[The shady private defense contractor, derivative of Northrop Grumman, awarded the contract for training the Saudi National Guard forces in 1975, now infamous for having badly botched the training of the new Iraqi Army in 2004, has quietly trained a secret army of 1,800 (mostly Colombian) soldiers, to fight the Huthis in Yemen. This seems like an appropriate time to post a chapter on Vinnell from a very interesting book on Middle Eastern mercenaries and royal armies.]
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The Iron Triangle–
Inside the Secret World Of the Carlyle Group
Dan Briody, 2003
Chapter 7 – VINNELL’S EXECUTIVE MERCENARIES
We train people to pull triggers.
—A potential Vinnell employee,
Newsweek, February 24, 1975
Cast of Characters
Henry Jackson Former U.S. senator.
Richard Secord Retired Air Force general, ex-employee of Vinnell, Iran-Contra fall guy.
After its early buyout misadventures, Carlyle had finally tasted fortune in both the BDM deal and its work with the Prince. In 1992, the time came to combine their newfound successes, when BDM, by then already under Carlyle’s ownership, bought a little known company of ambiguous ownership named Vinnell.
The deal would marry Carlyle’s burgeoning expertise in defense with its incipient relationships in the Middle East. And it would forever strengthen the political ties between two of the world’s most powerful countries. Vinnell is the clearest example of Carlyle’s business inside the Iron Triangle. It combines all of the necessary elements of the military, government, and big business, in one neat, utterly secretive package.
Vinnell defines the term war profiteer, a private company that trains foreign militaries in times of need, and would ultimately make Carlyle an insidious force inside the Kingdom of Saudi Arabia. Vinnell is yet another company with a highly controversial past that Carlyle snapped up, only to heighten its questionable legacy. Vinnell’s history, before, during, and after Carlyle owned it, is a litany of covert operations, mercenary missions, and cover-ups: right up Carlyle’s alley. Carlyle, it seemed, was building an entire portfolio of controversy, and Vinnell was the early centerpiece.
The relationship between the United States and Saudi Arabia has grown increasingly complex and co-dependent in recent years: the United States gorging itself on Saudi Arabia’s cheap oil, and the Saudi’s relying on American military support of the royal family. This give-and-take relationship has made navigating the post-September 11 political waters very tricky.
Despite a near total lack of cooperation in the bombing campaign of Afghanistan and the investigation into September 11, Saudi Arabia remains the United States’ chief ally in the Gulf. In response to Saudi Arabia’s obstruction, senators have come out with strong rhetoric toward the Saudis, calling the regime corrupt. Some have accused them of sponsoring terror, or at least doing nothing to abate it. Others have recommended an end to the alliance between the two nations. But the relationship, however tenuous, holds.
Like the oil that trades hands between the two countries, the United States holds Saudi Arabia in a slippery, combustible embrace. Saudi Arabia’s military dependence on the United States can be traced back to a Vinnell deal in 1975 that would alter the nature of the alliance forever. Of all the military ties the United States has fostered with Saudi Arabia over the last three decades, perhaps no one company has done as much to inject the American military machine into everyday life in Saudi Arabia than Vinnell.
It was, and still is, an integral part of the Saudi military makeup.
A Company with No Past
Until Carlyle, through BDM, purchased Vinnell in 1992, the company virtually didn’t exist to the public. Even though Vinnell claims to have been around since the days of the Great Depression, documentation of its history is nearly impossible to find. No publicity, no press releases, no news clippings. To this day, no one knows who the original owners were. Reports indicate that Vinnell, at one time a heavy construction company in Los Angeles, built Dodger Stadium. Then the company built some airstrips in Vietnam.
But it wasn’t until 1975 that the company mistakenly flew temporarily above the radar and into the public’s view. In February 1975, the Associated Press broke a story that sent shock waves through Washington. A private American firm was hired by the Pentagon to train Saudi troops to protect oil fields from potential aggression in the Middle East. The news came just two years after the United States had pulled its final remaining troops out of Vietnam, and Americans saw the action as yet another ill-conceived involvement in a foreign nation’s affairs.
Only this time, it wasn’t enlisted soldiers, working for the American Armed Forces. It was soldiers of fortune, civilians with guns. The $77 million contract, brokered through the Defense Department, stipulated that Vinnell would hire 1,000 former Special Forces personnel, most of whom had recently served in Vietnam, to work with the Saudi National Guard, the 26,000 men sworn to protect the royal family. Never before had a private company, employing civilians, been deployed overseas to train a foreign government in battle tactics.
But it would not be the last time. The news caused instant outrage on Capitol Hill. Congressmen accused the Pentagon of hiring “mercenaries” to develop the military of a country the United States may one day have to invade. At the time, U.S. oil companies complained incessantly to congressmen that Saudi Arabia and the Middle East were strangling the United States by manipulating the exportation of oil. Henry Kissinger himself had threatened an invasion of Saudi Arabia if the situation did not improve. With tensions rising between the two nations, the Vinnell deal left lawmakers scratching their heads.
Senator Henry Jackson, of Washington, demanded a congressional inquiry and was quoted as saying he was “completely baffled,” by the deal, adding that to his knowledge, the only threat to Saudi Arabia’s oil fields had come from the United States itself. And we certainly weren’t going to train the Saudi National Guard how to defend themselves against us, were we?
U.S. companies had regularly scored contracts for training foreign nations in the use of American-made military equipment. But training men in battlefield tactics and combat was considered off limits. It was viewed by many as a way for the government to get around laws that prohibit the United States from getting involved militarily in certain nations, an issue that was particularly raw following America’s disastrous foray into Vietnam. It was a quiet, though expensive, way to further America’s agenda abroad without committing its own troops.
The type of men Vinnell was recruiting for the job led to consternation from others in the military training industry. This was not your typical service contract. The head of one security company at the time of the deal told Forbes that,
“the whole thing stinks. You’re talking about professional killers, very senior Special Forces guys on this Vinnell contract. These aren’t personnel specialists. They’ve got tremendous combat reputations. What kind of control does Vinnell have over them once they get over there?”
