overseas, so we approached him." [27]
As a former White House chief of staff, secretary of the treasury and secretary of state, statesman, and confidant of George H. W. Bush, Baker was assessing what he was going to do for his next act. If he signed on, Carlyle could go global. It could take what it had done in defense and replicate it in other sectors, on other continents.
And so, in early 1993, not long after Baker left office, Rubenstein met him at his home in the exclusive Foxhall section of Washington. Even though Carlyle had come a long way with Carlucci, it was still a small firm with only about twenty-five people. "I'd say Baker was skeptical," Rubenstein recalls. "His attitude was, 'Who are you guys? You're not exactly Goldman Sachs.'"
If Baker was reticent about joining Carlyle, it was not because he was averse to cashing in on the Gulf War. At roughly the same time, in April 1993, he accompanied former president Bush and two of his sons, Marvin and Neil, on a trip to Kuwait. According to an article by Seymour Hersh in the New Yorker, Baker stayed in Kuwait for meetings in which he represented Enron, the Houston oil company, which was bidding to rebuild a Kuwaiti power plant. [vi] Even though Enron's bid was characterized as "fatally flawed," the article said, it was taken seriously by the powers that be in Kuwait because of "pressure" from the ruling al-Sabah family to compensate Baker for his services during the Gulf War. [28]
The trip demonstrated the kind of cachet Baker had that an ordinary businessman didn't. To woo the former secretary of state, Rubenstein went first to Richard Darman, who had served as Baker's deputy when Baker was Reagan's chief of staff and at the Treasury Department when Baker was its secretary. After one of the most dazzling non-elective careers in the history of American politics, Baker became one of just seven partners at Carlyle. "I have run five presidential campaigns," he told the Financial Times. "I have run the Treasury. I have run the White House twice, and I have run the State Department. I don't want to manage." [29] As usual, Baker took full advantage of his new opportunity: not only did he join Carlyle, but his law firm, Baker Botts, also won Carlyle as a prized client. [30] Darman was so entranced with the possibilities that Carlyle offered that in the end he joined the firm as well.
Carlyle was not the only investment firm to bring in high-powered politicians, of course. In 1988, David Stockman, Ronald Reagan's budget director, had joined the Blackstone Group. Years later, Henry Kissinger joined the firm of Hicks, Muse, Tate & Furst, which itself was closely connected to George W. Bush. But Carlyle was developing the practice of access capitalism into an art form.
Getting James Baker on board had been an extraordinary coup, but in 1995, Rubenstein topped even that by persuading former president George H. W. Bush to join Carlyle as a senior adviser. Later, former prime minister John Major joined as well. For good measure, Carlyle added prominent Democrats such as former Speaker of the House Tom Foley and Arthur Levitt, former head of both the Securities and Exchange Commission and the American Stock Exchange. [31] [vii]
Rubenstein argues that the role played by these high-profile officials in Carlyle has been wildly exaggerated by the press. Carlyle, he points out, has 320 deal makers -- nearly three times as many as the next largest firm. And once they had joined the firm, as Rubenstein tells it, these high-profile statesmen didn't really do that much. "We would have lunches or dinners with prospective investors," he says. "We would talk to investors and Baker would talk about the world and that would be it. He didn't negotiate deals. He would meet with prospective investors and not ask for money."
Likewise, Rubenstein says Bush was not directly involved in fundraising. "Bush's speeches are about what it's like to be a former president, and what it's like to be the father of a president. He doesn't talk about Carlyle or solicit investors."
Of course, just showing up was all that was necessary. [viii] particularly when Bush and Baker went to visit the House of Saud in Saudi Arabia on behalf of Carlyle.
***
Rubenstein takes umbrage when asked about the firm's relationship with the Saudis, which he characterizes as virtually nonexistent. "The implication is that we have so much Saudi business," he says. "Actually, we have no investments in Saudi Arabia and never have." [32]
Maybe. But a look at the many defense companies Carlyle has bought and sold shows that the investment firm has had a long and lucrative history with the Saudis. The Carlyle Group was not just the most prominent outpost for Bush and his allies in the private sector, it was also where the House of Saud and the House of Bush really did business.
