The Pentagon and the Dollars of Wall Street

Sex, money and power. This combination, which is as old as the hills, has provided fodder for many a film and detective novel. But, this time, reality is overtaking the Hollywood stereotype. A CIA chief is forced to resign for having had an extramarital affair, and a few months later finds himself at the headquarters of one of Wall Street’s most powerful investment funds.

The main character in this saga is the four star general David Petraeus, aged 60—a hero in the Iraq war who also coordinated the international force in Afghanistan before being appointed as head of the CIA. But, a sex scandal with his biographer, 20 years his junior, followed by an incredible soap opera, led him to resign from the famous agency on November 9, 2012, the day after Barack Obama’s re-election.

On Thursday May 30, the Wall Street Journal revealed that Mr. Petraeus would be joining Kohlburg Kravis Roberts (KKR), a top investment firm. He will head a new, specially-created institute, the KKR Global Institute, with the remit of researching major economic indicators, the role of the central banks and risks in emerging countries.

But what is really making Wall Street’s mouth water is his experience and his contacts in capital cities throughout the world and with major American groups. KKR, which is worth $76 billion, specializes in company buyouts using a leveraged buyout, i.e. financing the operation with a high debt ratio.

Secret Pact

Have Wall Street and the Pentagon made a secret pact? This fear cannot be described as being pure fantasy, but it does need to be put into perspective. Investment funds and merchant banks, in both the U.S. and old Europe, have traditionally recruited former public officials in order to benefit from their savoir-faire. No need to dream up espionage scenarios to understand that this helps to clinch deals. In the same way, the Carlyle Group recruited George W. Bush, former president of the United States, as one of its official advisers.

Even so, certain investments in cutting-edge companies abroad have a strategic dimension which is of interest to American defense manufacturers, and therefore to the Pentagon. To such an extent that, under Jacques Chirac’s presidency, the French defense ministry had asked its strategic affairs delegation to produce a study on “American funds in Europe.”

But if we are to believe American analysts, it is not so much the European connections of the former CIA head which are of interest to KKR—his greatest asset is his ability to analyze economic and political risk and identify potential targets in emerging countries. Paradoxically, this is not reassuring. It confirms the relative decline in interest in European companies by American investors.