"Crony Capitalism Goes Global" [CARLYLE]
FEATURE STORY | April 1, 2002
thenation.com
© 2002 The Nation Company, L.P.
thenation.com
by TIM SHORROCK
William Conway, managing director and co-founder of the Carlyle
Group, was talking recently about the media coverage of his
bank and the cast of ex-Presidents and former officials, including
George H.W. Bush, James Baker III and Frank Carlucci, on its
payroll. "One of the words that has recently cropped up as an
adjective around us--and I love this adjective--is the 'secretive'
Carlyle Group," he said in an interview in his offices overlooking
Pennsylvania Avenue in downtown Washington. "What's the secret? I
don't think we have many secrets. The reality is, we're a group of
businessmen who have made an enormous amount of money for our
investors by making good investments over the past fifteen years."
To give Conway his due, Carlyle has
done exceedingly well for the 435
pension funds, banks and investment
funds--40 percent from overseas--that
have entrusted their money to one of
the world's largest private equity funds.
Under the leadership of Carlucci, a
former CIA deputy director who was
Defense Secretary in the Reagan
Administration, Carlyle has become the
nation's eleventh-largest defense
contractor, a major arms exporter to
Saudi Arabia and Turkey, one of the
biggest foreign investors in South Korea
and Taiwan, and a key player in global
telecommunications, wireless, real
estate and healthcare markets. Since
1987 it has invested $6.4 billion in 233
transactions, with a rate of return of 36
percent on its completed investments.
Carlyle currently has $12.5 billion
invested.
"Their basic nature is not to be a long-term investor but buy low and
sell high," said Philip Finnegan, an analyst with the Teal Group, a
Beltway company that tracks the aerospace industry. "They always
look for an exit strategy in whatever they buy. They have a sense of
the stability of the business because of the accumulated expertise
they have."
That's where Carlyle's global network of statesmen and former
officials comes in. Bush is Carlyle's senior adviser on Asia and makes his money by
giving speeches at Carlyle's investment conferences.
Baker, who was Bush's Secretary of State, is Carlyle's senior
counselor and a member of the firm's Asia, Europe and Japan
advisory boards. John Major, the former British prime minister, was
named chairman of Carlyle Europe last year. Carlyle's advisory
boards are peppered with corporate executives from Boeing, BMW,
Toshiba and other big multinationals, and men of influence like
former Bundesbank president Karl Otto Pohl, former Thai prime
minister Anand Panyarachun and former US ambassador to Japan
(and former Speaker of the House) Thomas Foley. Carlyle's new asset
management group is run by Afsaneh Beschloss, the former
treasurer and chief investment officer of the World Bank.
By hiring enough former officials to fill a permanent shadow cabinet,
Carlyle has brought political influence to a new level and created a
twenty-first-century version of capitalism that blurs any line between
politics and business. In a sense, Carlyle may be the ultimate in
privatization: the use of a private company to nurture public
policy--and then reap its benefits in the form of profit. Although the
fund claims to operate like any other investment bank, it's
undeniable that its stable of statesmen-entrepreneurs have the
ability to tap into networks in government and commerce, both at
home and abroad, for advance intelligence about companies about to
be sold and spun off, or government budgets and policies about to be
implemented, and then transform that knowledge into investment
strategies that dovetail nicely with US military foreign and domestic
policy.
How the Carlyle System Works
A good analogy to the Carlyle system is a Japanese tradition
known as amakudari (literally, "descent from heaven"). Under
this system, senior officials from Japanese ministries retire, only to
be instantly hired as senior advisers by the companies and industry
groups they were paid to regulate. "What we're really talking about is
a systematic merging of the private and public sectors to the point
where the distinctions get lost," said Chalmers Johnson, president of
the Japan Policy Research Institute and author of two acclaimed
books on the Japanese system of governance. "The Carlyle Group is
a perfect example. It's the use of former government officials for their
access to government bureaucracies to determine contractual
relations. It's inside knowledge--knowing where the government is
going to spend money and then investing in it."
In turn, Carlyle executives influence policy--sometimes
profoundly. On March 12 Carlucci, who is chairman of the
US-Taiwan Business Council, a coalition of US multinationals
doing business in Taiwan, invited Tang Yao-Ming, Taiwan's Defense
Minister, to attend a closed-door summit of US and Taiwanese
defense officials sponsored by the council and key US military
contractors, including Carlyle's United Defense Industries. Tang's
visit, which was capped by a meeting with US DEPUTY DEFENSE
SECRETARY PAUL WOLOWITZ, marked the highest-level defense contacts
between Taipei and Washington since diplomatic relations were
severed in 1979 --and paralleled President BUSH's
push to expand arms sales to Taiwan, where Carlyle has significant investments.