Carlyle's first major transaction with the Saudis took place in 1991 when Fred Malek steered Prince Al Waleed bin Talal, a flamboyant thirty-five-year-old Saudi multibillionaire, [33] [ix] to the firm for a deal that would enable him to become the largest individual shareholder in Citicorp, which had seen a sharp fall in its stock price. At the time, Carlyle's partners said they were selected by Al Waleed because they knew the right people in the right places. Suddenly, Carlyle, a nonentity compared to the huge Wall Street firms, had a name. "Little-Known Carlyle Scores Big," read the headline in the New York Times. [34]
Al Waleed's investment would prove enormously profitable. By 1998, his $590 million in stock was worth as much as $7 billion. [35] Soon, the amity between the House of Saud and Carlyle became a two-way street. In bringing together Baker, Darman, Carlucci, and later, former president Bush, Rubenstein had reassembled the team that had helped set up the AWACS deal with Bechtel and Saudi Arabia in the early days of the Reagan-Bush era. A decade earlier they had turned on the spigot for tens of billions of dollars of arms sales to the Saudis.
Carlyle's companies still had to compete with rivals for Saudi defense contracts, but now they had extraordinary advantages. In addition to its familiarity with the corridors of power, Carlyle's trump card was that it could offer members of the royal family or other wealthy Saudis equity in the Carlyle funds that owned defense companies. That way, the Saudis could share in the profits instead of seeing the money leave the kingdom to go to the Bechtels of the world or to rival defense companies. "They knew that the Saudis were tired of relying on foreigners and having all their money leave the country," says an American oil executive with ties to the Saudi royal family. "That's where Carlyle made its claim to fame." [36] [x]
As world leaders who had defended the Saudis during the Gulf War, Bush, Baker, and Major were soon becoming star rainmakers for Carlyle, and the firm's practices allowed them to do so without sullying their hands by asking for money directly. On several occasions, Bush, Baker, and Major flew to Saudi Arabia on behalf of Carlyle to meet with and speak before members of the royal family and wealthy merchants such as the bin Ladens and the bin Mahfouzes. [37] "Carlyle wanted to open up doors," one observer told the Financial Times, "and they bring in Bush and Major, who saved the Saudis' ass in the Gulf War. If you got these guys coming in ... those companies are going to have it pretty good." [38]
As elsewhere, it was standard procedure for former president Bush to give speeches before potential investors. [39] After Bush's speeches, in which he never mentioned investing in Carlyle, CEO David Rubenstein and his fundraising team went in for the money. The Saudis could not have been more receptive.
