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Merriam Webster's Dictionary defines nepotism as a noun, meaning favoritism based on kinship. It is a simple definition, inherently neutral, and easy to understand. After all, isn't it natural to favor your own family members over strangers? It seems harmless enough. But when applied to international politics, it could not be more inappropriate. Our world leaders have a responsibility to act on behalf of the people they represent. Many of them take an oath to that effect. So when a politician, particularly the president of the United States, demonstrates nepotism in his actions, it is cause for serious and immediate alarm.
George Herbert Walker Bush and his son George W. Bush have repeatedly and flagrantly crossed this border of impropriety since the younger Bush became president in 2001.
And the company creating this ongoing
breach of the public's trust is the Carlyle Group.
But along with those newfound advantages for Carlyle came the continued, and at times increased, scrutiny of its behavior; fevered charges of cronyism; and the occasional accusation that the company was not a private equity firm at all, but rather a shadow government pulling the strings in Washington. Some of these concerns are more legitimate than others, but there was another more immediate issue: Who were they going to hire now that all the Republicans were going back to work?
Carlyle had been cultivating an unseemly reputation as a Republican boys club, whose membership privileges included the thrill of deal making on a global scale and a hefty paycheck at the end of the month. Indeed, it was difficult to spot any Democrats on the employee roster aside from Rubenstein himself, and he was 20 years removed from service by this time.
But as always, Carlyle already had a plan. It was time once again to pick over the bones of an outgoing administration. And this time, they were looking to harvest a host of Democrats. In the spring of 2001, just a few months after Clinton had cleared out his desk, Carlyle snatched up both outgoing Federal Communications Commission (FCC) chairman William Kennard and outgoing Securities and Exchange Commission (SEC) chairman Arthur Levitt. The announcements of their hirings were less than a week apart.
Both men are loyal to traditional democratic doctrine. Levitt has long been known for his concern for the individual investor, fighting to defend the little guys from the scourge of corporate greed. In one master stroke, indeed in one week, the Carlyle Group went from being a dark and mysterious GOP lair to a bright and open bipartisan buyout firm with a heart. It was Rubenstein at his best, fully aware of public opinion, and ready to make whatever changes were needed. Incidentally, the company had also picked up two of the best minds in the telecommunications and securities businesses.
But like most of Carlyle's high-profile hires, it seems that Kennard and Levitt did not come without baggage. Kennard in particular had the apparent stink of a quid pro quo deal. Over the course of 2000, SBC Communications, the parent company of the Baby Bell Southwestern Bell, was pursuing two major agendas simultaneously. On one hand, SBC was eager to buy into the Saudi Telecommunications Company (STC), as the Saudi Arabian Kingdom took the state-owned and run telephone monopoly private.
In so doing, the company had contracted Carlyle to help them, because, as one European investor noted,
Two years earlier, Carlyle had hired Frank Yeary, former head of the media and telecommunications investment group at Salomon Smith Barney. With Salomon, Yeary had helped SBC grow from a thriving regional telephone company into the second largest telecommunications firm in the country by acquiring Ameritech and Pacific Telesis.
Then in 1998, he had helped Carlyle and a partner buy some cable properties in Virginia and Maryland from SBC for $250 million, then turn around and sell them six months later to Comcast for $735 million. He was a legend in telecom. And he was very close to the folks at SBC. Carlyle was in the perfect position to facilitate the deal in Saudi Arabia, which they did, extremely quietly, in August 2000.
The deal was so secretive, it was near miraculous that anybody got wind of it at all. But an Arabic daily called Asharq al-Awsat reported that the Saudi government had chosen SBC Communications to buy between 20 percent and 40 percent in the Saudi Telecommunications Company, which had an estimated value of $12 billion at the time. The deal was termed a "strategic partnership." Any number of telecom companies would have wanted in on it, but with Carlyle on its side, SBC never had any real competition.
At the same time, SBC was chaffing under newly established restrictions on telecommunications companies at home in the United States. Under the Telecommunications Act of 1996, regional bell operation companies, or Baby Bells, had to make their local lines available to the national long distance companies before they would be able to enter the long distance market themselves. Baby Bells, by nature of the telecommunications structure in the United States, had been government sanctioned regional monopolies since Ma Bell was broken up. Each Baby Bell owned and operated all of the local telephone lines for a given geographic area.
Like Bell Atlantic in the Northeast, Pacific Bell in California, or Southwestern Bell in Texas. But the Telecommunications Act of 1996 was supposed to change all of that, opening up each region to competition. The tricky part was ensuring the Baby Bells would allow new competitors in to use their lines, thereby taking customers away. A bureaucratic nightmare of line request forms, fees, and fines for noncompliance emerged. Not surprisingly, new competitors had an impossible time securing lines from the Baby Bells, who protected their turf with arrogance and defiance of the new law. It was a mess. Baby Bells, like SBC, abused the spirit of the Telecommunications Act of 1996 repeatedly.
When competitive local carriers requested lines for a new customer, the Baby Bells would drag their feet, with little or no incentive to help a new competitor steal their customers. The fines for this anticompetitive behavior, levied by the FCC, were nominal and harmlessly factored in as a cost of doing business by the Baby Bells. Many of the would-be competitors in local markets dried up and died waiting for lines they knew they would never get from the likes of SBC.
SBC was among the biggest offenders, drawing millions in fines and testing the patience of regulators and potential competitors alike. That's why jaws dropped when SBC filed an application to begin delivering long-distance service in Texas at the end of 1999. Competitors that had been trying to get a fair shake in Texas, waiting in vain to gain access to SBCs local lines, couldn't believe it.
The law clearly stated that a Baby Bell must open its local lines up to competition before it would be allowed to enter the long distance markets. SBC had not done that yet. So the U.S. Department of Justice recommended in February of 2000 that the application be rejected on the basis that SBC had not sufficiently opened up its network to competitors. But the Department of Justice (DOJ) doesn't get the final say in the matter. The FCC, chaired by William Kennard, does. SBC voluntarily withdrew the application, and reapplied a few months later.
After being embarrassed by the original rejection, the company pointed to the recommendation of the Texas Public Utilities Commission (TPUC) to approve the application, which the DOJ had summarily dismissed. The TPUC, happens to be chock full of Bush appointees, and SBC was one of the largest single corporate contributors to Bush's presidential campaign.
To the shock and dismay of many, SBC's application was ultimately approved by William Kennard and the FCC in the summer of 2000, and SBC was free to deal long distance in Texas. And in January 2001, the FCC approved SBC's application to offer long distance in Oklahoma and Kansas as well, making it the first Baby Bell company to offer interstate service since the breakup of Ma Bell.
The approval was handed down on Kennard's last day as FCC chairman. Less then two months later, Kennard was working alongside Frank Yeary and the boys at Carlyle. It was all sounding awfully familiar. The hiring of William Kennard brought with it the same appearance of impropriety that the hiring of Frank Carlucci brought. It looked quite a bit like the hiring of Paul Silvester at Park Strategies after he left the office of the treasury of Connecticut, and that of Afsaneh Mashayekhi Beschloss after she left her post at the World Bank.
Here were men and women that made industry-altering decisions while in powerful positions and public office, then put themselves in a position to profit from those decisions months after they left their posts. Did Kennard act with foreknowledge of his employment with Carlyle? And what happened to his "cooling off" period? Kennard was on fire when he accepted a job at Carlyle.
Only William Kennard, and maybe a few folks at Carlyle, know the answers to these questions. Perhaps that's why they all declined to be interviewed for this book. Regardless, while the Kennard situation smells bad, there was, and still is, another problem that Carlyle has on its hands that has a much mightier stink. That ex-presidents cash in on their celebrity after their careers as public servants is understood.
Most erstwhile chiefs end up on the public speaking circuit, pulling down $100,000 a speech. Many set up charity organizations, dabble in the stock market, or play a lot of golf. But never has an ex-president had the opportunities that George H. W. Bush has, doing business with heavily regulated industries, subject to the whims of the country's commander-in-chief, who also happens to be his son.
And we may never see such an
extraordinary arrangement again.
