The Big Guns: The Carlyle Group

Originally Published in July 2002

New Internationalist Magazine

With board members like these, who needs lobbyists? The Bush connection to US defence giant the Carlyle Group.

ON 12 March 2002, Frank Carlucci, the former US Secretary of Defense and chair of the Carlyle Group, presided over a closed-door conference of US and Taiwanese defence officials. At Carlucci’s invitation, Taiwan’s Defence Minister Tang Yao-Ming flew in from Taipei and met with Deputy US Defense Secretary Paul Wolfowitz, the Bush administration’s leading hawk and a man with close ties with conservative leaders in Asia.

The meeting turned out to be the highest-level defence contact between the United States and Taiwan since diplomatic relations were severed in 1979. It provided the Bush administration with an opening to pursue its policies of expanding arms sales to Taiwan outside the glare of the media. Wolfowitz promised to do ‘whatever it takes’ to strengthen Taiwan’s military capabilities against China – a policy of great interest to Carlyle and its largest defence subsidiary, United Defense Industries, which was one of 12 military contractors to sponsor the conference.

This incident illustrates the extraordinary reach of the Carlyle Group and the man at its helm. Carlucci came to Carlyle in 1987 after a long career in the top ranks of the US national security establishment, including stints as deputy director of the Central Intelligence Agency and National Security Advisor to former President Reagan. During the 1980s, he ran Sears World Trade, a company that became deeply involved in shady arms deals and commodity imports before going bankrupt.

Under Carlucci’s leadership, Carlyle has become one of the world’s largest private equity funds, with over $13 billion worth of investments in defence, manufacturing, telecommunications, healthcare and finance.

As the eleventh largest US defence contractor, Carlyle is involved in nearly every aspect of military production, including making the big scandal for guns used on US naval destroyers, the Bradley Fighting Vehicle used by US forces during the Gulf War and parts used in most commercial and military aircraft. United Defense has joint ventures in Saudi Arabia and Turkey, two of the United States’ closest military allies in the Middle East.

Unbeatable contacts Carlyle’s extraordinary investment strategy is what sets it apart. It focuses on industries, such as defence and telecommunications, where government spending, regulations and policies play critical roles in defining the market. But unlike its competitors in the military-industrial complex or investment banking, Carlyle doesn’t lobby Congress or the White House to fund pet projects or push for legislation that would help its interests. It doesn’t need to. Instead, it has hired a stable of former statesmen and senior officials, including former President George Bush, former Secretary of State James Baker III and former British Prime Minister John Major, to exploit their experience in government and diplomacy to open doors and gather intelligence on investment opportunities.

Through their unbeatable high-level connections, Carlyle has direct lines to government leaders in Asia, the Middle East and Europe. And, not least, to George W Bush who once served as an executive with Caterair, one of hundreds of companies Carlyle has bought and sold over the past 15 years. In an unprecedented twist on the Washington influence game, through Bush Senior’s ties to Carlyle and United Defense, President George W Bush’s family is making untold sums from the war he is directing against terrorism. This fact is underscored by Carlyle’s decision after the opening salvoes of the war to go public with two of its defence companies, including United Defense.

‘We’ve never in the history of the republic had a former US president working for arms manufacturers,’ says Charles Lewis, the executive director of the Center for Public Integrity, a Washington-based research group that investigates the influence of money and politics. ‘What is most offensive to me is that we have a former president of the United States with a substantial pension from US taxpayers, and we cannot find out what he is doing for the eleventh largest defence contractor.’

Since 1987 Carlyle has invested $6.4 billion in 233 transactions, with a rate of return of 36 per cent on its completed investments. It invests on behalf of 435 pension funds, banks and investment funds, 40 per cent of which are based overseas. During a recent (and rare) public briefing on its investment strategies, one of Carlyle’s senior managers disclosed that the Group has $7 billion in cash ready to invest. That’s not chump change: $7 billion is the minimum amount the world community should invest every year to fight AIDS and HIV, UN Secretary General Kofi Annan said last year.

The extraordinary connections with former high-level statesmen has given Carlyle a great deal of expertise on tap. Bush Senior, who was CIA director and US ambassador to China and the UN before becoming president, is the senior adviser on Asia and makes his money by giving speeches at Carlyle’s investment conferences makes those speeches or how much he earns). Baker, who also served as Treasury Secretary during the Reagan administration and defended George W during the disputed 2000 election with Al Gore, is Carlyle’s senior counsellor and a member of the firm’s Asia, Europe and Japan advisory boards. Since last spring, John Major has been chair of Carlyle Europe and heads meetings of its European advisory board.

