Full Text COPYRIGHT 2002
The Nation Company L.P.
(Hilites annotated for comment and emphasis by webmaster, e-Disc.net)
Crony
Capitalism Goes Global: Bush Sr. and Others Open Doors for the Carlyle
Group.
by, Tim Shorrock
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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