The New York Times finally got in on the game, writing a revealing article in March 2001, detailing the relationships between the current administration and the Carlyle Group.
It was the first most people had ever heard of this company, and it scared the pants off of them. In the article, Charles Lewis, the executive director of the Center for Public Integrity is quoted as saying:
As a member of their Asian advisory board, Bush Sr. was visiting the Middle East, and in particular, Saudi Arabia, on behalf of the Carlyle Group. Photos taken of a meeting between Bush Sr. and King Fahd started popping up all over the Internet. A natural confusion arose over the nature of Bush's visits to foreign dignitaries. Were the trips a form of commercial diplomacy? Were they social visits? Was the former president representing U.S. interests? Or was he just there on behalf of a moneymaking behemoth by the name of the Carlyle Group?
The same questions arose in the United Kingdom over the actions of John Major, who accompanied Bush on the trips to Saudi Arabia. Of greater concern was that Major and Bush Sr. were meeting with less savory characters than the royal family. They had been to see the bin Laden family, the wealthy relatives of a known terrorist (by this time Osama bin Laden was unambiguously viewed as a terrorist threat to the United States, and estranged from his family). It wasn't clear what either of the former world leaders were up to.
And it was this confusion, on the part of both the public and foreign world leaders, that played to Carlyle's advantage. Carlyle repeatedly reaped the benefit of blurred boundaries, with foreign business owners and world leaders not knowing whether Bush Sr. represents American political interests or Carlyle's financial interests. That was, and still is, a very powerful tool for Carlyle.
But while everyone was waiting for a conflict of interest to arise in the elder Bush's business with Saudi Arabia—as indeed it would later—the real controversy was happening half a world away, in the tiny peninsula off the Eastern coast of Asia: Korea.
He also met with the chairman of South Korea's Financial Supervisory Commission, Lee Hun-jai, chairman of SK Telecom Choi Tae-won, and the president of a financially ailing Asian conglomerate called Halla. Again, it was classic Carlyle: a measured blend of business and politics that sufficiently blurred the boundaries between the two. Carlyle's spokespeople, when questioned by the press about the impropriety of the senior Bush working for a defense contractor while his son is president, often retort by explaining that all the senior Bush does for them is make speeches about world events.
They say his job is to pack the house, get the crowd excited, then step aside while Rubenstein pries open their wallets. But this trip to South Korea was much more than that. Bush Sr. wasn't just giving speeches to rooms full of investors; he was doing business, one on one, with CEOs and politicians. These were not motivational talks about global politics. This was business. And he was good at it. Carlyle was really starting to get busy in South Korea now. That same spring, the company hired Michael Kim, a Harvard-educated native Korean, to open its brand new Seoul offices. Kim is the son-in-law of aforementioned Park Tae-joon. Carlyle and nepotism seemed to go hand in hand.
Immediately following Bush's visit, Korean newspapers lauded an announced $1 billion investment in the country by Carlyle, including a buyout of a division of Mando Machinery, a South Korean industrial firm, owned by Halla, the same company Bush Sr. had visited weeks earlier. Bush had been busy, and apparently, successful on his quick two-day trip to South Korea. Carlyle was in business on the peninsula. Bush went on to tour Thailand, with former prime minister and Carlyle advisor Anan Panyarachun, spreading more of the good news that money from America was coming.
But back in Korea, Michael Kim was working to put together another massive deal. This time Carlyle was looking to buy one of the few healthy banks left in Korea, KorAm Bank. Korea, like the rest of Asia, had suffered terribly from the economic crisis that swept through the continent in the late 1990s. Many of the country's banks had faltered and collapsed. But KorAm was an exception. It had taken some hits, like all businesses in Korea, but had remained solvent. The Korean government had a vested interest in keeping the firm in Korean investors' hands. But Carlyle had other ideas.
Carlyle gained approval for the buyout by the KorAm board, thanks to its high-powered connections with Park Tae-joon, who became prime minister of South Korea in January 2000 and lobbied on Carlyle's behalf. But when Park resigned just four months after taking office, amid allegations of corruption, Carlyle had lost its regulatory advantage. It was going to be difficult to get the government to approve the deal without Park Tae-joon's involvement.
So the firm then struggled to get the deal, which was to be for a 40 percent stake in the bank, approved by Seoul's Financial Supervisory Commission, the chairman of which Bush had met with a year prior. Carlyle was slipping, losing their political edge because of the unexpected and unseemly departure of Park Taejoon from politics. They were losing the deal. But after some months in self-imposed exile, Park Tae-joon, still a popular figure in Korea despite the allegations of corruption against him, came through in the end, rising from the ashes and lobbying the key government officials to allow the deal to happen, according to press accounts of the deal.
By the fall of 2000, Carlyle had won, snagging 40.7 percent of the bank for $450 million. Between Bush Sr. and Park Taejoon, Carlyle had made all the right moves to get their business in Korea humming. After another purchase of a small telecommunications carrier called Mercury Telecommunications, Carlyle had invested close to a billion dollars into Korea's recovering economy. It was the best financial news Korea had seen in years, and it was largely Carlyle's doing.
But the mirth would soon come to an
abrupt halt.
And it was coming from a man that had virtually no experience in foreign affairs. The nation watched in disbelief. Not surprisingly, the backlash from Bush's brash actions was felt far and wide. North Korea accused the United States of planting a "time bomb" in the midst of their fragile negotiations with South Korea. The South Korean government received Bush's actions as a rebuff to their safety, knowing that North Korea would be more inclined to attack without Washington's involvement. Kim Dae^ung, South Korea's president, was forced to turn to the European Union for help in filling the sudden gap the United States had created in the peace process between North and South Korea.
He was also getting lambasted at home for not being on top of the situation in Washington. Bush had made the South Koreans look bad, and undermined their safety, all with one fell swoop. Analysts speculated that Bush was motivated by his desire to create a national missile defense system, part of his campaign platform. If North Korea had no missiles to defend against, the thinking went, Bush's need for a missile defense system would evaporate.
As absurd as it sounds, peace between North and South Korea, and between North Korea and the United States, did not further his broader agenda in the White House. Regardless of his rationale, he had created an international crisis on just his second month on the job. This also threatened Carlyle's extensive investments in South Korea, which would plummet in value as instability in the region increased. The threat of war always sends local economies into a tailspin, much like America's economy since September 11.
And Carlyle could kiss regulatory approval for future deals goodbye, with South Korean officials feeling slighted by the United States, and particularly George W. Bush. At first it seemed as if this was a rare case in which being associated with the Bushes was not going to work to the benefit of Carlyle. But that would not prove to be the case. Adding to the disarray George W.'s stance toward North Korea was causing, the unionists at KorAm bank were starting to rebel against their new American owners, accusing Carlyle of being nothing more than a speculative investor that had already broken its promise not to intervene with management.
Employee representatives at the company believed that Carlyle intended to restructure the company, probably threatening jobs. And the union was rallying against Carlyle. The situation was dire. Carlyle had just ploughed nearly $1 billion into South Korea, and the man they all thought would be so good for business, George W. Bush, was on the verge of screwing it all up. Something had to be done. On June 6, Bush reversed course. In a statement, the president announced plans to resume negotiations with North Korea, essentially picking up where the Clinton administration had left off.
Among the issues that the new administration would work on with North Korea was improving relations between North and South Korea. The sigh of relief could be heard around the world, and especially from Carlyle's offices on Pennsylvania Avenue and in downtown Seoul. Just like that, the situation was all better. But what could have created the sudden change of heart? On June 10, 2001, just a few days after the welcome announcement by President Bush, the New York Times reported that the senior Bush had forcefully argued for his son to reopen negotiations with North Korea shortly before President Bush did just that.
The article opened:
It was the first time that anyone had tangibly seen the influence of the father on the son. According to the article, Bush Sr. felt that his son was being unduly influenced by the Pentagon, and that he should adopt a more moderate stance toward the Korean peninsula. He also spelled out that the hard-line policy toward North Korea was undermining the government in South Korea, thereby hurting U.S. interests in North Asia.
