Connections
And Then Some
David Rubenstein Has Made Millions
Pairing the Powerful With the Rich
Greg Schneider Washington Post Staff
Writer
March 16, 2003; Page F1
David M. Rubenstein is exasperated, and he
blurts something that a quick look around the room proves is outrageous:
"We're not," he nearly shouts, "that well connected!"
Behind him is a picture of Rubenstein on a plane with then-Gov. George W.
Bush. Across the room, a photo of Rubenstein with the president's father
and mother. Next to that, Rubenstein and Mikhail Gorbachev. Elsewhere:
Rubenstein and Jimmy Carter. On a bookshelf: Rubenstein and the pope.
This is not some honor wall
in Rubenstein's office on Pennsylvania Avenue, this is his wood-paneled den
at home in Bethesda. The snapshots are nearly hidden among books and
trinkets and family photos -- the decorating restraint of the truly, deeply
connected.
Rubenstein, after all, is
co-founder of the Carlyle Group, an investment house famous as one of the
most well-connected companies anywhere. Former president George H.W. Bush
is a Carlyle adviser. Former British prime minister John Major heads its
European arm. Former secretary of state James Baker is senior counselor,
former White House budget chief Richard Darman is a partner, former SEC
chairman Arthur Levitt is senior adviser -- the list goes on.
Those associations have
brought Carlyle enormous success. Founded in 1987 with $5 million, the
Washington-based merchant bank controls nearly $14 billion in investments, making
it the largest private equity manager in the world. It buys and sells whole
companies the way some firms trade shares of stock.
But the connections also have
cost Carlyle, in ways that are hard to measure. It has developed a
reputation as the CIA of the business world -- omnipresent, powerful, a
little sinister. Media outlets from the Village Voice to BusinessWeek have
depicted Carlyle as manipulating the levers of government from shadowy back
rooms. "The Iron Triangle," a book about the company due out next
month, promises to take readers into "a world that few of us can even
imagine, full of clandestine meetings [and] quid pro quo deals."
Last year, then-congresswoman
Cynthia McKinney (D-Ga.) even suggested that Carlyle's and Bush's ties to
the Middle East made them somehow complicitous in the Sept. 11 terror
attacks. While her comments were widely dismissed as irresponsible, the
publicity highlighted Carlyle's increasingly notorious reputation. Internet
sites with headlines such as "The Axis of Corporate Evil" purport
to link Carlyle to everything from Enron to al Qaeda.
"We've actually replaced
the Trilateral Commission" as the darling of conspiracy theorists,
says Rubenstein -- who, truth be told, happens to be a member of the
Trilateral Commission.
It didn't help that as the
World Trade Center burned on Sept. 11, 2001, the news interrupted a Carlyle
business conference at the Ritz-Carlton Hotel here attended by a brother of
Osama bin Laden. Former president Bush, a fellow investor, had been with
him at the conference the previous day.
But even if you believe the
conspiracy theories that Carlyle luminaries are pulling strings on the
company's behalf, there is evidence they haven't been very good at it
lately. The current Bush administration has sloughed off advice from Baker
calling for restraint in the Middle East, where Carlyle has investors, and
from former president Bush on the need for calm on the Korean peninsula,
where Carlyle owns banks. Defense Secretary Donald Rumsfeld even canceled the
$11 billion Crusader howitzer program, a crucial contract for the
Carlyle-owned United Defense company.
Rubenstein resents the
suggestion that Carlyle's bigwigs shape public policy for private gain --
it's what made him erupt in an interview about his lack of connections.
"Do you really think the current president of the United States would
ruin his reputation and potentially hurt the United States because of his
father's business interests? It's ludicrous," he says. "Do you
really think because your father's making speeches in Saudi Arabia you're
going to tilt U.S. policy one way or the other? It's ridiculous, it's
absurd."
Still, he knows why people
believe that about Carlyle. He even takes the blame for it. "I
probably failed in conveying the idea that we're not using this company in
an inappropriate way," he says.
Now, bit by bit, Rubenstein
wants to change that image. A year ago he hired his first public relations
specialist. Then, in November, he replaced former defense secretary Frank
Carlucci as Carlyle's chairman with a different type of heavyweight: Louis
V. Gerstner Jr., the former chairman of IBM.
It is Carlyle's first marquee
hire from the world of business instead of government. It's only a step,
and Carlyle has a long way to go to overcome its shadowy reputation. But
Rubenstein has experience with transformation. His own career took a
curious twist, as Rubenstein transformed himself from a young Carter White
House policy wonk into a tycoon whose family safaris with Barbara Bush.
