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Blog Post | September 17, 2021

Powell's Carlyle Past Meets The Fed's Ethics Scandal Present

Ethics in GovernmentFederal ReservePrivate EquityRevolving Door
Powell's Carlyle Past Meets The Fed's Ethics Scandal Present

Revolving Door Project Executive Director Jeff Hauser wrote in a letter to Fed Chair Jerome Powell today that he should ban securities trading for Fed policymakers and place scandal-dogged Fed bank presidents Robert Kaplan and Eric Rosengren on administrative leave, pending a fuller investigation of their stock trades.

In an accompanying statement, Hauser said “It really shouldn’t surprise anyone that a former Carlyle Group executive — a firm whose whole profit strategy is based on exploiting insider connections in the federal government — hasn’t prioritized ethics and oversight in running the nation’s largest stockpile of potentially market-moving information.” 

For those less familiar with the Carlyle Group, the private equity firm where Powell was a partner between 1997 – 2005, here’s a quick overview of their history with capitalizing on political connections and the revolving door.

Carlyle’s Strategy

  • Carlyle has recruited major players across politics for decades. Former executives include former secretary of defense and CIA deputy director Frank Carlucci, former secretary of state James Baker III, former President George H.W. Bush, former UK Prime Minister John Major, and former chairman of the SEC Arthur Levitt, who is still a Senior Adviser at Carlyle.
    • On 9/11, as George W. Bush was responding to the terrorist attacks on the World Trade Center, his father George H.W. Bush, then a Carlyle executive, was working to get one of the firm’s investors out of the country in the middle of the crisis. This investor was Osama Bin Laden’s estranged brother, who has no affiliation with al Qaeda or any other terrorist organization.
    • Powell joined the Carlyle Group himself after working at the Treasury Department between 1990 – 1993. He was George H.W. Bush’s Undersecretary of the Treasury for Domestic Finance. He spent 1993 – 1997 at investment banks Bankers Trust and Dillon Read.
  • Powell’s Vice Chair for Supervision at the Fed, Randal Quarles, is a fellow Carlyle Group alumnus. Quarles has led the Fed’s drastic deregulatory moves during Powell’s Chairship, all of which Powell supported.
  • Carlyle’s offices are located halfway between the White House and the Capitol building in downtown Washington, D.C.
  • Carlyle co-founder David Rubenstein is a well-known member of the D.C. cocktail circuit. He is the Chairman of the Economic Club of Washington, D.C., an invite-only consortium of business executives which hosts regular dinners and schmoozing sessions with powerful politicians.
    • Rubenstein began his career in the Carter White House, and afterward learned the influence game as “just another Washington lawyer, peddling influence on behalf of clients he didn’t care about with causes he didn’t believe in,” according to a New Republic profile from 1993. “‘I found it demeaning,’ he says. ‘It was legalized bribery. You’d go up to talk to a senator and the minute you got back to your office the phone would be ringing and it would be the senator’s aide asking when you might be able to throw a fund-raiser.’”
  • During Powell’s tenure at Carlyle, it was widely reported that the firm’s government connections were key to their profit strategy. As the Washington Post reported in 1997: “Over the past decade, Rubenstein and his partners have built a network of influential people who can make sure Carlyle gets an early look at these private deals. And because Carlyle specializes in industries affected by government regulation, this network is heavily weighted to former government officials, many of whom have made tidy profits investing in the deals themselves.”
  • Carlyle’s branding as respectable, elite, and secretive is deliberate. In the early 1990’s, the firm was “being dismissed as a bunch of second-rate tax scammers, greenmailers and influence peddlers,” in the words of the Washington Post. (emphasis added) They had made costly bad bets on airlines and commercial brokerages, but rebounded to become of the most successful private equity firms in the country through several purchases in a sector where their political access and name-dropping was helpful: arms and aerospace manufacturing.
    • Carlyle’s Chairman at the time was Frank Carlucci, the former secretary of defense who served in presidential administrations throughout the 20th century. As the Washington Post wrote: “through his years of government service and his service now on several dozen corporate boards, [Carlucci] has won Carlyle an early look at deals involving General Dynamics, Vought Aircraft Co., CB Commercial Real Estate Group Inc. and United Defense LP. ‘The best deals are negotiated deals, which is why Carlyle’s network has been so important,’ said Bernard Aronson, a former assistant secretary of state who did some work from Carlyle before starting up his own investment firm, Acon Investment. ‘It puts them in the deal flow.’”
    • As Matt Stoller has documented, the 1990’s saw massive consolidation within the defense contracting space into a few massive firms. Carlyle bought several mid-size firms which it later resold to the dominant players during this period. Per the Washington Post: ​​”From Magnavox Electronic Systems Co. and General Dynamics Corp., they picked up defense electronics divisions for a song, then bought LTV Corp.’s aerospace division out of bankruptcy following a long, contentious auction. And when Loral Corp. beat them out for the aerospace division of Ford Motor Co., Carlyle settled for the leftovers: BDM International Corp., the granddaddy of Beltway government contractors. Now all four companies are back in the hands of the few surviving defense giants, but not before the Carlyle partners generated $765 million for their investors and themselves.”
    • Carlyle’s reputation for tax-scamming at the time came from the firm exploiting a brief tax loophole which allowed Eskimo-owned companies to sell their losses for cash, allowing American firms to offset their gains against Eskimo losses and avoid income taxes. Carlyle employees reportedly called it “The Great Eskimo Tax Scam of 1987.”

Carlyle Today

  • While Powell was a partner at Carlyle, its CEO was Glenn Youngkin. Youngkin is now running for governor of Virginia on a Trumpian platform. He was endorsed by former President Donald Trump and has denied that the 2020 election was legitimate.
  • In the 2020 election cycle, Carlyle became the only major private equity firm to have its own political action committee, according to the industry press outlet Institutional Investor
  • The firm’s habit of recruiting former high-ranking political leaders has not gone without scrutiny. In 2004, the Center for Public Integrity called Carlyle’s work “access capitalism,” using a term first coined by Michael Lewis to describe Carlyle in the New Republic in 1993: “the access capitalist can plausibly represent himself as a higher social type—a businessperson rather than an influence-peddler—which gives him an edge if he decides to return to politics. But perhaps best of all for those who have spent their lives in politics, the access capitalist doesn’t really need to know much about business. Wall Street has proved brutal to the many beginners, such as David Stockman and Larry Speakes, who have gone there to work from Washington. That true capitalism requires something more than connections is the source of Carlyle’s appeal: only a merchant bank that trades more on whom one knows rather than on what one knows can provide a real home for the access capitalist.”
  • The firm is the subject of investigative journalist Dan Briody’s book The Iron Triangle, which probes its work at the “nexus of big business, government, and defense.” Briody told the Center for Public Integrity “Carlyle would never have gotten to the level that it is at today had it not been for this premeditated commingling of business and politics.”

Takeaway: We have long been critical of private equity and find nothing redeeming about its business model. Nonetheless, even by the generally bottom-feeding standards of the industry, Carlyle is unusually dependent on exploiting government contacts, insider information, and the revolving door. It is little surprise that a Fed Chair who emerges from Carlyle would de-prioritize ethics standards and enforcement.

Ethics in GovernmentFederal ReservePrivate EquityRevolving Door

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