White House spokesman Ari Fleischer confirmed the report in the Times, and told the press that the argument for reopening negotiations came originally from Donald Gregg, former ambassador to South Korea under the first Bush administration. Fleischer said that Gregg had sent a memo to the senior Bush, who then sent the memo to national security advisor Condoleeza Rice, who then passed along "the thoughts in the note" to the president.
It was a way of watering down the connection between George W. Bush and his father, even though it has been widely reported that the two speak regularly. Nobody in the White House wanted the press to get the impression that senior Bush was directly influencing the president. That's probably why Fleischer's accounting of the events made so little sense.
Why Bush Sr. would have to go through Rice to relay crucial information on foreign policy to his son, when he talks to him twice a week on the telephone, is anyone's guess. Bush Sr. went on to do even more damage control, recording reassuring remarks on U.S. policy to be distributed among participants in a crucial meeting between South Korean President Kim Dae-jung and North Korea's leader, Kim Jong-il, on Cheju Island. It seemed the former president was everywhere at once, acting as counsel to his son, ambassador to Korea, and businessman for Carlyle.
For a man that had supposedly retired
from politics, Bush Sr. was awfully busy.
Then another story hit the front pages.
Bush Sr. was at it again. This time the New York Times reported that
in July 2001, just months after he had advised his son on North
Korea, the elder Bush had placed a call to Crown Prince Abdullah of
Saudi Arabia on behalf of his son, to reassure Saudi Arabia's
leadership that his son's "heart is in the right place," when it
comes to Middle East policy. The call was necessitated by the
younger Bush, who had upset the Arabs with his one-sided approach to
the Israeli-Palestinian conflict. And Daddy was again there to bail
him out.
The news was stunning, and it undermined the credibility of George W. Bush on foreign policy. Who was making the decisions in the White House? Why didn't Bush Senior run for president instead? But more than that, the news of Bush Sr.'s continued involvement in foreign policy was undermining the credibility of both Bushes ability to keep politics and family business apart.
Like the situation on Korea, Carlyle's extensive business interests in Saudi Arabia and throughout the Middle East, were in grave danger if the younger Bush kept pissing off the royal family. So the Senior Bush needed to step in and preserve the relationship once again. It was testament to the sway ex-president Bush still held over foreign affairs. And it didn't look good.
The reports of Bush Sr.'s actions sent the Washington, DC-based public advocacy groups into a tizzy. Tom Fitton, general counsel of Judicial Watch, a conservative watchdog group in the Beltway, is beside himself to this day.
That Judicial Watch has called on Bush Sr. to resign from Carlyle is more telling than you might think. This is not your average, ultraliberal watchdog organization. Judicial Watch is a public interest group that was conceived during the Clinton administration as a way to monitor activities that diminish the public's trust in government. It is an extremely conservative group, designed originally to bring down a Democratic president that the group felt was corrupt.
Other watchdog groups had been howling at Carlyle's antics for years, but when Judicial Watch, which had a reputation as a Republican-friendly group, could no longer look the other way, Carlyle had to take notice.
Fitton points out that not only has the former president been making investments for Carlyle and weighing in on foreign policy that directly affects those investments, but he is also privy to CIA briefings whenever he sees fit, referred to internally at the CIA as "President's daddy's daily briefing," a right that all ex-presidents maintain.
And according to press reports, Bush Sr. still requests and receives CIA briefings often. Despite being 10 years removed from his presidency, Bush Sr. remains an extremely powerful and influential man. Imagine what a global enterprise, that does large amounts of business with arms contractors and foreign governments, could do with weekly CIA briefings. Or a company with the ability to influence foreign governments and global events. A company like that would have access information that would set it apart from any company to come before it. A company like that could be very successful.
A company like that might look a lot
like Carlyle.
The part of Carlyle's business that has naturally attracted controversy over the years is its defense business. It makes sense. War, after all, is inherently controversial. It usually involves heated passions, covert strategy, and death on a large scale. So it's not entirely surprising that ordinary American citizens felt outrage at Carlyle's commingling of ex-politicos, guns, and money.
The idealist in all of us wants to believe that war is an awful, but necessary, part of the human condition. We want to think that our nations enter reluctantly into battle, always as a last resort, after all other means of resolving conflict are exhausted. And we never want to believe that war, and the destruction and horror that accompany it, could ever be seen as a business. But it is true.
At least the people profiting from these wars aren't the same elected officials that have led us into battle in the past and still hold sway over current decision makers in the White House and the Pentagon, right?
Wrong.
They were just having trouble putting a name to it. Everyone was looking for the proverbial smoking gun. Little did they know that it was literally a smoking gun they would find. The saga began in the summer of 1997, when Carlyle was raising money like mad, hiring world leaders, and, in general, becoming the dominating global private equity firm it is today. Among the investments Carlyle had targeted for its Carlyle Partners II fund— the one chock full of defense, aerospace, and security companies— was a maker of armored vehicles named United Defense.
The owners of United Defense were FMC Corporation and Harsco Corporation— the same company that Carlyle had unsuccessfully and hostilely tried to acquire six years earlier. All Carlyle got for its $63 million back then was one lousy board seat with Harsco. But what a valuable board seat that had suddenly become. The news around the defense industry August 1997 was that General Dynamics had bid $1 billion for United Defense, far more than any other bidder. General Dynamics already made armored vehicles, so United Defense's expertise—they made the Bradley fighting vehicles used in the Gulf War—fit perfectly with that of General Dynamics.
The deal seemed like a no-brainer: highest bidder, synchronized interests, little overlap. There really was no competition. But at the last minute, Harsco and FMC decided instead to sell to the Carlyle Group, which had submitted a low-ball bid of $850 million, 15 percent less than General Dynamics had been offering. It turns out that rumors had begun to circulate around Washington, DC, that General Dynamics was going to run into antitrust issues. Eventually, the rumors grew so loud that General Dynamics was forced to back out of the bidding, and Carlyle was there to pick up the scraps.
It was another stunning victory for Carlyle. Despite paying a fire-sale price for United Defense, Carlyle was not without its challenges regarding the new acquisition. Since 1994, United Defense had been working on a massive gun: a mobile howitzer that can fire 10 rounds of 100 pound shells per minute, 25 miles in distance, cruise at 29 mph, and reload on the battlefield.
The "Crusader" was the most advanced artillery system the U.S. Army had ever conceived. It is the kind of weapon that makes the United Stated unbeatable in large scale, open warfare, lobbing multiple shells at varying trajectories so that they rain down at their desired target at the same time. It is a fearsome weapon. A killing machine. It was also United Defense's future cash cow. But times had changed considerably since Crusader was first conceived in the early 1990s. In fact, the very nature of war had changed and had left Crusader behind.
The gun had two very serious problems: It was too big, and it was designed to fight a type of battle that no longer presented itself to the U.S. armed forces. The gun is so out of date, in fact, that according to a congressionally appointed independent National Defense Panel in 1997, which reviewed all of the military's ongoing weapons projects, the Crusader was a Cold War inspired weapon, rapidly approaching obsolescence due to a military trend toward swift deployment and agile forces. It was a gun designed to fight large scale, open field battles, the kind the United States had not fought since World War II. Unfortunately, for Carlyle, the damning report came out just a few months after the company had acquired United Defense.
The problem was that at 60 tons each—plus a supply vehicle that weighed an additional 50 tons—the Crusader was impossible to deploy quickly enough to hot spots around the world. It could not be airlifted by any of the massive cargo planes employed by the Army. And shipping Crusader would take too long to reach the ephemeral battles to which the Army had recently grown accustomed. The United States had learned that lesson the hard way, when it took more than a month to ship its Apache helicopters to the action in Kosovo in 1999, a conflict that lasted only 78 days total.
The United States wasn't fighting long, drawn out land wars in Europe anymore, and Crusader's effectiveness for the new breed of fighting was being called into question. "For the foreseeable future, no one is going to stand out in the open and fight the American forces," says Andrew Krepinevich, a member of the 1997 National Defense Panel that panned the Crusader and executive director of the Center for Strategic and Budgetary Assessments.
