Naomi Klein / The Nation – 2005-05-23 22:55:30
(October 13, 2004) — When President Bush appointed former Secretary of State James Baker III as his envoy on Iraq’s debt on December 5, 2003, he called Baker’s job “a noble mission.”
At the time, there was widespread concern about whether Baker’s extensive business dealings in the Middle East would compromise that mission, which is to meet with heads of state and persuade them to forgive the debts owed to them by Iraq. Of particular concern was his relationship with merchant bank and defense contractor the Carlyle Group, where Baker is senior counselor and an equity partner with an estimated $180 million stake.
Until now, there has been no concrete evidence that Baker’s loyalties are split, or that his power as Special Presidential Envoy — an unpaid position — has been used to benefit any of his corporate clients or employers. But according to documents obtained by The Nation, that is precisely what has happened. Carlyle has sought to secure an extraordinary $1 billion investment from the Kuwaiti government, with Baker’s influence as debt envoy being used as a crucial lever.
James Baker and the Carlyle Connection
The secret deal involves a complex transaction to transfer ownership of as much as $57 billion in unpaid Iraqi debts. The debts, now owed to the government of Kuwait, 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, the government of Kuwait would also give the consortium $2 billion up front to invest in a private equity fund devised by the consortium, with half of it going to Carlyle.
The Nation has obtained a copy of the confidential sixty-five-page “Proposal to Assist the Government of Kuwait in Protecting and Realizing Claims Against Iraq,” sent in January from the consortium to Kuwait’s foreign ministry, as well as letters back and forth between the two parties.
In a letter dated August 6, 2004, the consortium informed Kuwait’s foreign ministry that the country’s unpaid debts from Iraq “are in imminent jeopardy.” World opinion is turning in favor of debt forgiveness, another letter warned, 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 $30 billion from Iraq in sovereign debt, but the $27 billion in war reparations that Iraq owes to Kuwait from Saddam Hussein’s 1990 invasion “may well be a casualty of this U.S. [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 United Nations and in key capitals,” the proposal states.
If Kuwait agrees to transfer the debts to the consortium’s foundation, the consortium will use these personal connections to persuade world leaders that Iraq must “maximize” its debt payments to Kuwait, which would be able to collect the money after ten to fifteen years. And the more the consortium gets Iraq to pay during that period, the more Kuwait collects, with the consortium taking a 5 percent commission or more.
Driving Up Iraq’s Debt Undercuts Reconstruction
The goal of maximizing Iraq’s debt payments directly contradicts the US foreign policy aim of drastically reducing Iraq’s debt burden.
According to Kathleen Clark, a law professor at Washington University and a leading expert on government ethics and regulations, this means that Baker is in a “classic conflict of interest. Baker is on two sides of this transaction: He is supposed to be representing the interests of the United States, but he is also a senior counselor at Carlyle, and Carlyle wants to get paid to help Kuwait recover its debts from Iraq.”
After examining the documents, Clark called them “extraordinary.” She said, “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.”
‘Why? Because of Who We Are
And Who We Know’
The Nation also showed the documents to Jerome Levinson, an international lawyer and expert on political and corporate corruption at American University. He called it “one of the greatest cons of all time. 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.’ It’s influence peddling of the crassest kind.”
In the confidential documents, the consortium appears acutely aware of the sensitivity of Baker’s position as Carlyle partner and debt envoy. Immediately after listing the powerful players associated with Carlyle — including former President George H.W. Bush, former British prime minister John Major and 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], that Carlyle and those leading individuals associated with Carlyle will then once again be free to play a more decisive role…”
Carlyle Claims Its Innocence
Chris Ullman, vice president and spokesperson for Carlyle, said that “neither the Carlyle Group nor James Baker wrote, edited or authorized this proposal to the Kuwait government.” But he acknowledged that Carlyle knew a proposal was being made to the government of Kuwait and that Carlyle stood to land a $1 billion investment. “We were aware of that. But we played no role in procuring that investment.”
