Alaska is crucial to understanding the Rubenstein origin story. In the early ’70s, Congress and President Richard Nixon created the Alaska Native Claims Settlement Act, which aimed to settle tribal land claims by transferring 44 million acres of land and nearly $1 billion to Alaska Natives. Native-run corporations would own and administer mineral, fishing, and timber rights on a for-profit basis, employing thousands of Natives and lifting entire communities out of poverty. That was the theory, anyway.
The reality was messier, and the plan wildly ambitious. At the time, most Alaska Natives lived deep in the bush. Just 14 percent had completed high school and 1 percent had graduated from college. The act pitched tribes into a crash Westernization. By the mid-’80s, several Native-run corporations teetered near insolvency. Alaska’s powerful Senator Ted Stevens, a Republican, stepped in to help. He created a tax loophole, which he assured the Senate would not prove terribly costly, and attached it to a 1986 tax bill. (Stevens had reeled in so many federal dollars that Alaskans jokingly referred to him as the state’s largest industry.) The loophole allowed Alaska Native corporations to sell losses on lumber, mining, and fishing to large American corporations seeking to reduce their tax liability—a potential lifeline for the Native corporations and a profitable possibility for middlemen who understood tax law. You see where this is going?
Rubenstein and his partners in the fledgling Carlyle firm were struggling to make their way in a financial world they only half understood. But they had a splendid sense of how politics and backdoor decision making worked in D.C. One day, Stephen Norris, a co-founder of Carlyle, told Rubenstein of the Alaska loophole, a situation that was practically tailor-made for the firm’s expertise. Rubenstein, then 38, took notes. This, he figured, might be their break.
The Alaska loophole gave birth to what those in Washington business circles called the “Great Eskimo Tax Scam.” It was akin to sounding a dinner bell for D.C. lawyers. Rubenstein dialed tribal leaders and lobbyists affiliated with the Native corporations and promised that he could make them lots of money—in exchange for a cut of the action. He and Norris recruited corporations in search of tax losses, flying the executives to Washington and lodging them at posh hotels. Many of the Native leaders Rubenstein worked with have passed away, but I found a long-retired Native businessman who shared his recollection on condition of anonymity. Rubenstein, he told me, did not talk of the beauty of Alaska’s forests and fjords. Nor did he make much eye contact. I will make you millions, he said, and I will work seven days a week. It was, this man recalled, a disarmingly effective spiel.
In less than a year, Rubenstein and Norris bundled and sold more than $1 billion worth of tax losses by tribal corporations to American companies. For their service, Rubenstein and Norris charged a 1 percent fee and walked away with at least $10 million. With that, Rubenstein knew that he could compete in the world of finance.