Climate for Wrongdoing Created : Scandal’s Roots Traced to Basic Reagan Policy Goals

The massive procurement scandal now enveloping the Defense Department had its roots not only in the greed of individuals but in some of the Reagan Administration’s most basic policy goals: cutting back the bureaucracy, encouraging free-market competition and restoring the strength and prestige of America’s armed forces.

As applied to the Pentagon, the changes produced unquestionable benefits, but they also created conditions under which the incentives to cheat grew enormously even as traditional safeguards were being reduced.

The defense budget is so vast it has always been a prime target for abuses. But former Pentagon officials, defense analysts and members of Congress say the Reagan Administration unwittingly helped create a climate in which the opportunities--and temptations--rose dramatically for potentially dishonest or unscrupulous Pentagon employees, defense consultants and contractors.

“It’s like driving down the highway at 80 miles an hour in your car and taking your hands off the steering wheel,” said Gordon Adams, director of the Defense Budget Project. “It’s crazy.”

The factors contributing to the new environment included four separate but related Administration initiatives:

--First, when Caspar W. Weinberger became secretary of the Department of Defense in 1981, he fundamentally overhauled the relationship between the Pentagon and the defense industry. Instead of relying on what amounted to a cluster of federally supervised monopolies to supply the ever-more-esoteric tools of war, Weinberger instituted a system of direct competition for defense contracts.

That saved money, as the Administration boasted, but it also created a new, cutthroat environment for the defense industry in which billions of dollars--and sometimes a company’s future--were at stake on a single winner-take-all contract. As a result, there was an enormous surge in the value of the kind of inside, even classified information that private consultants, working with friends inside the Pentagon, could obtain and secretly peddle.

--Second, moving to free the armed forces from micromanagement by the civilian analysts whose role had been expanding since the “whiz kids” days of Robert S. McNamara in the 1960s, Weinberger adopted a hands-off management style. Concentrating his own efforts on expanding the Pentagon’s overall budget, he gave the individual military services great freedom to decide how to spend and manage their portions of the pie.

Resisted Congress

--Third, Weinberger resisted efforts by Congress to create a stronger, more independent investigative office to monitor contracts for everything from Air Force fighters to Navy radar systems.

--Fourth, to demonstrate that it was attacking the bureaucracy and controlling federal payrolls, the Administration played an old Washington game: It used consultants--who are paid under contract and not counted on the regular federal payroll--instead of government employees to help carry the Pentagon’s increasing workload.

This created at least the appearance of holding down the federal payroll, but it also added to the cozy relationship between government officials and outside consultants just as the Defense Department was embarking on the biggest military buildup in peacetime history.

Taken all together, experts say, these factors went a long way toward creating the go-for-broke, anything-goes competition for a Niagara of new defense dollars that contributed to the present scandal.

‘An 8-Year Feeding Frenzy’

“This Administration sent a gold-engraved invitation to this crowd to come to an eight-year feeding frenzy,” said Sen. David Pryor (D-Ark.), chairman of the Governmental Affairs subcommittee on federal service, which has been investigating the use of consultants government-wide. “Now you’re seeing the fruits of it.”

The FBI is now nearing the final stages of a two-year investigation of wrongdoing in the Pentagon’s weapons development and acquisition sections. Investigators say interlocking networks of Defense Department officials, consultants and contractors have tainted as many as 100 contracts worth tens of billions of dollars.

Already, the Navy has suspended activity on nine contracts mentioned in court papers released Thursday in Dallas. Six Pentagon officials have been reassigned away from contracting duties. And Norden Systems Inc., a leading candidate for a $120-million Marine Corps aircraft control system, withdrew from the competition amid allegations that a company consultant had illegally obtained information about its competitors’ bids.

Focus Is on Navy

The FBI probe thus far appears to center on the Navy, where former Secretary John F. Lehman Jr. made the most of the opportunities left to him by Weinberger’s decentralized style of Pentagon management.

In a signal of the aggressive way he would operate, Lehman startled the Administration shortly after taking office by announcing publicly and without authorization that the United States would not be bound by the limits of the SALT and SALT II arms-control agreements--a declaration an embarrassed White House was forced to disengage itself from.

Similarly, the politically well-connected Lehman more than once scuttled agreed-upon Defense Department positions on pending legislation by announcing independent positions of his own, or by lobbying against the department’s official position behind the scenes.

Lehman also turned his attention to the Pentagon’s procurement bureaucracy. Attacking the old system of relying on single sources to meet the military’s specialized needs, he charged that the bureaucrats’ long-established relationships with contractors had permitted “decades of gold-plating, cost overrunning and contract sole-sourcing.”

Armies of Buyers

Complaining in 1985 that armies of buyers in the Defense Department and within the military services “take power away from the secretary and the appointed officials,” Lehman simply abolished the Navy’s Materiel Command, which had been coordinating the purchase of everything from torpedoes to aircraft carriers since 1966.