In the same article, William L. Hilger, corporate secretary for Vinnell at the time of the deal, told Forbes,
“This isn’t anything new for us. We’ve done all this sort of stuff with the Chinese Nationalists, the South Koreans, the South Vietnamese . . . We teach them to rebuild their ordnance equipment, repair their vehicles for them, operate and maintain their airbases, their drydocks, install and operate their power system, everything.”
The Pentagon, embarrassed by the press leak of the deal, went into defense mode, assuring Americans that the Vinnell personnel would not be instructing the Saudi National Guard in ground tactics and maneuvers (Vinnell employees were seen fighting with Saudi troops in the Gulf War 15 years later). Defense Department spokesmen explained that the United States was trying to wean foreign governments off of U.S. military manpower, steering them toward private companies instead, which frees up active troops for more pressing action.
It was the beginning of privatization in the defense industry, a trend that would burgeon over the following two decades and make Carlyle very rich. The Vinnell contract was characterized as a one-time training mission, a quick in-and-out. Twenty-seven years later, Vinnell is still well entrenched in Saudi Arabia, though Carlyle sold the company in 1997. At the time, Vinnell spokespeople played down the significance of the announcement, defending themselves against claims that they were nothing but a ragtag group of mercenaries.
One former U.S. Army officer, while waiting in line to apply for a position in Saudi Arabia (Vinnell had to hire on most of the men for the job due to a lack of experience in this type of work), told Newsweek “We’re not mercenaries because we’re not pulling the triggers. We train people to pull triggers.” Hundreds of young men applied for the positions, which were advertised in local newspapers. It was a truly frightening trend for Americans to watch evolve. Senator Henry Jackson finally got his congressional investigation into the Vinnell deal.
And the results were difficult to fathom. The probe yielded a stunning contract clause that barred Jews from working on the contract. Because of the sensitivities between Arabs and Jews, which ran very high in the mid-1970s, Vinnell had agreed to the obviously anti-Semitic clause. The investigation also turned up a suspicious $4.5 million agent’s fee that investigators thought was a kickback to the royal family. But in the end, the anti-Semitic clause was dropped, and no charges were filed.
Vinnell was free to go ahead with the highly controversial, highly profitable, contract in Saudi Arabia.
Going Dark
Then Vinnell disappeared again. Like a shadow at night, the company seemed to have the disconcerting ability to disappear when it needed to, just go dark. It wasn’t until the Iran-Contra affair that Vinnell resurfaced temporarily. Richard Secord, a retired Air Force general who worked for Vinnell in the mid-1980s, was implicated as Oliver North’s accomplice in the well-known arms-for hostages scandal. As part of the voluminous press coverage of the scandal, Secord’s background was thoroughly investigated, and it was found that he had previously worked for Vinnell.
But Vinnell managed to successfully distance itself from the investigation and from Secord, who would eventually plead guilty to lying to Congress for his involvement with Iran-Contra. But his involvement with Vinnell put the quiet company in the spotlight once again. In a brief, confusing, and rare public reference to the company, a Time magazine article in 1987 picked up the scent of Vinnell when it reported that two Vinnell employees may have been tangentially involved in a failed attempt to overthrow Granada’s leftist Prime Minister Maurice Bishop. It was a bizarre revelation and few in the media knew what to make of it. What were these guys doing? And does this mean Vinnell was involved with plots of regime change?
The story caused a few ripples of concern, no follow-up, and then once again the company dropped off the radar. How was such an intriguing company keeping so quiet? Why did the press never seem to follow up on these strange tales? By the time Carlyle picked up Vinnell, via BDM, in March 1992, the company had built the Saudi National Guard up to about 70,000 troops from the original 26,000. It had also paved the way for the cooperation between the United States and Saudi Arabia in the Gulf War.
Many of its employees fought right alongside the Saudis, something the Pentagon had promised would never happen, in defending Saudi Arabia from Iraq’s aggression.
“During the Gulf War, when a lot of companies sent their people home, BDM (and Vinnell) did not,” says Phil Odeen, then chairman of BDM. “We kept our people there during war, and we got high marks from the Saudi’s for that. I’m sure there were a lot of nervous people, but that was a big factor in our continued success in Saudi Arabia.”
The U.S. military presence in Saudi Arabia was growing steadily after the war. The Air Force was setting up shop indefinitely in Riyadh. BDM was increasing its business. By the mid-1990s, there were about 5,000 U.S. military personnel in Saudi Arabia, and close to 2,000 BDM and Vinnell employees. But while the royal family welcomed the presence of the American military machine in its backyard, many Saudi nationals did not. It is a dichotomy that exists to this day, in which the royal family’s concerns do not mirror those of the general population of Saudi Arabia.
And Vinnell’s presence in Saudi Arabia was exacerbating that problem. Both the royal family and Vinnell tried to keep their dealings as quiet as possible. But with so many non-Arab employees working in and around Riyadh, the secret got out.
Tensions steadily rose, and then, disaster struck.
Hate Boils Over
In November 1995, a car bomb ripped through the Riyadh offices of BDM and Vinnell, killing seven people, including five Americans. Three spouses of Vinnell employees were injured in the blast. The offices that were targeted were those supporting Vin-nell’s National Guard contract. “One of them got cut up badly,” remembers Odeen. Unlike a U.S. embassy, a typical target for this kind of terrorism, the building that housed Vinnell’s people were purposely nondescript. The workers kept as low a profile as possible.
Vinnell’s employees knew they were an unwelcome presence to the majority of the population.
“There was a fair amount of security concern,” recalls Odeen. “You didn’t drive around with an American flag in your car.”
