Sleeping With The Devil (10 page)

    Here’s an example. Throughout the nineties, Americans (and Europeans)
consistently paid less for Saudi oil than Asians paid, on the average of $1.00 a barrel. In
2001, prices split sharply, with Americans reportedly buying Saudi oil for $4.83 less a barrel.
That’s an effective discount of $2.8 billion a year - a discount off Asian markets at least.
And in September 2001, in the wake of the September 11 attacks, the price disparity between
American and Asian markets surged to a reported $9.66. Oil analysts I talk with dismiss the
notion that Saudi Arabia has in place a program to sell discounted oil to the United States.
Oil markets are extremely complicated, they tell me, and there are logical market reasons that
Asians from time to time pay more for Saudi oil. Asians, for instance, willingly pay a steep
premium in order to secure their oil supplies, even buying higher priced spot contracts when
markets are volatile. There are other considerations, like transportation costs and varying
market structures, the fact that Asia produces almost no oil of its own, and the fact that
Saudi Arabia is invested in U.S. downstream production. These factors alone, the oil analysts
tell me, are what accounted for the wide price differences between Asian and Western markets in
September 2001. As one analyst told me, “It’s simply that Asia pays a surcharge for its oil.
There is no Saudi discount for oil going to the U.S.”

    Be that as it may, the point is that Saudi Arabia has consistently
forgone making enormous profits in tight markets, such as occurred after September 11. If the
Saudis had taken even a little of their oil off the market on the afternoon of September 11
instead of pumping more, it could have made billions gouging Americans. The same thing happened
in 1990 when Saudi Arabia and its Gulf allies opened their taps, making up for the
five-million-barrel-a-day output lost from both Iraq and Kuwait. Had they wanted, they could
have kept oil hovering above $100 a barrel and walked away from Desert Storm with a lot of
money rather than a gaping deficit.

    The reason that Saudi Arabia has forgone huge profits on its oil sales
is because it does not want the United States to forget who is its most reliable supplier. Not
only has it paid a lot to hold that position, it has turned a deaf ear to increasingly shrill
Asian complaints about the “Asian premium.” As I write, Russia has plans in place to build
pipelines east across Siberia, which one day might cause Saudi Arabia to lose its Asian market.
The bottom line is that what the Saudis really care about is driving home the message to
Washington that it needn’t worry: Sure, we’ve lost control of our country, and our citizens are
slaughtering yours, but you can depend on us to keep your cars on the road and your houses
warm. And, by the way, you’ll feel better if you don’t think about the unpleasant reality that
your oil bank is sitting on dangerously shifting sands.

    The Saudi oil subsidies didn’t fall on Washington like some weird,
benevolent meteorite. The business landscape is filled with such deals, each of them pointed
reminders that even apocolyptic acts of terrorism needn’t get in the way of business. In 1997,
Saudi Aramco set up a joint venture with Texaco, Inc., later joined by Shell Oil, to refine
roughly eight hundred thousand barrels of Saudi crude a day. In 1998 the same three companies
joined to form Motiva Enterprises, one of the largest oil-refining and marketing companies in
the United States. AT&T got into the game with a $4 billion contract to expand the Saudi
telecommunications network. Even Lucent Technologies, a collapsed star of the U.S. high-tech
stock-market bubble, landed a July 2001 contract worth $240 million to improve mobile-phone
service.

    In May 2001, the Saudi Higher Economic Council approved long-term
contracts with American oil companies worth “tens of billions of dollars,” according to the
Saudis, to provide desalinization and power-generation plants and to develop the kingdom’s
natural-gas resources. A few months earlier, the Saudi Arabian General Investment Authority
issued a license to a consortium of U.S. contractors to build three thousand new schools in the
kingdom, at a cost of $3.5 billion. Allah alone knew where the Saudis were going to get all the
money, but that didn’t seem to be bothering anyone on either side of the Atlantic. The point
was that we couldn’t do without our Saudi fix.

    It’s not just that Saudis spend boatloads of money in the United
States. Spending boatloads of money was part of the deal from the very beginning: The U.S.
would buy the House of Sa’ud’s oil and provide protection and security, and the Saudis would
buy their weapons, construction services, communications systems, and drilling rigs from the
U.S. All this recycling, to judge solely by the numbers, was a dream come true. Collectively,
two-way trade between Saudi Arabia and the United States grew from $56.2 million in 1950 to
$19.3 billion in 2000.

