Have you read Dan Briody's "The Iron Triangle" yet? Not only a remarkably high-access history of the Carlyle Group's origins, but also a very entertaining business book about people who were desperate to try anything and everything within their reach that could possibly make them money ... for those of us with LLCs, inspiring stuff.
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When George W. Bush was sworn in to office in January 2001, everything changed suddenly and dramatically. One of the first things that young Bush did as president was call off the missile control talks that the Clinton administration had been conducting with North Korea for years. Bush revealed open hostility toward North Korea, calling it a rogue state that cannot be trusted. It was a stunning reversal of American policy, which heretofore had been to use diplomacy in mitigating North Korea's military aggression toward South Korea. And it was coming from a man that had virtually no experience in foreign affairs. The nation watched in disbelief.
Not surprisingly, the backlash from Bush's brash actions was felt far and wide. North Korea accused the United States of planting a "time bomb" in the midst of their fragile negotiations with South Korea. The South Korean government received Bush's actions as a rebuff to their safety, knowing that North Korea would be more inclined to attack without Washington's involvement. Kim Dae-jung, South Korea's president, was forced to turn to the European Union for help in filling the sudden gap the United States had created in the peace process between North and South Korea. He was also getting lambasted at home for not being on top of the situation in Washington.
Bush had made the South Koreans look bad, and undermined their safety, all with one fell swoop. Analysts speculated that Bush was motivated by his desire to create a national missile defense system, part of his campaign platform. If North Korea had no missiles to defend against, the thinking went, Bush's need for a missile defense system would evaporate. As absurd as it sounds, peace between North and South Korea, and between North Korea and the United States, did not further his broader agenda in the White House. Regardless of his rationale, he had created an international crisis on just his second month on the job.
This also threatened Carlyle's extensive investments in South Korea, which would plummet in value as instability in the region increased. The threat of war always sends local economies into a tailspin, much like America's economy since September 11. And Carlyle could kiss regulatory approval for future deals goodbye, with South Korean officials feeling slighted by the United States, and particularly George W. Bush. At first it seemed as if this was a rare case in which being associated with the Bushes was not going to work to the benefit of Carlyle. But that would not prove to be the case.
Adding to the disarray George W.'s stance toward North Korea was causing, the unionists at KorAm bank were starting to rebel against their new American owners, accusing Carlyle of being nothing more than a speculative investor that had already broken its promise not to intervene with management. Employee representatives at the company believed that Carlyle intended to restructure the company, probably threatening jobs. And the union was rallying against Carlyle. The situation was dire. Carlyle had just ploughed nearly $1 billion into South Korea, and the man they all thought would be so good for business, George W. Bush, was on the verge of screwing it all up. Something had to be done.
On June 6, Bush reversed course. In a statement, the president announced plans to resume negotiations with North Korea, essentially picking up where the Clinton administration had left off. Among the issues that the new administration would work on with North Korea was improving relations between North and South Korea. The sigh of relief could be heard around the world, and especially from Carlyle's offices on Pennsylvania Avenue and in downtown Seoul. just like that, the situation was all better. But what could have created the sudden change of heart?
On June 10, 2001, just a few days after the welcome announcement by President Bush, the New York Times reported that the senior Bush had forcefully argued for his son to reopen negotiations with North Korea shortly before President Bush did just that. The article opened:
In an effort to influence one of his son's most crucial foreign policy decisions, former President George Bush sent to the president through his aides a memo forcefully arguing the need to reopen negotiations with North Korea, according to people who have seen the document.
It was the first time that anyone had tangibly seen the influence of the father on the son. According to the article, Bush Sr. felt that his son was being unduly influenced by the Pentagon, and that he should adopt a more moderate stance toward the Korean peninsula. He also spelled out that the hard-line policy toward North Korea was undermining the government in South Korea, thereby hurting U.S. interests in North Asia.
White House spokesman An Fleischer confirmed the report in the Times, and told the press that the argument for reopening negotiations came originally from Donald Gregg, former ambassador to South Korea under the first Bush administration. Fleischer said that Gregg had sent a memo to the senior Bush, who then sent the memo to national security advisor Condoleeza Rice, who then passed along "the thoughts in the note" to the president. It was a way of watering down the connection between George W. Bush and his father, even though it has been widely reported that the two speak regularly. Nobody in the White House wanted the press to get the impression that senior Bush was directly influencing the president. That's probably why Fleischer's accounting of the events made so little sense. Why Bush Sr. would have to go through Rice to relay crucial information on foreign policy to his son, when he talks to him twice a week on the telephone, is anyone's guess.
Bush Sr. went on to do even more damage control, recording reassuring remarks on U.S. policy to be distributed among participants in a crucial meeting between South Korean President Kim Dae-jung and North Korea's leader, Kim Jong-il, on Cheju Island. It seemed the former president was everywhere at once, acting as counsel to his son, ambassador to Korea, and businessman for Carlyle. For a man that had supposedly retired from politics, Bush Sr. was awfully busy.
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The folks at Carlyle refuse to talk about how ex-president Bush is compensated for his work on their behalf. Former employees, however, say that he is invested in the funds that he helps raise and place. If that is the case, the senior Bush's involvement in foreign policy regarding South Korea is a clear conflict of interest. He stands to gain financially from decisions that he is urging his son to make. It doesn't get any more egregious than that. But the press missed the connection at the time. Indeed it was a difficult connection to make, given that Bush Sr.'s trips to Korea and his work on behalf of Carlyle was kept very quiet. Then another story hit the front pages. Bush Sr. was at it again.