The panel recommended the Crusader program be dramatically scaled back, and some, including Krepinevich, wanted it canceled outright. A cancellation of the Crusader program would have been catastrophic for United Defense. The company had just lost out on a crucial contract with General Dynamics to build tracked fighting vehicles for the army. It was a devastating loss, leaving Crusader as the saving grace for the company.
Losing the Crusader contract, originally valued at $20 billion, would jeopardize the future of the company and would be a mighty hit to Carlyle's premier fund, Carlyle Partners II. The momentum against the Crusader was building rapidly by the turn of the century, as more defense analysts recognized the importance of mobile armed forces that could be deployed instantly.
When General Shinseki took over as U.S. army chief of staff in June 1999, he preached the gospel of a faster, lighter army in which the Crusader played no role. Even George W. Bush, when running for office, questioned the utility of the Crusader. In a Campaign speech in 1999, Bush recognized the end of the Cold War as an opportunity to "skip a generation of technology."
It was all part of an effort to build an army "not by mass or size, but by mobility and swiftness," according to Bush. The future of the Army was at hand, and almost everyone was on board but United Defense. The Crusader had become the poster child of the old, lumbering Cold War army. Time magazine said of the Crusader, "the kind of war it was meant to fight is already obsolete." The Wall Street Journal called it a "dinosaur."
By all accounts, the Crusader was headed for the scrap heap. But Carlyle was just getting started. The effort the company put forth to save their precious gun would illustrate exactly how the Iron Triangle of defense, government, and business work together to the benefit of all three. Carlyle had been built to prevail in situations like these, when the large amounts of money were riding on the decisions of a few men in public office.
It was time to call in a few favors.
United Defense worked furiously through the winter to meet the goal. They redesigned the engine, stripped armor, and reduced ammunition. They worked through the Thanksgiving and Christmas holidays. By 2000, they had made their designated weight: 42 tons on the button. In the meantime, Carlyle and United Defense were waging a political battle for the Crusader.
Shortly before Carlyle bought the company, United Defense organized a political action committee (PAC) through which the company would funnel contributions to key lawmakers. In the cycle leading up to the 1998 elections, United Defense made campaign contributions of only $49,500. But by 2000, under Carlyle's leadership, the company's PAC had spread around more than $180,000 to more than 70 senate and house members. The bulk of the company's largesse went to politicians on the house and senate arms committees.
And often, a good deal of money found its way to the house and senate members whose districts were expected to participate in manufacturing the Crusader. It was also uncanny how United Defense planned to build manufacturing facilities for the Crusader in the backyards of key members of the arms committees, creating jobs and wealth that hadn't existed before. These are the kinds of things that get politicians reelected, and get businesses what they want.
Rick Santorum, a Republican senator from Pennsylvania, netted $10,000 from the United Defense PAC in 2000. York, Pennsylvania, is home to a United Defense manufacturing facility. Another manufacturing facility for Crusader was located in Minnesota, home of republican senator Rod Grams, who took another $10,000 from the United Defense PAC.
Republican representative J. C. Watts of
Oklahoma received $6,000 from the United Defense PAC. Watts's corner
of Oklahoma, which included Fort Sill, was targeted as a factory
site for assembly of Crusader. Watts was also a member of the House
Armed Services Committee. Carlyle was being thorough and strategic,
and they were starting to make up ground. Reports of Crusader's
death had in fact been greatly exaggerated.
The company often aggressively defends itself from accusations that it lobbies or has any undue influence over key decision makers. But concentrating on whether Carlyle "lobbies" or not is a red herring argument, designed to lead reporters on a wild goose chase for the elusive definition of lobbying. Besides, according to official records, Carlyle does in fact lobby. According to the Center for Responsive Politics, the Carlyle Group spent more than $1,200,000 in 2000 hiring lobbying firms to wage battle on Capitol Hill on behalf of United Defense.
What Carlyle representatives are really saying when they assure the public they do not lobby is that their high-profile hires like Carlucci, Bush, and Baker don't personally register as lobbyists and work to drum up support for various programs. That, of course, is true. But to say that the Carlyle Group doesn't lobby is simply not true. Rubenstein, a former lawyer, has been playing a cat-and-mouse game of semantics with the press for years. Does the Carlyle Group register as lobbyists? No. Do they hire lobbying firms to do it for them? Yes. Do they influence key lawmakers and help shape policy? Of course they do. People like Carlucci don't need to lobby, in the traditional sense of the word.
They already know the lawmakers involved in key decisions, and the lawmakers know them. There are memorandums and meetings. There are unspoken understandings that are reached over a drink and a wink. "It's impossible to say when people working for Carlyle are wearing more than one hat," Peter Eisner, managing director at the Center for Public Integrity, told me. It would be ludicrous to imagine George Bush Sr. fighting it out in the trenches with all the other registered lobbyists.
But does George Bush Sr. have a say in policy decisions made by this White House? That much has already been proven. Regardless of your definition of lobbying, in the case of the Crusader, Carlucci and his team did lobby, and they lobbied hard. According to the Wall Street Journal, Carlucci called Defense Undersecretary Jacques Gansler multiple times to have the program spared. The Wall Street Journal also reported that Carlucci called defense think tanks and pleaded with them not to write anything negative about Crusader.
Carlyle hired recently retired senator Dan Coats and his former staffer, a retired army colonel named Frank Finelli, to start stumping for Crusader. In an interview, Greg McCarthy, a spokesperson for now retired representative Watts, said this of Carlyle and Finelli: "Carlyle's strength was within the DOD. As a rule someone like Frank Carlucci is going to be able to have access, and members of congress are going to have an open door to Frank. Without question, they have influence. But the fact that this is all known mitigates that influence to some extent.
They are not able to hide. But they have other, less visible people. They have these staff types that are behind the scenes; they work in the dark. Guys like Frank Finelli who know everything about the army and about Capitol Hill." One of the lobbyists who Carlyle hired to work congressmen on Crusader had this to say of Carlyle: "I felt that in this effort, they were like any other lobbying group, aside from the fact that they are not one. They have been able to reach into Congress, and there was a lot of contact with the Pentagon.
They definitely influenced the decision-making process." Lobbying laws in the United States are vague and ill defined. Lobbyists are required to register with the federal government and disclose their clients and the payment amounts publicly. But what exactly constitutes lobbying is much less clear.
The formal definitions of lobby are:
By those definitions, contributing funds to various lawmakers, calling the defense undersecretary to plead for the Crusader, and hiring $1,200,000 of lobbying groups on United Defense's behalf would indeed be considered lobbying. It's hard to see what Carlyle did in this case as anything but lobbying. What they did was save their precious gun. Between the slimming down of the gun, the massive lobbying effort, and the scaling back of the original order from 1,200 to 480, the Crusader survived.
When Bush's proposed defense budget for 2002 was finally handed down in June 2001, it included funding for Crusader. It was nothing short of a Hail Mary pass with no time left on the clock for Carlyle. And within two months of the decision by Bush, the Carlyle took its first dividends from United Defense, a windfall of $289 million. The Crusader was saved for the time being, but opponents continued to fight to have the program cancelled.
The raging debate would not be
ultimately settled until long after September 11, 2001.
It just wasn't the kind of thing a reporter could spend time on. But then there was a break. Judicial Watch, the public interest law firm that investigates government corruption and repeatedly called for the resignation of Bush Sr. from the Carlyle Group, has been using legitimate and legal means to prove to the American public that the Carlyle Group has the ability to access and influence key decision makers in the current administration.
By utilizing the Freedom of Information Act, a law that gives the right for all citizens to request and receive information from the federal government, Judicial Watch has been able to obtain a smattering of documents from the Department of State and the Department of Defense that illustrate the sway Carlyle holds. Many of Judicial Watch's requests were ignored or delayed indefinitely, heightening their suspicions of foul play and forcing them to file a lawsuit against the state and legal departments to obtain the requested documents.
Finally, they saw a few documents coming their way. But only a few. Judicial Watch grew increasingly frustrated as they were consistently stonewalled in their requests. But even the limited documents that the state and defense departments did release show the power, reach, and influence of Carlyle. The first documents Judicial Watch received are correspondences between Carlucci and William Perry, another former secretary of defense, and Carlucci's good friend Donald Rumsfeld, the current secretary of defense.
