It is hard to imagine an address closer to the heart of American power. The
offices of the Carlyle Group are on Pennsylvania Avenue in Washington DC,
midway between the White House and the Capitol building, and within a stone's
throw of the headquarters of the FBI and numerous government departments.
The address reflects Carlyle's position at the very centre of the Washington
establishment, but amid the frenetic politicking that has occupied the higher
reaches of that world in recent weeks, few have paid it much attention.
Elsewhere, few have even heard of it.
This is exactly the way Carlyle likes it. For 14 years now, with almost no publicity,
the company has been signing up an impressive list of former politicians -
including the first President Bush and his secretary of state, James Baker; John
Major; one-time World Bank treasurer Afsaneh Masheyekhi and several
south-east Asian powerbrokers - and using their contacts and influence to
promote the group. Among the companies Carlyle owns are those which make
equipment, vehicles and munitions for the US military, and its celebrity employees
have long served an ingenious dual purpose, helping encourage investments
from the very wealthy while also smoothing the path for Carlyle's defence firms.
But since the start of the "war on terrorism", the firm - unofficially valued at
$3.5bn - has taken on an added significance. Carlyle has become the thread
which indirectly links American military policy in Afghanistan to the personal
financial fortunes of its celebrity employees, not least the current president's
father. And, until earlier this month, Carlyle provided another curious link to the
Afghan crisis: among the firm's multi-million-dollar investors were members of
the family of Osama bin Laden.
The closest the Carlyle Group has previously come to public attention was last
May, when a Seoul-based employee called Peter Chung was forced to resign
from his Ŗ100,000-a-year job after sending an email to friends - subsequently
forwarded to thousands of others - boasting of his plans to "fuck every hot
chick in Korea over the next two years". The more business-oriented activities
of Carlyle's staff have been conducted much more quietly: since it was founded
in 1987 by David Rubenstein, a policy assistant in Jimmy Carter's administration,
and two lawyer friends, the firm has been dispatching an array of former world
leaders on a series of strategic networking trips.
Last year, George Bush Sr and John Major travelled to Riyadh to talk with senior
Saudi businessmen. In September 2000, Carlyle hired speakers including Colin
Powell and AOL Time Warner chair Steve Case to address an extravagant party
at Washington's Monarch Hotel. Months later, Major joined James Baker for a
function at the Lanesborough Hotel in London, to explain the Florida election
controversy to the wealthy attendees.
We can assume that Carlyle pays well. Neither Major's office nor Carlyle will
confirm the details of his salary as European chairman - an appointment
announced shortly before he left the House of Commons after the election - but
we know, for the purposes of comparison, that he is paid Ŗ105,000 for 28 days'
work a year for an unrelated non-executive directorship. Bush gives speeches
for the company and is paid with stakes in the firm's investments, believed to be
worth at least $80,000 per appearance. The benefits have attracted political
stars from around the world: former Philippines president Fidel Ramos is an
adviser, as is former Thai premier Anand Panyarachun - as well as former
Bundesbank president Karl Otto Pohl, and Arthur Levitt, former chairman of the
SEC, the US stock market regulator.
Carlyle partners, who include Baker and the firm's chairman, Frank Carlucci -
Ronald Reagan's defence secretary and a former deputy director of the CIA -
own stakes that would be worth $180m each if each partner owned an equal
slice. As in many areas of its work, though, Carlyle is not obliged to reveal the
details, and chooses not to.
Among the defence firms which benefit from Carlyle's success is United
Defense, a Virginia-based contractor which makes vertical missile launch
systems currently on board US Navy ships in the Arabian sea, as well as a range
of other weapons delivery systems and combat vehicles. Carlyle's other holdings
span an improbable range, taking in the French newspaper Le Figaro and the
company which bottles Dr Pepper.
"They are big, and they are quiet," says David Mulholland, business editor of
Jane's Defence Weekly. "But they're not easy to get information out of, [but]
United Defense are going to do well [in the current conflict]." United also owns
Bofors, a Swedish munitions manufacturer.
Carlyle has said that it does not lobby the federal government, thus avoiding a
conflict of interest when, for example, Carlucci met Rumsfeld in February when
several important defence contracts were under consideration. But critics see
that as a matter of definition.
"It should be a deep cause for concern that a closely held company like Carlyle
can simultaneously have directors and advisers that are doing business and
making money and also advising the president of the United States," says Peter
Eisner, managing director of the Center for Public Integrity, a
non-profit-making Washington think-tank. "The problem comes when private
business and public policy blend together. What hat is former president Bush
wearing when he tells Crown Prince Abdullah not to worry about US policy in
the Middle East? What hat does he use when he deals with South Korea, and
causes policy changes there? Or when James Baker helps argue the presidential
election in the younger Bush's favour? It's a kitchen-cabinet situation, and the
informality involved is precisely a mark of Carlyle's success."
The world of private equity is an inherently secretive one. Firms such as Carlyle
make most of their money buying firms which are not publicly traded, overhauling
them and selling them at a profit, so the process by which likely targets are
evaluated is much more confidential than on the open market. "These firms
certainly don't go out of their way to get into the headlines," says Steven Bell,
chief economist at Deutsche Asset Management. "They'd rather make a splash in
Institutional Pensions Week. The aim is to realise very high returns for your
investors while exerting a high degree of control over the company. You don't
want to get into the headlines when you force the management to fire a
director."
The process has worked wonders at United, and this month the firm announced
plans to go public, giving Carlyle the chance to cash in its investment.
But what sets Carlyle apart is the way it has exploited its political contacts.
When Carlucci arrived there in 1989, he brought with him a phalanx of former
subordinates from the CIA and the Pentagon, and an awareness of the scale of
business a company like Carlyle could do in the corridors and steak-houses of
Washington. In a decade and a half, the firm has been able to realise a 34% rate
of return on its investments, and now claims to be the largest private equity firm
in the world. Success brought more investors, including the international
financier George Soros and, in 1995, the wealthy Saudi Binladin family, who
insist they long ago severed all links with their notorious relative. The first
president Bush is understood to have visited the Binladins in Saudi Arabia twice
on the firm's behalf.
The Carlyle Group does not employ anyone at its Washington headquarters to
deal with the press. Inquiries about the links with the Binladins (as most of the
family choose to spell their name) are instead referred to someone outside the
company, on condition he is referred to only as "a source familiar with the
relationship". This source says: "I can confirm the fact that any Binladin Group
investment in Carlyle has been terminated or is being terminated. It amounted to
a $2m investment in the Carlyle II Fund, which was anyway a very small portion
of a $1.3bn fund. In the scheme of the investments and in the scheme of the
business of either party it was very small. We have to get this into perspective.
But I think there was a sense that there were questions being raised and some
controversy, and for such a small amount of money it was something that we
wanted to put behind us. It was just a business decision."
But if the Binladins' connection to the Carlyle Group lasted no more than six
years, the current President Bush's own links to the firm go far deeper. In 1990,
he was appointed to the board of one of Carlyle's first purchases, an airline food
business called Caterair, which they eventually sold at a loss. He left the board in
1992, later to become Governor of Texas. Shortly thereafter, he was
responsible for appointing several members of the board which controlled the
investment of Texas teachers' pension funds. A few years later, the board
decided to invest $100m of public money in the Carlyle Group. The firm's magic
touch was already bringing results. Today, it is proving as fruitful as ever.