"His ideology was
compatible with mine -- dedicated to human rights, civil rights,
environmental quality, better education," Carter says in an interview.
"I have been truly amazed by what David has done since the White House
years."
Carlyle, in its early days,
was a far humbler creature than it is now. In fact, the company's first
successful venture sounds like something from a spam e-mail. Rubenstein had
discovered a legal loophole allowing Native Americans in Alaska to sell
their tax losses, and he did a brief, brisk business connecting Eskimos
with corporations in search of a write-off. Congress quickly closed the
loophole, and Carlyle moved on in search of companies to buy. It made an
abortive stab at the Chi-Chi's restaurant chain, and bought the Caterair
International airline food service -- putting George W. Bush on the board,
but later selling it at a huge loss.
The whole venture was
something of a midlife crisis for Rubenstein, who had read somewhere that
people rarely start businesses after they are in their late thirties. He
had been treading water in a Washington law office, and through old friend
Ed Mathias, then of Legg Mason, hooked up with a few other men of similar
age looking to get into something new.
What they started was a
private equity firm, aimed at using money from rich people or institutions
to buy companies, run them for a while and sell them, hopefully at a
profit. Carlyle was named for the swanky-sounding New York hotel, but that
city's elite derided the little company for being based in a financial
backwater like Washington.
Rubenstein craved legitimacy,
so he paid attention when a former law partner passed on the tip that a big
name in government, Carlucci, was about to leave office and was looking for
opportunities. Rubenstein resolved to hire him.
"He was a person of some
prominence. We were a 10-person firm, we thought hiring a person who was
better known than we were might help us get our calls returned more. It was
nothing more nefarious than that, or more intelligent than that," Rubenstein
says.
It worked. Carlucci is one of
the world's great networkers. He got insight into business deals all over
the country by serving on a long list of corporate boards. With his
Pentagon background, he pushed Carlyle to buy defense contractors at a time
when such companies were out of favor with investors. When the defense
industry later consolidated, Carlyle minted money by selling its pieces to
the dominant new corporations.
Carlucci became chairman, and
Rubenstein realized he had hit on a winning formula: If you put powerful
people next to rich people, some of the power rubs off on the rich guys and
some of the money rubs off on the powerful guys. Rubenstein began hiring
other statesmen like a football owner stocking his team with stars, and the
company steered its investments into government-regulated industries.
He got Baker, the former
secretary of state, in a twofer with Darman, the former White House budget
director. Former FCC chairman William Kennard signed on to oversee
telecommunications and media investing. Former SEC chairman Levitt is
helping Carlyle find companies to buy and advising on corporate ethics.
Baker helped land Bush, whose primary function is to give speeches for
Carlyle that attract wealthy foreigners in places where the former
president is especially revered, such as Asia.
After Bush speaks, Rubenstein
and others close in to get the wowed attendees to entrust them with their
riches.
The company has rewarded its
faithful with a 36 percent average annual rate of return. It has done so
through deals such as its $165 million purchase of Magnavox Electronic
Systems in 1993, which it sold two years later for $370 million. Or its
1997 purchase of United Defense for $180 million. Four years later -- just
before Rumsfeld canceled its Crusader howitzer program -- Carlyle took
United Defense public and sold about half the stock for $588 million.
Such deals are the province
of co-founders Daniel D'Anielo, who runs daily operations, and William
Conway, who oversees investments. Rubenstein is the people person. He
travels 300 days a year recruiting investors, visiting employees, scouting
for opportunities. He is a Jew who sips tea in Arabian palaces, the son of
a Baltimore postal worker who buys pinstripe suits -- all alike -- in London.
His role would suggest some-
one with a chamber-of-commerce smile, a two-handed handshake. Rubenstein is
not that guy. "I'm a pretty serious person," he says, cataloguing
the sins he avoids: "I don't drink alcohol, I don't smoke, I don't play
golf."
At 53, he manages to look
boyish even though his hair has gone white. His eyebrows are still dark,
a{grv} la Steve Martin, and his mannerisms -- the palms-up shrug, the fast
blinking when he makes a point -- evoke a less-hyper Woody Allen.