But it didn’t matter. The radicals responsible for the explosion knew enough to attack the Americans where they worked. Vinnell was fooling nobody. The bombing set off a feeding frenzy by the national media. It was as though the Vinnell story was brand new, and everyone had questions. What were these people doing in Saudi Arabia? How did the Saudis know they were there? Why were they targets?
The answers would turn out to be far more sinister than anyone suspected. According to one former board member of Vinnell, who wishes to remain anonymous, Vinnell had been a cover for the CIA for decades. Dating all the way back to 1975, the company was gathering intelligence on behalf of the U.S. government, by infiltrating the Saudi National Guard under the specious guise of military trainers. The board member also says that though the company was supposed to be nothing more than a front for covert intelligence gathering, the darn thing started making money.
The board member likened the operation to the Hollywood movie Swordfish starring John Travolta, in which secret operatives from the government end up making a fortune off of companies designed to be fronts for the Drug Enforcement Agency. According to this board member, even after BDM purchased Vinnell in 1992, there was very little anyone on the board did in terms of overseeing of Vinnell. Board members met regularly, but rarely was anything acted upon. The company that seemed to run itself was, in fact, being run by someone else. If true, the company’s murky history starts to make more sense.
The ambiguous ownership. The fits of secrecy. The peripheral involvement in Iran-Contra and Granada. And finally, the targeting of Vinnell by Saudi nationals. For his part, Odeen demurs when presented with this revelation.
“I know nothing about it being a CIA front,” says Odeen. “I knew it to be a first-rate training organization.”
But first-hand sources, one of whom sat side by side with Odeen on the Vinnell board, say otherwise. Today, Vinnell continues to do its work in Saudi Arabia, since 1997 as a subsidiary of TRW. Whether it is a front for CIA activity is unclear. The company is among many that have come under political attack in the wake of September 11, and has been held up as an example of why it is so difficult for the United States to cut ties with the Saudis during the War on Terrorism.
William Hartung, a foreign policy expert at the World Policy Institute, in referring to Saudi Arabia’s stonewalling of the United States following September 11, was quoted as saying,
“If there weren’t all these other arrangements—arms deals and oil deals and consultancies—I don’t think the United States would stand for this lack of cooperation.”
And it’s not just Vinnell. The company led a tidal wave of private American military into Saudi Arabia. Today, it is estimated that between 35,000 and 45,000 employees for outfits like Vinnell are living and working in Saudi Arabia. It is becoming nearly impossible to distinguish America’s real military from America’s soldiers for hire. Carlyle has certainly had more pedestrian investments than Vinnell, but it’s had more controversial ones as well. It’s safe to say, that after the purchase of Vinnell, Carlyle entered new territory that separated the company from other buyout giants like Kohlberg Kravis Roberts and Co.
Alleged CIA cover ups, car bombs, purported executive mercenaries may sound like a Hollywood movie script or a far-fetched work of fiction, but it’s all in a day’s work for Carlyle.
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8 – OUT OF THE SHADOWS
A Republican administration in exile.
—Time magazine,
March 22, 1993
By the beginning of 1993, Carlyle was a somewhat seasoned, if not terribly successful, private equity firm. Six years and a dozen or so buyouts after Rubenstein and Norris joined forces at the Carlyle Hotel in New York, the firm had made some huge deals happen. It had also participated in some major flops. The company had stakes in 10 companies valued at around $2 billion.
But the bottom line was that the Carlyle was not making the gobs of money its co-founders had hoped it would. And the time had come to kick it into gear. In 1993, Carlyle began a rapid transformation, from an eager young private equity firm into an international political and financial powerhouse. They brought in the high-priced, high-profile talent that would ultimately define the company.
They shed some of their old, bad habits, one of which happened to be Steve Norris, the co-founder of the company. And the result was nothing short of astounding. The moves the company made between 1993 and 1995 would cause some growing pains within the firm, but would also lay the groundwork for the new Carlyle— the company kicked off the training wheels and began to tear around the international business community. All of which began with a very important hire, and ended with a tragic but inevitable firing.
To this point, the company was still operating without a chairman. Carlucci had settled nicely into his role as vice chairman. Aside from opening the doors of defense to the Carlyle Group, he was now residing on the boards of an astounding 32 companies, not all of them owned by Carlyle. He was ridiculously well connected. His time was precious, and he was not highly involved in Carlyle’s day-to-day deal making. While Carlucci was a serviceable figurehead, he was a bit detached, and didn’t exactly reek of credibility. In referring to Carlucci’s status value and lack of business acumen, Rubenstein was often overheard around the office saying, “we all know what Frank is . . .”
Carlucci was invaluable in Carlyle’s dealings in defense. But he was not the marquee name the company needed to really go global. Carlyle needed someone who could help raise money. Someone that would make the world stand up and take notice. Someone universally admired and respected.
Someone like James A. Baker III.
A Trophy Hire
Baker, like Carlucci and Rumsfeld, attended Princeton University, and graduated in 1952. (The more you research the backgrounds of the key figures in Carlyle, the more you end up at the same place: Princeton.) He then spent almost 20 years toiling with Houston law firm, Andrews and Kurth. But in 1975, he would enter American politics when he became the Undersecretary of Commerce for then President Ford. He would not leave politics again for the next 18 years.
During that time, he would lead presidential campaigns for Ford, Reagan, and Bush. He would serve as Reagan’s White House Chief of Staff from 1981 to 1985, then secretary of the Treasury from 1985 to 1988. After leading George H. W. Bush to victory in the 1988 presidential election, he would be rewarded by becoming the nation’s sixty-first secretary of state, a post he would hold from January 1989 to August 1992.
For the last few months of Bush’s time in office, Baker again became White House chief of staff, until January 1993, when after failing to get his boss reelected, he resignedly cleaned out his office to make way for the incoming President Clinton, ushering in eight long years of Democrats in the White House. All told, Baker had been camped in the White House for 12 years straight.
