War Is Sell - Washington Elite Benefits from War

October 31, 2001

War has always been a profitable money machine for shrewd investors with foresight, but the extremely close connections of the Carlyle Group, a Washington-based private equity investment firm and major war profiteer, to the Bush and Bin Laden families raise unavoidable questions of waging war for profit.

Established in 1987 the Carlyle Group was founded by David Rubenstein, a former staff member in the Jimmy Carter White House, and his two partners, Dan D'Aniello and Bill Conway. Today there are 18 partners in the firm and one outside investor. The Washington Post has described Carlyle as a "merchant banking firm" set up "to serve corporations and wealthy families." From the beginning the founders of Carlyle have recruited former politicians as consultants: former President George H. W. Bush is among them, along with a host of other Bush family cronies.

The Bush connection to the Carlyle Group is nothing short of a scandal, according to Larry Klayman, a notable government watchdog best known for pursuing the scandals of former President Bill Clinton.  Now that the United States is bombing Afghanistan and allocating huge sums of money for defense, including $40 billion for the "war on terrorism" and more than $200 billion [1994 dollars] for the Joint Strike Fighter (JSF), the conflict of interest is "direct," Klayman says. "President Bush should not ask but demand that his father pull out of the Carlyle Group." Carlyle owns many of the companies that will share in the $200 billion JSF deal.

"Carlyle is as deeply wired into the current administration as they can possibly be," Charles Lewis, executive director of the Center for Public Integrity, said. "George Bush is getting money from private interests that have business before the government, while his son is president. And, in a really peculiar way, George W. Bush could, some day, benefit financially from his own administration's decisions, through his father's investments. The average American doesn't know that. To me, that's a jaw-dropper."

The Carlyle Group, which claims to be the largest U.S. private-equity fund with some $14 billion in assets, makes money by investing in undervalued companies and reselling them at a profit, employing a host of former top-level government officials from the Bush and Reagan administrations, including former President Bush, in a global "money machine." The Washington Business Journal said in May that the Carlyle Group "seems to play by a different set of rules."  Carlyle is a high-end business open only to the very rich. The Carlyle empire has investments around the world, owns numerous defense related companies outright, and has considerable business with the U.S. government. It owns so many companies that it is now one of the biggest U.S. defense contractors and a major force in global telecommunications. Carlyle also serves as financial adviser to the Saudi government.

Carlyle's directory reads like a Who's Who of high-profile Republicans going back to the Reagan administration. The chairman is Ronald Reagan's former defense secretary, Frank Carlucci. Former Secretary of State James Baker III, former Budget Director Richard Darman, and Arthur Levitt, chairman of the Securities and Exchange Commission through most of the Clinton administration, are all senior advisers to the firm.

"Nothing in recent history, however, seems to approach the success this group has had in the wholesale conversion of former high government rank to gigantic profits," Dan K. Thomasson, former editor of Scripps Howard News Service wrote in March 2001. "To use that influence at the highest levels to garner such enormous wealth and power presents an undeniably unsavory appearance. 

"One of the underlying themes of the last election, rarely spoken but always present, was the need to restore dignity to the presidency. Now we discover that at the same time he was being held up as an example of how to be presidential, Bush senior was using his stature and entree everywhere to push the interests of himself and his cronies," Thomasson wrote.

The success of the relatively young Carlyle Group is hardly surprising given that it primarily buys companies that are regulated by government. Nearly two-thirds of its investments are in defense and telecommunications companies, which are affected by shifts in government spending and policy. Financial experts say the Carlyle Group's most profitable niche is buying military and aerospace supplies at discount prices and selling them for a lot more.  With Carlucci as chairman, it's no surprise that Carlyle is drawn to defense firms. Carlyle owns numerous defense and aerospace firms such as United Defense Industries, which makes tanks, guided missiles, space vehicles, and weapons delivery systems. United States Marine Repair (USMR) is America's largest non-nuclear ship repair, modernization and conversion company and is another Carlyle company.

Carlucci's knowledge of the Pentagon's inner workings gives Carlyle an advantage when buying defense companies that have fallen in market value. "Because they have a good sense of the defense and aerospace business, they have an ability to project future earnings so they can calculate the true value," Philip Finnegan, a senior analyst with the Teal Group said.  Carlucci, who is seen as largely responsible for Carlyle's success, said he met in February with his old college classmate, Donald Rumsfeld, the new secretary of defense. He also met with Vice President Dick Cheney, himself a defense secretary under former President Bush, to talk about military matters-at a time when Carlyle has several billion-dollar defense projects under consideration.

