THE NATION: - April 1, 2002(CONT'D) Crony Capitalism Goes GlobalMon Apr 10, 2006 03:27
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Crony Capitalism Goes Global
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."
Where 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.
EXPOSED: The Carlyle Group
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