One of the most complicated
things about Rubenstein is his sense of humor, which is pervasive but so
bone-dry and understated that it's almost sneaky. When he greets someone
for the first time with the stony-faced line "You were promised lunch,
but the truth is, we don't actually have any lunch," the effect is
off-putting and then amusing, a kind of barbed-wire charm.
Rubenstein also is
relentlessly self-deprecating. Being a reporter must be a fascinating job,
he'll say -- "with the exception of this interview." President
Bush would no doubt love to have his advice, he deadpans, "so he could
get inflation to 18 percent" the way Carter did with Rubenstein's
help.
He speed-reads 10 newspapers
a day and six books a week. Among the clutter on his coffee table one
Saturday afternoon: Gulf Business magazine, the book "What Went Wrong:
Western Impact and Middle Eastern Response" by Bernard Lewis and
"The Lexus and the Olive Tree" by New York Times columnist Thomas
Friedman.
Despite his drive to stay
informed, Rubenstein also nurses an image as someone apart from the modes
of the day. He hasn't seen a movie "in a dozen years." He carries
a cell phone for emergencies, but doesn't know its number. He gets some 200
e-mails daily and responds to them all -- though he writes the responses on
a legal pad and has an assistant type them into the computer.
Rubenstein's only real
indulgence is gossip, which he uses both to reward and to milk his global
network of big names. Otherwise, the man has no diversions. Work is his
hobby.
"If I were forced to
relax in conventional ways I'm convinced I'd have a heart attack," he
says. "I came from a very modest background, worked very hard and now
I've achieved something -- not a Nobel Peace Prize, not Bill Gates, but
something."
An only child, Rubenstein was
raised in a working-class Jewish neighborhood in the Pikesville section of
Baltimore. "It was a rigidly segregated place by religion," he
says. But everything changed for him when he went to Baltimore's enormous
City College public high school.
There Rubenstein became
friends with a charismatic football star named Kurt Schmoke, who one day
would become the first elected black mayor of Baltimore. The two were
members of the Lancers, a club for boys founded and still operated by
retired Baltimore judge Robert I.H. Hammerman.
"I didn't think David
was a leader in the sense of Kurt being a leader, in the sense of being
president of a class or president of a school," says Hammerman, who
recalls urging the teenage Rubenstein to believe in himself. "I didn't
think David at that time had that in him because he was too shy and too
unsure of himself. . . . He did not have much self-confidence then,
[though] he might feel he always bristled with confidence, because he
certainly bristles with it now."
Rubenstein went on to Duke
University and won a scholarship to the University of Chicago Law School.
After a couple of years working at a law firm in New York City, Rubenstein
signed on as legal counsel to the presidential campaign of Birch Bayh.
When Jimmy Carter won the
Democratic presidential nomination in 1976, Rubenstein won a job crafting
domestic policy with campaign adviser Stuart Eizenstat. The two formed a
close working relationship, and after the election Rubenstein found himself
as the president's deputy domestic policy adviser at the age of only 27.
Intoxicated by the job,
Rubenstein made himself indispensable through sheer labor. "He devoted
probably more hours to his work in the White House than anyone on my staff,
so far as I ever knew," Carter says. "He was a reticent person as
far as putting himself forward. He was very modest, and never claimed
credit for successes when they did materialize. . . . And he never betrayed
me."
Newsweek magazine profiled
Rubenstein in 1978 as the prototypical hyper-committed young policy wonk --
eating dinner from a vending machine, all but sleeping in his office. As
the last one out of the West Wing most nights, Rubenstein would put his and
Eizenstat's memos at the top of the pile in the president's private study,
ensuring Carter always knew their positions. A jealous staffer with the
Office of Management and Budget eventually got a Secret Service agent to
sniff out his technique and put that agency's memo on top, Rubenstein says.
He likes to add that he
didn't speak to that staffer for months, but later married her. Alice
Rogoff Rubenstein went on to become an assistant to Donald Graham, then
publisher of The Washington Post, and she later spent eight years as chief
financial officer of U.S. News & World Report.
Rubenstein also recruited his
old friend Schmoke to the White House staff. "All the legends about
him and how hard he worked are absolutely correct," Schmoke says.
"He was somebody that I never heard anybody say anything critical or a
bad word about. He was always somebody concerned about community. . . . He
was very much interested in public policy concerns, and broad societal
issues."
Then, to Rubenstein's
surprise, Carter failed to win a second term.
