The arms buildup benefactors

full article: http://www.commondreams.org/headlines02/0110-01.htm

WASHINGTON -- Even by Washington standards, the Carlyle Group has some serious clout.

President George W. Bush's father works for Carlyle; so does former Defense Secretary Frank C. Carlucci, whose close friend Donald H. Rumsfeld now runs the Pentagon; and so does a stellar cast of retired generals and Cabinet secretaries, including former Secretary of State James A. Baker III.

And even by Wall Street standards, the Carlyle Group has some serious money: $12.5 billion in investments at last count. The Washington-based private equity firm, which advises and invests for wealthy clients and institutions, has shown returns of more than 34% through the last decade, particularly through timely defense and aerospace investments. So when President Bush declared war on terrorism in September, few were better poised than Carlyle to know how and when to make money.

On a single day last month, Carlyle earned $237 million selling shares in United Defense Industries, the Army's fifth-largest contractor. The stock offering was well timed: Carlyle officials say they decided to take the company public only after the Sept. 11 attacks. The stock sale cashed in on increased congressional support for hefty defense spending, including one of United Defense's cornerstone weapon programs.

Carlyle's windfall is a result of astute business decisions, excellent connections, strategic lobbying, good timing and a bit of luck. It is also a prime example of how defense contractors got well in a hurry after the Sept. 11 attacks, in a year when the Bush administration already was planning steep hikes in defense spending.

For several years in the late 1990s, United Defense's Crusader Advanced Field Artillery System--a massive high-tech cannon that could fire faster and with more impact than any before it--was in trouble at the Pentagon. The system clashed with the vision many military planners and analysts have for a lighter, more mobile Army. And its high price tag--originally $20 billion--endangered it in times of tight defense budgets.

But the suicide attacks on the Pentagon and the World Trade Center freed up tens of billions of dollars in new defense spending. United Defense already had modified the Crusader, making it 20 tons lighter. And the Army had cut its order by more than half to make it more palatable to budget cutters.

On Sept. 26, the Army signed a $665-million modified contract with United Defense through April 2003 to complete the Crusader's development phase. In October, the company listed the Crusader, and the attacks themselves, as selling points for its stock offering.

Then Congress fully funded the system in the defense authorization bill that passed the House and Senate on Dec. 13, the day before Carlyle's stock sale. And President Bush is scheduled to open the funding spigot today, when he signs a defense appropriation bill that includes $487.3 million for the Crusader in 2002.

The ties that bind the president's family and close advisors to Carlyle have helped draw the confidence of its investors--and the criticism of outsiders.

"It's the first time the president of the United States' father is on the payroll of one of the largest U.S. defense contractors," said Charles Lewis, director of the Center for Public Policy and one of Carlyle's most ardent critics.

"Between Baker and Carlucci, not to mention dear old dad, the relationship of the president with this particular company is as tight and close as, well, anyone can imagine."

Carlyle officials bristle at such talk. They described their recent stock sale as just plain good business that benefited a wide array of investors, including pension funds like those of California's state employees.

Carlyle spokesman Chris Ullman said that neither the company nor its managers, directors and advisors have ever personally lobbied for the Crusader or other government contracts now in the hands of United Defense and other Carlyle subsidiaries and investments.

Of Carlucci, Carlyle's board chairman, and his friendship with the current Defense secretary, Ullman said: "I assure you he doesn't lobby. That's the last thing he'd do. You'd have to know Carlucci to know he'd never do that, and you'd have to know Rumsfeld to know it wouldn't matter."

But even if Carlyle and Carlucci don't lobby, their subsidiaries and majority-owned companies do. And documents on file with the Securities and Exchange Commission, the Federal Election Commission, the Defense Department and Congress show that they do so heavily, strategically and persistently.

Midway Between White House, Congress

By any standard, the Carlyle Group has the right address. Its suite of offices are on Pennsylvania Avenue midway between the White House and Congress--a 15-minute walk to each.

It was founded as a small private-equity firm in 1987 by David M. Rubenstein, a young lawyer who had worked as an aide in Jimmy Carter's White House, and two investment specialists. They named the company after their favorite hotel in New York and started out with a modest portfolio of $100 million.

In 1989, Carlucci retired as Ronald Reagan's Defense secretary and joined Carlyle. Soon after, the company aggressively went after defense and aerospace investments, a specialty for Carlucci and the other former government officials who followed him into Carlyle.

Their investment strategies paid off, not only in defense acquisitions and sales but also in a wide array of corporations. Carlyle's portfolio quickly grew into the billions of dollars as pension funds and wealthy businessmen and families, including royal sheiks in the Persian Gulf, invested with the firm.

As its reputation grew, so did the group's star-studded management roster. It added former Joint Chiefs of Staff Chairman Gen. John M. Shalikashvili; Arthur Levitt, the long-serving former chairman of the Securities and Exchange Commission; former British Prime Minister John Major; former Secretary of State Baker; and former President Bush (Carlyle officers say the elder Bush's principal role is as "a draw": delivering speeches at Carlyle-sponsored events).......