28 Oct Carlyle Covers Up

October 28th, 2004
By Naomi Klein

Less than twenty-four hours after The Nation disclosed that former Secretary of State James Baker and The Carlyle Group were involved in a secret deal to profit from Iraq’s debt to Kuwait, NBC was reporting that the deal was “dead.” At The Nation, we started to get calls congratulating us on costing the Carlyle Group $1 billion, the sum the company would have received in an investment from the government of Kuwait in exchange for helping to extract $27 billion of unpaid debts from Iraq.

We were flattered (sort of), until we realized that Carlyle had just pulled off a major public relations coup. When the story broke, the notoriously secretive merchant bank needed to find a way to avoid a full-blown political scandal. It chose a bold tactic: In the face of overwhelming evidence of a glaring conflict of interest between Baker’s stake in Carlyle and his post as George W. Bush’s special envoy on Iraq’s debt, Carlyle simply denied everything. The company issued a statement saying that it does not want to be involved in the Kuwait deal “in any way, shape or form and will not invest any money raised by the Consortium’s efforts” and, furthermore, that “Carlyle was never a member of the Consortium.” A spokesperson told the Financial Times that Carlyle had pulled out as soon as James Baker was appointed debt envoy, because his new political post made Carlyle’s involvement “unsuitable.” Mysteriously, there was no paper trail-just Carlyle’s word that it had informed its business partners “orally.”

You have to hand it to them: It was gutsy. In the leaked business proposal from the consortium to the Kuwaiti government—submitted almost two months after Baker’s appointment—the Carlyle Group is named no fewer than forty-seven times; it is listed first among the companies involved in the consortium; and its partner James Baker is mentioned by name at least eleven times. In interviews, other consortium members, including Madeleine Albright’s consulting firm, the Albright Group, confirmed that Carlyle was still involved, as did the office of the Prime Minister of Kuwait. Shahameen Sheikh, the consortium’s CEO, told me that when Baker was named envoy in December, Carlyle was “very clear with us that they wanted to restrict their role to fund managers,” but she said the firm was very much still a part of the deal.

That was exactly what Carlyle spokesman Christopher Ullman had told me. He also admitted that Carlyle would land a $1 billion investment if the proposal was accepted. After I reported these facts, Ullman even called to thank me for quoting him accurately.

So when I heard about Carlyle’s about-face, I called Ullman to see what was up. I felt like I was talking to one of the brainwashed characters in The Manchurian Candidate, the Jonathan Demme remake about a Carlyle-esque company that conspires to put a mind-controlled candidate in the Oval Office. “We learned today that we did not even join the consortium,” Ullman told me, drone-like. “When I spoke to you yesterday, I did not know that.”

Amazingly, it worked. The story—which made front-page news around the world—vanished almost as soon as it had appeared in the press at home. The New York Times has not printed a word about Baker’s conflict, despite the fact that when Baker was first appointed envoy, it published an editorial calling on him to resign from Carlyle in order to “perform honorably in his new public job.” The Kerry campaign has been equally silent, apparently for fear that any criticism would boomerang onto the Democrats because of Albright. This was Carlyle’s stroke of genius: when Baker was appointed, the consortium recruited Albright to front the deal; when they got caught, Carlyle denied all involvement in this “unsuitable” activity and left a prominent Democrat holding the bag. As the story disappeared under Carlyle’s spell, it was as if the entire US media had been implanted with Manchurian memory chips. Here was hard evidence that the Carlyle Group—the “ex-Presidents’ club,” run so much like a secret society that Charles Lewis of the Center for Public Integrity once described researching the firm as “shadowboxing with a ghost”—had participated in a scheme to use Baker to undermine US policy, possibly in violation of multiple conflict-of-interest regulations, including criminal statutes. Yet Carlyle was slipping out of reach once again.

Crucially, the central question remains unanswered by the White House: Have James Baker’s business interests compromised his performance as debt envoy? That question does not go away simply because $1 billion will stay in the coffers of a wealthy oil emirate rather than in a Carlyle equity fund. The week after losing the deal, Carlyle handed a record-breaking $6.6 billion pay-out to investors. “It’s the best 18 months we ever had,” boasted Carlyle Chief Investment officer Bill Conway to the Financial Times. “We made money and we made it fast.”

In Iraq, the last eighteen months have been markedly worse, and the stakes for Baker’s job performance there are considerably higher. This was underlined on October 13, when Iraq’s health ministry issued a harrowing report on its post-invasion health crisis, including outbreaks of typhoid and tuberculosis and soaring child and mother mortality rates. A week after the report came out, Iraq paid out another $195 million for war reparation debts, mostly to Kuwait. Meanwhile, the State Department announced that $3.5 billion for water, sanitation and electricity projects was being shifted to security in Iraq, claiming that, according to Deputy Secretary of State Richard Armitage, debt relief is on the way.

Is it? In fact, Iraq is being plunged deeper into debt, with $836 million in new loans and grants now flowing from the IMF and the World Bank. Meanwhile, Baker has not managed to get a single country to commit to eradicating Iraq’s debts. Iraq’s creditors know that while Baker was asking them to show forgiveness, his company was offering Kuwait a special side deal to push Iraq to pay up. It’s not the kind of news that tends to generate generosity and good will. And the timing couldn’t be worse: the Paris Club is about to meet to hash out a final deal on Iraq’s debt.

But that doesn’t happen until November 17. And if 2000 is any indication, by then Baker could be on to bigger deals. Look out for him in swing states, if another election needs stealing.

This column was first published in The Nation.