That move, which eliminated 549 jobs, fit neatly with the Administration’s aim of keeping federal payrolls to a minimum while rebuilding the nation’s weapons arsenals.

It also consolidated Lehman’s hold on the Navy’s multibillion-dollar acquisitions process by removing a layer of analysts and others who had stood between Lehman and the Navy’s purchasing commands. Melvyn R. Paisley, the Navy’s assistant secretary for research, engineering and systems--and an old friend of Lehman--moved to the forefront of Navy weapons development and purchasing.

But the drive for efficiency apparently did not always breed respect for the law. “Those layers of bureaucracy that prevent you from doing anything efficiently,” said Loren Thompson, a procurement expert at Georgetown University and a former defense consultant, “are also what prevent the kinds of abuses that can come when a process that complex is streamlined and placed primarily in the hands of political appointees.”

A Free-Market Approach

Lehman and Paisley, the latter now seen as a central figure in the FBI’s investigation, presided over the Navy’s effort to implement Weinberger’s policy of promoting a free-market approach to procurement.

Weinberger has said competitive contracts at the Pentagon increased from 30% to 60% of total dollar value during his tenure, which ended with his resignation last Nov. 17. And industry representatives and Defense Department insiders say the competitive mind-set that predominated may have been as important as the statistics.

“I’d never seen that much enthusiasm for the business aspect of the thing,” said one naval officer who sat in on Navy budget deliberations with Lehman and his team. “Paisley and Lehman used to resonate together about how we’ll dual-source this and compete that. It was taken as a kind of religious dogma that competition would save you money.”

At one point, when General Dynamics, whose Electric Boat Division had a monopoly on building missile-carrying submarines, persisted in pressing litigation against the Navy in disputes over costs, Lehman publicly threatened that the Navy would ready another naval shipyard to produce Trident submarines in competition.

Breaking a Monopoly

In another case, Lehman determined to break General Electric’s monopoly on engines for several naval planes and regain control of the cost of engines, which can account for 10% of aircraft costs. Lehman ordered GE in 1984 to turn over its technical drawings to archrival Pratt & Whitney. GE balked but eventually bowed to Lehman’s pressure.

At the same time, Lehman and Paisley directed a new trend in the aerospace industry--the teaming of contractors at an early phase in the design of a weapon. The practice, described by one contractor as “a kind of authorized collusion,” united former competitors such as McDonnell Douglas and General Dynamics, Grumman and Northrop.

In a process known in the industry as “fusion-fission,” the companies were forced together during the design phase of new weapons and then separated when it came time to bid on contracts to produce them.

Stirred Competition

Applied to airplanes, for example, Lehman saw “fusion-fission” as a way of readying two manufacturers to compete later to build the planes. To the contractors, the new practice guaranteed some role in the Pentagon’s aircraft business, which has increasingly involved fewer but more expensive programs.

As Lehman and his inner circle tried these bold new experiments, it became clear to many contractors that the Navy was drafting some of the rules of competition as it went along. In many cases, procurement strategies changed in midstream, leaving contractors grasping.

“The rules of the game had changed completely,” one contractor said.

The changes put a premium on the ability of companies to make direct contact with the brash young Navy secretary and his cohorts, Paisley notable among them. Reading Lehman’s mercurial moods became high art, spawning a cottage industry of tip sheets and trade papers with such names as Inside the Pentagon and Navy News and Undersea Technology.

The Lehman policies also forced industry to put a premium on knowing the bottom line of a competitor’s bid. In the past, other factors, including the quality of the proposal, had carried much more weight, and the amount of the bid had mattered less.

“It used to be that the best technological development got the project, that technical prowess was the key,” said Michael Beltramo, a Los Angeles-based defense analyst. “Now the cheapest product is the winner. . . . Cost is the new king (and) clearly information is at a premium.”

At the same time when the opportunities for wrongdoing mounted, critics say, the Defense Department was dragging its heels on efforts to prevent corruption.

In 1981, the department resisted efforts by Congress to create an independent inspector general’s office, arguing that agents working for such an office could jeopardize national security by investigating programs on the eve of major military operations.

Although the Pentagon eventually accepted a semi-independent inspector general’s office, critics charge that the Defense Department brass has never fully supported its operation. This year the office’s investigators, subject to the same austerity measures that apply throughout the department, are being forced to reduce overtime and cut travel.

The Defense Department reluctantly created the position of “procurement czar”--undersecretary of defense for acquisitions--in 1986 after a presidential commission had recommended it and Congress had required it. Rep. John R. Kasich (R-Ohio) said the Pentagon resisted the congressional initiative “every step of the way.”

Richard Godwin, the first to hold the job, quit after a year, complaining of a lack of support from the top. Godwin said he felt like “a man who has the steering wheel in his hand but nothing hooked to the rudder.”

Acting Independently

When he left, Godwin said Weinberger’s top aide, Deputy Secretary William H. Taft IV, had issued a written directive allowing the individual military services to continue to act independently on major purchases.

