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July
26, 2003
Onward and Downward
Book Cooking
at Boeing
By JEFFREY ST. CLAIR
Early this summer, a top Wall Street stock picker
issued a glowing report about Boeing: buy, buy, buy. The unusually
rosy assessment for the troubled company had nothing to do with
the need to replenish the Pentagon's arsenal of cruise missiles
depleted by the Iraq war or the Bush administration's drive to
implement Star War, both of which will net Boeing billions. No,
this analysis, written by Heidi Wood, a vice-president at Morgan
Stanley, pointed to "a no risk" risk deal with the
federal government to lease 100 Boeing-767 tanker aircraft.
According to Wood's report, the deal
will generate $2.3 billion in profit for Boeing. To put this
in perspective, that's about as much profit as Boeing reaps for
the sale of 1,033 of its 737 commercial airliners. From Boeing's
perspective, the great part of the tanker deal is that the company
has few obligations, yet the government is locked into the leases,
even if it proves that the Pentagon doesn't need the planes.
Boeing is guaranteed a 15 percent profit on each plane it delivers.
"There's substantially less risk than is common in the commercial
aircraft market," Wood wrote.
Wood should know what she's talking about.
The Wall Street Journal calls her the top stock analyst in the
Aerospace / Defense sector and she also serves as a Bush appointee
to the Commission on the Future of the US Aerospace Industry.
Under the deal approved by the Pentagon
last month, Boeing will convert 100 B-767s into military refueling
tankers. It's quite a coup, because many Air Force generals have
said that the planes aren't needed, an assessment backed up by
a Government Accounting Office investigation.
There are currently 545 KC-135 tankers
in the Air Force fleet. More than 400 of them are new, fully
upgraded "R" models. The other 134 tankers are older
"E" models that some inside the Pentagon and the Congress
are anxious to replace with the leased planes from Boeing.
On the surface, the Boeing proponents
appear to have an argument: the E tankers are aging. Most of
the planes are 35 years old. However, the Air Force primarily
assesses the life span of planes based not on age but on flight
hours. The engines for the "E" model has a projected
life of 36,000 flying hours. A 1995 GAO report revealed that
the majority of the "E" tankers have accumulated about
13,000 hours. The report projected that not one of the tanker
planes in the fleet would reach its limit until 2040. The new
plan is to begin replacing the E tankers with the Boeing planes
in 2006.
Even if the Air Force decided it needed
to upgrade the engines on the E planes sooner, because of added
usage and stress from the wars in Afghanistan and Iraq, it would
be much cheaper to simply upgrade the engines instead of entering
into a lease arrangement with Boeing. The GAO estimates that
the entire fleet of "E" tankers could be upgraded with
"R" engines for about $3.6 billion. This is more than
seven times cheaper than the $26 billion the Air Force will have
to fork out for the Boeing commercial tankers.
Despite the fact that Boeing famously
fled Seattle to set up its new headquarters in Chicago, the tanker
lease deal was engineered through the tireless work of the Washington
State congressional delegation, led by Sen. Patty Murray and
Congressman Norm Dicks. Wood, who demonstrates a sophisticated
understanding of the political economics of the Beltway, cautions
investors that Boeing may need to demonstrate its gratitude to
the Washington delegation by agreeing to locate some of its manufacturing
plant for the new 7E7 commercial jet in Seattle rather than in
a more corporate friendly environs.
"A subtle negative may be the payback
required considering political capital BA [Boeing] has expended
to land the tanker deal," Wood warned. "Now the company
is somewhat beholden to its hard-working Washington constituency.
This may limit some of the latitude the company would probably
like to have in deciding where to build the 7E7, adding pressure
to keep some of the 7E7 work in expensive, union-dominated Seattle."
Of course, the congressional delegation
couldn't have prevailed on its own. Boeing got some vital help
greasing this deal from the inside as well in the form of Darleen
Druyun, a top Air Force official who called herself the Godmother
of the C-17-the troubled air transport plane made by Boeing.
According to Pentagon sources, she helped craft the tanker deal,
fought off skeptical Pentagon accountants and auditors, worked
the appropriations committees and, finally, when it all seemed
nicely tied up, retired from the Pentagon and joined Boeing as
an executive vice-president, where she now supervises the company's
interests before congress and the Pentagon.
Druyun is not the only Pentagon powerbroker
to be recruited into Boeing's corporate hangar. Recently, Boeing's
board has boasted both former Defense Secretary William Perry
and John M. Shalikashvili, at one time the chairman of the Joint
Chiefs of Staff. In 2001, Boeing also hired Rudy de Leon, Clinton's
Deputy Secretary of Defense, to run its Washington office. Although
De Leon is known as a hawk and a masterful dealmaker, his hiring
may have been a rare misstep for Boeing, since congressional
Republicans howled that the company should have picked one of
their own from the Pentagon's rolls.
It's just this kind of zealous devotion
to political payback and behind-the-scenes influence peddling
that has landed Boeing in a rare spot of trouble. According to
a one paragraph item in Reuters from early June, the Inspector
General of the Air Force has opened an investigation into Boeing
whether or not Boeing should be debarred from bidding on contracts
with the federal government. The probe stems from allegations
that Boeing executives received proprietary information from
Lockheed concerning bids on Pentagon contracts.
The Lockheed affair is not Boeing's only
transgression. The Project on
Government Oversight, a DC-based Pentagon watchdog group,
reported last year that since 1990 Boeing has committed more
than 36 violations and has been forced to pay more than $350
million in fines, penalties, restitution and settlement. Among
the more recent allegations:
Boeing placed defective gears in Chinook
helicopters;
Company officials offered bribes to officials
of the Bahamas government as a means of securing a contract;
Produced a defective safety system for
the Apache helicopter;
Misrepresented the progress of clean-up
at Rocky Flats nuclear weapons site; Charges from the State Department
that Boeing violated the Arms Export Control Act and International
Traffic in Arms Regulations-more than 100 instances are cited;
Accused of civil rights violations in
hiring and salary practices toward blacks and women;
Routinely mistated labor costs and exaggerated
overhead costs.