In the letter to Rumsfeld from Carlucci and Perry, which is on Carlyle letterhead, the two former secretaries of defense urge Rumsfeld to heed the findings in a report the BENS Tail-to-Tooth Commission wrote on reducing infrastructure Spending in the Pentagon.
Both Carlucci and Perry served on the BENS Commission: The BENS Commission stands for the Business Executives for National Security, and the suggestion, as the letter shows, is to "cut the cost of defense infrastructure and reinvest in modernization and other priority programs."
In Rumsfeld's response, the secretary is clearly amenable to Carlucci's suggestions. He even invites the two of them to come in and address the staff within the Pentagon.
The BENS Commission report showed that too much money was being spent on support, overhead, staff, and the like, while not enough was being spent on supporting combat forces. In other words, Carlucci was encouraging Rumsfeld to spend less on infrastructure, more on weapons and the like—the precise business in which Carlyle is so heavily invested.
The mere fact that Carlucci could have such unimpeded access to such an important decision is disturbing enough, but the nature of their correspondence is wholly inappropriate, given the obvious financial benefit of Carlucci should Rumsfeld follow his advice. And sure enough, by July 2001, Rumsfeld's defense budget was incorporating the BENS Commission's suggestions.
The second document that Judicial Watch obtained was a long, in-depth letter from Carlucci to brand new Secretary of State Colin Powell, sent on February 23, 2001. In it, the chairman of the Carlyle Group, again on Carlyle letterhead, lays out an extensive argument for the United States to support Montenegro's desire for independence from Yugoslavia. Montenegro is among the more outspoken republics in the formerly war-torn region of Yugoslavia.
After allying with the United States in isolating, and eventually removing Slobodan Milosevic, Montenegrin President Milo Djukanovic was now pressing his case for Montenegrin independence in the Balkans. The move was widely opposed by the international community, including the United States, because of fears that the move toward independence would again destabilize the region, which had been at war for years and had finally reached some semblance of peace. Djukanovic came to the United States to press his case in early February 2001 and was rebuffed by Secretary Powell in his request for a meeting.
The Bush administration had taken a stand against Montenegrin independence, fearing it would in fact plunge the entire region back into war. Djukanovic did manage to meet, however, with Frank Carlucci of the Carlyle Group.
And the following is Carlucci's plea to Colin Powell on Montenegrin independence:
Why Frank Carlucci, the chairman of a private equity firm, would be meeting with leaders of war-riddled nations is anyone's guess. It is easy to see how anyone would be confused as to what role he has in Montenegro's independence. Is he acting on behalf of the United States? Or as a Carlyle executive, since the letter is on Carlyle letterhead and signed "Chairman."
But it is even more baffling why he felt it necessary to directly lobby the state department for support of Montenegro's independence in the first place. Perhaps his thinking was that the more instability in the Balkans, the more need for war and the more weapons that are sold. All of which benefits defense contractors, like Carlyle. Although unsubstantiated, that could be the intent behind Carlucci's overtures to Powell.
Regardless, Powell's administrators had the good sense to recommend against the inappropriate meeting, recognizing that Carlucci would likely have more to talk about with Powell than just Montenegro. In this memo, Powell's assistant offers the secretary two potential replies to Carlucci.
Powell's stamp and initials indicate his declining of the meeting.
The few documents that Judicial Watch was able to recover show the extraordinary reach of Carlyle Group into the Bush administration. In addition to making these documents public on their Web site, www.judicialwatch.org, the organization has repeatedly called for the resignation of George Bush Sr. from Carlyle, at least while his son is president.
Judicial Watch chairman and general counsel had this to say in the group's May 4, 2001, press release:
He goes on to say, very presciently, "questions are now bound to be raised if the recent Bush administration change in policy toward Iraq has the fingerprints of the Carlyle Group, which is trying to gain investments from other Arab countries who would presumably benefit from the new policy." This press release was issued in May 2001, before the terror attacks on the World Trade Center and the Pentagon, and before President Bush began incessantly banging the war drum on Iraq. By the summer of 2001, the public outcry against the Carlyle Group had seemed to reach a fever pitch.
The New York Times, the Washington Post, the Wall Street Journal, and the Los Angeles Times had all written grim and damning accounts of the company's business dealings within the Iron Triangle, particularly around the Crusader. Photographs and news accounts of Bush Sr. visiting the Saudi royal family had graced the cover of the New York Times, outraging those who believed Saudi Arabia to be more of an enemy than an ally. These were all stunning realizations for the American public.
But nothing would compare to what was to
come, on the day the world was changed forever: September 11, 2001.
September 11 changed everyone's life.
It's that simple. The impact is still being felt around the world as
economies buckle, war looms, and uncertainty accompanies every step
we take. Few can look back at the events of that day and conclude
that anything good came of the attacks. But the grim reality is that
for some, the September 11 attacks were not all bad. In fact, some
businesses stood to make a lot of money from what went on that
fateful day. Vendors on New York City streets could not stock the
shelves with Fire Department hats and t-shirts fast enough.
Businessmen sidestepped delivery men on frenetic sidewalks, everyone hustling, with somewhere important to be. And the sky, unambiguously blue, looked down silently at the city below. At 8:43 A.M., American Airlines Flight 11 from Boston tore through the daily cacophony of New York, ripping a path down midtown Manhattan, roaring toward the north tower of the World Trade Center.
Many in midtown would shrug off the incident, wondering why a jumbo jet was flying so low, and maybe speculating with a friend, but never suspecting the ultimate destination. It wasn't until the thick, dark stripe of smoke from the explosion billowed and writhed against the clear blue sky on the southern horizon, that most New Yorkers knew something was terribly wrong. In Manhattan, the avenues cut from north to south, in dead straight lines. People began gathering on street corners to peer down the long avenues and get a look at the smoke.
Coworkers crowded around company television sets, watching with confusion and fear, as the single tower smoked and burned. Less than 20 minutes later, as the city, thirsty for information, devoured live television news reports, United Airlines Flight 175, banking hard from the west, disappeared into the south tower of the World Trade Center amidst a ring of fire and smoke.
Newscasters were initially baffled, as if their networks had suddenly come across footage of the first plane hitting the tower. Suddenly the dreadful logic of what was unfolding quickly took hold, and the grim reality dawned on the city's collective conscience at once, with inescapable reality: It was a second plane, and we were under attack. The fear that descended on the city was immediately palpable.
Without speaking, everyone not directly involved in the horrifying events taking place at the Trade Center asked themselves the same questions: How long will this go on for? Is my building safe? Who do I know in the Twin Towers? Will God ever forgive us for this? The city was instantaneously shut down. Bridges and tunnels were sealed off. Subways stopped running. Airplanes were redirected and landed at alternate airports.
Then, at 9:43 A.M., American Airlines
Flight 77 crashed into the Pentagon, leaving little doubt that the
attacks were ongoing.
George Bush Sr. was also at the conference, but Carlyle's spokesperson says the former president left before the terror attacks, and was on an airplane over the Midwest when flights across the country were grounded on the morning of September 11. In any circumstance, a confluence of such politically complex and globally connected people would have been curious, even newsworthy.
But in the context of the terrorist attacks being waged against the United States by a group of Saudi nationals led by Osama bin Laden, the group assembled at the Ritz-Carlton that day was a disconcerting and freakish coincidence. At 10:05 A.M., the world stifled a collective cry as the south tower of the World Trade Center, once the mightiest building on earth, seemingly evaporated behind a shroud of dust and smoke. For all the confusion and cloudiness, it was impossible to tell what had happened from television.
But for those on the ground, the unthinkable was the only explanation: the tower had collapsed. Twenty minutes later, the north tower met the same fate as its twin, pounding mercilessly into the streets of downtown Manhattan, leaving thousands dead and hundreds more fleeing for their lives. By noon, New Yorkers were paralyzed in fear, uncertain whether the attacks had ended and unclear as to the safest place to be. By mid-afternoon, all traffic on the island of Manhattan had ceased. Citizens wandered the streets, dialing and redialing their cell phones to contact loved ones, vaguely moving in the direction of their homes.
