Are you the sort of person who believes in conspiracies--the Trilateral Commission secretly runs the world, that sort of thing? Well, then, here's a company for you. The Carlyle Group, a Washington, D.C., buyout firm, is one of the nation's largest defense contractors. It has billions of dollars at its disposal and employs a few important people. Maybe you've heard of them: former Secretary of State Jim Baker, former Secretary of Defense Frank Carlucci, and former White House budget director Dick Darman. Wait, we're just getting warmed up. William Kennard, who recently headed the FCC, and Arthur Levitt, who just left the SEC, also work for Carlyle. As do former British Prime Minister John Major and former Philippines President Fidel Ramos. Let's see, are we forgetting anyone? Oh, right, former President George Herbert Walker Bush is on the payroll too.

The firm also has about a dozen investors from Saudi Arabia, including, until recently, the bin Laden family. Yes, those bin Ladens. Is it any wonder that Internet sites with names like paranoiamagazine.com are rife with stories about Carlyle's shadowy, corrupt global network? And it's not just wackos. "Be careful," a tech entrepreneur in Silicon Valley wrote in an e-mail when he learned I was doing a story on Carlyle. "The rabbit hole runs really deep on this one.''

Leaving aside the conspiracies for a moment, what exactly does the Carlyle Group do? Start with the basics: It's one of the world's largest and most powerful private-equity investment firms, meaning it buys and sells privately held companies and divisions of large public companies for big profits. Founded in 1987 (and named after the favorite New York hotel of the firm's first investors, the Mellon family), Carlyle has raised a total of $14 billion from investors in just the past five years--more than any other private-equity firm has attracted in the same period, except the Blackstone Group and CSFB Private Equity. Profits, too, have been pretty terrific. Not counting the standard 20% cut that goes to Carlyle's partners and managing directors, the firm's average annual rate of return has been 36%.

It's quite a success story, and to understand how Carlyle pulled it off, FORTUNE spent a month and a half peeking down that rabbit hole. One conclusion seems clear: While most of the conspiracy theories are amusingly overblown, this is a firm that's been built on the backs of Bush and other big shots who have lent Carlyle their names, their golden networks of friends in high places, and their insights into how government works. It wasn't until Carlucci joined, for instance, that Carlyle really took off. Founded by David Rubenstein, a lawyer who worked as an aide in the Carter White House, Bill Conway, a former CFO at MCI, and Dan D'Aniello, a former finance executive for Marriott, Carlyle early on invested in a motley assortment of deals--buying an airline-catering business, a health-food chain, and a biotech firm, for example. In 1990, Carlucci got the trio interested in the $150-billion-a-year U.S. defense industry, making introductions to companies that would turn into some of Carlyle's most lucrative investments. Rubenstein quickly realized the wisdom of recruiting a former Secretary of Defense and followed it up with a former Secretary of State, then a former White House budget director, and on and on.

The revolving door has long been a fact of life in Washington, but Carlyle has given it a new spin. Instead of toiling away for a trade organization or consulting firm for a measly $250,000 a year, former government officials can rake in serious cash by getting equity cuts on corporate deals. Several of the onetime government officials who have hooked up with Carlyle--Carlucci, Baker, and Darman, in particular--have made millions. Carlyle isn't the only organization doing it: Metropolitan West Financial in Los Angeles recently hired Al Gore to help with tech deals and make introductions overseas, for example. But Carlyle, which pioneered the idea, seems more adept at it than any other firm.

Unlike other private-equity groups, Carlyle concentrates on companies funded by the government, such as defense contractors, or those affected by government regulation, such as telecommunications firms, and then hires people with relevant government experience. As the company once put it in a brochure, "We invest in niche opportunities created in industries heavily affected by changes in governmental policies." Doing so, of course, raises the ultimate rabbit-hole question: Is Carlyle's approach just a smart twist on good old business networking or a step over the line into an ethical twilight zone in which the public trust is broken?