Asked if Carlyle was “willing to take the billion but not to try to get it,” Ullman answered, “Correct.”
Iraq is the most heavily indebted country in the world, owing roughly $200 billion in sovereign debts and in reparations from Saddam’s wars. If Iraq were forced to pay even a quarter of these claims, its debt would still be more than double its annual GDP, severely undermining its capacity to pay for reconstruction or to address the humanitarian needs of its war-ravaged citizens. “This debt endangers Iraq’s long-term prospects for political health and economic prosperity,” President Bush said when he appointed Baker last December.
Given his Conflicts of Interes,
Why Was Baker Chosen?
But critics expressed grave concern about whether Baker was an appropriate choice for such a crucial job. For instance, one of Iraq’s largest creditors is the government of Saudi Arabia. The Carlyle Group does extensive business with the Saudi royal family, as does Baker’s law firm, Baker Botts (which is currently defending them in a $1 trillion lawsuit filed by the families of September 11 victims).
The New York Times determined that the potential conflicts of interest were so great that on December 12 it published an editorial calling on Baker to resign his posts at the Carlyle Group and Baker Botts to preserve the integrity of the envoy position.
“Mr. Baker is far too tangled in a matrix of lucrative private business relationships that leave him looking like a potentially interested party in any debt-restructuring formula,” stated the editorial. It concluded that it wasn’t enough for Baker to “forgo earnings from clients with obvious connections to Iraqi debts…. To perform honorably in his new public job, Mr. Baker must give up these two private ones.”
The White House brushed off calls for Baker to choose between representing the President and representing Carlyle investors. “I don’t read those editorials,” President Bush said when asked by a reporter about the Times piece. Bush assured reporters that “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 America.”
Carlyle was equally adamant: Chris Ullman assured a Knight-Ridder reporter that Baker’s post “will have no impact on Carlyle whatsoever.”
Carlyle’s Kuwait Meeting
In fact, several months earlier, on July 16, 2003, Carlyle had attended a high-level London meeting with Kuwaiti officials about the deal. According to the document, the Kuwaitis asked Carlyle and the other consortium members to “prepare a detailed financial proposal for the protection and monetization” of reparation debts from Iraq. But at the time Baker was appointed envoy, the consortium had not yet submitted its proposed plans to the Kuwait.
That means that the Carlyle Group could have pulled out of the consortium, citing the potential conflicts of interest. Instead, Carlyle stayed on and the consortium proceeded to use Baker’s powerful new position to aggressively pitch a deal that positioned the consortium as the Kuwaiti government’s chief lobbyist on Iraq’s debts and that gave Carlyle a clear stake in the fate of Iraq’s debts.
However, several changes were made in the way the consortium presented itself. The documents state that, “Prior to [Baker’s] appointment [former US Secretary of Defense Frank] Carlucci had played a convening and guiding role on behalf of Carlyle.” But after the appointment, according to Carlyle’s Chris Ullman, the firm’s role was scaled back.
“When James Baker was named special envoy…Carlyle explicitly restricted its role to only investing assets on behalf of Kuwait.” Shahameen Sheikh, chairman and CEO of International Strategy Group, a company created by the consortium to manage this deal, said that Carlyle told her that “they are not a lobbying firm.” Days before Baker’s appointment, the consortium reached out to another high-profile Washington firm, the Albright Group, which eventually signed on as the leading political strategists and lobbyists for the consortium.
Moreover, Ullman said that Carlyle put “controls in place” that would insure that Baker “would play no role in nor benefit from” the proposed $1 billion investment–an amount that would constitute nearly 10 percent of Carlyle’s total equity investments.
Carlyle Hid Its Role in Seeking to Control Iraq’s Unpaid War Debts
But it’s not clear that Carlyle has been straightforward about its dealings so far. The day before Baker’s appointment was announced, John Harris, managing director and chief financial officer of Carlyle, submitted a signed statement to White House Counsel Alberto Gonzales.