    Money only goes so far, no matter how much you have to spend.
Professional sports are full of filthy-rich owners who can’t buy a title for love or money.
What has made the Saudi money so effective is that it is well targeted, and in Washington
especially, the Saudis have hooked up with a culture that seems willing to do almost anything
to get it.

    Call it a poetic coincidence. But right as the Carlyle Group was
getting into its annual investor conference at Washington’s Ritz-Carlton Hotel on September 11,
2001, American Airlines Flight 77 slammed into the Pentagon, only two and a half miles to the
south. If United Airlines Flight 93 had hit the White House, its presumed target, the Carlyle
attendees would have felt the shock, and it was a group fairly hard to shock. At the meeting
were the group’s senior counsel James Baker, secretary of state in the Bush I administration;
then Carlyle chairman Frank Carlucci, Ronald Reagan’s last secretary of defense and national
security adviser before that; and Shafiq bin Laden, representing the Bin Laden Group - one of
the world’s largest construction companies - but far more famous today as Osama bin Laden’s
brother. The gathering was the perfect metaphor for Washington’s strange affair with Saudi
Arabia.

    Named for the luxurious Manhattan hotel where the private investment
company was dreamed up in 1987, the Carlyle Group has had a long and profitable relationship
with the Al Sa’ud family. In 1991, as one of its first big coups, Carlyle paved the way for
Prince al-Walid bin Talal to purchase nearly $600 million in Citicorp stock. A nephew of King
Fahd, Prince al-Walid was named the world’s sixth richest person by
Forbes
in 2001, with
assets of roughly $20 billion, most of that through his Riyadh-based Kingdom holding company.

    Prince al-Walid has a knack for saying what’s on his mind. Shortly
after the September 11 attacks, the prince flew to New York City to donate $10 million to the
Twin Towers Fund, set up by New York mayor Rudy Giuliani to aid the families of the victims.
Al-Walid couldn’t resist offering the helpful advice that the United States needed to
“reexamine its policies in the Middle East and adopt a more balanced stance toward the
Palestinian cause.” Apparently, the Carlyle Group forgot to tell him that New York City is
overwhelmingly pro-Israel, and that Americans don’t like being reminded about living off Saudi
charity and putting our foreign policy up for sale. But Rudy Giuliani didn’t need the Carlyle
Group to remind him of the realities of American politics. He immediately told the prince what
he could do with his check. And in case you’ve been sailing the Galapagos Islands without a ham
radio for the last three years, the White House never offered to return the $2.8 billion oil
subsidy in solidarity with Giuliani.

    One thing certain about Carlyle’s management: It never missed an
opportunity to make money. Tap into the uninterrupted flow of Saudi oil and arms, the Carlyle
thinking went, and you couldn’t go wrong. Look at a couple of Carlyle deals, and you get the
point. For much of the 1990s, the defense contractor BDM International, in which Carlyle then
had a controlling interest, received $50 million annually to provide training and operational
and logistical services for the Saudi Arabian National Guard, the Al Sa’ud’s bodyguards.
(Carlyle sold its stake in BDM to TRW in late 1997.) Until shortly after the 9/11 attacks,
Carlyle also served as adviser to the royal family on the Economic Offset Program. In the
official literature of the kingdom, the Economic Offset Program encourages foreign investment
in Saudi Arabia and helps to ensure that a critical percentage of its oil revenues remain
there. Unofficially, and more accurately, the program assures that a percentage of all arms
sales to the Saudis are siphoned off into fees and commissions to businesses owned almost
entirely by royal family members.

    Carlyle has also made a fortune through buying up small defense
contractors and flipping them to defense giants like Boeing, Lockheed Martin, and TRW
International, a major weapons provider to the Saudis. Along the way, it bought its own arms
business, United Defense, America’s eleventh largest defense contractor. As the world’s largest
consumer of U.S.-made armaments, Saudi Arabia virtually makes the secondary market for American
fighter planes, missiles, tanks, armored vehicles, and other weaponry and supporting services.
Saudi Arabia was also the second largest consumer, after the U.S. military, of the Bradley
Fighting Vehicle, which was for many years the mainstay of United Defense’s product line.

