Saturday, November 15, 2003

The Iron Triangle: Inside the Secret World of the Carlyle Group
By Dan Briody
John Wiley & Sons (2003)

(A 45 minute web-streamed Dutch documentary about Carlyle)

It's hard to write objectively about the Carlyle Group, the global private equity investment bank that specializes in defense and aerospace takeovers, without sounding like a conspiracy nut. Yet it's hard to imagine any single company that epitomizes Eisenhower's warnings about the "military-industrial complex" more than the Carlyle Group.

The company employs a who's who of Washington and global insiders, including (until recently) ex-president George H.W. Bush, ex-SEC Chair Arthur Levitt, former UK British Prime Minister John Major, "Spooky" Frank Carlucci -- the former deputy director of the CIA and Reagan-era Secretary of Defense, Bush family consigliere James Baker III, Fidel Ramos (former President of the Philippines), and a roster of other top ex-government figures, Ivy-league MBAs, World Bank executives, etc. As Dan Briody (a business journalist who has written for Forbes, Wired and others) puts it: "over time, the pattern of Carlyle's hiring practices emerges to reveal a series of old friends helping one another out." And opportunizing on the decisions that their ex-colleagues (e.g. Colin Powell, once a Carlyle consultant) or sons (in Bush's case) are making inside a sitting administration.

The Carlyle Group was the first major private venutre capital firm to be located on Pennsylvania Avenue, blocks from the White House. As such, Carlyle epitomizes what Michael Lewis was the first to label "access capitalism" in a 1993 article for The New Republic. And given the way many of the post-war contracts have been doled out, Carlyle has become a model for THE way of doing business in Washington these days.

The company has come a long way since the early 1970s, when it was first established by a fluke at a NYC hotel of that name (chosen to give teh firm an old money patina). The company's first deal was a scam that brokered tax loopholes intended for Alaskan Eskimos but sold to U.S. companies. Carlyle partners have since continuously milked their high-level contacts ("in Washington, it's not what you know, but who you know" Briody writes) so successfully that the company boasts in its own marketing literature about having "a vast interlocking global network." Carlyle's influence clearly signals a dangerous trend in U.S. foreign policy that has gained considerable force and deserved attention during the Bush administration.

The company was embarrassed when an investment stake from the bin Laden family was revealed after 9/11. (Carlyle quietly returned the investment after the unwelcome attention, though bin Laden had been identified as a terrorist long before then). Like Halliburton, Carlyle pioneered the privatization of certain military operations. The company's Vinnell Corporation subsidiary (which Briody calls the "clearest example of Carlyle's business inside the Iron Triangle") -- recently spun off -- has been training the Saudi Armed Forces in how to protect their country's oil fields since the mid-1970s (Vinnell personnel actually fought alongside Saudi forces in the first Gulf War). Vinnell was the target of a major terrorist bomb attack in July. (The bin Ladens pulled their money out of Carlyle after 9/11.)

Critics have suggested U.S. interests have also been bent to help the company. For example, ex-president George H.W. Bush (who took a leading role in the company's Asian operations) is reported to have influenced his son's decision to reverse course and reopen negotiations with North Korea, a move tied to the over $1 billion the company had invested in South Korea. (Carlyle invested in South Korean banks after the Asian crisis of the late 1990s collapsed the country's economy. The IMF had forced South Korea to open up the banking sector to overseas investors as a bailout condition.) The IMF may criticize countries like Indonesia for fostering a system of "crony capitalism," while forgetting to look out of its windows and down Pennsylvania Avenue for a better example.

Carlyle has had a few setbacks, but they are rare. The ill-fated (and unfortunately named) Crusader howitzer, for instance, was cancelled through the efforts of Donald Rumsfeld, a friend of Carlucci's from Princeton days. (Rumsfeld shortly thereafter threw his old friend a contract for another new weapon system that the company's United Defense Industries subsidiary could supply.)

With all of their connections, some of Carlyle's executives also epitomize the Bush League's ability to rise to top-level positions despite their less than stellar business record (President Bush himself was appointed to the board of a Carlyle subsidiary - Caterair -- that also crashed). Before he joined the Reagan administration (where he was called "Mr. Clean" for coming in after the Iran-Contra scandal left so many people tarnished, if not indicted), Carlucci made $1.2 million -- not bad for steering a company (Sears World Trade) into bankruptcy. He succeeded Caspar Weinberger as secretary of defense for the final year and a half of the Reagan administration, where he spent much of his time refining the budgeting and weapons procurement process, experience that would serve him well in his future role with Carlyle, where "he would have special knowledge of which defense contractors would later be cashing in on the long-term procurement system he had arranged."

The fact that more and more financial companies are hiring politicians like Rudolph Giuliani or Al Gore during their hiatus from politics suggests that they are either learning from Carlyle's example, or coming to recognize that having a quality rolodex may be increasingly more important than having a better business plan.

In a move that Business Week characterized as an attempt to "scramble the conspiracy theories," Carlyle recently hired Lou Gerstner - the ex-chair of IBM to succeed Carlucci as chairman. Although Gerstner helped the computer maker turn itself around in the 1990s, no matter how much he diversifies the company's business, it will continue to rely most heavily on the deal-maker's high-level political contacts.

Other Carlyle stories:
Red Herring

Also, check out this French Stop Carlyle web site.