“Carlyle does not have any investment in Iraqi public or private debt,” he wrote. He didn’t mention that Carlyle had for months been in negotiations with Kuwait to help secure its unpaid war debts from Iraq. Asked if the White House had been informed of the Carlyle Group’s dealings with Kuwait at any point, Ullman replied, “I’ll get back to you on that.” He did not.
According to Kathleen Clark, the consortium’s activities may be in violation of both criminal and regulatory statutes that prohibit 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.
Clark notes, “even if Baker is somehow being screened from profiting from this deal, Carlyle is using Baker’s government position to benefit themselves.” She says it’s time for Carlyle and the White House to come clean. “There’s a tremendous need for transparency here.” The White House and James Baker’s office did not respond to repeated requests for comment.
Madeleine Albright Sounds an Alarm over Baker
Baker occupies a complicated place in the consortium’s January proposal — he is both problem and solution, stick and carrot. In the documents, Baker’s name comes up repeatedly, usually in tones of high alarm. “Mr. Baker’s new role and the likely emergence of what will be understood as a new round of global negotiations over Iraqi debt — casts all of these issues in a new light and gives them a new, perhaps even intense, sense of urgency,” states a letter signed by Madeleine Albright; David Huebner, chairman of the Coudert Brothers law firm (another consortium member); and Shahameen Sheikh.
But after establishing Baker’s envoy job as the embodiment of the threat that Kuwait will lose its reparations payments, the proposal goes on at length about the powerful individuals connected to the consortium who will “have the ability to gain access to the highest levels of the United States Government and other Security Council governments for a hearing of Kuwait’s views.”
According to Levinson, “What they are proposing is to completely undercut Baker’s mission–and they are using their connection with Baker to do it.”
Baker Does Double Duty
On January 21, 2004, James Baker’s dual lives converged. That morning Baker flew to Kuwait as George Bush’s debt envoy. He met with Kuwait’s prime minister, its foreign minister and several other top officials with the stated goal of asking them to forgive Iraq’s debts in the name of regional peace and prosperity.
Baker’s colleagues in the consortium chose that very same day to hand-deliver their proposal to Foreign Minister Mohammad Sabah Al-Salem Al-Sabah — the same man Baker was meeting. The proposal “takes into account the new dynamics that have developed in the region,” states the cover letter, signed by Albright, Huebner and Sheikh — dynamics that include “Secretary Baker’s negotiations” on debt relief. If Kuwait accepts the consortium’s offer, they explain, “we will distinguish Kuwait’s claims – -legally and morally — from the sovereign debt for which the United States is now seeking forgiveness.”
Was it a coincidence that the consortium submitted its proposal on the same day Baker was in Kuwait? And which James Baker were Kuwait’s leaders supposed to take more seriously — the presidential envoy calling for debt forgiveness or the businessman named in the proposal as a potential ally in their quest for debt payment?
Ahamed al-Fahad, undersecretary to the prime minister of Kuwait, told The Nation, “I have seen it [the proposal] and I am fully aware of the situation.” But when asked about Baker’s dual role in Kuwait, he said, “It’s hard to comment on that issue, especially now. I hope you fully understand.”
The Timing Was “a Coincidence”
Shahameen Sheikh, the consortium head who made the delivery, says the timing 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.”
We do know this: After meeting with Baker on January 21, Kuwait’s foreign minister told reporters that Baker had shown “understanding of Kuwait’s position on war reparations,” confirming that the subject did come up. He also said that, while sovereign debt might be forgiven, reparations would not, because “there is an international decision from the UN.”
Three days later, when Baker was back in Washington giving a speech, he made this distinction for the first time. “My job is to deal with Iraqi debt to sovereign creditors, not with war reparations,” he said. He also echoed the exact line of the Kuwaiti government: that reparations are outside his purview because they are “under the jurisdiction of the United Nations Security Council and subject to resolutions it has passed.”