These are serious charges of criminal
and civil malfeasance, some of which Boeing didn't even dispute.
Yet, despite the rap sheet, Boeing has never been suspended or
debarred from bidding on contracts since 1990. Federal contract
guidelines require that contractors to the government sanction
violators and only award contracts to "responsible"
contractors with a record of "integrity and business ethics".
Of course, Boeing is hardly alone in
getting a pass from these high-minded rules. In the past decade,
out of the top 50 defense contractors the Pentagon has only suspended
the contract privileges of only one major company, General Electric
Avionics Division, and that lasted for only five days.
Even so, some in Congress aghast at
the mere possibility of a crackdown on cheating contractors make
haste to loosen the rules even further. At the behest of Boeing
and other big contractors, Rep, Tom Davis, the Virginia Republican
who chairs the House Government Reform Committee, has just introduced
legislation that will unravel many of the key provisions governing
the regulation of Pentagon contracts.
One of the changes proposed by Davis
is for the Pentagon to shift to so-called Time and Material and
Labor Hour contracts, where the weapons firms would get paid
for how much time they spent working on a project rather than
by such standards as to whether they completed it on time or
according to code. This amounts to a blank check without any
incentive ever finish the job. Davis even includes a provision
that would prohibit government auditors from examining the contractor's
billing records.
The congressman, who once won a Harvard
rock trivia contest by correctly identifying the Blues Magoos
as the group that performed the 1966 hit "(We Ain't Got)
Nothin' Yet, also wants to expand the use of Share-in-Savings
Contracts, a kind of Enron-style financial speculation that allows
contractors to be lavishly reimbursed for investments in infrastructure
upgrades, such as computer systems. The companies are allowed
to charge the government for "efficiency savings"
over the lifetime of the contract. But even the Bush administration
is skeptical of such claims. In hearings before Congressman Davis's
committee last year, Angela Styles, the chief procurement analyst
for the White House, testified that her office had examined dozens
of the contracts and "we have seen no real savings."
The program is so ripe for fraud that
one expert in defense contracts compared it to the savings-and-loan
scandal. "Share-in-Savings contracts could propagate problems
similar to those that accompanied deregulation of the government-insured
savings-and-loans institutions or procurement of defense spare
parts in the 1980s by sole-source contracts," says Charles
Tiefer, a professor at the University of Baltimore School of
Law.
The biggest prize for the defense contractors
is Davis's plan to scrap key provisions in two hated laws: the
Truth in Negotiations Act and the Cost Accounting Standards Act.
Back in the late 1960s, Senator William Proxmire teamed with
Admiral Hyman Rickover to standardize accounting procedures for
defense contractors during the spending frenzy of the Vietnam
War. They also set up a board to oversee the enforcement of the
standards and deflate the complex accounting tricks of the defense
contractors which were costing the government more than $6 billion
a year.
The Truth in Negotiations Act forced
weapons manufacturers to come clean with the true basis of their
pricing and cost data. Under current guidelines, defense contractors
must comply with TINA for any contract over $550,000. Davis's
measure would effectively gut the bill by making the reporting
requirements apply only to contracts involving more than $200
million.
After the defense industry consolidation
frenzy of the 1990s, many Pentagon contract offerings now receive
only one bid. To allow the defense companies to set their own
accounting and pricing rules in this sole-source environment
is to invite the kind of runaway fraud last seen in the procurement
scandals of the 1970s and 1980s. It's one way to jumpstart the
economy. No wonder Wall Street's bullish on Boeing.
[Postscript: This article was written
in June. On July 25, the Pentagon announced that it was prepared
to impose sanctions on some of Boeing's subsidiaries for contract
fraud. This is the first tiime in more than a decade that the
Pentagon has taken action against one of its prime contractors.
The terms of the sanction have not yet been announced. But don't
expect the sentence to be too harsh. The last time the Pentagon
barred a big contractor from bidding on new contracts the ban
only lasted five days. --JSC]
Jeffrey St. Clair is author of Been
Brown So Long It Looked Like Green to Me: the Politics of Nature
(Common Courage Press) and coeditor, with Alexander Cockburn,
of The
Politics of Anti-Semitism (AK Press). Both books will be
published in October.
Weekend Edition Features for July 19 / 20, 2003
Arthur
Mitzman
Will the Pax Americana be More Sustainable
Than the Dot.com Bubble?
Julian
Bond
We Shall be Heard
Cynthia
McKinney
Bush's Racial Politics at Home and Abroad
Mel
Goodman
What is to be Done with the CIA?
Jason Leopold
Tenet Blames Wolfowitz
Mickey
Z.
History Forgave Churchill
Doug Giebel
Impeachment as the Message
Jon
Brown
Whipping the Post
Mano Singham
Cheney's Oil Maps
Steven
Sherman
Nickle, Dimed and Slimed at UNC
Robin Philpot
Liberia: History Doesn't Repeat Itself, It Stutters
Khaldoun
Khelil
Capturing Friedman
Jeffrey
St. Clair
You Must Leave Home, Again: Gilad Atzmon's A Guide to the Perplexed
Lenni
Brenner
Sitting in with Mingus
Vanessa
Jones
Three Dog Night
Adam
Engel
Video Judas Video
Poets'
Basement
Foley, Smith and Curtis
Website
of the Weekend
Illegal Art
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