Lawyers who had once dangled
job offers now didn't return Rubenstein's calls. He eventually hired on at
the firm of Shaw, Pittman, Potts & Trowbridge, but found that he didn't
really enjoy the work. Eizenstat, who remains a close friend, didn't worry
about Rubenstein, because he figured he would follow a path similar to his
own -- practice law, write papers for think tanks, step in and out of
Democratic administrations.
But Walter Mondale's big loss
in 1984 soured Rubenstein on politics. And as he entered his late thirties,
he was restless for something to focus all that intense drive upon.
Something that might carry a significant paycheck.
So he took the leap and
formed Carlyle. Not long after the firm started up, Rubenstein met Judge
Hammerman for lunch at Duke Zeibert's. "I just want you to know,"
he said to his old mentor, "I'm not selling out."
Rubenstein got his payday,
and then some. He has lost track of his net worth, he says, because
Carlyle's structure gives him an interest in each of the firm's 250-plus
investments, and those values fluctuate. But it's safe to say he has many
millions.
The Rubensteins remodeled
their Georgian-style home in Bethesda -- assessed last year at $1.7 million
-- then bought the place next door and renovated it as a guesthouse. They
built a 10,000-square-foot chalet in Beaver Creek, Colo., and a compound
that sleeps 30 on Nantucket.
For all that, Rubenstein
spends most of his time on airplanes or in hotels. He likes to point out
that he neither skis nor sails, and visits those getaway homes maybe one
week apiece each year.
"I'm kind of fascinated
with his acquisition of houses," says Arthur Levitt, the former SEC
chairman. "I'm not convinced that he likes any of these houses a great
deal. . . . He talks about them, but I certainly don't have the feeling
that he has any commitment to them whatsoever."
Despite his riches,
Rubenstein has hung on to the persona of the earnest staffer laboring to
make the marquee names look good. He hates the spotlight so much,
associates say, he'll rearrange place cards at dinner to get himself off
the head table. But what he's really doing is putting big potential
investors next to the guest of honor, softening them up.
One thing that has changed
about Rubenstein is his politics. He hasn't let go of his roots -- his
wife, Alice Rogoff Rubenstein, is on the board of the Carter Center, and
the Carters were overnight guests at the Rubensteins' Nantucket home this
summer. But George and Barbara Bush are more common houseguests.
Rubenstein's wife and three children went along on a safari with Mrs. Bush,
and the Rubensteins were among a select group invited to the former first
lady's 75th-birthday party.
"Spending time with them
has affected my political views," Rubenstein says. Rather than
Democrat or Republican, he now sees himself as a capital-C Capitalist. And
he says he wants to position his company the same way.
Rubenstein has refused to let
Carlyle form its own political action committee, and he has all but stopped
making political donations. Since 1999 Rubenstein has contributed a total of
about $2,500 to political campaigns, all Republican, according to the
Center for Responsive Politics.
Others associated with
Carlyle have given far more. From 1999 to 2000, people affiliated with the
firm gave nearly $224,000 to Democratic candidates and groups and nearly
$248,000 to Republicans, according to the center's numbers. Carlucci and
co-founder William Conway are the company's most generous givers.
Numbers were way down in the
post-presidential 2000 to 2001 cycle: $27,350 to Democrats and $81,285 to
Republicans.
Rubenstein says he voted for
the current president but did not raise money for him, and that he has
visited this Bush White House only once, when a friend was involved in
staging a Kennedy Center event.
Critics argue that the
Carlyle magic can't be gauged by such traditional standards. "My
concern is the influence that Carlyle has that is not accountable or
monitored," says Charles Lewis of the Center for Public Integrity
watchdog group. "This is a company that doesn't register for the most
part in terms of its activities in Washington. It clearly has enormous
influence, I mean astonishing influence."
Even Rubenstein, for all his
protests that Carlyle doesn't consciously lobby the government, concedes
that "maybe you get this influence by people thinking you have
it."
How do you measure the
impact, Lewis asks, when a company's top executive -- Carlucci -- chats at
a cocktail party with Donald Rumsfeld about their wrestling days at
Princeton? Or when its top adviser is not only a former president but once
changed the diapers of the current president?
It's not just in Washington
that such questions arise. Last year when the British government decided to
privatize its secret technology lab by selling a stake to Carlyle,
commentators and even some of the lab's employees expressed outrage about
the company's ties to former British prime minister Major and to U.S. power
brokers.
Also last year, Carlyle made
the seemingly innocuous purchase of a Hong Kong company that is the world's
biggest manufacturer of artificial Christmas trees. Shareholders in the
Chinese company who opposed the sale pointed out that one of its top
executives kept a picture of Major in his office, implying that once again
Carlyle's connections had given it an unfair advantage.