Carlyle people also testify frequently before government panels:
senior adviser Arthur Levitt, the former chairman of the Securities
and Exchange Commission, has been ubiquitous before
Congressional hearings on Enron.
Carlyle's investment philosophy, as described in its brochures, is to
focus "on industries we know and in which we have a competitive
advantage," in particular "federally regulated or impacted industries
such as aerospace/defense." Its capital is siphoned into fourteen
funds, seven focused on US industries and real estate, four on
Europe and three on Asia. The $1.3 billion Carlyle Partner II fund is
the majority owner of United Defense, maker of the Bradley Fighting
Vehicle and other weapons systems, and owns Vought Aircraft, the
world's largest supplier of commercial and military airline parts.
Carlyle's largest acquisition took place two years ago in South Korea,
when its $750 million Asia Buyout Fund invested $145 million to
buy a controlling stake in KorAm Bank. Through United Defense,
Carlyle owns Bofors Defense, a Swedish manufacturer of naval guns
and other weapons. In its latest deal, finalized March 13, Carlyle is
investing $50 million in Conexant Systems, a spinoff from defense
giant Rockwell International, to manufacture silicon wafers for
wireless communications and Internet supply markets around the
world.
The Conexant deal illustrates the extraordinary mix of business
acumen and contacts that makes Carlyle tick. Carlyle's entry
into wireless is being led by William Kennard, who regulated the
wireless industry as chairman of the Federal Communications
Commission before being hired as managing director of Carlyle's
global telecommunications group. Carlyle's investment will help
Conexant expand its already sizable market in China, where its
wireless division recently won approval to supply a key cell-phone
technology to state-owned China Unicom, the second-largest telecom
provider in the world's largest wireless market. In a convenient twist,
China Unicom's national network is operated by Canada's Nortel
Networks under a contract signed during a visit to Beijing by
Carlucci, who was Nortel's chairman from 2000 to 2001.
A classic example of how Carlyle's
political connections work was the
Pentagon's decision last year to develop
United Defense's Crusader mobile
artillery system. The decision to fund
the CRUSADER, which could eventually
cost $11 billion, came after years of
strenuous objections from senior
military planners, who said it was
outdated, too heavy and of little use in
contemporary warfare. But United
Defense's modifications to the
system--and a lobbying campaign by a
handful of lawmakers who received a
total of $300,000 in donations from a
United Defense political action
committee--apparently made the
difference.
Then came September 11 and its
aftermath. With the Crusader contract
in hand and President Bush's war in
Afghanistan well under way, Carlyle
decided the time was ripe to sell some of its United Defense holdings
on the stock market. The initial public offering on December 14
raised $237 million for Carlyle. In January United Defense, whose
board of directors includes Carlucci and John Shalikashvili, former
chairman of the Joint Chiefs of Staff, said its fourth-quarter profits
had risen 62 percent, due in large part to sales of the Crusader,
which received $472 million in the Pentagon's latest budget.
Those events raised a few eyebrows, particularly at a time when the
media were dishing out daily revelations about Enron's political
influence in Washington. Columnist Paul Krugman described the
Pentagon's policy switch on the Crusader as a "very nice gift" from
Rumsfeld to Carlucci, whom Rumsfeld brought into government, and
an example of "crony capitalism," the Asian model of capitalism
scorned by US economists and the International Monetary Fund[for
more on Carlucci, see "Company Man" at www.thenation.com].
Conway, who is chairman of United Defense, scoffed at the
speculation. "Frank [Carlucci] is not going to lobby somebody in the
Defense Department about a program for Carlyle," he said. As for the
timing of the IPO, which was organized after the hijack attacks, "no
one wants to be a beneficiary of September 11," he said.
Friends in High Places
Bush Sr., who chairs the annual meeting of Carlyle's Asian
Advisory Board, has not hesitated to communicate with his son
regarding policies that could affect Carlyle and other US investors in
the region--particularly South Korea, where Carlyle could soon have
an investment stake of more than $2 billion. Last spring, after
President Bush stuck a knife in Kim Dae Jung's sunshine policies
by saying North Korea couldn't be trusted, Bush Sr. sent the
President a memo written by Donald Gregg, his former National
Security Adviser who once served as CIA station chief in Seoul,
urging the new Administration to ease its hard-line policies.