Survivors walked aimlessly northward from what would come to be known as Ground Zero, caked in soot and dust, battered and bleeding, clutching strangers and sobbing. Throngs of shell-shocked Brooklynites marched silently across the Brooklyn Bridge, eager to get home and assure their families of their safety. In Washington, a state of emergency was declared by 1:30 P.M.
The Pentagon ordered five warships and two aircraft carriers to various locations throughout the East Coast. The ships were saddled with guided missiles capable of shooting down any aircraft perceived to be a further threat. President Bush had been whisked from Florida to Louisiana to Nebraska. Colin Powell was on his way back from Latin America. Donald Rumsfeld was in the Pentagon. By 4:30 P.M., the president was on his way back to Washington, and the first reports of Osama bin Laden's involvement in the attacks has already been aired.
Newspapers would later report that the bin Laden family members that were in the United States at the time, of which there were many, were quickly moved to safe locations awaiting their expedited travel arrangements back home to Saudi Arabia. During sunset, buildings burned and lurched, cleaved and collapsed, and filled the sky with smoke and dust. Brooklyn, a mile southeast of Manhattan, lay covered in noxious dust, singed documents, Daytimer pages.
The stench of burning plastic permeated every crevice of New York, a stinging reminder of the already unforgettable events of the day. At 8:30 P.M., the president, now back at the White House, addressed the nation on television. He spoke of the "thousands of lives suddenly ended by evil." He boldly claimed that "these acts shattered steel, but they cannot dent the steel of American resolve." And he cast the net of America's vengeance far and wide in making no distinction between the terrorists who committed the acts, and those who harbor them.
It is impossible to say whether during the darkest day in America's history, it dawned on the partners at the Carlyle Group that what was to come, as a direct result of this attack, would serve their financial interests. Perhaps it was that very day, in the midst of the chaos and grief that had gripped the nation. It might have been after they had ascertained the whereabouts of their many friends at the Pentagon, and the future started to become clear. Or maybe it was the next day, when President Bush characterized the attacks in no uncertain terms as "acts of war." Regardless, there was little doubt by the third day after the attacks that Carlyle was in for some heady times. Congress overwhelmingly approved $40 billion in emergency funds, about half of which was earmarked for the armed services.
Also in the works was a massive increase
in the Pentagon budget, $33 billion, in time for the Department of
Defense's 2002 fiscal year, beginning October 1, 2001.
This is the reality of the business they chose. And in the defense industry, war time is boom time. "Capitol Hill is prepared to do whatever the Pentagon wants," said Gordon Adams, a budget official in the Clinton administration, in a New York Times piece a week after the attacks. Indeed Capitol Hill provided enough money to the Pentagon to make the budget woes and tough decisions of the past year suddenly irrelevant.
Among the weapons programs that had been given new life was, of course, the unkillable gun: the Crusader.
The money was pouring in now and there was no longer any reason to deny the army its precious gun. After the attacks, opponents to the gun were silenced, not wanting to assume the political liabilities of killing a weapons program in the midst of war. On September 26, just two weeks after that attacks, the army signed a $665 million contract with United Defense for the next phase of the Crudader's development. The money would carry the gun maker through 2003. But the first prototype for Crusader was not due to be delivered until 2004, and production of the units would not come for years after. It was highly unlikely the war in Afghanistan would still be ongoing by that time.
And nothing had changed the original argument against the gun: it was still too heavy, even at 42 tons, and the need for this type of open battlefield weapon was waning, as the fighting in the caves and tunnels of Afghanistan was demonstrating. But none of that was important anymore. There was enough money to go around for everyone.
The defense landscape had changed so dramatically, and so thoroughly, after September 11 that Carlyle quickly and wisely decided it was time to take United Defense public weeks after the attacks on the America. On October 22, 2001, the company filed an S-l registration with the Securities and Exchange Commission, planning an initial public offering before the end of the year.
In the filing, United Defense listed the following as its reasons for selling shares to the public:
William Conway would later go on the record as saying "No one wants to be a beneficiary of September 11," in a report in The Nation entitled "Crony Capitalism Goes Global." Nevertheless, Carlyle took United Defense public on December 14, the day after Congress passed the defense authorization bill allowing for full funding of Crusader program going forward. On that single day, Carlyle took profits of $237 million. On paper, the company had made three times that amount. All the time spent lobbying government officials, calling on old friends, and greasing the palms of congressmen had finally paid off.
Crusader was alive and well.
After all, the company had been running the Saudi Economic Offset Program for years, a government funded program designed to encourage foreign investment into Saudi Arabia, under the condition that a portion of the profits be reinvested in Saudi Arabia. In a sense, Carlyle had become the gatekeeper to foreign investing in Saudi Arabia. Not many people knew any of this at the time of the September 11 attacks. But by the end of September, the general public would know far more about Carlyle's business than anyone at Carlyle was comfortable with.
In the weeks following the attacks, the name Osama bin Laden leaped onto the forefront of America's consciousness as public enemy number one. Storefronts hung pictures of his likeness, cut out of newspapers, with headlines of "Wanted: Dead or Alive." Not since the Red Scare of the 1950s had the United States had a more tangible opposition. It seemed that the entire nation was united in its hatred of one man.
Then, on September 27, the Wall Street Journal ran a story entitled "Bin Laden Family Is Tied to U.S. Group."
That group, of course, was Carlyle. Carlyle had a relationship with the bin Ladens that began in the early 1990s, when they tried to put together a deal for the Italian Petroleum (IP) company. At the time, Basil Al Rahim, a young Carlyle associate, was traveling from Saudi Arabia to Amman to Bahrain, to United Arab Emirates, drumming up support for Carlyle's forthcoming international funds.
Since that time, Carlyle's business in the Middle East blossomed. One of the clients that Al Rahim helped secure was the bin Laden family, which owned a $5 billion construction business by the name of Saudi Binladin Group. The bin Laden family consists of more than 50 brothers and sisters, all the progeny of Mohammed bin Laden.
Osama had his Saudi citizenship revoked in 1991, and was reportedly cut off from his family. Since his father's passing, Bakr bin Laden became the head of the business and the family, and as such he committed money to Carlyle on several occasions. It was a fruitful relationship for both parties involved. But now, all of that had changed. The article in the Wall Street Journal pointed out the most stunning and atrocious irony of Carlyle's history: through Carlyle, the bin Laden family was in a position to make millions from the war being waged against their own brother.
The news that George Bush Sr., James Baker III, and Frank Carlucci had visited the bin Ladens in recent years also stunned the American public. It was, in fact, the Carlyle Partners II fund in which the bin Laden family was invested. The same fund that held United Defense, as well as a host of other defense holdings. Carlyle told the press that the bin Ladens were only in for $2 million, a relatively small amount of money considering the whole fund was worth $1.3 billion. But one bin Laden family financial representative says the number was much larger.
And Al Rahim says that earlier in his time with Carlyle, which ended in 1997, the bin Laden family had several times that amount invested in the company. Regardless of the actual amount, the irony ultimately proved too much for Carlyle, and by the end of October, they severed ties to the family, liquidating their holdings. A month had elapsed between when the news of Carlyle's bin Laden connection emerged and the company divested their millions. During that time, every major news outlet had picked up the story.
Carlyle was sustaining significant collateral damage and was ill-equipped to handle it. Up to this point, Rubenstein had always acted as the company's spokesperson to the press. But this was too much. Calls were pouring in from around the world. Everyone wanted to know about the company that connected the Bush's and the bin Ladens.
It was a disaster.
In the address, McKinney named the Carlyle Group as an example of the cronyism she was talking about. McKinney was implying that the Bush administration knew the attacks were coming, allowed them to happen, and was now reaping the profits, both financial and political, through its connections to the Carlyle Group. The comments resonated with a growing group of cynics on the Internet and spread like wildfire across the Web. For weeks there had been reports of an intelligence breakdown and foreknowledge of the attacks in the major news outlets.
