Mr Baker's Carlyle Group is in a consortium secretly proposing to try to collect $27bn (£15bn) on behalf of Kuwait, one of Iraq's biggest creditors, by using high-level political influence. It claims Mr Baker will not benefit personally, but the consortium could make millions in fees, retainers and commission as a result.
Other countries, including Britain, have been urged by Mr Baker to relieve the new Iraq regime of its $200bn debt burden. Iraq owes Britain approximately $1bn.
One international lawyer described the consortium's scheme as "influence peddling of the crassest kind".
Jerome Levinson, an expert on political and corporate ethics at American University in Washington, told the Guardian: "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'."
When George Bush appointed Mr Baker, a former secretary of state, as his unpaid envoy on December 5 2003, he called Mr Baker's job "a noble mission". But Mr Baker is also a senior counsellor and an equity partner with a reported $180m stake in the merchant bank and defence contractor the Carlyle Group.
A confidential 65-page Proposal to Assist the Government of Kuwait in Protecting and Realising Claims Against Iraq was sent in January from the consortium to Kuwait's foreign ministry, according to documents obtained by the Nation magazine in New York, which are published today on the Guardian website.
In a letter dated August 6 2004, the consortium informs 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 warns, 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 $30bn from Iraq in sovereign debt, but the $27bn in war reparations that Iraq owes to Kuwait from Saddam Hussein's 1990 invasion "may well be a casualty of this US [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 UN and in key capitals".
Kathleen Clark, a law professor at Washington University and a leading expert on government ethics and regulations, said this meant that Mr Baker was in a "classic conflict of interest".
"Baker is on two sides of this transaction: he is supposed to be representing the interests of the US, but he is also a senior counsellor at Carlyle, and Carlyle wants to get paid to help Kuwait recover its debts from Iraq."
She added: "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."
Last night, a Carlyle spokesman said the company had scaled down its involvement after the Baker appointment: "Neither the Carlyle Group nor James Baker wrote, edited or authorised this proposal to the Kuwait government. When James Baker was named special envoy, which was before the proposal was produced and sent, Carlyle explicitly restricted its role to only investing assets on behalf of Kuwait, an activity that James Baker would play no role in nor benefit from."
According to the documents, Carlyle is seeking to secure as part of the deal an extraordinary $1bn investment from the Kuwaiti government.
The main proposal would transfer ownership of $57bn in unpaid Iraqi debts. The debts 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, Kuwait would also give the consortium $2bn to invest in a private equity fund devised by the consortium, with half of that going to Carlyle.
The consortium would then use its personal connections to persuade world leaders that Iraq must "maximize" its repa ration payments to Kuwait. The more the consortium gets Iraq to pay over a period, the more Kuwait collects, with the consortium taking a 5% commission or more.
The goal of maximizing Iraq's debt payments directly contradicts the stated US foreign policy aim of drastically reducing Iraq's debt burden.
Chris Ullman, Carlyle's spokesman in Washington, said that the firm was aware that a $1bn investment for Carlyle was part of the Kuwait proposal: "We were aware of that. But we played no role in procuring that investment."
"So you were willing to take the billion but not to try to get it?" He answered: "Correct"
Mr Ullman said Mr Baker would not benefit from the proposed $1bn investment. "We have controls in place that regulate how partners are compensated, we have a huge back office. We have the mechanisms."
Asked whether the White House had been informed that the Carlyle consortium had been in negotiation with the government of Kuwait over debts at the time of the Baker appointment, he said: "I'll get back to you on that."
In the confidential documents, the consortium appears acutely aware of the sensitivity of Mr Baker's position as both Carlyle partner and also debt envoy for the US government.
Immediately after listing all of the powerful players associated with Carlyle - including former President George Bush, former prime minister John Major and Mr 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], Carlyle and those leading individuals associated with Carlyle will then once again be free to play a more decisive role."
It was on January 21 2004, that Mr Baker's dual lives converged. That morning Mr Baker flew to Kuwait as Mr Bush's debt envoy. He met Kuwait's prime minister, its foreign minister and several other top officials with the stated goal of asking them to forgive Iraq's debts.
Mr Baker's colleagues in the consortium chose that same day to hand-deliver their full proposal to the foreign minister, Mohammad Sabah al-Salem al-Sabah, the same man Mr Baker was meeting.
A covering letter was signed by Ms Albright; David Huebner, chairman of the Coudert Brothers law firm (another consortium member); and Shahameen Sheikh, chair and CEO of International Strategy Group, a company created by the consortium for the purposes of this deal.
Shahameen Sheikh, who made the delivery, said it 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."
The proposal "takes into account the new dynamics that have developed in the region," states the Albright letter - dynamics that include "Secretary Baker's negotiations" on debt relief.
If Kuwait accepts the consortium's offer, it states, "we will distinguish Kuwait's claims - legally and morally - from the sovereign debt for which the United States is now seeking forgiveness."
Iraq is the most heavily indebted country in the world. "This debt endangers Iraq's long-term prospects for political health and economic prosperity," President Bush said when he appointed Mr Baker last December.
At the time, critics expressed concern about whether Mr Baker was an appropriate choice. But the White House brushed them off. Mr Bush assured reporters: "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."
Mr Ullman said at the time Mr Baker's post "will have no impact on Carlyle whatsoever."
The day before Mr Baker's appointment was announced, John Harris, managing director of the Carlyle Group, signed a statement to Alberto Gonzales, counsel to the president. It stated that Carlyle "does not engage in lobbying or consulting" and that "Carlyle does not have any investment in Iraqi public or private debt."
According to the documents, at the time of that statement the Carlyle consortium was at least five months into its assignment from the Kuwaiti government to "prepare a detailed financial proposal for the protection and monetization" of reparation debts from Iraq.
The assignment was agreed at a high-level meeting with Kuwaiti officials in London on July 16 2003, according to the files the Guardian has obtained.
Ms Clark said both criminal and regulatory statutes prohibited 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.
In the statement to Judge Gonzales, Mr Harris wrote that "Secretary Baker has renounced his partnership share of future benefits, if any, that might constitute a conflict with his official duties and he will not benefit personally through his Carlyle partnership income from his work as a special government employee."
But the proposed deal with Kuwait is so large that it is hard to see how Mr Baker could be prevented from benefiting: Carlyle stands to land a $1bn investment, which is 10% of the firm's total equity funds.
And under the proposal, the firm would be benefiting from that investment for at least 12 years.
Ms Clark said: "Even if Baker is somehow being screened from profiting from this deal, Carlyle is using Baker's government position to benefit themselves."
She said it was time for the White House to come clean. "There is a tremendous need for transparency here."
According to Mr Levinson, "What they are proposing is to completely undercut Baker's mission - and they are using their connection with Baker to Ahmed al-Fahad, under secretary to the prime minister of Kuwait, said this week: "I have seen it [the proposal] and I am fully aware of the situation."
But asked about Mr Baker's dual role, he said: "It's hard to comment on that issue, especially now. I hope you fully understand."
A fuller version of this article is due to appear today on the Nation websitewww.thenation.com
