Carlyle started its $750 million Asia fund three years ago to invest in countries trying to recover from the Asian financial crisis. Under pressure from the IMF and the US Treasury, the structure of Asian capitalism has been changing from family-controlled conglomerates, such as the Korean chaebols Daewoo and Hyundai, to leaner companies run by professional managers, hired in many cases by foreign owners. Governments, meanwhile, have abandoned social policies that once guaranteed a portion of the work force lifetime jobs and made it difficult to fire workers. That's even true in Korea, where militant unions have given the country a bad reputation in the eyes of foreign investors.

"Contrary to popular belief, major layoffs are being done in Korea," Jonathan Colby, a former aide to Kissinger who is one of Carlyle's managing directors for Asia, told a recent Asian investors conference in New York. With Asian banks holding billions of dollars in bad loans, "being able to tap private equity is crucial to long-term growth in Asia," Ray Hood, director of Asian investments for State Street Bank, said at the same event. For companies like Carlyle, Asia "is where the rewards will be in the next few years. Investment returns will be a complete steal."

In Japan, Carlyle is positioning itself alongside Goldman Sachs, Newbridge Capital, the Ripplewood Group and other US investment banks in buying up nonperforming loans and distressed assets, which are valued at more than $1 trillion. "Just as in Korea you can make some investments by taking a piece of the chaebols, I think the same thing is true in Japan, where you have these overleveraged, underperforming companies," said Conway.

These investment strategies mesh with policies of financial deregulation, structural reform and privatization, which have been publicly endorsed by President Bush, whose Administration is deeply concerned that a collapse of Japan's financial system could imperil the US-Japan security alliance. Last July, when Japanese Prime Minister Junichiro Koizumi visited Bush to seek his help in resolving Japan's financial woes, Japanese reporters blinked in astonishment as George W. explained at some length the importance of restructuring bad loans and banks from his experience as an oil executive and Texas governor during the S&L disaster.

So far, Carlyle's Asia fund has made four acquisitions: KorAm Bank, whose value has almost doubled since it was purchased in 2000; Taiwan Broadband, that country's fourth-largest cable company, in which Carlyle has invested $187 million; Mercury Communications, a telecom manufacturer recently spun off from the bankrupt Daewoo Group, for $49 million; and Pacific Department Stores, a joint venture with a Taiwan group that operates a chain of retail stores in mainland China, for $43 million.

Carlyle's Japan fund recently agreed to make its first acquisition, a 90 percent stake, worth $28 million, in the security trucking subsidiary of the bankrupt Daiei Group, Japan's largest retailer. Carlyle Asia is about to close its third acquisition in Korea, where Carlyle and J.P. Morgan have reportedly offered $1.2 billion to buy Kumho Industrial, the world's tenth-largest tire maker and a major exporter to the United States and China. China, in fact, may be where Carlyle is heading in the long term. "We are very focused on South Korea today, but China is our priority market of tomorrow," Michael Kim, Carlyle's managing director in Seoul, told the Daily Deal in January.

All of this is good news for Carlyle's family of investors, who seem nonplussed by the questions swirling around the firm. "I don't see what the issue is with Carlyle, except that there are some people who just don't like President Bush," said Michael Flaherman, chairman of the CalPERS investment committee. But as America has learned from the Enron fiasco, the mix of big business and politics can lead to disastrous investments, poor public policy and further erosion of the democratic process. The Carlyle system, where former Presidents, prime ministers, diplomats and industry regulators capitalize on their careers to make money for themselves and their clients, may be perfectly legal. Yet as Japan's experience over the past decade shows, even the most vaunted economies can sink--and sink fast--when the line between public interest and private profit disappears. Outside of the conservative Judicial Watch and the muckraking Center for Public Integrity, there has been little public interest in the Carlyle system of capitalism and where it is going. Congress, meanwhile, is too busy seeking Carlyle's advice even to ask the question. The people who run Carlyle may hate the word secrecy, but their words and actions make it impossible to know where the policy-making ends and the money-making begins.

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