McKinney was simply giving a voice to what many already suspected. And she was absolutely lambasted for it.
Carlyle spokesman Chris Ullman, in easily his most entertaining, not to mention effective, public statement in his six months on the job asked the press if McKinney had "said these things While standing on a grassy knoll in Roswell, New Mexico?"
And the public lashing was on. Representative Johnny Isakson, a Republican from Georgia, said McKinney has "demonstrated in Washington a total lack of responsibility in her statements." Senator Zell Miller from Georgia called her "very dangerous and irresponsible." Kathleen Parker, a nationally syndicated columnist, called McKinney's statements "idiotic" and bordering on treason.
Parker suggested the advent of a new
award, the McKinney Award, "for people too stupid to serve in public
office."
In the end, McKinney received vindication when it became clear that a complete investigation would indeed be necessary, as enough information had emerged that indicated Bush's prior knowledge of the attacks. But McKinney's over-the-top comments probably did more damage than good in the drive to address the truly important issues surrounding the Carlyle Group. Charles Lewis, executive director of the Center for Public Integrity, said the comments undermined the important work the center has been trying to complete in regards to Carlyle by making a "caricature of the issues that may make it easily dismissible."
McKinney was certainly an easy target to discredit. And by August her previously loyal constituents voted her out of office. But at least part of what she said in that interview was dead on: Persons close to the Bush administration were in fact in a position to gain financially from the September 11 attacks, as the United Defense IPO had already demonstrated. But there were other ways the company was getting rich off the events of that day as well. Lots of ways.
And September 11 was turning into an
outright bonanza for the boys at Carlyle.
First it was an editorial assistant at the Post who noticed a blister on her finger: cutaneous anthrax.
Then an assistant to NBC anchor Tom Brokaw found a lesion. Then a photo editor at The Sun in Boca Raton. Mail sorting facilities were shut down. News media outlets were on edge, and stopped opening their mail. In many ways, the anthrax scare had Americans more on edge than the September 11 attacks. It seemed more insidious, like we were seeing the beginnings of what could ultimately be a far more deadly act of terror. And the terror spread rapidly, from mail processing facilities in Trenton, New Jersey, to the Hart Senate Office building in Washington, DC.
The country was ill-equipped to handle this kind of an attack, psychologically or logistically. Building after building was shut down, crippling postal service and severely inhibiting the Beltway's political machine. The government gave mixed messages on a daily basis, encouraging citizens not to panic, while at the same time warning of the lethality of anthrax. It was a confusing, fearful time for the whole country. But once again, Carlyle had the uncanny ability to be at the right place at the right time, and profit from the situation.
Carlyle owned 25 percent of a Pittsburgh, Pennsylvania-based company called IT Group, an environmental and hazardous waste cleanup specialist. At the time of the anthrax attacks, IT Group was in bad shape, suffering under the weight of nearly $700 million worth of debt, and on the verge of declaring bankruptcy. In the wake of the anthrax attacks, IT Group scored a number of cleanup contracts with anthrax-infected buildings. Among the new work coming their way was the contract for the Hart Senate Office Building and the Trenton postal facility.
The company had 400 workers on site at various locations working 24 hours a day, 7 days a week to clean up anthrax spores. It was snapping up contracts with government agencies left and right, like the General Services Administration, the Army Corp of Engineers, the Center for Disease Control and Prevention, and the U.S. Navy. Richard Conte, vice president and treasurer of IT Group would tell reporters that the anthrax work "is very good for our bottom line."
For a moment, it looked as if IT Group was going to miraculously save itself from bankruptcy and emerge one of the few winners in the war on terrorism. But the anthrax scare turned out to be much more limited an attack than was originally feared. In the end, IT Group still declared bankruptcy and was bought out by the Shaw Group for $105 million plus close to $95 million in assumed debt, a price that presumably would have been much lower had anthrax never burst on the scene and given IT Group some last minute business.
Carlyle had saved at least some of its bacon. Then rumors spread around the Internet that Carlyle was also invested in a company called Bioport, which held the only government contract on an experimental and highly controversial anthrax vaccine. The company has retired Admiral William Crowe, a man who was chairman of the Joint Chiefs of Staff while Carlucci was secretary of defense. The two know each other well, but Carlyle's involvement with the company is unknown. Both companies are private, and as such have no obligation to disclose investments to the public.
Carlyle Group spokesperson Chris Ullman asserts that Carlyle has nothing to do with Bioport. There were other ways that Carlyle was capitalizing on both the airplane attacks and the anthrax letters: security. Deep in the belly of a mountain in Boyers, Pennsylvania, exists an underground facility carved into rock that holds one of Carlyle's most important investments, U.S. Investigations Services. USIS, as it is known, is a classic example of privatization, and a classic Carlyle investment.
Once known as the U.S. Civil Service Commission, then the U.S. Office of Personnel Management (OPM), and finally the Office of Federal Investigations (OFI), the organization was a staple of the U.S. government's ability to gather information on any individual applying for a job with the government. Its charter, as it had been from the beginning, was to investigate the backgrounds of government employees, and provide them with varying levels of national security clearance. USIS's cave-like work environment is something that only James Bond could love.
Rock walls, tight security, no open-toed shoes, and no open flames—employees have steamed lunches brought into the facility every day. The former mine is also home to the personnel files of thousands of government officials. It is top secret stuff. The company's history, like most of the companies in Carlyle Partners II, is highly controversial. Since going private in 1996, USIS has been incredibly successful. But getting private wasn't so easy. Employees of the government-run Office of Federal Investigations fought the privatization the whole way, fearing layoffs and salary cuts.
They hired lawyers, testified at congressional hearings, and protested the decision to take it private, which was made by the Clinton administration. To quiet them down, the government offered the investigators an employee stock ownership plan (ESOP) and promised them the same or better salaries in the newly formed private enterprise. After years of acrimonious battles, the Office of Federal Investigations became USIS in July 1996. Employees retired from OFI and started work the next day at USIS. As life under the ESOP went on, some employees felt they had been duped.
One former USIS employee says that USIS executives harassed older investigators, encouraging them to leave the company so they could hire younger employees, who wouldn't vest in the stock plan for five years. That left more of the equity pie to the high-level executives, should the company ever go public or sell itself.
Before USIS had gone private though, the only investigators allowed to work on national security investigations had to have five years experience. That meant that the company would have to rely on less experienced investigators for some of the most important jobs in the country. Many of the older investigators then left in disgust. The result was a watering down of the talent at USIS, and many blamed Carlyle for the changes. T
he company was growing profits and acquiring smaller firms by the turn of the century. But nothing would compare to the explosion of business after September 11.
USIS is just one more example of how Carlyle was in a frighteningly good position to reap the benefits of September 11.
There are more examples, like EG&G, a company Carlyle bought in the summer of 1999, which makes, among other things, the X-ray scanners that are used in airports. Whether the company is a "shadow government," is for conspiracy theorists to debate.
But the company's uncanny ability to be
in the right place at the right time sure doesn't help to dissuade
the cynics.
After the unrelenting bad press about the Crusader approval reached a fever pitch in Washington, Rumsfeld, at the behest of Deputy Secretary of Defense Paul Wolfowitz, finally gave the order to kill the gun once and for all, but only after United Defense had already made gobs of money from its public offering. It also came after Rumsfeld was publicly embarrassed by an Army-sponsored lobbying campaign of Congress that went on behind Rumsfeld's back, after the Defense Secretary had already made it clear the program was to be cancelled.
The actions on the part of the Army would result in Rumsfeld launching an investigation (still ongoing) and excoriating those responsible for the clandestine lobbying effort. "I have a minimum of high regard for that kind of behavior," Rumsfeld would tell the press in an article by the Associated Press. But Carlyle had already taken its profits. And besides, the very same day the U.S. Army officially notified United Defense of the termination of the Crusader contract, that same Army awarded United Defense a brand new contract for a new artillery system, much like the Crusader only much, much lighter.
Everyone was happy with the result. Rumsfeld and Carlyle avoided a damaging public relations fiasco over the Crusader by killing the program in a decidedly public manner.
