Oliver Burkeman and Julian Borger
Guardian,Wednesday October 31, 2001
It is hard to imagine an address closer to the heart of American power. The offices of the Carlyle Group are on Pennsylvania Avenue in Washington DC, midway between the White House and the Capitol building, and within a stone's throw of the headquarters of the FBI and numerous government departments. The address reflects Carlyle's position at the very centre of the Washington establishment, but amid the frenetic politicking that has occupied the higher reaches of that world in recent weeks, few have paid it much attention. Elsewhere, few have even heard of it.
This is exactly the way Carlyle likes it. For 14 years now, with almost no publicity, the company has been signing up an impressive list of former politicians - including the first President Bush and his secretary of state, James Baker; John Major; one-time World Bank treasurer Afsaneh Masheyekhi and several south-east Asian powerbrokers - and using their contacts and influence to promote the group. Among the companies Carlyle owns are those which make equipment, vehicles and munitions for the US military, and its celebrity employees have long served an ingenious dual purpose, helping encourage investments from the very wealthy while also smoothing the path for Carlyle's defence firms.
But since the start of the "war on terrorism", the firm - unofficially valued at $3.5bn - has taken on an added significance. Carlyle has become the thread which indirectly links American military policy in Afghanistan to the personal financial fortunes of its celebrity employees, not least the current president's father. And, until earlier this month, Carlyle provided another curious link to the Afghan crisis: among the firm's multi-million-dollar investors were members of the family of Osama bin Laden.
The closest the Carlyle Group has previously come to public attention was last May, when a Seoul-based employee called Peter Chung was forced to resign from his £100,000-a-year job after sending an email to friends - subsequently forwarded to thousands of others - boasting of his plans to "fuck every hot chick in Korea over the next two years". The more business-oriented activities of Carlyle's staff have been conducted much more quietly: since it was founded in 1987 by David Rubenstein, a policy assistant in Jimmy Carter's administration, and two lawyer friends, the firm has been dispatching an array of former world leaders on a series of strategic networking trips.
Last year, George Bush Sr and John Major travelled to Riyadh to talk with senior Saudi businessmen. In September 2000, Carlyle hired speakers including Colin Powell and AOL Time Warner chair Steve Case to address an extravagant party at Washington's Monarch Hotel. Months later, Major joined James Baker for a function at the Lanesborough Hotel in London, to explain the Florida election controversy to the wealthy attendees.
We can assume that Carlyle pays well. Neither Major's office nor Carlyle will confirm the details of his salary as European chairman - an appointment announced shortly before he left the House of Commons after the election - but we know, for the purposes of comparison, that he is paid £105,000 for 28 days' work a year for an unrelated non-executive directorship. Bush gives speeches for the company and is paid with stakes in the firm's investments, believed to be worth at least $80,000 per appearance. The benefits have attracted political stars from around the world: former Philippines president Fidel Ramos is an adviser, as is former Thai premier Anand Panyarachun - as well as former Bundesbank president Karl Otto Pohl, and Arthur Levitt, former chairman of the SEC, the US stock market regulator.
Carlyle partners, who include Baker and the firm's chairman, Frank Carlucci - Ronald Reagan's defence secretary and a former deputy director of the CIA - own stakes that would be worth $180m each if each partner owned an equal slice. As in many areas of its work, though, Carlyle is not obliged to reveal the details, and chooses not to.
Among the defence firms which benefit from Carlyle's success is United Defense, a Virginia-based contractor which makes vertical missile launch systems currently on board US Navy ships in the Arabian sea, as well as a range of other weapons delivery systems and combat vehicles. Carlyle's other holdings span an improbable range, taking in the French newspaper Le Figaro and the company which bottles Dr Pepper.
"They are big, and they are quiet," says David Mulholland, business editor of Jane's Defence Weekly. "But they're not easy to get information out of, [but] United Defense are going to do well [in the current conflict]." United also owns Bofors, a Swedish munitions manufacturer.
Carlyle has said that it does not lobby the federal government, thus avoiding a conflict of interest when, for example, Carlucci met Rumsfeld in February when several important defence contracts were under consideration. But critics see that as a matter of definition.
"It should be a deep cause for concern that a closely held company like Carlyle can simultaneously have directors and advisers that are doing business and making money and also advising the president of the United States," says Peter Eisner, managing director of the Center for Public Integrity, a non-profit-making Washington think-tank. "The problem comes when private business and public policy blend together. What hat is former president Bush wearing when he tells Crown Prince Abdullah not to worry about US policy in the Middle East? What hat does he use when he deals with South Korea, and causes policy changes there? Or when James Baker helps argue the presidential election in the younger Bush's favour? It's a kitchen-cabinet situation, and the informality involved is precisely a mark of Carlyle's success."
The world of private equity is an inherently secretive one. Firms such as Carlyle make most of their money buying firms which are not publicly traded, overhauling them and selling them at a profit, so the process by which likely targets are evaluated is much more confidential than on the open market. "These firms certainly don't go out of their way to get into the headlines," says Steven Bell, chief economist at Deutsche Asset Management. "They'd rather make a splash in Institutional Pensions Week. The aim is to realise very high returns for your investors while exerting a high degree of control over the company. You don't want to get into the headlines when you force the management to fire a director."
The process has worked wonders at United, and this month the firm announced plans to go public, giving Carlyle the chance to cash in its investment.
But what sets Carlyle apart is the way it has exploited its political contacts. When Carlucci arrived there in 1989, he brought with him a phalanx of former subordinates from the CIA and the Pentagon, and an awareness of the scale of business a company like Carlyle could do in the corridors and steak-houses of Washington. In a decade and a half, the firm has been able to realise a 34% rate of return on its investments, and now claims to be the largest private equity firm in the world. Success brought more investors, including the international financier George Soros and, in 1995, the wealthy Saudi Binladin family, who insist they long ago severed all links with their notorious relative. The first president Bush is understood to have visited the Binladins in Saudi Arabia twice on the firm's behalf.
The Carlyle Group does not employ anyone at its Washington headquarters to deal with the press. Inquiries about the links with the Binladins (as most of the family choose to spell their name) are instead referred to someone outside the company, on condition he is referred to only as "a source familiar with the relationship". This source says: "I can confirm the fact that any Binladin Group investment in Carlyle has been terminated or is being terminated. It amounted to a $2m investment in the Carlyle II Fund, which was anyway a very small portion of a $1.3bn fund. In the scheme of the investments and in the scheme of the business of either party it was very small. We have to get this into perspective. But I think there was a sense that there were questions being raised and some controversy, and for such a small amount of money it was something that we wanted to put behind us. It was just a business decision."
But if the Binladins' connection to the Carlyle Group lasted no more than six years, the current President Bush's own links to the firm go far deeper. In 1990, he was appointed to the board of one of Carlyle's first purchases, an airline food business called Caterair, which they eventually sold at a loss. He left the board in 1992, later to become Governor of Texas. Shortly thereafter, he was responsible for appointing several members of the board which controlled the investment of Texas teachers' pension funds. A few years later, the board decided to invest $100m of public money in the Carlyle Group. The firm's magic touch was already bringing results. Today, it is proving as fruitful as ever.
