The Place Where Industry, the
Military and Government Converge
[The Carlyle Group]
by Geraldine Perry
The implosion of the Carlyle Capitol Corporation
just weeks before the Bear Stearns debacle last March is little
more than a distant memory in the minds of most people. Yet the
facts surrounding Carlyle Capitol, like those surrounding the
J.P. Morgan/Bear Stearns/WaMu deals - not to mention the JP Morgan/Enron
scandal - certainly deserve further scrutiny.
To be sure, derivatives, along with "innovative"
accounting techniques, are a unifying theme of these and similar
eye-brow raising, but effectively submerged, stories. Chief among
these submerged stories are those which surround Carlyle Capitol
and its parent company the Carlyle Group. Here's what can be said
The derivatives-heavy Carlyle Capitol
had been the first of 55 funds the Carlyle Group took public between
July 2007 and March 2008. It went belly up as its mortgage-backed
assets began to implode and a group of the world's biggest banks,
including JP Morgan, refused to hold off on margin calls and liquidation
of assets - moving instead to seize and sell what was left of
the fund's assets. While the losses to the Carlyle Group were
"minimal from a financial standpoint", it nevertheless
represented a major embarrassment for the giant private equities
firm - which, it must be mentioned, had $76 billion tied up in
exactly the same kinds of "derivative investment tools"
as its "separate legal and business entity" aka the
Carlyle Capitol Corporation.
Perhaps it is mere coincidence that the
Carlyle Group is registered in Britain (but based in Washington,
D.C.) while Carlyle Capitol was based on Guernsey Island off the
British coast. Nevertheless the question persists as to whether
Carlyle Capitol was functioning as an offshore entity created
as a means of misstating, or perhaps burying, certain material
financial statements. You know, the kind of activity that subjected
JP Morgan to Congressional Investigation in 2002, proof of which
activity the Congressional Investigating Committee was given audiotapes
and copies of incriminating emails.
The Carlyle Group itself has what can
only be described as a controversial history with trails leading
to 9-11, the current war on terror, the first Gulf War, Afghanistan
and elsewhere. It also has had extensive "counter party links"
to Enron, Arthur Andersen, Global Crossing, the Saudi Royal Family,
and yes, even the Bin Ladens.
Its main business is buying and selling
large corporations. Described as a powerful merchant bank and
leading defense contractor, the Carlyle Group also is a key player
in the privatization of public resources within the U.S. Known
as the ex-presidents club it is surprising to say the least that
so few have ever even heard of the Carlyle Group, especially given
the scope of its activities. Perhaps this is because, as an October
31, 2001 Guardian UK article tells 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 power brokers - 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
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.
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.
Despite its lack of notoriety, one can
find Carlyle connections turning up everywhere. For example and
in addition to the "counter party web" of the Texas
teachers pension fund mentioned above, an August 10, 2005 NewsMax
article revealed that the Carlyle Group had caught the attention
of federal prosecutors after Illinois Teachers Retirement System
officials raised concerns about the $4.5 million in fees offered
by Carlyle to one Robert Kjellander (a lobbyist, Bush campaigner
and newly appointed treasurer of the Republican National Committee)
for helping land business with the Illinois teachers pension fund.
A spokesman for Carlyle of course maintained
that Kjellander's fees weren't unusual and in any case, the average
returns on these funds investments was 45% per year. After all,
who could complain about that, even if the earnings themselves
had the unmistakable taint of blood and corruption written all
Interestingly, the article also revealed
that "Kjellander had previously raised eyebrows in 2003 when
he received an $809,000 consulting fee from Bear, Stearns Inc.
after Democratic Governor Rod Blagojevich picked that investment
house to handle $10 billion in pension fund bonds. The firm received
$8 million for handling the bond issue"
Bear Stearns, J.P. Morgan, Carlyle Capitol,
the Carlyle Group and a VERY long list of other rarefied corporations
are (or were, as the case may be) all heavily involved in derivatives
instruments that are still in the process of unwinding themselves
from their myriad counter party entanglements across the globe.
Many, if not all, of these firms have long used their financial
clout to influence government officials, not to mention the media
and educational institutions - and many are either directly or
indirectly heavily invested in the defense industry among other
industries. But when all is said and done, there is no other private
business which has so successfully navigated the heady waters
of what is known as the Iron Triangle - a place where industry,
government and the military converge - than the Carlyle Group.
A most striking example can be found in
Iraq, where we find two former Secretaries of State heading up
a secret investment deal involving a "complex transfer of
ownership of as much as $57 billion in unpaid Iraqi debts."
Seems that former Secretary of State James Baker (and senior counsel
for the Carlyle Group) just happened to be appointed by Bush II
as the special envoy to negotiate Iraqi "debt relief".
The objective of this envoy was to see to it that "[t]he
debts, now owed to the government of Kuwait, would be assigned
to a foundation created and controlled by a consortium in which
the key players are the Carlyle Group and the Albright Group,
which is headed by another former Secretary of State, Madeleine
We also have Frank Carlucci, who not only
served as Chairman of the Carlyle Group at the time of the September
11 attack, but had served as a former Secretary of Defense in
the Reagan Administration and a Deputy Director of the CIA during
the Carter Administration. Perhaps even more curiously - and again
at the time of the September 11 attacks - Carlucci was serving
on the RAND Corporation Board of Trustees and was also the co-chair
of the Rand Center for Middle East Public Policy Advisory Board.
The Rand Corporation, it can be said, is one of many nonprofit
(non-taxpaying) "think tanks" where people get paid
to think, and Frank Carlucci was among those who were being paid
to think about the situation in the Middle East.