He was, and still is, a consummate statesman, and a steadfast Republican. Carlyle, with its offices at 1001 Pennsylvania Avenue, just a few blocks from the White House, with a distinctly Republican flavor, made a compelling offer to Baker. It’s not as if Baker had a paucity of offers either. Publishers urged him to write his memoirs. Rice University, in Baker’s hometown of Houston, wanted him to run a foundation. Enron made overtures. So when the boys from Carlyle knocked on his door, they weren’t sure what to expect.
Rubenstein, Conway, and Norris went to the White House to make their pitch during the White House transition, and in the waiting room, they ran into David Rockefeller, the next in line to see the man of the hour. They knew then that the competition for Baker’s services was going to be stiff. After an hour-long meeting with Baker, however, they felt considerably better about their chances of landing the outgoing administration’s biggest fish (aside from the president himself, of course).
Baker was intrigued by the offer, and he invited Richard Darman, Bush’s outgoing budget director, to get involved. Darman convinced Rubenstein that if Carlyle wanted Baker, they were going to have to take him, too. He made it a package deal. On February 24, 1993, the news release hit the wire that Richard Darman, former director of the Office of Management and Budget, was joining the Carlyle Group as a managing director.
Darman was a former executive at Shearson Lehman Hut-ton, Inc., and combined with his years of government service, would make an excellent investment advisor in sectors heavily affected by government regulation, like energy, transportation, and insurance. Two weeks later, days after accepting another job consulting with Enron on overseas projects, James Baker became a partner at the Carlyle Group. Carlyle had officially appeared on the radar screen. Suddenly, every media outlet wanted to find out more about this quiet little merchant bank called the Carlyle Group, and it seemed that every writer had the same idea. Ten days after Baker was hired, Time magazine ran a story entitled “Peddling Power for Profit.”
In it, the magazine referred to Carlyle as a “Republican administration in exile,” and reported that Colin Powell was also considering a job offer from the group. Powell and Carlucci were very close from their days together on Reagan’s National Security Council. Then the New Republic wrote a scathing cover story later that year entitled “The Access Capitalists,” which portrayed Rubenstein as a nervous, paranoid wreck, obsessed with the media’s portrayal of Carlyle. His fears proved warranted.
In a New Republic article, writer Michael Lewis called the company a “salon des refuses for the influence peddling class.” It went on to say, “[Carlyle] offers a neat solution for people who don’t have a lot to sell besides their access, but who don’t want to appear to be selling their access.” It was not the kind of public relations coup Rubenstein was looking for when he went combing through the remains of the former Republican White House. The stinging accusations and acrid characterizations first levied in these articles would follow the company to this day.
Baker’s hiring caused some waves inside Carlyle as well. Ruben-stein and Norris, who were running the firm at this point, were concerned that Carlucci would want out when Baker came on board. After all, it would be hard to argue that Carlucci would be of more value to the company than Baker. It seemed reasonable to assume that Baker might be Carlucci’s boss. It wasn’t clear which one was going to be more senior. So in a preemptive case of ego-stroking, the firm decided to bring Baker in as a partner and promote Carlucci to chairman.
But former employees agree that the new title was purely for outside appearances. One former employee would say of Carlucci,
“Frank was a good guy to have around, even though he was rarely there. But when we had a tough problem to tackle, no one said, ‘Hey, let’s go show this to Frank and see what he comes up with.'”
Carlucci and Baker also clashed over politics. When he was in the Carlyle offices, Carlucci was often overheard badmouthing former President Reagan, the man who appointed him national security advisor and secretary of defense, saving him from the nightmare that was Sears World Trade. Baker, a devoted Reaganite, didn’t take lightly to Carlucci’s disrespect. And Norris, a huge Reagan fan, would often remind Carlucci that it was Reagan who “made you who you are,” a jab that went unappreciated by Carlucci.
But Carlucci and Baker’s differences were miniscule compared to the other clashes to come in Carlyle’s testosterone-laden executive ranks. Darman and Rubenstein’s personalities clashed badly early on. Rubenstein phoned Norris in Paris one day to say he had reached the end of his rope and that something had to be done. It was a classic style clash. The two eventually had to work out an arrangement limiting Darman’s role in management in order to get along. The tensions inside the company were growing along with the company itself.
As with any company that achieves success, Carlyle was finding itself at a crossroad between the past and the future, and the strain was weighing on its executives. Power struggles were common, and not the least bit private. The entire office saw management openly sniping at one another. But no one could have understood the severity of the split that had opened up between fellow co-founders Steve Norris and Bill Conway.
And this was the battle that would be the turning point in Carlyle’s history, the winner defining how business would be done going forward, the loser left to carve out another future, away from Carlyle.
A Chasm of Character
Norris’ relationship with Conway had almost completely deteriorated by the mid-1990s. There were major differences of opinion on business issues. But this particular feud got increasingly personal over the years. Two men could not have had more wildly disparate styles. Norris loved “elephant hunting,” wheeling and dealing, striking out occasionally, but all the while looking for the deal of the century, the one that would make them all rich beyond their dreams.
He spent money lavishly, spoke out of turn, and followed his own instincts. Some call him mercurial, a term he dismisses by claiming not to know the definition. Some call him a loose cannon.
But no one denies the important impact that Norris had on Carlyle.
“In the beginning, it was all Steve,” recalls one employee. “David and Steve. Steve and David. That was all anybody knew. Between the two of them, they got it all done.”
Conway, on the other hand, was conservative to a fault. He deplored wastefulness and railed against unnecessary expenses. He was a button-down businessman from New England. His father wrote the book on quality. . . literally. William E. Conway Sr., a world-renowned quality consultant, first wrote The Quality Secret: The Right Way to Manage in 1996, and followed it up with Winning the War on Waste: Changing the Way We Work in 1997. Conway’s father was also the first American CEO to embrace the teachings of Total Quality Management (TQM), a corporate trend that would sweep through American business as capriciously as the Macarena affected American dance.
