[A-List] Iraq: debt, Baker & Carlyle Group

Michael Keaney michael.keaney at mbs.fi
Tue Oct 12 23:20:55 MDT 2004

Bush special envoy embroiled in controversy over Iraq debt

Consortium plans to cash in as Baker asks countries to end £200bn burden

Naomi Klein
Wednesday October 13, 2004
The Guardian

President Bush's special envoy, James Baker, who has been trying to persuade
the world to forgive Iraq's crushing debts, is simultaneously working for a
commercial concern that is trying to recover money from Iraq, according to
confidential documents.

Mr Baker's Carlyle Group is in a consortium secretly proposing to try to
collect $27bn (£15bn) on behalf of Kuwait, one of Iraq's biggest creditors,
by using high-level political influence. It claims Mr Baker will not benefit
personally, but the consortium could make millions in fees, retainers and
commission as a result.

Other countries, including Britain, have been urged by Mr Baker to relieve
the new Iraq regime of its $200bn debt burden. Iraq owes Britain
approximately $1bn.
One international lawyer described the consortium's scheme as "influence
peddling of the crassest kind".

Jerome Levinson, an expert on political and corporate ethics at American
University in Washington, told the Guardian: "The consortium is saying to
the Kuwaiti government, 'Through us you have the only chance to realize a
substantial part of the debt. Why? Because of who we are and who we know'."

When George Bush appointed Mr Baker, a former secretary of state, as his
unpaid envoy on December 5 2003, he called Mr Baker's job "a noble mission".
But Mr Baker is also a senior counsellor and an equity partner with a
reported $180m stake in the merchant bank and defence contractor the Carlyle

A confidential 65-page Proposal to Assist the Government of Kuwait in
Protecting and Realising Claims Against Iraq was sent in January from the
consortium to Kuwait's foreign ministry, according to documents obtained by
the Nation magazine in New York, which are published today on the Guardian

In a letter dated August 6 2004, the consortium informs Kuwait's foreign
ministry that the country's unpaid debts from Iraq "are in imminent

World opinion is turning in favor of debt forgiveness, another letter warns,
as evidenced by "President Bush's appointment of former secretary of state
James Baker as his envoy to negotiate Iraqi debt relief."

The consortium's proposal spells out the threat: not only is Kuwait unlikely
to see any of its $30bn from Iraq in sovereign debt, but the $27bn in war
reparations that Iraq owes to Kuwait from Saddam Hussein's 1990 invasion
"may well be a casualty of this US [debt relief] effort".

In the face of this threat, the consortium offers its services. Its roster
of former high-level US and European politicians have "personal rapport with
the stakeholders in the anticipated negotiations" and are able to "reach key
decision-makers in the UN and in key capitals".

Kathleen Clark, a law professor at Washington University and a leading
expert on government ethics and regulations, said this meant that Mr Baker
was in a "classic conflict of interest".

"Baker is on two sides of this transaction: he is supposed to be
representing the interests of the US, but he is also a senior counsellor at
Carlyle, and Carlyle wants to get paid to help Kuwait recover its debts from

She added: "Carlyle and the other companies are exploiting Baker's current
position to try to land a deal with Kuwait that would undermine the
interests of the US government."

Last night, a Carlyle spokesman said the company had scaled down its
involvement after the Baker appointment: "Neither the Carlyle Group nor
James Baker wrote, edited or authorised this proposal to the Kuwait
government. When James Baker was named special envoy, which was before the
proposal was produced and sent, Carlyle explicitly restricted its role to
only investing assets on behalf of Kuwait, an activity that James Baker
would play no role in nor benefit from."

According to the documents, Carlyle is seeking to secure as part of the deal
an extraordinary $1bn investment from the Kuwaiti government.

The main proposal would transfer ownership of $57bn in unpaid Iraqi debts.
The debts would be assigned to a foundation created and controlled by a
consortium in which the key players are the Carlyle Group, the Albright
Group (headed by another former secretary of state, Madeleine Albright) and
several other well-connected firms.

Under the deal, Kuwait would also give the consortium $2bn to invest in a
private equity fund devised by the consortium, with half of that going to

The consortium would then use its personal connections to persuade world
leaders that Iraq must "maximize" its repa ration payments to Kuwait. The
more the consortium gets Iraq to pay over a period, the more Kuwait
collects, with the consortium taking a 5% commission or more.

The goal of maximizing Iraq's debt payments directly contradicts the stated
US foreign policy aim of drastically reducing Iraq's debt burden.

Chris Ullman, Carlyle's spokesman in Washington, said that the firm was
aware that a $1bn investment for Carlyle was part of the Kuwait proposal:
"We were aware of that. But we played no role in procuring that investment."

