DECEMBER 1996 · VOLUME 17 · NUMBER 12
T H E I R M A S T E R S ' V O I C E
DECEMBER 1996 · VOLUME 17 · NUMBER 12
T H E I R M A S T E R S ' V O I C E
DURING THE FALL U.S. electoral campaign, both Democrats and Republicans boasted
of their efforts to save taxpayers' money by hacking away at federal spending.
But with big business providing the lion's share of campaign financing, neither
party had much to say about scaling back on the mountain of tax breaks and
direct subsidies that Washington lavishes on U.S. corporations.
One of the more shameful cases of "corporate welfare" is a Pentagon program that reimburses defense contractors for expenses related to mergers and acquisitions. Groups ranging from the conservative Cato Institute to the liberal Taxpayers for Common Sense oppose this boondoggle, but Congress -- facing an intense lobbying blitzkrieg by the arms industry -- preserved the payoff to weapons companies during the last session.
The defense industry's latest assault on the federal treasury dates to June 3, 1993. On that day, the chief executive officers (CEOs) of Martin Marietta, GM Hughes Electronics, Lockheed and Loral Corporation wrote a letter to Under Secretary of Defense John Deutsch (now head of the CIA) saying that the Pentagon's refusal to help pay for merger costs would "discourage needed restructuring ... [and] undermine the defense industrial base."
Deutsch responded swiftly. Just a month later, he unilaterally overruled the Pentagon's own internal auditors and decreed that henceforth contractors could submit merger-related bills to the Defense Department for review.
That the top Pentagon brass was so sensitive to the CEOs, led by Norman Augustine of Martin Marietta, was not terribly surprising. Before moving to the Pentagon, Deutsch had served as a consultant to Augustine's firm for nine years, earning $425,000. Defense Secretary William Perry was part owner of a firm, Technology Strategies & Alliances, which had a contract with Martin Marietta until 1992.
Recognizing that the public might not look kindly upon the new policy, Deutsch and the Pentagon prudently failed to notify Congress of the payoff plan. The program only came to light in early 1994, when Senator Sam Nunn, D-Georgia, head of the Senate Armed Services Committee, received a memo showing that Martin Marietta was seeking $60 million from the Pentagon to help pay for its $208 million acquisition of General Dynamics' space division.
That $60 million request foreshadowed a stampede of big defense contractors heading for the public trough. Lockheed and Martin Marietta merged in March 1995, a move that will eliminate 30,000 jobs. The new company, Lockheed Martin, has since submitted bills to the federal government for more than $1 billion in restructuring costs.
The bills included a plea for taxpayer help in paying for $31 million out of $92 million in bonuses that the companies paid to their top executives in the merger's aftermath. Martin Marietta's Augustine, who became CEO of the new company, was showered with a cash payment of $10.6 million, as well as stock options worth $9.5 million. Daniel Tellep, who had been president of Lockheed, pocketed the same amount in stock options as well as $4.3 million in cash. The Pentagon has given preliminary approval for $16 million of the bonus money requested and is reviewing the rest.
Ten months after Lockheed Martin was formed, the new company swallowed up the Loral Corporation. After agreeing to sell his firm, Loral's CEO Bernard Schwartz -- who like Augustine and Tellep was one of the letter writers to Deutsch -- received a $35 million bonus, part of which taxpayers are also being asked to cover.
Other defense contractors have also moved to cash in on the Pentagon's largesse. The government is currently reviewing 30 applications for merger subsidies totaling $2 billion. Paul Nesbit, a defense analyst at JSA Research in Newport, Rhode Island, expects the number of defense mergers to rise sharply. "The government is spending less money for weapons procurement so companies are going to consolidate or get out of the business," he says. "Either way, this prompts merger activity."
The Pentagon and the weapons industry insist that post-Cold War cuts in military spending have made industry consolidation necessary. They say that mergers will allow contractors to consolidate their operations, become more efficient and thereby reduce the prices defense companies charge the government. "I'm puzzled at how a policy that saves the government billions of dollars can be termed a subsidy," says Chip Manor, a spokesperson for Lockheed Martin Loral.
It is far from certain that the savings and benefits promised by the arms industry will ever materialize, however. A September report from the General Accounting Office, a congressional research agency, examined eight defense mergers that had been approved by the Pentagon and found that actual savings realized are less than half of what defense companies had estimated when applying for subsidies.
And despite budget cuts in some areas of the defense budget, total military spending last year -- $265 billion -- was higher in real terms than it was in 1980, when the United States was confronting the former Soviet Union and its allies in Eastern Europe. Between mid-1995 and mid-1996, Lockheed Martin stock climbed by 48 percent, while the stock of McDonnell Douglas, another defense behemoth, leapt by 80 percent.
Senator Tom Harkin, D-Iowa, and Representative Bernie Sanders, I-Vermont, have led the effort in Congress to abolish "payoffs for layoffs." The House overwhelmingly voted to ban restructuring payments last June but the military contractors' friends in the Senate killed the measure in September.
"The defense lobby got ginned up and put out a lot of disinformation," says a congressional staffer who asked not to be identified. "Lockheed Martin was working full time around here."
-- Ken Silverstein