Knowing this, it is not difficult to understand why Conway found Norris’ footloose style of deal making deeply offensive. And why Norris felt threatened by Conway’s staid approach to business. If you didn’t know any better, you’d have thought Conway was playing the role of controlling father to Norris’ troubled adolescent in Carlyle’s internal drama. The rift between the two was damaging morale at the Carlyle offices. Without solidarity at the top, there was little to keep the younger MBA types from fracturing and feeling put upon.
One former employee remembers the office at the time like this:
“It was not a place where you sensed joy or even teamwork. There was no camaraderie. It was a tough place to be, where most of the economics went to the senior guys, and they didn’t even like each other. It was hard for the younger guys to see how they were ever going to make money. A huge amount of the firm was going to a bunch of guys who didn’t even do deals.”
Things got even worse, and even pettier. Norris recalls a painting he bought for about $5,000 for his wife at the time that hung in his living room. Later when the Nor-rises hosted a cocktail party at their home, Conway and his wife saw the painting and were beside themselves.
Apparently, Conway’s wife had intended to buy the same painting. According to Norris, the rivalry between the two had grown so fierce, that the Conways were convinced that Norris had bought the painting just to stick it to them. Norris claims he had no idea the Conways had designs on the painting. The petty jealousies and name calling of the super rich can be astonishing to the rest of us.
By 1993, it had become appallingly clear that Norris’ time with the firm was going to end badly. Conway had begun to manage Carlyle’s defense buyout business, taking over the day-to-day deal- making responsibilities that Carlucci had helped put in place. By this time, Norris was spending a great deal of time and money set ting up shop in Paris as he worked a deal between the Prince Al-waleed and Euro Disney, an operation badly in need of some financing. Norris wasn’t afraid to enjoy his successes, and when he was in Paris on business, he stayed at the Ritz Carlton.
He also availed himself of some free time while traveling on business. He didn’t dwell on the minutia of high finance. He likes to tell a story that illustrates the difference in work ethics between him self and David Rubenstein. Bill Conway came in to the Carlyle of fices one weekend to pick up some work. Rubenstein was there, huddled over his desk, feverishly writing a memo, with Norris relaxing on his couch. Conway asked Rubenstein what he was doing, and David said, “writing a memo.” Norris and Conway teased him, until Rubenstein asked Conway what he liked to do to relax, to which Conway replied, “play golf.”
Rubenstein then said, “Think of this as me playing golf.” Suffice to say given Norris’ position on the couch, he didn’t write memos to relax. While Norris was negotiating with Michael Eisner and crew for the Prince’s eventual $360 million investment into Euro Disney, he was racking up healthy expense reports. One day, in the midst of heated negotiations, he decided to go shopping.
“I could see that it wasn’t going anywhere,” Norris says of the negotiations. “If I wasn’t available, nobody could talk to anybody, and tempers would calm down, and we could reach a compromise.”
It was a decision for which Conway could never forgive him. Carlyle eventually did get the deal done, but the folks back in Washington objected to the amount of money it was costing them and Norris’ laissez-faire attitude in Paris. Norris claims that he could have spent less money, but not much less. However, in talking about this contentious time in the company’s history, he lets slip,
“I was in my suite at the Ritz . . . well, my room at the Ritz … I was accused of having a suite, but I really didn’t.”
By this time, Norris alienated the Prince by turning down a job offer from him, pissed off Michael Eisner during the Disney negotiations, and ran up a monster expense tab in Paris. His partners were losing patience.
“He has no discipline,” says Stan Anderson, a partner at McDermott Will & Emery in Washington, who worked with Carlyle, especially Baker, on a few early deals. “On a bike trip in Europe, Eisner lambasted him for bringing an undisciplined approach to the negotiations,” says Anderson. “He was basically living in Paris, and he was living too large.”
Norris’ Last Stand
The final straw for Norris came when he drummed up a potential piece of business with a man he met in a sauna. (Norris and saunas seem to have a long history at Carlyle—rumors abound at Carlyle about Norris’ alleged sexual exploits with a female employee in the Carlyle office’s sauna, an adventure that allegedly ended badly when it triggered the fire alarm and evacuated the building— a rumor that Norris flatly denies but other former employees swear is true.)
After a workout, Norris started up a conversation with an Italian businessman in the steam room of their fitness club. The man was Antonio Guizzetti, the Washington, DC, representative of ENI, a massive Italian oil exploration firm. Norris smelled a deal.
“He wanted to internationalize Carlyle,” recalls Guizzetti. “To that point, Carlyle International didn’t exist.”
Norris and Guizzetti struck up a friendship. It was classic Norris, always looking for deals, even in the sauna. The two tried all sorts of deals at first. They met with Italian designer Giorgio Armani. They met with Paolo Bulgari, of Bulgari Jewelers and nearly cinched a deal to buy 10 percent of the company for only $5 million. (“If we had finalized the deal with the Bulgaris we would be multimillionaires right now,” laments Guizzetti.)
But in the end, the deal they decided to pursue was a buyout of IP, the retail unit of Italian oil company AGIP, a subsidiary of ENI. AGIP had built up too large a market share in Italy with IP, and the European Union was uncomfortable with the potential for monopoly, so the company was looking to sell off the retail chain of gas stations.
Because the deal would have major political implications within Italy and the United States, Carlyle assigned a career diplomat to assist Norris. They called in Baker. Guizzetti, Norris, and Baker traveled around Italy meeting with ENI’s top executives as well as high-ranking politicians. They secured time with then Prime Minister Carlo Azeglio Ciampi’s general secretary.
The met multiple times with Paolo Savona, the minister of industry privatization. Guizzetti said traveling with Baker was like traveling with royalty.
“We flew in a private jet and had meetings with everybody,” gushes Guizzetti. “Traveling with James Baker in Italy guaranteed that the deal was serious.”
