Toys vs. Boys (II) Crony Capitalism American Style

October 24, 1998

Comment: #203

Discussion Thread:  #s 169 & 202


[1] John Diamond, "Analysts, auditors worry about impact of defense mergers," The Associated Press, October 18, 1998.  Excerpts attached.

In Comment #202, I used the example of shortfalls in 60mm mortar ammunition in a "first-to-fight" infantry company to illustrate the warped priorities of the Defense Department. On the one hand, we are pinching pennies and starving the readiness of the troops, and on the other, we are subsidizing mergers of the companies that produce the unaffordable technologies that driving up the costs of low readiness and forcing us to pinch pennies.

This kind of warped value system helps to explain why the senior management in the Pentagon has insulted the troops for three years by producing Armed Forces Day posters that portray weapons instead of people.

The Associated Press report by John Diamond shows that the mergers are not even producing the savings that were promised. In 1993, the Plutocrats on the Potomac (the Washington POPs) changed the subsidy policy to allow contractors to charge the expense of merging to ongoing cost-plus contracts. This had the effect of increasing merger subsidies dramatically and was justified by a typical FRONT LOADING promise, namely that higher costs today would reduce FUTURE costs, in this case, by making the post-cold war downsizing of the defense industry more efficient.

John Diamond reports that after spending $856 million to consolidate 21 companies into 5 companies, auditors say there is no way to determine if the merger subsidies have saved money, even though these mergers should have reduced overhead costs by $4.1 billion. Moreover, Diamond reports that some people are now concerned that the policy of subsidizing mega-mergers may damage competition.

Crony capitalism damages competition. Duh!

The fact that documenting the actual savings is impossible should come as no surprise to anyone who reads this list. It is but one more consequence of a corrupt bookkeeping system.

What is surprising is that someone in the Pentagon convinced the Secretary of Defense to ask David Mosso, Chairman, Federal Accounting Standards Advisory Board (FASAB), to relieve the Pentagon of the requirement that to use historical costs when accounting for its Property, Plant, and Equipment, thus ensuring that it will be impossible to prove or disprove claims about the savings or costs of these mergers.

In Comment #169, I discussed a 15 May 1998 letter from Mr. Cohen to Mr. Mosso in which Mr. Cohen said the Department does not have all the documentation needed to satisfy the audit requirements of the Chief Financial Officers Act of 1990. Moreover, he argued that the HIGH COST of developing the UNNEEDED accounting systems would take money away from needed readiness and modernization programs. This theme was amplified by William Lynn, the Defense Department Comptroller, in a June hearing of the FASAB. [Secretary Cohen's letter is Reference #1 to Comment 169, "The Constitution, Situational Ethics, & the Phony Debate Over More Defense Spending." References 2,3, & 4 and #169 discuss Lynn's testimony and the commentary places this entire issue in context of the legal requirements of Accountability Clause of the Constitution and some of the derivative statutes, as well as the moral requirements implicit in our oath of office.]

Like most front loading promises made by the Washington POPs, the promise of future savings by creating monopolies was patent B.S. But promises about the future have the beauty of being a unprovable hypotheses, which makes them irresistible to Congressmen trying to shovel money to their constituents and PAC benefactors, not to mention the program managers and political appointees who will be long gone before the truth evolves out the murk.

Perhaps the corrupt accounting system also helps to explain the cognitive dissonance exhibited by Eleanor Spector, the director of defense procurement. Diamond reports that she said the merger policy is fair and reaps "enormous savings." But she concedes it's difficult to measure because "It's a needle-in-a-haystack problem," and therefore . "It's an impossible question to answer."

When enormous savings are needles in haystacks that are impossible to find, one begins to understand why Captains don't have enough 60mm mortar ammunition.

Mr. Cohen's letter is wrong, paying for a little accountability will give us the information we need to improve readiness. Who knows, it might even help Ms. Spector find her needles and thereby determine if her statements about the effects of procurement policies make sense.

Chuck Spinney

[Disclaimer: In accordance with 17 U.S.C. 107, the following material is distributed without profit or payment to those who have expressed a prior interest in receiving this information for non-profit research and educational purposes only.]

Reference #1

"Analysts, auditors worry about impact of defense mergers."
October 18, 1998
Copyright 1998 By The Associated Press. All Rights Reserved.


A policy born five years ago, when the Clinton administration was encouraging defense companies to consolidate, continues to cost millions in government "allowances" for merged companies.

The Pentagon pays relocation costs, worker retraining, severance and plant closing expenses. The total will almost certainly exceed $1 billion as newly consolidated firms such as Boeing apply for them.

In return, the new, leaner companies agree to pass on at least two-thirds of their savings to taxpayers.

The savings don't come painlessly: The seven merged defense companies now receiving government allowances have cut 18,000 jobs.


But the GAO found the savings generated by mergers difficult to trace to weapons prices. Critics question whether the savings are really passed on to the Pentagon and predict that the loss of competition will lead to higher prices.


"I've never been able to find a specific weapons system that's come down in price. I've never seen the documented savings," said Lawrence Korb, a defense expert with the Council on Foreign Relations.

Rep. Chris Smith, R-N.J., whose district was hard hit by defense layoffs, said, "The only results that can be absolutely documented from this policy are layoffs."