"So you were willing to take the billion but not to try to get it?" He
answered: "Correct"

Mr Ullman said Mr Baker would not benefit from the proposed $1bn investment.
"We have controls in place that regulate how partners are compensated, we
have a huge back office. We have the mechanisms."

Asked whether the White House had been informed that the Carlyle consortium
had been in negotiation with the government of Kuwait over debts at the time
of the Baker appointment, he said: "I'll get back to you on that."

In the confidential documents, the consortium appears acutely aware of the
sensitivity of Mr Baker's position as both Carlyle partner and also debt
envoy for the US government.

Immediately after listing all of the powerful players associated with
Carlyle - including former President George Bush, former prime minister John
Major and Mr Baker himself, the document states: "The extent to which these
individuals can play an instrumental role in fashioning strategies is now
more limited due to the recent appointment of Secretary Baker as the
president's envoy on international debt, and the need to avoid an apparent
conflict of interest."

Yet it goes on to state that this will soon change.

"We believe that with Secretary Baker's retirement from his temporary
position [as debt envoy], Carlyle and those leading individuals associated
with Carlyle will then once again be free to play a more decisive role."

It was on January 21 2004, that Mr Baker's dual lives converged. That
morning Mr Baker flew to Kuwait as Mr Bush's debt envoy. He met Kuwait's
prime minister, its foreign minister and several other top officials with
the stated goal of asking them to forgive Iraq's debts.

Mr Baker's colleagues in the consortium chose that same day to hand-deliver
their full proposal to the foreign minister, Mohammad Sabah al-Salem
al-Sabah, the same man Mr Baker was meeting.

A covering letter was signed by Ms Albright; David Huebner, chairman of the
Coudert Brothers law firm (another consortium member); and Shahameen Sheikh,
chair and CEO of International Strategy Group, a company created by the
consortium for the purposes of this deal.

Shahameen Sheikh, who made the delivery, said it was a coincidence. "It had
nothing to do with Mr Baker's visit ... I was in the region so I thought I
would stop over on the way to Europe and deliver the proposal."

The proposal "takes into account the new dynamics that have developed in the
region," states the Albright letter - dynamics that include "Secretary
Baker's negotiations" on debt relief.

If Kuwait accepts the consortium's offer, it states, "we will distinguish
Kuwait's claims - legally and morally - from the sovereign debt for which
the United States is now seeking forgiveness."

Iraq is the most heavily indebted country in the world. "This debt endangers
Iraq's long-term prospects for political health and economic prosperity,"
President Bush said when he appointed Mr Baker last December.

At the time, critics expressed concern about whether Mr Baker was an
appropriate choice. But the White House brushed them off. Mr Bush assured
reporters: "Jim Baker is a man of high integrity. We're fortunate he decided
to take time out of what is an active life to step forward and serve

Mr Ullman said at the time Mr Baker's post "will have no impact on Carlyle

The day before Mr Baker's appointment was announced, John Harris, managing
director of the Carlyle Group, signed a statement to Alberto Gonzales,
counsel to the president. It stated that Carlyle "does not engage in
lobbying or consulting" and that "Carlyle does not have any investment in
Iraqi public or private debt."

According to the documents, at the time of that statement the Carlyle
consortium was at least five months into its assignment from the Kuwaiti
government to "prepare a detailed financial proposal for the protection and
monetization" of reparation debts from Iraq.

The assignment was agreed at a high-level meeting with Kuwaiti officials in
London on July 16 2003, according to the files the Guardian has obtained.

Ms Clark said both criminal and regulatory statutes prohibited government
officials from participating in government business in which they have a
financial interest, including matters that affect an outside company that
employs the official.

In the statement to Judge Gonzales, Mr Harris wrote that "Secretary Baker
has renounced his partnership share of future benefits, if any, that might
constitute a conflict with his official duties and he will not benefit
personally through his Carlyle partnership income from his work as a special
government employee."

But the proposed deal with Kuwait is so large that it is hard to see how Mr
Baker could be prevented from benefiting: Carlyle stands to land a $1bn
investment, which is 10% of the firm's total equity funds.

And under the proposal, the firm would be benefiting from that investment
for at least 12 years.

Ms Clark said: "Even if Baker is somehow being screened from profiting from
this deal, Carlyle is using Baker's government position to benefit

She said it was time for the White House to come clean. "There is a
tremendous need for transparency here."

According to Mr Levinson, "What they are proposing is to completely undercut
Baker's mission - and they are using their connection with Baker to Ahmed
al-Fahad, under secretary to the prime minister of Kuwait, said this week:
"I have seen it [the proposal] and I am fully aware of the situation."

But asked about Mr Baker's dual role, he said: "It's hard to comment on that
issue, especially now. I hope you fully understand."

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