The Army was assured of getting an even better gun in the same time frame as the Crusader had been promised. And United Defense got to prop up its stock price by announcing the new contract the day they announced the death of the old contract, without ever skipping a beat. It was classic Carlyle. United Defense also picked up in September 2002, a contract to provide Taiwan with $250 million worth of amphibious assault vehicles.
The deal happened after Carlucci, who is the chairman of the U.S.-Taiwan Business Council, met with Tang Yao-Ming, the defense minister in Taiwan. Just another day in Carlyle's global playground. The saga of Crusader is one of the clearest examples of how Carlyle does business. To the outside observer, the company lives on the edge, deftly maneuvering its way through the revolving door of politics and business.
Keenly aware of public opinion, and how to manage the press, Carlyle has always been able to avoid the kind of scandal that brings a company down.
Though more financial companies are learning from Carlyle's example—hiring politicians like Al Gore or Rudolph Giuliani, during their political downtime—we may never see another company like Carlyle. The sheer volume of political capital the company has amassed in its 15 years of existence is unprecedented, and would be nearly impossible to duplicate.
With $13 billion under management, close
to 500 employees throughout the world, and hundreds of defense,
aerospace, telecom and health care companies in their portfolio, it
is safe to say that Carlyle has already gone well beyond
Eisenhower's vision of a military industrial complex. There is every
indication that with the current administration, and war remaining
on the foreseeable horizon, Carlyle's power and reach may exceed
anything Eisenhower might have imagined when he first warned against
the formation of an Iron Triangle.
As America's most revered companies are brought down through scandals and abuses of the public's trust, it has never been more important for the average citizen to remain vigilant and skeptical, of our country's business and political leaders, even during war time, when we are expected to be exceedingly patriotic. While the Carlyle Group is certainly not about patriotism, it is a uniquely American story. It is about money, power, war, and politics.
All of the things that build America's
might, and compromise its integrity.
Epilogue
A truly scary prospect, but nothing we haven't seen before. China, like Saudi Arabia decades ago, is fertile ground for American investment. Edging its way toward a more capitalistic society, China is still a massive untapped market controlled largely by the government: a combination tailor made for Carlyle's special brand of access capitalism. In other words, watch this space.
Another area to keep an eye on would be Europe. In the fall of 2002, Carlyle completed an acquisition of Qinetiq, the research and development arm of the United Kingdom's Ministry of Defense. When news of the acquisition broke in England, the MOD came under fire for potentially compromising the national security of the United Kingdom by selling such a crucial unit to an American company run by so many ex-politicians.
Fiona Draper, a representative of the trade union Prospect, which includes the scientists at Qinetiq, told reporters,
The "opaque structure" to which Draper refers is not uncommon for private companies, especially private equity companies. The nature of the business is such that a private company buys other private companies, none of which are obligated to reveal their financial records. All of which makes gathering information on Carlyle very challenging. Though it excels in buying and selling businesses that are under heavy government regulation, Carlyle itself is under almost no scrutiny from federal overseers. The only thing keeping Carlyle the least bit honest at this point is public interest groups and the media.
And at a time when American patriotism is at an all-time high following the attacks on the World Trade Center and the Pentagon, criticizing the current president and his father for questionable business practices is a tricky business. There is frighteningly little tolerance for muckraking at the moment. When Carlyle was notified of this book, the company immediately circled its wagons, declining to allow any interviews of its employees and waging what one insider termed as a "scorched earth campaign," instructing anyone that could be used as a source to clam up.
Several people who have spoken to the partners about this book said the company is "scared to death" of the publicity that is sure to follow. It is common for former employees of the company to fear that Carlyle will somehow discern their identities if they speak to reporters, either on or off the record, and ruin them. The company has required many of its ex-employees to sign nondisclosure agreements, or gag orders, instructing them not to talk about their work to the press, a highly unusual move.
The result of the company essentially pleading the fifth is that they maintain plausible deniability of anything written about them. But the unintended effect is that it makes them appear as if they have something damaging to hide. All the while, Carlyle executives take umbrage at the mere suggestion that the company is secretive. Yet the names of some of their most prominent employees, like George H. W. Bush, is not listed anywhere on the company's Web site. There are many things this company doesn't want anyone to know. Conspiracy theorists that obsess on secret societies and outlandish plots overlook the more insidious and destructive effects of a company like Carlyle.
By insinuating itself into the very fabric of the world's economic structure, Carlyle has accomplished far more than any Trilateral Commission or Masonic society could dream. They have made themselves an indispensable part of the international community's cash flow. Millions of people are invested in Carlyle and don't even know it, like the 1.3 million people relying on CalPERS to manage their pension fund. Do they even know that CalPERS is a part owner of Carlyle? Ultimately, the success of the Carlyle Group depends on its continuing ability to gain access to high-level government officials, thereby getting a jump on policy changes, both domestic and international.
And that access hinges on Carlyle's remarkable track record of hiring the most powerful men in the world. To keep their stockpile of political powerhouses fresh, don't be surprised to see the company reach deep into the current Bush administration after the president leaves office and snare anyone from Colin Powell to Dick Cheney to Donald Rumsfeld to George W. Bush himself.
The revolving door to Carlyle is always turning. Though company officials are outwardly amused by the rumors and accusations that swirl around Carlyle, there is a reason why people fear them.
It's difficult to explain away certain aspects of the company. Like why George Bush Sr., in the face of mounting criticism and the undermining of his son's credibility in office, doesn't simply resign from the company? He is already wealthy, with his family's legacy secure. And there must be a thousand different job opportunities available for the ex-president that don't involve obvious conflicts of interest or incidents of international political intrigue. Or why James Baker III, with his own law firm and a foundation that bears his name, feels the need to continue toiling for a firm that clearly threatens his heretofore untarnished reputation?
It begs the question: What are these men up to? From Watergate to Iran-Contra to Lewinsky-gate, the public and the press have performed admirably in keeping our politicians honest, or at least accountable, while they are in office. But the civil checks and balances mechanism breaks down after politicians leave office. The power and influence of politicians diminishes upon their retirement from public service, but it is still formidable. And the work that Carlyle's ex-politicos perform, both in nature and in scale, is unlike anything that's come before them.
That's why Carlyle will continue to be both a compelling story to follow, as well as a cautionary tale.
Afterword
In a move that Business Week immediately characterized as an attempt to "scramble the conspiracy theories," Carlyle named Lou Gerstner, the long time IBM Chairman and CEO, as Frank Carlucci's successor to the chairman position at Carlyle. Carlucci retained the role of "Chairman Emeritus."
Charles Lewis of the Center for Public Integrity was quoted in the New York Times as saying,
Gerstner will certainly bring a new sense of financial credibility to Carlyle, on which he plans to spend about 20 percent of his time, according to the Carlyle press release. It will certainly be a significant bolstering of the business side of the Iron Triangle. At IBM, Gerstner led a stunning reversal of the computer maker's fortunes through the 1990s and, unlike many tech CEOs of late, leaves with his company and his legacy well intact.
His knowledge of global markets will be invaluable to Carlyle. But the company will still be run by Rubenstein, Conway, and D'Aniello, just like it always has been. And newcomers to Carlyle should not be fooled by the impeccable pedigree of Gerstner: This is still a company that made its fortunes on the strength of political power.
And it is likely that it always will be.
From the list, which is merely the tip
of the iceberg, it is clear how thoroughly Carlyle has insinuated
itself into the political, military, and financial fabric of the
United States. From security to weapons to information technology,
Carlyle has all of the bases covered. Carlyle is among the largest private equity firms in the world. It employs 491 people in 21 worldwide offices. It has more than 535 investors from more than 55 different countries. And as of June 2002, the company had over $13.5 billion under management in 21 different funds. Following is a small sampling of the hundreds of companies that have been a part of the Carlyle family since the firm's founding in 1987. From the list, which is merely the tip of the iceberg, it is clear how thoroughly Carlyle has insinuated itself into the political, military, and financial fabric of the United States.
From security to weapons to information technology, Carlyle has all of the bases covered.
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