This was a curious statement: Why would such a large portion of Iraq’s debts be off the table? It also seemed to contradict other things Baker said in the same speech. He said that “any reduction [in Iraq’s debt] must be substantial, or a vast majority of the total debt.”
That is impossible without addressing reparations, which by some measures account for more than half of Iraq’s foreign debts. The Center for Strategic and International Studies, the center-right think tank hosting Baker’s speech, has said it is “unwise” to make any debt relief plan “that does not include reparations.”
Baker’s statement on reparations also placed him at odds with several other members of the Bush Administration, including former chief envoy to Iraq Paul Bremer. “I think there needs to be a very serious look at this whole reparations issue,” Bremer said in September 2003.
He compared the Iraq situation to that of Germany after World War I, when the 1921 Reparations Commission forced the Weimar Republic to pay $33 billion. The massive reparations “contributed directly to the morass of unrest, instability and despair which led to Adolf Hitler’s election,” Bremer warned.
1991 War Reparations Have Cost Iraq $1.9 Billion
Yet Iraq continues to make regular reparations payments for Saddam’s 1990 invasion of Kuwait. In the eighteen months since the US invasion, Iraq has paid out a staggering $1.8 billion in reparations — substantially more than the battered country’s 2004 health and education budgets combined, and more than the United States has so far managed to spend in Iraq on reconstruction.
Most of the payments have gone to Kuwait, a country that is about to post its sixth consecutive budget surplus, where citizens have an average purchasing power of $19,000 a year. Iraqis, by contrast, are living on an average of just over $2 a day, with most of the population dependent on food rations for basic nutrition. Yet reparations payments continue, with Iraq scheduled to make another $200 million payout in late October.
This arrangement dates back to the end of first Gulf War. As a condition of the cease-fire, Saddam Hussein agreed to pay for all losses incurred as a result of his invasion and seven-month occupation of Kuwait. Payments started flowing 1994 and sped up in 1996, with the start of the UN’s oil-for-food program.
According to UN Security Council Resolution 986, which created the program, Iraq could begin to export oil as long as the revenue was spent on food and medicine imports, and as long as 30 percent of Iraq’s oil revenues went to the United Nations Compensation Commission (UNCC), the Geneva-based quasi-tribunal in charge of Gulf War reparations.
Some of the claims that have been awarded by the UNCC are huge: the cost of cleaning up Kuwait’s and Saudi Arabia’s coastlines from oil spills and fires, or the Kuwait Petroleum Corporation’s controversial award for $15.9 billion in lost oil revenues. So far, the UNCC has paid out $18.6 billion in war reparations and has awarded an additional $30 billion that has not been paid because of Iraq’s shortage of funds.
There are still $98 billion worth of claims before the UNCC that have yet to be assessed, so these numbers could rise steeply. That’s why there are no accurate estimates of how much Iraq owes in war reparations–the figure ranges from $50 billion to $130 billion.
But the fate of these debts is now highly uncertain. On May 22, 2003–two months after the United States invaded Iraq–the Security Council decided to cut the percentage of Iraqi oil revenues going to war reparations to 5 percent.
This past May, an Iraqi delegation went to the UN to ask for the percentage to be reduced even further, to accommodate Iraq’s own reconstruction needs. There is growing sympathy for this position. Justin Alexander of the debt relief group Jubilee Iraq says that many of the claims before the UNCC are inflated and that “even for genuine claims, this is Saddam’s responsibility, not the Iraqi people’s, who themselves suffered far more than anyone.”
This is where the Carlyle/Albright consortium comes in. The premise of its proposal is that Iraq’s unpaid debts to Kuwait are not just a financial problem but a political and public relations problem as well. Global public opinion is no longer what it was when Kuwait was promised full reparations.
Now the world is focused on reconstructing Iraq and forgiving its debts. If Kuwait is going to get its reparations awards, the cover letter argues, it will need to recast them not as a burden on Iraq but “as a key element in working toward regional stability and reconciliation.”
(For the complete report, gClick here)