    In Washington, to bring up the “revolving door” between government and
business is like discussing incest in the family. But Washington’s franchise players head
straight for the Carlyle employment office as soon as they’re out of the government.

    In addition to serving as a professional home for James Baker and Frank
Carlucci, Carlyle also employs Arthur Levitt, former head of the Securities and Exchange
Commission; William Kennard, who chaired the Federal Communications Commission during the
second Clinton administration; Afsaneh Beschloss, former treasurer and chief investment officer
of the World Bank and wife of historian Michael Beschloss, a regular on PBS’s
The NewsHour
with Jim Lehrer;
and Richard Darman, who ran the U.S. Office of Management and Budget under
the first president Bush and, during the Reagan administration, served as assistant to the
president and the Treasury deputy secretary. Just to prove that Carlyle is truly an
international conglomerate, former British prime minister John Major serves as chairman of
Carlyle Europe.

    No one in Washington has better contacts or has worked them more
effectively than Frank Carlucci. In addition to his posts as defense secretary and national
security adviser, Carlucci was deputy director of the CIA from 1978 to 1980, after a stint as
ambassador to Portugal. He also competed on the Princeton University wrestling team with Donald
Rumsfeld and has stayed friendly with him in the years since.[text omitted]

    In 1972 Carlucci was deputy to Caspar Weinberger at Richard Nixon’s
Office of Management and Budget when a new White House fellow named Colin Powell, on loan from
the U.S. Army, reported for work. Eight years later, when Ronald Reagan made Weinberger
secretary of defense, Powell became his senior military adviser. In 1987 Carlucci, who had been
serving as assistant to the president for national security affairs, succeeded Weinberger as
secretary of defense, and Powell stepped into Carlucci’s slot as national security adviser.
(Carlucci likes to call himself Powell’s godfather.)

    Carlyle did its own godfather schtick for George W. Bush as well. Back
in 1990, when the future president was wandering the Lone Star State in search of a career,
Republican insider Fred Malek found Bush a slot on the board of a Carlyle subsidiary: Caterair,
an airline-catering company. A decade later, when Bush II was governor of Texas, the state
teachers’ pension fund invested $100 million with the Carlyle Group.

    Carlyle’s most famous adviser is George Herbert Walker Bush, the
forty-first president of the United States. Greatly admired among the monied classes in Saudi
Arabia and Kuwait for their leadership in the Gulf War, Bush and John Major have traveled
frequently to both places on Carlyle’s behalf, opening the doors to some of the world’s most
well-heeled investors. Indeed, even as his son was campaigning for the presidency in 2000, Papa
Bush flew to a posh desert compound outside Riyadh to discuss Saudi-U.S. business relations
with Crown Prince ‘Abdallah. Carlyle insists that Bush was not carrying the investment firm’s
portfolio on the trip, but it could not have escaped the notice of his superwealthy hosts that
G.H.W. Bush is a trusted and highly valued Carlyle senior adviser - with that son making a run
at the White House.

    Like many advisers to high-powered equity firms, G.H.W. Bush is
compensated for his time, reputation, and Rolodex with shares in the investments he helps to
generate. Bush is also allowed to plow back into Carlyle investment funds money he earns by
giving speeches on the firm’s behalf - generally in the $80,000-to-$100,000 range for each
speech. Again, Carlyle is a private entity, and Bush I a private citizen. No reporting of total
take is required or expected, but it would strain credulity to think that the former president
has earned less than the mid-seven figures from his decade-old association with the investment
firm, the bulk of that either directly or indirectly from Saudi Arabia. Anything less would be
almost disrespectful.

    Because Carlyle is privately held, only its principals know how much of
its money - $13.9 billion under management as of November 2002 - comes from Saudi investors.
The Bakr bin Laden family had a piddling $2 million invested in the Carlyle Partners II fund, a
portfolio that includes United Defense and other defense and aerospace companies. With
embarrassment spreading on both sides, Carlyle and the bin Ladens parted company in October
2001, some five weeks after the World Trade Center and Pentagon attacks. About a dozen other
Saudis are thought to still be investors in the group.