The deal was serious, and Norris began rounding up financing. Through a new Carlyle colleague named Basil Al Rahim, who had been traveling throughout the Middle East to raise money, Carlyle was put in touch with an extremely wealthy family in Saudi Arabia that wanted in on the deal. The family had amassed a fortune through construction contracts and was looking to diversify. The name of the family was bin Laden. And the relationship Al Rahim established with the estranged family of Osama bin Laden would go on to be a long-term and very lucrative partnership. But not this time. With financing in place, regulatory issues cleared with the help of Baker, and AGIP ready to sell, Norris was suddenly asked to leave Carlyle in January 1995.
The public face on the resignation was that Norris no longer wanted to be bothered with managing money, when his real passion was for cutting deals. Rubenstein was quoted in the Washington Post saying “Steve is one of the most creative deal-doers in the country. He wants to do different types of deals from what we want to do.” According to Norris, the reality was far more contentious and personal. Conway’s cautious conservativism had won out, and Norris was to be part of Carlyle’s past, not its future. Without Norris, the IP deal fell apart.
Carlyle backed out of the transaction at the eleventh hour, claiming that one of AGIP’s oil refineries processed oil from Libya, a nation embargoed by the United States for sponsoring terrorism. Norris says that Baker’s law firm, Baker Botts, had already told Carlyle there were no legal problems with owning the refinery. But Carlyle wanted out anyway, apparently preferring to distance itself from deals that were initiated by Norris.
“We were very, very close to the deal,” recalls Guizzetti. “Then suddenly Carlyle changed, and the reason they gave about Libya being a terrorist state was stupid. It was the departure of Steve [Norris] that killed the deal.”
Norris went on to start up a series of independent investment houses on his own and met with tepid success. Many people in the private equity world say that Carlyle made it very difficult for Norris to succeed after he left.
“They badmouthed him all over Europe,” says one banker. “It made it impossible for him to raise money.”
A number of bizarre rumors had begun to crop up around the Beltway, like the one about the sauna, about Norris’ relationships and spending habits. To this day, Norris is baffled by the animosity he curried while at Carlyle, and questions his actions often.
“I’ve certainly made my share of mistakes while I was there, but if I had to do it over again, I don’t think I would have changed anything,” he says.
He blames Carlyle, particularly Conway, for waging what he terms a “scorched earth” campaign against him after he left, sullying his name and attacking his character. What is undeniable is that Norris has been completely written out of the firm’s history. Deals that he said he did are now attributed to Rubenstein, Conway, or Carlucci. He is no longer mentioned in any of the company’s literature. He is persona nongrata. It’s as if he never existed. Poof.
“They had to discredit me,” says Norris today, while waiting for his girlfriend at the Four Seasons in Washington, DC, the hotel chain that he’d helped the Prince invest in years earlier. “I should have been a hell of a lot smarter. But one of my biggest weaknesses is that I tend to be too trusting. I thought I had some partners around me that, though we all had different approaches, would pull together. That just didn’t turn out to be the case.”
With Norris out of the picture, and Baker in place, Carlyle was now looking toward its future. Baker’s marquee value put the company in a position to start raising massive amounts of capital, a problem that had plagued them in the early stages. And now they would be able to take their dog-and-pony show on the road, raising international funds off the strength of Baker’s name.
The company now had enough heavy hitters to pry open wallets from South Korea to Saudi Arabia. While Baker was still having a little difficulty weaning himself from politics—on a fund-raising trip to Japan in 1994, Baker could not pull himself from the television set as he watched that year’s election results come in—he would prove to be an invaluable addition to the firm. He would help attract money from some of the wealthiest people in the world.
A trend that in turn would make Carlyle itself one of the biggest investors in the world.
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9 – BREAKING THE BANK
When you make $50 million, you have a different perspective on life.
— David Rubenstein,
New Republic, October 18, 1993
Cast of Characters
George Soros Carlyle investor.
John Major Internationally respected investor and speculator, Former prime minister of the United Kingdom, Carlyle partner.
David Rubenstein
Private equity firms are often judged on the amount of money they have under management. It is generally considered a measure of success, an indication of investors’ trust and confidence. In this business, size matters. And though Carlyle had done some decent deals, they were not considered a major private equity player. They didn’t have any funds of $1 billion or more, a basic earmark of a successful firm. In fact, their largest fund was a meager $100 million. They still struggled to raise enough capital to fund the deals they did identify, and even those were cobbled together using smoke and mirrors.
They often took on too much debt when acquiring companies, and that would inevitably make exiting the investment more difficult. What they needed was more fund raising. They needed money in the bank. Enough money that they could stop worrying about money. The kind of money that only the elite firms could raise. They were about to get it. But like Carlyle’s portfolio of acquired companies, its list of investors carried conflict and controversy. Soliciting money from just about anyone who had it, the company put together some powerful and unlikely bedfellows. And the little merchant bank from Washington, DC, began to grow in both stature and intrigue.
Considering Carlyle’s questionable investing record by the mid1990s, it is truly remarkable that the firm was able to attract the type of talent it had. Midway through the 1990s, the company had yet to cash in on anything but a few defense buyouts. Carlyle was getting pigeon holed as a defense company, and fast. Business press was criticizing it for being a bunch of tax-scamming crony capitalists, trading in on their time in government, and hitting up old friends for business. They had made a little money, but they certainly weren’t lighting up the Scoreboard.
One magazine reported that Conway’s wife was pestering him about seeing some profits they could take to the supermarket. Then everything started to change. With Baker on board, Rubenstein turned his focus to raising money. Truckloads of money. Rubenstein began work on a fund that would eventually be called Carlyle Partners II, designed to focus on aerospace, defense, healthcare, telecommunications, and insurance.
The idea was to parlay the newly acquired political expertise that Carlyle had gained through the hiring of Darman and Baker, and invest in industries that are heavily dependent on federal regulation. This way, Carlyle could cash in on its ex-politicos in two ways: first, to help them raise money by giving speeches at home and abroad, packing the house with high net worth individuals; and, two, to leverage their relationships with lawmakers to gain insight on the direction of policies that affect their target industries.
