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Rolling in War Bucks 

How the state public employees' retirement system and the politically connected Carlyle Group profit from defense

Wednesday, Oct 22 2003
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Q: The President was in Santa Clara last week and he appeared at United Defense, a major defense contractor controlled by the Carlyle Group. The President's father is a paid advisor to the Carlyle Group. So you have a situation where the President was there touting the products of the company that directly benefits financially his father. Why isn't that unethical?

MR. FLEISCHER: The question is, are Bradley fighting vehicles part of what the military does that should be supported. The answer is, of course, yes, regardless of who serves on Carlyle.

Q: What if the President's father was, like, the President of United Defense? Would that be unethical?

MR. FLEISCHER: What if the President's father was on Social Security and the President wanted to strengthen the Social Security program so all Americans could have a strong retirement. (Laughter.)

-- from a May 8 White House press briefing by then-Press Secretary Ari Fleischer

When questions about corporate governance and transparency dominate the national news, you can be pretty sure you'll be reading cluck-clucking quotes from someone connected to CalPERS, our state's retirement system for public employees. With more than $145 billion in assets, the system is one of the bigger dogs on any financial block, and it is not shy about using its clout to influence entities with which it does business. Recently, CalPERS's bark added velocity to the defenestration of Dick Grasso, the longtime New York Stock Exchange chairman with the salary so large it made even the greediest of Wall Street investment bankers blanch.

Indeed, the retirement system has a long and public history of advocating for increased attention to corporate openness and ethics. For the last year or so, for example, state Treasurer and CalPERS board member Phil Angelides has been pushing the retirement system to "encourage" American companies that have moved their headquarters to offshore tax havens like the Cayman Islands to come back home. "You have 6,000 or 7,000 public companies in America playing by a common set of rules," the San Francisco Chronicle quoted Angelides as saying last year, "and two dozen or so outliers who want all the benefits of being part of this American society without paying their fair share."

That's not to say the notion of CalPERS as reformer lacks all comic undertones; when it is a subject of inquiry, CalPERS can sometimes be about as open as the Politburo. Last fall, for instance, the San Jose Mercury News had to sue the retirement system because it had stopped providing even cursory information about CalPERS's investments in venture capital funds. A few months later, the system capitulated, agreeing to provide some data on rates of return in the venture capital funds in which it had placed public employees' money.

At that point, though, CalPERS suggested it might be so generous as to tell its beneficiaries even more about what it does with their money when it is thrown into the venture capital realm. "We intend to work with other institutional investors, the private-equity industry, and the public to develop the best reporting standards,'' the San Jose Mercury News quoted CalPERS board President William Crist as saying.

In an effort to help CalPERS reach its financial transparency goals, I called the retirement system last week to ask for details about its investments in various entities related to the Carlyle Group, a "global private equity firm with $16 billion under management," according to the firm's Web site. Being the avid reader you undoubtedly are, you probably already know something about Carlyle; it's the firm wise enough to have hired former President George H.W. Bush, former Secretary of State James A. Baker III, former Office of Management and Budget Director Richard Darman, and former Secretary of Defense Frank Carlucci in advance of the election of Bush's son as president. (The Carlyle Web site says President Bush's father retired this month from his position as a senior adviser to Carlyle; Carlucci moved recently from the chairman's seat to a position called chairman emeritus.) It's the firm that takes money from institutional investors and high-wealth individuals -- notably, according to some publications, members of the Saudi Arabian ruling elite, including, until Sept. 11, 2001, intervened, the bin Laden family -- and invests it around the world. Those investments run the gamut of business sectors, from defense to energy to health care to telecommunications and beyond.

My interest in the CalPERS-Carlyle link was sparked by some Securities and Exchange Commission documents that skittered across my desk recently. The documents described an interesting or dismaying development (depending on one's views on defense investment) that had a CalPERS connection, and had received relatively little attention in the press. It's a fairly complicated development, though; excuse me while I drag you through some necessary detail.

In August, the owners of nearly half of the stock of a major U.S. military contractor, United Defense Industries Inc., decided to sell a chunk of their holdings. The sale brought the owners of the stock something like $270 million. The sale capitalized on significant increases in United Defense's revenues, earnings, and stock price realized in the first six months of this year -- a six-month period that also happened to include, in Bush administration terminology, "major combat operations" in Iraq.

It is, of course, hardly extraordinary when the owners of defense companies profit from war. There is something a wee bit unusual about this case of war profit-making, though. In this case, the entity that reaped profits from the U.S. defense buildup and the Iraq War was a company employing a host of political luminaries, many of whom served in past Republican administrations or have connections to the current Republic administration.

But that's not quite the whole of the development I found noteworthy.

Yes, the Carlyle Group arranged for a group of investors to buy into United Defense and, apparently, make money. The actual identities of many of those investors have not been publicly revealed; in fact, some of those identities are obscured in partnerships based in the secrecy-happy offshore tax haven of the Cayman Islands.

About The Author

John Mecklin

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