Other recent hires include Arthur Levitt, the former chair of the Securities and Exchange Commission (SEC), which regulates the US stock market; William E Kennard, the former chair of the Federal Communications Commission, which has jurisdiction over the US telecom and wireless industries; and Afsaneh Beschloss, the former chief investment officer of the World Bank, who runs Carlyle’s new asset management group. Carlyle’s advisory boards are peppered with corporate executives from Boeing, BMW, Toshiba and other big transnationals, and influential characters like former Bundesbank President Karl Otto Pohl, former Thai Prime Minister Anand Panyarachun, former Philippines President Fidel Ramos and former US Ambassador to Japan and former Speaker of the House Thomas Foley.

The Saudi connection After Bush was inaugurated in January 2001, Carlyle’s Republican connections – and the role of the President’s father – became grist for several press exposes, including a detailed article in the New York Times that focused on Bush Senior and Baker’s close ties with the Saudi royal family.

But few took notice until shortly after September 11, when the Wall Street Journal revealed that the bin Laden family, which owns a major construction company in Saudi Arabia, had committed at least $2 million to one of Carlyle’s funds and entertained Bush Senior, Baker and Carlucci at their family compound in Jeddah during the 1990s. Carlyle, deeply embarrassed, quickly severed the investment ties. But a few months ago, The Washington Post revealed that the bin Laden money had been solicited by members of the Saudi royal family, who encouraged wealthy Saudi citizens to invest in Carlyle as a sign of respect for Senior and Baker, their hero from the Gulf War.

Judicial Watch, a conservative US legal group, seized on the bin Laden connection to launch a vitriolic attack, urging Bush Senior to resign from Carlyle. Charles Lewis of the Center for Public Integrity believes the bin Laden connection may be the tip of the iceberg of Carlyle’s political relationships. ‘I actually think this is a potentially more serious scandal for the Bush administration than Enron, because it’s more personal,’ he said.

Carlyle only tells the public what it wants. That makes information about Bush Senior’s meetings with heads of state and his other activities on Carlyle’s behalf almost impossible to obtain.

In April, Cynthia McKinney, an outspoken Democrat Representative from Georgia, became the first public figure to criticize the relationship between the Bush family and the Carlyle Group. In a radio interview, McKinney accused the Bush administration of ‘serving the interests’ of Carlyle and said that ‘persons close to this administration are poised to make huge profits off America’s new war’. For that, she was vilified by her fellow lawmakers and the White House, which said through a spokesperson that: ‘The American people know the facts, and they dismiss such ludicrous, baseless views. The fact that she questions the President’s legitimacy shows a partisan mindset beyond all reason.’

Apparently it is out of bounds in American politics to question the ethics of a former president who makes money from policies pursued by his son in the White House. But without more voices like McKinney’s, the public is likely to remain in the dark about the global reach of the Carlyle Group, which combines the public and private interest in a form rarely seen in Washington. ~

Investing in War • Center of Public Integrity #CarlyleGroup #iraq #afghanistan #911truth

Originally Published on November 18, 2004

Source: The Center for Public Integrity

A dozen companies in which Carlyle had a controlling interest netted more than $9.3 billion in contracts.

Overall, six private investment firms, including Carlyle, received nearly $14 billion in Pentagon deals between 1998 and 2003. (See related report, “The Sincerest Form of Flattery.”)

From its founding in 1987, the Carlyle Group has pioneered investing in the defense and national security markets, and through its takeover of companies with billions of dollars in defense contracts became one of the U.S. military’s top vendors, ranking among better known defense firms like Lockheed Martin, Boeing Co., Raytheon Co., Northrop Grumman and General Dynamics.

Unlike those firms, however, the Carlyle Group itself is not a manufacturer. It offers no services directly to the Pentagon, and has no defense contracts. Rather, it manages investments—some $18.4 billion from 600 individuals and entities in 55 countries, according to its Web site. The firm’s business is making money for these investors, the vast majority of whose identities are not disclosed to the Securities and Exchange Commission or other government bodies.