Defense-related companies make up about 30 percent of the firm's portfolio, which also includes information technology, Internet companies, health care, real estate, and bottling companies. The French newspaper, Le Figaro, is another Carlyle asset.

"Carlyle has averaged annual gross returns of 34 percent since inception, par for the course among similar buyout firms. By comparison, funds offered by Kohlberg Kravis Roberts & Co. returned 30 percent. By the end of 2000 Carlyle had raised a total of $12.5 billion, which made it the fifth-largest private buyout firm in the U.S.," Bloomberg reported.

PUBLIC MONEY-PRIVATE EQUITY

Although the Carlyle Group is a "private equity fund" it has enriched itself using public and state pension funds from California, Texas and Connecticut. The California Public Employees' Retirement System (CALPERS) has invested hundreds of millions with Carlyle and has at least a 5 percent stake in the firm.

The Texas teachers' pension fund, whose board was appointed when George W. Bush was governor, gave Carlyle $100 million to invest. In Connecticut, a scandal resulted when Wayne Berman, a Washington consultant and fund-raiser for George W. Bush's presidential campaign, received "a kickback" of more than $900,000 after the state treasurer, Paul J. Silvester, steered tens of millions of state pension fund dollars into a Carlyle Group investment fund.

BIN LADEN CUTS CARLYLE TIES

On Oct. 26, it was reported that Osama Bin Laden's family was cutting its financial ties with the Carlyle Group. The Bin Laden family reportedly sold its investment worth $2.02 million because of criticism in Saudi Arabia that the Bin Laden family, whose construction company is one of the largest in the Middle East, would profit from increased military spending in the U.S.-led war against terrorism.

The fact that President Bush's father and his former secretary of state, James Baker, serve as senior advisers to the company has raised red flags in Washington. Bush the Elder and Baker reportedly use their extensive government contacts to further their business interests as Carlyle Group representatives. From Carlyle's point of view, the involvement of Baker and the former president is invaluable.  "It punches up the brand awareness for us globally," said Carlyle partner Dan D'Aniello. "We are greatly assisted by Baker and Bush. It shows that we are associated with people of the highest ethical standards."  Baker's stake was estimated to be worth more than $180 million when the fund was valued at $3.5 billion; today it is worth much more.

Unlike Baker, Bush the Elder has no ownership stake in Carlyle. As an adviser and an investor, however, Bush is allowed to put the money he earns giving speeches, between $80,000 and $100,000 per speech, into Carlyle's investment funds.

In July 2000, Carlyle Group bought Northrop Grumman's aerostructures business group in a deal valued at $1.2 billion. The business was renamed Vought Aircraft Industries and remains based in Dallas. On Aug. 20, Vought announced that it had been selected by Northrop Grumman to manufacture the wing for the Global Hawk unmanned reconnaissance system's air vehicle.

The corporate overlap between Carlyle and leading defense contractors can be seen in B. Edward Ewing, managing director and CEO of Dallas-based Carlyle Management Group (CMG). Ewing is also chairman and CEO of The Aerostructures Corporation (TAC), a leading worldwide designer and manufacturer of major components for commercial and military aircraft, and is CEO of USMR. Prior to joining Carlyle and leading USMR, Ewing served five years as vice president of operations for Lockheed Martin, the leading company on the JSF project.

The current White House occupant, George W. Bush, was a director of a Carlyle company named Caterair.  From the beginning the founders have recruited former politicians as consultants. George Bush the Elder visited Saudi Arabia, home of the Bin Laden family, to open doors for Carlyle's fund-raisers. Carlyle won't disclose how much senior advisers like Bush earn but industry experts estimate their fees average about $1 million per year.  "Mr. Bush gives us no advice on what do with the federal government. We've gone over backwards to make sure that we do no lobbying," Carlyle senior partner David Rubenstein said. "President Bush is not asking anybody for money. He speaks at lunches, dinners, and events on non-Carlyle matters and expresses his views on world events."

Rubenstein, who attended Barbara Bush's surprise 75th birthday party last summer in Kennebunkport, Me., says: "We don't do lobbying. We don't give to any politicians. We don't have a PAC [political action committee]. We try to be cleaner than Caesar's wife." Rubenstein may not know it, but Caesar's wife was not "above suspicion."  He divorced her over allegations of infidelity.