Fortuitously for the Carlyle Group, it
"cashed out many of its investments when the stock of defense
companies rose dramatically in the aftermath of September 11 and
the buildups to the Afghanistan and Iraq wars."
In the aftermath of the September 11 attack,
the Carlyle Group, together with Halliburton, has made millions
of dollars off the Iraq War. In addition Carlyle has "reaped
millions of dollars from government contracts on things such as
cleaning up anthrax-infected buildings - including the Hart Senate
Office Building - making X-ray scanners, providing logistics support
to the U.S. military, making metal-bond structures in fighter
jets and missiles, and providing employee background checks for
Although Carlyle's counter party webs
are seemingly endless, its growing involvement in public/private
partnership ventures is also exceedingly troublesome, and strangely
under-reported. In addition to the already established afore-mentioned
partnering activities, the announcement of a newly formed team
whose sole objective was to engage in public/private ventures
came after a public furor had been created over the fact that
DP World, a company owned by the United Arab Emirates, had acquired
a British company that manages operations at six U.S. Ports. Soon
after this news became public, the House Appropriation Committee
voted on March 8, 2006 to prevent DP World from taking control
of six U.S. Ports, and that story quickly faded into oblivion.
Perhaps by happenstance and the very next
day after the House vote - the Carlyle Group announced that it
had established an eight-person team co-headed by Robert Dove,
former executive vice-president at Bechtel and Barry Gold, former
managing director and co-head of the structured finance group
at Citigroup/Salomon Smith Barney. According to the Media Room
section of its own website, the team's objective is to invest
"in the [public] infrastructure sector, including investments
in transportation and water facilities, airports, bridges, ports,
stadiums and other public infrastructure primarily in transactions
ranging from $100 million to more than $1 billion. The team will
engage in public-private partnerships (PPP) with governments at
all levels as well as purchase projects outright or through long
Increasingly, cash strapped local governmental
entities are looking to these public-private partnerships for
relief for their liquidity problems. To be sure, the argument
for such projects carries a certain appeal because, as the logic
goes, what other options do state, county and municipal governments
have, after they downsize and increase taxes, besides holding
what amount to giant fire sales in which public assets are sold
to the highest bidder or public-private partnership deals are
struck? What all too often is not clearly and completely understood
by the average citizen - or even for that matter, his elected
officials - is that "[i]n this arrangement, government and
business "co-own" the former government asset and their
purpose is to make a profit."
Moreover, and given the allure of very
handsome profits that stand to be generated by this "new
asset class" it is no surprise that "banks and private
investment firms have fallen in love with public infrastructure.
They're smitten by the rich cash flows that roads, bridges, airports,
parking garages, and shipping ports generate-and the monopolistic
advantages that keep those cash flows as steady as a beating heart.
But are investors getting an even better deal [than the public]?
It's a question with major policy implications as governments
relinquish control of major public assets for years to come. The
aggressive toll hikes embedded in deals all but guarantee pain
for lower-income citizens-and enormous profits for the buyers.
What's more, some public interest groups complain that the revenue
from the higher tolls inflicted on all citizens will benefit only
a handful of private investors, not the commonweal."
What should likewise come as no surprise
in all this is the fact that "[i]nvestment firms including
Goldman Sachs, Morgan Stanley, and the Carlyle Group are approaching
state politicians with advice to sell off public highway and transportation
infrastructure. When advising state officials on the future of
this vital public asset, these investment firms fail to mention
that their sole purpose is to pick up infrastructure at the lowest
price possible in order to maximize returns for their investors.
Investors, most often foreign companies, are charging tolls and
insisting on "noncompete" clauses that limit governments
from expanding or improving nearby roads."
With respect to the Carlyle story in particular,
what is most unfortunate is that "[o]utside 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."
So it seems that the military/industrial/governmental
complex - and the Carlyle Group in particular - is perfectly positioned
to profit handsomely from both the endless war on terror and the
privatization of public resources, with nary a complaint from
government officials and next to no meaningful media coverage
of the long term ramifications of such "profit centers".
Behind it all are the Faustian bargains which are struck daily
through the speculative derivatives markets in the increasingly
rapacious quest for the "fast money" that only these
markets can provide.
In his 2002 Enron-related testimony before
Congress, attorney Frank Partnoy makes the following important
observations concerning the effect derivatives have on business
(and it might be said government) behavior:
The temptations associated with derivatives
have proved too great for many companies, and Enron is no exception.
The conflicts of interest among Enron's officers have been widely
reported. But too much focus on Enron misses the mark. As long
as ownership of companies is separated from their control - and
in the U.S. securities market it almost always will be - managers
of companies will have incentives to be aggressive in reporting
As Mr. Partnoy's comments reveal, the
lure of "fast money" promised by derivatives can be
as morally deadly as it is irresistible. What gets lost in the
mix are the nuts and bolts for which a company (or indeed our
country) was founded - even as an unending parade of enticements
are created for exaggeration of profits and a host of other forms
of deceptive and even unscrupulous behavior.
Without question, mammoth, globally-scaled
financial empires and unfathomable personal wealth have been created
through derivatives. But all this has come at a heavy price that
must be measured not just in dollars but in terms of blood and
honor as well.
It falls to ordinary citizens to reclaim
the practical tools and the moral high ground established by America's
founding documents - which not only created the United States
but which once served as a beacon of hope to the rest of the world.
Geraldine Perry is co-author of The Two
Faces of Money and creator of its related website which includes
recent reviews. This website also has an abundance of related
material and links, along with a free, down loadable slide presentation
describing the two forms of money creation and the Constitutional
solution, which is not the gold-backed dollar as popularly believed.
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