According to a source close to the Saudi government, the royal family viewed investing in the Carlyle Group as a way to show their deep gratitude to President Bush for defending the Saudis in the Gulf War. "George Bush or James Baker would meet with all the big guys in the royal family," the source says. "Indirectly, the message was, 'I'd appreciate it if you put some money in the Carlyle Group.'" From the Saudi point of view, the source adds, "There is nothing wrong with this. You are basically marketing the relationship you have developed." [40]
And so Carlyle became the vehicle through which the highest officials of the Reagan-Bush era reaped their rewards. Prince Bandar himself, the Washington Post reported, was among those who invested. [41] In 1995, the bin Ladens joined in, investing $2 million in the Carlyle Partners II Fund, a relatively small sum that was widely reported to be part of a larger package. And according to Cherif Sedky, Abdulrahman and Sultan bin Mahfouz, two sons of Khalid bin Mahfouz's, became investors that year as well by making an investment "in the neighborhood of $30 million." [42] [xi] Carlyle put a first cousin of the bin Mahfouzes, a Saudi investment manager named Sami Ba'arma who oversaw their finances, on one of its boards. [43]
Now that key Saudis, who had the blessing of the royal family, shared in the profits, it was not difficult for Carlyle's defense companies to win contracts in Saudi Arabia. In the wake of the 1991 Gulf War, while under Carlyle ownership, defense contractor BDM won contracts for technical support services for the Royal Saudi Air Force [44] and computer systems in Kuwait. [45] In 1993, BDM opened an office in Riyadh and expanded its presence to support its growing interests in the kingdom. [46] In 1994, it won lucrative new contracts to provide technical and logistics support to the Saudi Air Force. [47]
In 1995, after a visit to the kingdom by Carlucci, Vinnell won a $163-million contract to modernize the Saudi Arabian National Guard. [48] According to Associated Press accounts, under a new contract with the Saudis, Vinnell, which was serving as part of the personal bodyguard unit for Crown Prince Abdullah bin Abdul Aziz, the designated heir to King Fahd, agreed to "share the proceeds, taking on a brother-in-law of the crown prince as a joint-venture partner. Saudi Arabia's princes often make government contracts a family affair." [49] In July 1995, BDM announced its earnings per share had increased 46 percent, in large measure due to the company's expansion in Saudi Arabia. [50] In all, BDM alone had more than $5 billion in contracts with the Saudis over two decades. [51]
In 1994, the Saudis spent $6 billion on fifty U.S.-made commercial airliners, the tail sections of which were made by Carlyle's Vought Aircraft. [52] United Defense, which Carlyle had bought in 1997, quietly operated joint ventures in Saudi Arabia. [53] Among many other items, United Defense manufactured the Bradley Fighting Vehicle, which forms the core of American mechanized forces, two thousand of which were used in the 1991 Gulf War. [xii] Through a joint venture with the Saudi government, United Defense provided training and maintenance for the Bradleys that were purchased by the Royal Saudi Land Forces after the Gulf War. [54]
As a private equity firm, Carlyle's goal was not long-term profits for the companies it acquired. Rather, its strategy was to buy companies cheaply, rebuild them to the highest levels of profitability possible, and sell them within three to five years -- at huge margins. Thanks in large part to the Saudi contracts, its defense portfolio performed handsomely. When they were sold off, the defense deals Carlucci had brought in to the firm reaped some $2 billion in profits. [55] This for a company that, according to Rubenstein, had no investments in Saudi Arabia.
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[i] The term access capitalist was first used in a 1993 New Republic piece by Michael Lewis that was one of the first serious critiques of Carlyle.
[ii] Baker became a full partner in Carlyle, but former president George H. W. Bush did not. He was paid by the appearance -- what was reported to be $80,000 to $100,000 per speech. He was allowed to reinvest his earnings in Carlyle funds, though his investments did not end up in companies that do business with the U.S. government.
[iii] At the time, Caterair was carrying an enormous amount of debt financing and trying to cope with unexpected changes in the airline industry that had already led to more than $263 million in operating losses. As a result of its poor performance, the company became known as Craterair, and when Bush ran for governor of Texas in 1994, he dropped his board membership from his official campaign resume.
[iv] Readers may recall that Vinnell was called in to help put down the uprising known as the Mecca Affair in 1979.
[v] According to Chris Ullman, a spokesman for Carlyle, the firm's most recent evaluation, in 2001, put Carlyle's worth at approximately $3.2 billion. Ullman added that the firm's three founding partners, owned substantially more than 50 percent but less than 75 percent of that. Using the 2001 evaluation, that would mean that the average share for each of the three founding partners would be worth between $533 million and $800 million.
The remaining equity in Carlyle, if divided equally among the twenty other partners, would yield an average of $40 million to $80 million per partner. Ullman points out, however, that the shares are not divided equally among the partners, and he notes that Carlyle is highly illiquid.