It was a brilliant strategy that was about to make all of them very, very rich.
Soros’ Millions
The goal for the fund was $500 million, a relatively modest sum in private equity circles, but five times as much as Carlyle had ever raised. Until this time, Carlyle’s strategy was to first identify a deal, then round up the investors needed to make it happen. There was often a great deal of leverage involved, and the debt loads on some of the deals caused ongoing problems for Carlyle. This time would be different.
After rounding up almost $150 million from some banks, pension funds, and Richard K. Mellon & Sons (an original investor in Carlyle), the company was going after an investor that could contribute both money and fame and get them over the hump. They were going after George Soros. The Hungarian-American Soros already had the reputation of being the most prescient and successful investor in the world. His Quantum Fund was admired around the world. His investment record was unassailable.
But on September 16, 1992, he cemented his place in finance history by shorting the British pound, and nearly bringing down the British banking system. That day came to be known as Black Wednesday. Shorting is a way of betting that a stock or currency will lose value, usually over a relatively short amount of time. The investor borrows the stock or currency, then sells it, expecting to buy it back after the value decreases, thus pocketing the difference. It’s a very risky investment strategy, because should the stock or currency increase in value during that time, the short investor may be forced to buy back the stock with money they may or may not have, resulting in huge losses.
People who short are universally reviled in investing circles, because they want companies and currencies to fail and thus lose value. Often times, they take an active role in making that happen, circulating rumors and various untruths that will undermine the stock. It can be a rather dirty business. In 1992, Britain was in the midst of a tough recession, and the British pound was struggling to maintain its value against other currencies.
Then prime minister John Major had announced a comprehensive plan to restore confidence in the pound. Publicly, he called it his “over-riding objective.” But Soros had other ideas. Soros placed a $10 billion bet against the pound, enough to cause the value of the currency to bottom out on its own when the public saw that such an important and knowledgeable investor had lost confidence in the currency. In essence, Soros was betting against Major and his ability to prop up the sagging pound. It has been called the highest stakes poker game in history.
Currency speculators were either to believe in Major’s ability to save the pound or Soros’ intent to eviscerate it. Soros won. On Black Wednesday, the pound crashed, crippling the British economy and embarrassing the prime minister. Soros made a profit of $950 million. He would later be known in England as the man who made a billion off the pound’s collapse. Needless to say, George Soros wasn’t exactly a popular bloke in the United Kingdom. So when Soros agreed to become a limited partner in Carlyle’s new fund exactly one year after Black Wednesday, he was bringing far more than just $100 million. He was bringing added credibility and a reputation for making gobs of money.
George Soros didn’t make bad investments, so the Carlyle Group must be for real. Soros was also jump starting a fund that would go on to be the most successful in Carlyle’s history. It is unusual for a private equity firm to issue a press release announcing an investment into a fund. Usually contributions to private equity funds are decidedly low-key events, meant to be kept private. Most investors prefer it that way. But it’s different when the investor is George Soros. Carlyle needed to capitalize on their newfound fortune. So an announcement went out hailing a new dawn at Carlyle. Rubenstein would publicly characterize the investment as “more of a partnership than just a passive relationship.”
Indeed, Soros helped to market the fund, and his anchor investment brought the total money raised to half the anticipated $500 million. But as it turned out, reaching the stated goal of $500 million would not be a problem for Carlyle, now that they could throw Soros’ name around at meetings. Suddenly, raising money was surprisingly easy. Investments were pouring in from the likes of American Airlines, Gannett, Citibank, and others. By the winter of 1994, the fund had already reached $400 million, and the target was raised to $650 million. Then in the fall of 1995, the goal was again raised, this time to $750 million.
The money was starting to pile up. The Carlyle Group had everyone from Soros to Colin Powell helping them out, talking to investors, and opening wallets. In Carlyle’s previous fund, Carlyle Partners I, the defense investments Carlyle had made in the late 1980s were finally starting to cash out in the mid-1990s, and the payment was handsome. The company took a $38 million investment in Vought Aircraft in 1992, turned the company around, then sold it to Northrop Grumman just two years later for $130 million.
Word got around quickly that Carlyle had the best game in town. Rumors of 46 percent annual rates of return had investors salivating. Members of the bin Laden family were in for untold millions. The state of Florida was in for $200 million. And the California Public Employees’ Retirement System (CalPERS) was in for $80 million.
By the time Carlyle Partners II closed in September 1996, the fund had raised more than $1.3 billion, 13 times the size of the company’s first fund, and more than twice the anticipated amount. The billion dollar mark is an important right of passage for any private equity firm, and Carlyle had now reached the levels of the elite. From this massive fund, the company would spread its investments all over the defense world. Carlyle Partners II was, and still is, the company’s crown jewel.
Many more funds would come down the line, but none with the power, scope, and success of Carlyle Partners II.
The Rich Get Richer
The time had come to start investing the money the company had worked so hard to raise. And true to its word, Carlyle sunk the bulk of the cash into an impressive series of defense, aerospace, and security companies. Names like Aerostructures Corp., United Defense, United States Marine Repair, and U.S. Investigations Services dominated the list of investments. And most of them had one thing in common: They depended on government contracts to make a living. Carlyle Partners II would ultimately go on to become the source of massive controversy, but before that it would make a killing, returning better than 30 percent annually to its investors, and finally making Carlyle’s co-founders very, very rich.
Carlyle was really starting to hit its stride in the mid-1990s, both in raising capital and cutting deals. No deal illustrates that better than Howmet, a maker of blades that go into jet engines and gas turbines. In the fall of 1995, a major French multinational corporation called Pechiney was looking to unload Howmet quickly and quietly. Part of Carlyle’s strategy in identifying investments—the company was looking at more than 1,200 potential deals a year at this point, but rarely invested in more than four or five— was to avoid getting into an auction with all of the other big names in private equity, like Kohlberg Kravis & Roberts or Forstmann Little & Co. As it turned out, the big guys weren’t interested anyway, because the aerospace industry was in a major slump.