A few weeks later, in a decision the New York Times described as
"the first concrete evidence of the elder Bush's hand in a specific
policy arena," George W. said he was willing to talk to the North
"anytime, anyplace." But the President's "axis of evil" speech on
January 29, which North Korea took to be a near-declaration of war,
ended any hopes of rapprochement and led Pyongyang to cancel a
February visit by Gregg and several other former diplomats. Bush Jr.
tried to soften his rhetoric during his late February visit to Seoul but
was met instead by the largest anti-American demonstrations of his
career. Conway, however, was sanguine about the investment
climate in Korea. Bush's axis speech "doesn't add to my level of
concern," he said.
In Europe, Carlyle's strategy is to invest in companies seeking to
become Europewide and global players. Conway, who attends the
annual meetings of the European board, which are chaired by
Britain's Major, described the advisory boards as an expansive
process where advisers strategize about how to create and nurture
companies with a global reach. At the last meeting of the European
board, the consensus was that "all these companies that have been
more single-country companies are going to have to expand onto the
European stage and ultimately a global stage," he said. "Frankly, if
they don't, they'll have a tough time competing with the Americans
and the Asians." To implement the strategy, Carlyle acquired and
combined three companies, from Italy, Germany and the United
States; in another case, it combined two German and Canadian auto
firms.
In buying Bofors, Carlyle and United Defense crossed into an
extremely sensitive policy area. To smooth the process, a
member of Carlyle's European board "helped us on that even
though it was an acquisition by a US company of a Swedish
company," said Conway. "Most people, when you talk about defense
assets, tend to get a little bit sensitive, just as we do in this country."
Sensitivity is one lesson Carlyle has learned the hard way. Last
September, less than three weeks after the attacks on the twin
towers and the Pentagon, the Wall Street Journal disclosed that the
bin Laden family of Saudi Arabia had committed at least $2 million
to one of Carlyle's funds. Carlyle quickly returned the money.
Conway, in the bank's first public comments on the incident, said
the decision to part ways with the bin Ladens was made at the senior
partnership level. "Anything that had the word bin Laden in it, you
just didn't want to be associated with it," he said. "Its not that the
people we were dealing with had done anything wrong." But in the
end, "we said, 'Gee whiz, we'll buy you out at fair market value and
get on with our life.'"
Carlyle's Structure
The Carlyle Group is owned by
forty-nine managing partners, who
hold 94.5 percent of Carlyle's private
stock. (They include Baker and Major,
whose Carlyle holdings are worth at
least $200 million if the stock is equally
divided.) The remaining 5.5 percent is
held by the California Public Employees
Retirement System [see "CalPERS and
Carlyle," page 15]. The investors in
Carlyle's various funds include US
investment banks Goldman Sachs and
Salomon Smith Barney; investment
authorities in Abu Dhabi, Kuwait and
Brunei; giant insurers like American
International Group and the
labor-oriented Union Labor Life; public
pension funds in Ohio, Florida,
Michigan and New York; and the
corporate pension funds of American
Airlines, Boeing, BP Amoco, GM and
the World Bank.
Carlyle has distinguished itself from competitors like Kohlberg
Kravis Roberts and Donaldson, Lufkin & Jenrette by branding its
name on its fourteen investment funds, as Fidelity does with mutual
funds. David Snow, editor of PrivateEquityCentral.net, an industry
newsletter that recently named Carlyle its "deal team of the year,"
said the innovation was the inspiration of David Rubenstein, the
lone Democrat among Carlyle's founding partners. "They've taken
the name they built in defense and are stamping it on funds with
different expertise," he said. "That's the direction the private equity
industry is moving in." Carlyle's practice of hiring influential
statesmen and politicians has also inspired imitation. Al Gore, for
example, was recently hired by Metropolitan West Financial of
California to start a private equity practice, and Forstmann Little, a
fund co-managed by Erskine Bowles, President Clinton's former
Chief of Staff, lists Newt Gingrich and Henry Kissinger among its
advisers.
Carlyle doesn't provide investment figures by industry. But its focus
on military and government-regulated industries is illustrated by the
breakdown of Carlyle's Partner II fund, its primary vehicle for US
manufacturing, which has 24 percent of its capital in defense-related
companies, 23 percent in commercial aerospace and 24 percent in
telecommunications and energy.Similarly in its Asia fund, 52
percent of Carlyle's investments are in financial services, where
governments are deeply involved in restructuring the region's banks;
17 percent are in telecommunications; and 31 percent are in cable
TV, industries that are being privatized and are under strict
government supervision.