[vi] Marvin Bush was representing a company selling electronic fences to Kuwait, and Neil was selling antipollution equipment to Kuwaiti oil contractors. All parties concerned insisted there was no conflict of interest. But another hero of the Gulf War, General Norman Schwarzkopf, shied away from business with Kuwait that could be characterized as war profiteering. "I told them no," he said. "... American men and women were willing to die in Kuwait. Why should I profit from their sacrifice?"
[vii] Carlyle's formula was so successful that several of its key figures left to start similar investment firms on their own. One of Carlyle's cofounders, Stephen Norris, left the firm to start Appian Group, with former secretary of state Lawrence Eagleburger as an adviser. Fred Malek went on to chair Thayer Capital Partners, and Alton Keel, the former NATO ambassador, left Carlyle to start Atlantic Partners.
[viii] Carlyle also had an advantage over its rivals when it came to pitching portfolio managers from state funds -- given that two governors were members of the Bush family. In March 1995, the University of Texas Board of Regents voted to invest $10 million in one of the Carlyle Group's funds, Carlyle Partners II, at a time when George W. Bush was the governor of Texas and had direct power over the board. In addition, the Florida State Board of Administration had placed a $200-million investment in Carlyle that had begun before Jeb Bush became governor of Florida, a relationship that continued during his administration.
[ix] Shortly after 9/11, Al Waleed offered to give $10 million to the World Trade Center victims' fund, but his gift was rejected by New York mayor Rudy Giuliani when Al Waleed suggested the United States reexamine its policy toward the Palestinians. Al Waleed had also been the subject of an earlier debacle. After taking his huge position with Citicorp, of which Diners Club was a subsidiary, he distributed Diners Club credit cards to his relatives, which is to say, the House of Saud. According to The House of Saud, by Said K. Aburish, a few months later Diners Club was faced with $30 million in charges it refused to honor. The reason was typical of the thinking of the House of Saud, asserted Aburish, in that "the recipients proceeded to use [the credit cards] without knowing that they had to pay for their purchases." As a result, the Diners Club ceased to operate in the kingdom of Saudi Arabia.
[x] The Carlyle Group also participated in what was called the Economic Offset Program, through which American defense companies selling arms to the Saudis gave back some of their revenues through contracts to Saudi businesses, many of which were connected to the House of Saud.
[xi] The Carlyle Group categorically denied that Prince Bandar or the bin Mahfouz family ever invested in Carlyle. When apprised of Carlyle's denial, Cherif Sedky stood by his original statement. "I assume that Carlyle has records of investments from somebody on the bin Mahfouz side, whether it is with Sami Ba'arma as a nominee or someone else," he said, in an email to the author.
[xii] United Defense also manufactured another weapons system named, astonishingly enough, the Crusader, as if they were oblivious to the implications of sending Crusaders into battle in the Islamic world. Given that United Defense had made billions of dollars selling tanks to the Saudis, it was not exactly a wise marketing ploy.
NOTES:
1. Interview with David Rubenstein.
2. Robert H. Williams, "Postscript," Washington Post, June 27, 1977, p. A 3.
3. Michael Lewis, "The Access Capitalists -- Influence-Peddling: The Next Generation; The Carlyle Group," New Republic, October 18, 1993, cover story.
4. Williams, "Postscript," p. A 3.
5. Greg Schneider, "Connections and Then Some; David Rubenstein Has Made Millions Pairing the Powerful with the Rich," Washington Post, March 16, 2003, p. F1.
6. Lewis, "The Access Capitalists."
7. Ibid.
8. Interview with David Rubenstein.
9. Carlyle website, http://www.thecarlylegroup.corn/eng/ind ... ry495.html.
10. Melanie Warner, "What Do George Bush, Arthur Levitt, Jim Baker, Dick Darman, and John Major All Have in Common?" Fortune, March 18, 2002, p. 104.