So Carlyle joined forces with a maker of rocket fuel named Thiokol, and each picked up half of Howmet for $100 million. The two companies leveraged the rest of the purchase, which ended up costing $750 million in total. They all agreed they had overpaid. Carlyle then applied a formula that would result in many successes for them in the future. They structured a sweeping system of financial incentives, from the executives to the shop floor workers. Stock options for upper management, and straight bonuses for the grunts.
They taught every last employee in the company, all 10,000 of them, how to manage cash flow. They dangled a great big green carrot. And it worked. In the first two years Carlyle owned the company, sales increased by 25 percent while expenses fell consistently. By the fall of 1997, just two years after the buyout, Carlyle had managed to pay down more than half the debt that was incurred during the buyout and was ready to take Howmet public. The initial public offering was valued at $1.5 billion. Carlyle was entitled to half of that, making their $100 million investment worth $750 million. Not bad for a two-year turnaround.
The boys at Carlyle had learned much since the early days of Chi-Chi’s and Caterair. Things were starting to come more easily for them. Carlyle was on a serious roll now. They decided to hit the global scene, using the same formula they had applied domestically: hire ex-politicos to open doors and wallets. By this time the company had George Bush Sr. casually working for them on and off as a “senior advisor.” (Bush and Rubenstein had become very close friends at this point.) So it wasn’t difficult to hook former U.K. Prime Minister John Major, as well.
Fresh off his 16 years in government, the last seven of which were as prime minister, Major was another huge score for Carlyle. He had been America’s ally during the Gulf War, which put him largely in the good graces of Carlyle’s Middle East investors. And Carlyle had plans to create another massive buyout fund, this time targeted at European companies. The fit was perfect, and in late 1997, John Major became a member of the Carlyle European Advisory Board—just months after he left his post as prime minister in May.
The hiring of Major set up another of Carlyle’s global ironies. It was, of course, Major that fought so hard to restore the value of the pound during Britain’s disastrous recession in the early 1990s. And it was Soros who had opposed him; almost single-handedly defeating Major’s efforts by speculating on the pound, and bringing the British economy to its knees. Now they were partners in their business with Carlyle. Apparently, world leaders can forgive and forget. Nothing personal. With all that behind them, it was time to party.
The company held a lavish celebration marking its tenth anniversary in the fall of 1997. Inside the Library of Congress, the capital building visible through the windows, the Carlyle Group celebrated its success with a gala affair that included a 20-piece orchestra. The room was wall-to-wall dignitaries, world leaders, ex-presidents, and business leaders. The Carlyle gala was the place to be, the tough ticket in DC. These were good times, and the partners at Carlyle knew it.
They had finally made it.
Globalization
The European fund, like Carlyle Partners II, took off. Thanks to the help of Major, European heavy hitters, like Credit Lyonnais, Commerzbank, and Credit Agricole, contributed to the fund. As did American heavies, like AIG Global Investment, AMR Investment Services, BankAmerica, and the World Bank pension fund.
(Afsaneh Mashayekhi Beschloss, then treasurer and chief investment officer at the World Bank, was the woman in charge of pension fund investments. After she retired from the World Bank, having committed an undisclosed sum of money to Carlyle, she took a job with Carlyle, a trend that would be repeated through Carlyle’s history. That is not to say that Carlyle promised anyone they did business with a job, but the regularity of deals that look like quid pro quo is alarming.)
The money rolled in yet again, and by late summer in 1998, the company had doubled its initial goal for its second consecutive fund, closing it at $1.1 billion. It seemed as if Carlyle could do no wrong. But they didn’t stop there. Over the next two years, the company would raise funds for investments in Asia, begin marketing funds to Latin America and Russia, and start up several venture capital funds aimed at smaller investments of up-and-coming companies. It would set up real estate funds in Europe and the United States.
By the end of the decade, Carlyle stood with more than a dozen funds and close to $10 billion under management. It was officially a juggernaut, and the world was taking notice. The company was hiring politicians from all over the world to further their cause: former president of the Philippines Fidel Ramos; Prime Minister of South Korea Park Tae-joon; former SEC Chairman Arthur Levitt. And, of course, George Bush Sr. In the way that money breeds more money, Carlyle was becoming an unstoppable force during the latter half of the 1990s.
Both the money and the talent that was pouring in was building something that transcended a traditional private equity firm. In fact, it transcended traditional business. Carlyle was transforming into an entirely new kind of company, unique in both its makeup and its approach to business. With all of the politicians now on board, Carlyle was far more powerful than other investment banks. It had an enormous amount of money and clout, both of which had a certain snowball effect that led the company into uncharted waters.
But there was even more good fortune ahead. Much more.
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10 – BUYING BUSH
The shady world of bribes, kickbacks, and improper campaign contributions.
—Harper’s Magazine,
“Notes on a Native Son,” an article on the Bush campaign, February 2000
George W. Bush is a president who has long been criticized for being beholden to corporate interests. And perhaps no company holds more sway over the president than the Carlyle Group. After all, George W, Bush owes his presidency to two men: his father, who provided him the Bush surname and his legacy of success; and James Baker III, the man who first helped Bush Sr. get elected president, then fought in the trenches of the Florida recount to capture the 2000 election for his son.
Both of those men work for the same company: the Carlyle Group.
George W. Bush becoming the president of the United States Would turn out to be a major boon to Carlyle’s business. This was an eventuality that was not lost on Carlyle’s executives during the younger Bush’s campaign for the presidency, and as a result, Carlyle and its partners played as large a role as anybody in securing Bush’s victory in 2000.
But the road to the Bush White House was fraught with land mines for Carlyle. As Bush campaigned, the press examined his and his father’s relationship to Carlyle, and the result was a series of stories about dubious investments, seem