This time the New York Times reported that in July 2001, just months after he had advised his son on North Korea, the elder Bush had placed a call to Crown Prince Abdullah of Saudi Arabia on behalf of his son, to reassure Saudi Arabia's leadership that his son's "heart is in the right place," when it comes to Middle East policy. The call was necessitated by the younger Bush, who had upset the Arabs with his one-sided approach to the Israeli-Palestinian conflict. And Daddy was again there to bail him out.
The report said "former President Bush said that his son's 'heart is in the right place' and that his son was 'going to do the right thing,' a Middle East diplomat said. A senior administration official said that the phone call, warm and familiar in tone, was designed to encourage Abdullah to think of the new president as having a grasp of the Middle East similar to that of his father. According to one of the accounts, President Bush was in the room when his father made the call."
The news was stunning, and it undermined the credibility of George W. Bush on foreign policy. Who was making the decisions in the White House? Why didn't Bush Senior run for president instead? But more than that, the news of Bush Sr.'s continued involvement in foreign policy was undermining the credibility of both Bushes ability to keep politics and family business apart. Like the situation on Korea, Carlyle's extensive business interests in Saudi Arabia and throughout the Middle East, were in grave danger if the younger Bush kept pissing off the royal family. So the Senior Bush needed to step in and preserve the relationship once again. It was testament to the sway ex-president Bush still held over foreign affairs. And it didn't look good.
The reports of Bush Sr.'s actions sent the Washington, DC-based public advocacy groups into a tizzy. Tom Fitton, general counsel of judicial Watch, a conservative watchdog group in the Beltway, is beside himself to this day. "It screamed conflict of interest," he says. "We asked publicly that the senior Bush should step down. To this day we don't understand why he hasn't resigned. It's causing a scandal."
That Judicial Watch has called on Bush Sr. to resign from Carlyle is more telling than you might think. This is not your average, ultraliberal watchdog organization. Judicial Watch is a public interest group that was conceived during the Clinton administration as a way to monitor activities that diminish the public's trust in government. It is an extremely conservative group, designed originally to bring down a Democratic president that the group felt was corrupt. "The Clinton administration was the most corrupt in history," says Fitton. "He was a rapist who took money from the Chinese. But he's lowered the bar so far that there is an acceptance of this everyday type of corruption." Other watchdog groups had been howling at Carlyle's antics for years, but when judicial Watch, which had a reputation as a Republican-friendly group, could no longer look the other way, Carlyle had to take notice. "We're a conservative group, but we're not Republican. The Carlyle Group has been very upset with us, but this is an extraordinary company, very unique," says Fitton. "They hire these people, and I don't think they hire them for their good looks. I'm sure it smarts for them to know that we have raised ethical concerns on the part of the president's father."
Fitton points out that not only has the former president been making investments for Carlyle and weighing in on foreign policy that directly affects those investments, but he is also privy to CIA briefings whenever he sees fit, referred to internally at the CIA as "President's daddy's daily briefing," a right that all ex-presidents maintain. And according to press reports, Bush Sr. still requests and receives CIA briefings often. Despite being 10 years removed from his presidency, Bush Sr. remains an extremely powerful and influential man. Imagine what a global enterprise, that does large amounts of business with arms contractors and foreign governments, could do with weekly CIA briefings. Or a company with the ability to influence foreign governments and global events. A company like that would have access information that would set it apart from any company to come before it. A company like that could be very successful. A company like that might look a lot Carlyle.
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By 2001, the world outside of Washington, DC, was becoming dimly aware of the Carlyle Group. People would chat about them casually at cocktail parties, noting the intimidating employee roster and joking about shadow governments and X-files episodes. But it was all speculation at that point. No one in the media had put together the apparent conflicts of interests the Bushes had cultivated in Korea and Saudi Arabia. Yet people had a vague and nagging notion that there was something wrong with the way Carlyle was conducting its business. They were just having trouble putting a name to it. Everyone was looking for the proverbial smoking gun. Little did they know that it was literally a smoking gun they would find.
The saga began in the summer of 1997, when Carlyle was raising money like mad, hiring world leaders, and, in general, becoming the dominating global private equity firm it is today. Among the investments Carlyle had targeted for its Carlyle Partners II fund-the one chock full of defense, aerospace, and security companies-was a maker of armored vehicles named United Defense. The owners of United Defense were FMC Corporation and Harsco Corporation-the same company that Carlyle had unsuccessfully and hostilely tried to acquire six years earlier. All Carlyle got for its $63 million back then was one lousy board seat with Harsco. But what a valuable board seat that had suddenly become.
The news around the defense industry August 1997 was that General Dynamics had bid $1 billion for United Defense, far more than any other bidder. General Dynamics already made armored vehicles, so United Defense's expertise-they made the Bradley fighting vehicles used in the Gulf War-fit perfectly with that of General Dynamics. The deal seemed like a no-brainer: highest bidder, synchronized interests, little overlap. There really was no competition. But at the last minute, Harsco and FMC decided instead to sell to the Carlyle Group, which had submitted a low-ball bid of $850 million, 15 percent less than General Dynamics had been offering. It turns out that rumors had begun to circulate around Washington, DC, that General Dynamics was going to run into antitrust issues. Eventually, the rumors grew so loud that General Dynamics was forced to back out of the bidding, and Carlyle was there to pick up the scraps. It was another stunning victory for Carlyle.
Posted: Sat May 25, 2013 2:35 am