11. Tim Shorrock, "Crony Capitalism Goes Global," Nation, April 1, 2002.
12. Interview with David Rubenstein.
13. Christopher Connell, "Malek Juggles Jobs to Plan Economic Summit," Associated Press, Apri1 21, 1990.
14. Beth Ewen, "Malek Brings Cargo of Controversy to NWA," Minneapolis-St. Paul City Business, October 9, 1989, p. 1.
15. David Rubenstein, speech to the Los Angeles County Employees Retirement Association, http://www.pacifica.org/programs/dn/030703.html .
16. David Ignatius, "Bush's Fancy Financial Footwork," Washington Post, August 6, 2002, p. 15.
17. "Profile on Frank Carlucci: From the Knives of the Congo to Darkest Pentagon," Times (London), November 8, 1987.
18. Lewis, "The Access Capitalists."
19. Ibid.
20. Ibid.
21. Interview with David Rubenstein.
22. Erica Copulsky, "Gadzooks! -- The Super LBO Players Increasingly Are Those That Are Expanding Their Reach into New Product Lines or Geographic Regions," Investment Dealers Digest, August 17, 1998.
23. Lewis, "The Access Capitalists."
24. Ibid.; and Alison Leight Cowan, "Carlyle Getting Part of Ford Aerospace," New York Times, September 19, 1990, p. D5.
25. Katie Fairbank, "Carlyle Builds Defense Portfolio," Dallas Morning News, June 18, 2000; and PR Newswire Association, October 27, 1994.
26. Leslie Wayne, "Elder Bush in Big G.O.P. Cast Toiling for Top Equity Firm," New York Times, March 5, 2001, p. A 1.
27. Interview with David Rubenstein.
28. Hotline, August 20, 1993; and Louis Dubose, "O Brother, Where Art Thou?" Austin Chronicle, March 16, 2001.
29. Alan Friedman, "Big Names at Little Known Investment House," Financial Times, September 30, 1993, p. 27.
30. Baker Botts website, http://www.bakerbotts.com.
31. Michael Carroll, "Doing the Washington-Wall Street Shuffle," Institutional Investor, September 1996, pp. 48-66.
32. Interview with David Rubenstein.
33. Said K. Aburish, The Rise, Corruption and Coming Fall of the House of Saud, p. 82.
34. Kenneth Gilpin, "Little-Known Carlyle Scores Big," New York Times, March 26, 1991, p. D 1.
35. Nigel Dempster, "Desert Storm Costs Saudi Prince £76M," Daily Mail, August 6, 1998, p. 33.
36. Interview with Texas oil executive.
37. Interview with Chris Ullman, vice president, Carlyle Group; and Cherif Sedky, attorney for the bin Mahfouz family, via email.
38. http://www.globalarchive.ft.com/globala ... +and+Saudi.
39. Interviews with Chris Ullman and David Rubenstein.
40. Interview with oil analyst.
41. Robert G. Kaiser, "Enormous Wealth Spilled into American Coffers," Washington Post, February 11, 2002, p. A 17.
42. Interview by email with Cherif Sedky.
43. Ibid.
44. Laura Litvan and Jay Mallin, "Race Is On for Kuwait Projects," Washington Times, March 5, 1991, p. A 1.
45. PR Newswire, June 29, 1993.
46. "BDM Seeks to Buy 25pc of ISE," Moneyclips Ltd., April 10, 1995.
47. PR Newswire, October 27, 1994.
48. PR Newswire, May 3, 1995.
49. Charles J. Hanley, "Saudi Guard Gets Quiet Help," Associated Press, March 22, 1997.
50. PR Newswire, July 20, 1995.
51. Martin Walker and David Pallister, "Saudi Bomb Targets U.S. Military Role," Guardian, November 14, 1995, p. 13.
52. Richard Oppel, "Aerospace Deals Could Aid Area," Dallas Morning News, February 17, 1994, p. 1 D.
53. "Corporate Profile for United Defense," Business Wire, February 27, 1998.
54. Shorrock, "Crony Capitalism Goes Global."
55. Warner, "What Do George Bush, Arthur Levitt, Jim Baker, Dick Darman, and John Major All Have in Common?" p. 104.