Though Carlyle itself has won no contracts, the companies it has owned or controlled have done billions of dollars worth of business with the Pentagon. The Carlyle unit that brought in the largest share—$5.8 billion—was United Defense Inc., which manufactures combat vehicles, artillery, naval guns, missile launchers and precision munitions. United Defense also owns the country’s largest non-nuclear ship repair, modernization, overhaul and conversion company, United States Marine Repair Inc. Its most famous product may well be the Bradley fighting vehicle. United Defense brought in more than 60 percent of Carlyle’s defense business.

Carlyle took United Defense public in 2001; by April 2004 it had sold all its shares in the company.

Lear Siegler Services, a leading contractor in aircraft logistics support, maintenance, pilot training and ground support, received contracts worth more than $1 billion. Carlyle sold the company in August 2002.

Southwest Marine Inc. also received contracts worth more than $1 billion since 1998, and Norfolk Shipbuilding & Drydock received contracts worth $827 million. In 1998, Carlyle merged these two companies into United States Marine Repair.

Vought Aircraft Industries, a large subcontractor doing work for military cargo planes, bombers, and fighters, received contracts worth $85 million. Vought is among the few defense contractors that the Carlyle Group has not sold.

Among other private equity firms, New York-based Veritas Capital Management firm that employs many former high-ranking military officials received Pentagon contracts to the tune of more than $2.2 billion. Veritas is the 41st ranked defense contractor.

Companies under the ownership of Vectura Holding Co., another New York-based group, got deals to the tune of $1 billion, while companies controlled by Berkshire Hathaway, led by billionaire investor Warren Buffett, won contracts worth $688 million. Companies owned by Green Equity Investors II LP ($275 million) and Gores Technology Group ($153 million) also received substantial defense money.

New market

Private equity firms did not have any significant presence in the defense industry until the end of the Cold War. Traditionally, the Defense Department depended on mega contractors such as Boeing Corp., Lockheed Martin and Raytheon for weapons and services. But since the 1990s, the military has increasingly outsourced to private contractors a variety of jobs and services, ranging from planning of operations to the supply of linguistic services. A U.S. government decision in the 1990s to encourage small-business participation in contracts also contributed to the expansion of the market for smaller, privately-owned companies.

The Carlyle Group acquired controlling interests in several underperforming defense contractors, installed its own management teams and revitalized the companies, in part by landing big Pentagon contracts. Then, they sold the contractors to other investors for a large profit.

“There have always been [private equities] that went in with management and bankrolled management,” said Stuart McCutchan, editor of Defense Mergers & Acquisitions. “What Carlyle has done differently is they have taken it to a new level both in terms of size and in terms of being committed to an entire sector.”

“Carlyle is the biggest single success in Washington of a venture capital firm,” Dr. Loren B. Thompson Jr., a national security expert at the libertarian Lexington Institute, said.

In 1997, for example, the group made a 650-percent profit when it sold BDM International Inc., a McLean, Va., defense contractor. And in December 2001, Carlyle sold off the majority of its holdings in United Defense Inc. Altogether, Carlyle earned $1 billion in profit from the United Defense investment.

A windfall of war

The group cashed out many of its investments when the stock of defense companies rose dramatically in the aftermath of September 11 and the buildups to the Afghanistan and Iraq wars.

“Defense properties are too expensive these days,” explained Carlyle spokesman Chris Ullman.

In 1997, Carlyle liked the price of United Defense, and beat out General Dynamics and Alliant Techsystems, which also coveted the underperforming artillery firm. General Dynamics bid more than Carlyle offered for the company, but potentially faced a lengthy, drawn out antitrust battle if it acquired United Defense. Carlyle ended up winning the bid.

Carlyle finally sold its stakes in United after taking it public in the aftermath of the September 11 attacks. The Washington Post called the hugely successful public offering “one of the most successful single venture investments of recent years.”

But United did not seem all that lucrative before September 11.

“They [Carlyle] were really kind of in a pickle with United Defense,” McCutchan said. “They wanted to cash out on the equity. There wasn’t much money to be made… When 9/11 happened and the defense budget took off, suddenly they had a winner on their hands.”

Even Carlyle, which typically does not disclose its financial and operational details, crowed over the sale.

“It was one of Carlyle’s best investments,” Carlyle’s Ullman told the Center. “We did make more than a billion dollars on that deal, and we are very pleased that we served our investors quite well.”

The reason Carlyle’s defense portfolio is lean at the moment is the high value of defense firms, thanks in part to the ongoing U.S. wars. “If there comes a time when defense properties are priced in a way that we think makes sense for private equity investors, then we will certainly consider investing more of our dollars in that sector,” Ullman told the Center.