One Carlyle insider, while
vigorously defending the company's ethics, concedes that there is often an
unsaid component to overseas dealings in which "certain types of
investors" will assume Carlyle's big names mean big influence.
"No matter how much you try to tell them, they think it's like their
system," the source says.
That's also why the Internet
hosts a robust strain of Carlyle-bashing. A British musical act calling
itself the Carlyle Group has posted songs online with titles like
"Vast Right-Wing Conspiracy" and "Blinded by the
Right." One Web site offers a "Carlyle Casino" slot machine
that uses pictures of Bush, Baker and Carlucci in place of cherries, bells
and bars. Pull the handle, line up the photos and find out "Who's
making billions from the War on Terror?"
The characterization
infuriates some of Carlyle's biggest names. "I say that's
bull[expletive], and you can print it!" snaps Baker. "Somebody
would say, well, you had one of the bin Laden brothers as an investor.
Well, that's exactly right," he says, adding that the bin Ladens are
one of the wealthiest families in the Middle East and have disowned Osama.
Still, to deflect criticism,
Rubenstein returned the bin Ladens' $2 million investment, and said that
while Carlyle still has other investors in the Middle East, it no longer
owns any companies there.
But even people who aren't
looking for sinister conspiracies have questioned Rubenstein's approach
with Carlyle. Rep. Marcy Kaptur (D-Ohio) was once a junior member of
Carter's domestic policy staff and is amazed by her former colleague's
career.
"I sort of saw David as
the ultimate public servant. He was so selfless. He gave all that effort
over all that period of time," she says. But now he has become
something else: "I want to use a complimentary word here, I don't want
to say a shadowy figure," Kaptur says. "Kind of a translucent
figure."
Using former statesmen such
as Bush and Baker to pursue private gain just seems inherently wrong, she
says. "I think that using your public-sector contacts to aggrandize
yourself when you leave . . . creates a view that the public sector is for
sale."
Rubenstein understands the
negative way some people view what he's done. Democrats, especially,
"often consider the making of money in this kind of private-equity
business as not as socially significant as working in a foundation or in
government," he says. But he argues that Carlyle has contributed to
the social good: it has created jobs and generated wealth for investors
that include the California Public Employees Retirement System and other
major pension funds.
Former president Carter says
he finds no fault in Carlyle's stable of statesmen. "I think each
public official, once leaving office, is as completely free as all other
citizens of the United States to shape their own careers, within the bounds
of ethical proprieties," he says.
But he is quick to add that
Carlyle is something "in which, by the way, I have never been involved
at all. I have never been in the commercial life at all." He did make
one speech at a Carlyle conference, he says, but only to promote the Carter
Center.
Times are changing, though.
It's no longer valid to assume that Carlyle's golden roll of all-stars
automatically opens doors in certain parts of the world, says Youssef M.
Ibrahim of the Council on Foreign Relations in New York. "George Bush
junior is kind of screwing his father up, slowly but surely, in terms of
securing relationships in the region," Ibrahim says of the Mideast.
The current administration's support for Israel, its hostility toward Iraq
and its rocky dealings with the Saudi royal family have soured business and
political relationships alike, he says.
In that light, it was
especially good timing last year when Levitt introduced Rubenstein to
Gerstner. The legendary IBM executive was planning to retire, and
Rubenstein, much as he did 15 years before with Carlucci, resolved to hire
him.
It was past time for Carlyle
to work on its image, Rubenstein decided. Frustrated by the conspiracy
theories, burned by the Sept. 11-bin Laden situation, Rubenstein viewed
hiring Gerstner as the beginning of the next stage for his company.
"Maybe you would say
it's an evolution," he says. Political connections got them started,
but now Rubenstein would like Carlyle to take the next step -- becoming
part of the bedrock of American finance, an institution that outlives its
founders, the "Goldman Sachs of private equity."
As for his own future,
Rubenstein has been thinking about someday getting his hand back into an
administration. Not as a staffer or appointee -- that would be too
restrictive, he says. No, Rubenstein now understands that if you want to do
something to affect public policy, being the rich buddy of a sitting
president would be the way to do it.
"I'm not as convinced as
I once was when my hair was dark and I was 27 that all public-policy
achievements are accomplished within government," he says. "I can
have influence, if I want to, on the outside."
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