Carlucci,the mastermind of the bank's defense investments, came
on board in 1989 after serving in the Reagan Administration. Carlyle
says that Carlucci has never lobbied the government. He does,
however, get invited to government events of great use to Carlyle
simply because he is Frank Carlucci. According to recently
declassified documents from the Office of the Secretary of Defense,
Carlucci met with Rumsfeld twice last year--not as a representative of
Carlyle but as a former Defense Secretary and National Security
Adviser. The meetings, on February 9 and October 19, were
organized by Rumsfeld to discuss defense issues and the war on
terrorism, and included other luminaries from the national security
establishment, including Kissinger and Caspar Weinberger
(Shalikashvili was there too).
Rumsfeld's correspondence and Carlucci's subsequent comments
underscore the utility of such meetings to Carlyle. After the
February event, Carlucci and Rumsfeld agreed to follow up with
discussions on how "to cut the cost of defense infrastructure and
reinvest the savings in modernization and other priority
programs"--key issues for United Defense.
TEN DAYS after the October
19 session, which included Wolfowitz, Carlucci offered an
assessment of the situation in Afghanistan that exactly reflects the
Bush Administration's endless-war scenario. "We as Americans have
to recognize that [terrorism] is more or less a permanent position,"
Carlucci told a New York audience of business executives and labor
leaders that included AFL-CIO president John Sweeney. "We're
going to have to live with this kind of phenomenon for the rest of our
lives."
Looking East
There Carlucci has led Carlyle's foray into defense, Bush Sr. and
Baker have helped the bank forge deep ties with the Middle
East. Just after his son was sworn into office, Bush was invited by
Saudi ambassador Prince Bandar bin Sultan bin Abdulaziz to speak
to potential US investors in Saudi Arabia at a two-day conference in
Houston. Bandar, who is close to the Bush family, was not relying
purely on friendship, however: The Washington Post recently
disclosed that Bandar has invested in Carlyle, along with his father,
Prince Sultan, the Saudi defense minister. (Bush Jr. also has a
Carlyle connection: In the early 1990s he was on the board of
Caterair, a Carlyle company that provided in-flight food services to
airlines but never made a profit.)
Through a 51 percent joint venture with the Saudi government,
Carlyle's United Defense provides tactical training and maintenance
for the thousands of Bradley Fighting Vehicles purchased by the
Royal Saudi Land Forces after the Gulf War. Carlyle had a long
relationship with Saudi Arabia through BDM Corporation and
Vinnell Corporation, which train the Saudi National Guard and were
sold to TRW in 1998. In the early 1990s Carlyle advised Al-Waleed
bin Talal--the Saudi prince whose $10 million donation to the World
Trade Center victims' fund was rejected by Rudy Giuliani--on his US
investments, including a $600 million bailout of Citicorp, now
Citigroup.
Last April, Bush Sr. led a Carlyle delegation to Turkey, where
Rubenstein negotiated a joint venture with the Koc Group, Turkey's
largest conglomerate, which has holdings in energy,
telecommunications and defense. During a dinner with Turkish
business executives, Bush reminded the audience of Turkey's
support during the Gulf War and promised to "help Turkey as we did
in the past." FNSS, a joint venture between United Defense and the
Nurol Group, is Turkey's largest manufacturer of armored vehicles
and exports to Malaysia and other nations.
Over the past three years, in addition to visiting Turkey, Bush
has been to South Korea, Saudi Arabia, Australia, France,
Thailand and Hong Kong on Carlyle's behalf. In his speeches to
investment conferences, said Conway, Bush "talks about the world,
what he sees, what he thinks. Period." Carlyle's newly hired
spokesperson, Chris Ullman, would not discuss Bush's
compensation or his schedule, but added that Bush "does not and
has never represented Carlyle before other governments or
government officials. He has made no business deals for Carlyle."
Investors, however, recognize that the Bush name--and the many
contacts Bush developed as President, CIA director and ambassador
to the UN--carry tremendous weight as he travels around the world
on behalf of Carlyle. "Nothing beats the ability to have George Bush
call up some contact he's known for the last twenty years to
comment on the worthiness of a particular deal," said Pat Macht, a
spokesperson for CalPERS, after consulting with investment
managers about Bush's role in Carlyle. That is particularly true in
Asia, where personal relationships are key to business deals and
Bush chairs the annual meeting of Carlyle's Asian Advisory Board.