Investment expertise

Carlyle has a diversified portfolio, focusing its investments in sectors that have heavy government regulation and contracting—defense, telecommunications and banking. Carlyle has matched its investments with the expertise of high ranking government officials, whom the firm has courted almost from its inception.

It was under the leadership of former Defense Secretary Frank Carlucci—first as a managing director, from 1989 to 1993, and as chairman from 1993 to 2003—that Carlyle grew from a small private equity to a global investment giant, and became a major player among defense contractors.

Other former government officials who have recent or current ties to the firm include former British Prime Minister John Major and former Philippines President Fidel Ramos; former Office of Management and Budget director Richard Darman; former Clinton chief of staff Thomas F. “Mack” McLarty; former Securities and Exchange Commission chairman Arthur Levitt and former Federal Communications Commission chairman William E. Kennard. Former Secretary of State James Baker works for the firm, as did his former boss, President George H.W. Bush, who was an adviser for the firm’s Asian investment funds until he left Carlyle in 2003.

Critics have long denounced Carlyle’s practice of recruiting former high-ranking government officials at the same time as it invests in companies regulated by their former agencies, dubbing it “access capitalism.” For example, Kennard, who served as Bill Clinton’s FCC chairman, is now managing director for Carlyle’s global telecommunications and media group, directing the firm’s business investments in companies he regulated.

“Carlyle would never have gotten to the level that it is at today had it not been for this premeditated commingling of business and politics,” said Dan Briody, author of The Iron Triangle: Inside the Secret World of the Carlyle Group, a book that takes a critical look at the rise of the firm.

One of Carlyle’s most controversial hirings was of former president Bush to serve as a senior adviser for its “Asia advisory board.”

“The fact that George H.W. Bush was working for them while his son was president, while his son, in fact, was dramatically increasing defense spending—that seems to me one of the most blatant conflicts of interests in history,” Briody said.

Bush—who joined Carlyle in 1998, before his son, George W. Bush, became president—ended his relationship with the firm in October 2003, Ullman told the Center. But that hasn’t stopped the former president from continuing to give speeches for Carlyle, which he did at a Shanghai event sponsored by the firm in April 2004.

Ullman refused to disclose the remuneration Bush received for his services. “That’s not information that we disclose,” he said. “That’s his personal business. You are certainly welcome to ask him.”

Bush’s office did not respond to the Center’s request for an interview. Written questions faxed to the former president’s Houston office, at an aide’s request, did not elicit any response.

Though none are placed as closely as the president’s father, Carlyle’s other Washington insiders have ties to current Bush administration officials. Current Defense Secretary Donald Rumsfeld and Carlucci went to college together, for example, and Secretary of State Colin Powell was Carlucci’s deputy on the National Security Council in the mid-1980s.

The continued presence of Baker and Carlucci riles critics such as Briody. “If you look at the relationship that Frank Carlucci still maintains with Don Rumsfeld and Colin Powell and the reach that he has to those folks—and he has in fact used that reach in the past and tried to influence decisions those folks were making, decisions that could directly or indirectly affect Carlyle’s fortune,” Briody said.

Carlyle dismisses the notion that Carlucci or any other former government or military leader on its payroll has any conflicts of interest. “Are you aware of any solicitations from [Carlucci] to Secretary Rumsfeld to ask for any particular benefits to United Defense or any of our other portfolio companies?” Ullman said. “All they [Carlyle critics] do is, they say: ‘Oh, Carlucci used to work in the government and he went to college with Donald Rumsfeld, and Carlyle has defense investments, and now Secretary Rumsfeld is secretary of defense. Therefore, there is a conflict of interest.’”

Despite Ullman’s assertions, media accounts have noted occasions when former government officials working for Carlyle have approached the Pentagon brass. For example, Fortune magazine reported in March 2002 that Carlucci had contacted at least two senior Pentagon officials, though Carlyle claimed these contacts did not constitute lobbying.

Ullman added that all former government officials working for Carlyle abide by “all of the conflict of interests rules related to lobbying former colleagues for a year.” He pointed out that the Pentagon had cancelled the Crusader artillery system, produced by United Defense, adding, “So if we are as powerful as everyone thinks, why did they cancel it?”

Rumsfeld announced in May 2002 the termination of the artillery system; until then, the Pentagon had paid United Defense some $2 billion to develop the Crusader.

Researcher Sheetal Doshi contributed to this report.