Carlyle started its $750 million Asia fund three years ago to invest
in countries trying to recover from the Asian financial crisis.
Under pressure from the IMF and the US Treasury, the structure of
Asian capitalism has been changing from family-controlled
conglomerates, such as the Korean chaebols Daewoo and Hyundai,
to leaner companies run by professional managers, hired in many
cases by foreign owners. Governments, meanwhile, have abandoned
social policies that once guaranteed a portion of the work force
lifetime jobs and made it difficult to fire workers. That's even true in
Korea, where militant unions have given the country a bad
reputation in the eyes of foreign investors.
"Contrary to popular belief, major
layoffs are being done in Korea,"
Jonathan Colby, a former aide to
Kissinger who is one of Carlyle's
managing directors for Asia, told a
recent Asian investors conference in
New York. With Asian banks holding
billions of dollars in bad loans, "being
able to tap private equity is crucial to
long-term growth in Asia," Ray Hood,
director of Asian investments for State
Street Bank, said at the same event.
For companies like Carlyle, Asia "is
where the rewards will be in the next
few years. Investment returns will be a
complete steal."
In Japan, Carlyle is positioning itself
alongside Goldman Sachs, Newbridge
Capital, the Ripplewood Group and
other US investment banks in buying
up nonperforming loans and distressed
assets, which are valued at more than
$1 trillion. "Just as in Korea you can make some investments by
taking a piece of the chaebols, I think the same thing is true in
Japan, where you have these overleveraged, underperforming
companies," said Conway.
These investment strategies mesh with policies of financial
deregulation, structural reform and privatization, which have been
publicly endorsed by President Bush, whose Administration is
deeply concerned that a collapse of Japan's financial system could
imperil the US-Japan security alliance. Last July, when Japanese
Prime Minister Junichiro Koizumi visited Bush to seek his help in
resolving Japan's financial woes, Japanese reporters blinked in
astonishment as George W. explained at some length the importance
of restructuring bad loans and banks from his experience as an oil
executive and Texas governor during the S&L disaster.
So far, Carlyle's Asia fund has made four acquisitions: KorAm Bank,
whose value has almost doubled since it was purchased in 2000;
Taiwan Broadband, that country's fourth-largest cable company, in
which Carlyle has invested $187 million; Mercury Communications,
a telecom manufacturer recently spun off from the bankrupt Daewoo
Group, for $49 million; and Pacific Department Stores, a joint
venture with a Taiwan group that operates a chain of retail stores in
mainland China, for $43 million.
Carlyle's Japan fund recently agreed to make its first acquisition,
a 90 percent stake, worth $28 million, in the security trucking
subsidiary of the bankrupt Daiei Group, Japan's largest retailer.
Carlyle Asia is about to close its third acquisition in Korea, where
Carlyle and J.P. Morgan have reportedly offered $1.2 billion to buy
Kumho Industrial, the world's tenth-largest tire maker and a major
exporter to the United States and China. China, in fact, may be
where Carlyle is heading in the long term. "We are very focused on
South Korea today, but China is our priority market of tomorrow,"
Michael Kim, Carlyle's managing director in Seoul, told the Daily
Deal in January.
All of this is good news for Carlyle's family of investors, who seem
nonplussed by the questions swirling around the firm. "I don't see
what the issue is with Carlyle, except that there are some people
who just don't like President Bush," said Michael Flaherman,
chairman of the CalPERS investment committee. But as America has
learned from the Enron fiasco, the mix of big business and politics
can lead to disastrous investments, poor public policy and further
erosion of the democratic process. The Carlyle system, where former
Presidents, prime ministers, diplomats and industry regulators
capitalize on their careers to make money for themselves and their
clients, may be perfectly legal. Yet as Japan's experience over the
past decade shows, even the most vaunted economies can sink--and
sink fast--when the line between public interest and private profit
disappears. Outside of the conservative Judicial Watch and the
muckraking Center for Public Integrity, there has been little public
interest in the Carlyle system of capitalism and where it is going.
CONGRESS, meanwhile, is too busy seeking Carlyle's advice even to
ask the question. The people who run Carlyle may hate the word
secrecy, but their words and actions make it impossible to know
where the policy-making ends and the money-making begins.
thenation.com
Tim Shorrock
Tim Shorrock is a Maryland freelance journalist who specializes in
economics and US foreign policy and has been reporting about Asia,
globalization and finance for more than twenty years, for many
publications at home and abroad. He can be reached at
tshorrock51@hotmail.com. |