Sen. Pryor said the Reagan Administration consistently opposed efforts to reform the Pentagon procurement system. Besides trying to block the creation of an inspector general’s office, he said, the Administration also opposed establishment of an independent office of operational testing and evaluation and broader protection for Pentagon whistle-blowers.

Pryor said the Administration, through its free-enterprise philosophy and its emphasis on defense spending, encouraged arms makers and their consultants to abuse the system.

Rep. John D. Dingell (D-Mich.), chairman of the House Energy and Commerce Committee, charged that Weinberger ignored direct warnings from him that something was seriously amiss in the Pentagon’s contracting offices.

‘Black Budget Programs’

Dingell also cautioned Weinberger that the increasing use of the secret budget process for classified programs--known as “black budget programs”--was making it possible for contractors to defraud the government. Some of the contracts now being investigated by the FBI fall into that category.

“Our letter to the secretary made it very clear that we were referring to improper possession of classified documents by contractors,” Dingell said.

And in a Defense Department memo drafted for Weinberger at his request more than three years ago, the secretary was warned that defense contractors had “a direct pipeline” to classified budget documents from “leakers” in Lehman’s office. Weinberger has said he met with Lehman over a single such instance, and that the offender was fired.

Others say they told Weinberger, to no avail, that Lehman’s seat-of-the-pants management of the Navy would eventually backfire.

Angry Phone Calls

One telling case involved Lawrence Korb, who left his job as assistant secretary of defense to work for Raytheon Corp., a major defense contractor. Raytheon executives received angry phone calls from Lehman aides Paisley and Everett A. Pyatt, assistant secretary for shipbuilding, after Korb criticized the Reagan Administration defense budget at a press conference. A month later, Raytheon fired Korb.

An inspector general’s investigation of the incident concluded that Paisley and Pyatt had abused their powers and contributed to Korb’s firing, and it recommended that they be disciplined. But Weinberger chose instead, in his words, to “caution” the two men not to do the same thing again.

Rep. Denny Smith (R-Ore.), a longtime Lehman foe who requested the investigation into the Korb matter, maintains that the incident illustrates the arrogance of Lehman’s administration and the inability of Weinberger to control his subordinates.

“I was amazed at the brashness of all of them and their feeling that they were above the law,” he said, referring to Lehman, Paisley and Pyatt.

As for Weinberger, Smith said: “He’s a cheerleader. That’s about what his role was. He didn’t have time for anything but that.”

Ignored Warnings

Another knowledgeable source said he believed the secretary ignored warnings about Lehman because he did not want to confront his intimidating Navy secretary. “If he took them (complaints) seriously, he would have to do something about them,” said the source, who asked not to be identified by name.

Tom McNaugher, a defense analyst at Brookings Institution, said Weinberger placed too much faith in decentralization. He called it “illusory” to rely on the services to manage their own programs and be accountable for the results.

“You can’t hold a service accountable for a weapons development program because it takes 10 years to develop the weapons,” McNaugher said. “You can get a rosy briefing out of the services on any project. The only way to hold them accountable is to go out there and look. Weinberger didn’t see that as his role.”

Adams, of the Defense Budget Project, said Weinberger was hurt by a management style more suited to academia than an institution that is, among other things, the single biggest business enterprise in the world, with $156 billion in purchases last year.

Saw Self as Fund-Raiser

“He tended to see himself as president of the university,” Adams said. “His job was to front for the department and raise money for the department. The management of the resources was not something he was going to give daily attention to. That element from the top of the building was relatively laissez faire. All the services got to act as the deans spending the money.”

Others say Weinberger cannot be faulted for the failings at the Pentagon.

“With millions of people involved, how do you expect any secretary of defense to be in charge of all that?” asked Harlan K. Ullman, a senior associate at the Center for Strategic and International Studies. “If you’ve got someone who’s crazy or venal, it is difficult to put in rules and regulations to make that not happen. You’ve got lots of laws and lots of robbers.”

Weinberger himself has denied responsibility for the scandal and instead blamed a few greedy individuals.

‘Saw a Great Deal’

“You don’t spend 14 to 16 hours a day, seven days a week, for seven years, and not oversee something,” Weinberger said June 24 on the ABC News program “This Week With David Brinkley.” “And I oversaw a great deal. And we tried in every way we could to make sure that the procedures were such that the dishonesty would not prevail, would be at a minimum.

“You could have scandals anywhere. You have scandals in Congress. You have scandals in banks. You have scandals in grocery stores. Some people are dishonest. And it’s a very sad, unhappy thing. But when you’re running one of these departments with approximately 3 million people involved, you’re at the mercy of the person, one or two people, who may be dishonest.”

But Rep. Dingell contends that a scandal involving five top Pentagon officials, dozens of consultants, 100 contracts and billions of dollars cannot be blamed on a “few bad apples.”

“In no way could this waste, fraud and abuse be conducted by a few knaves, fools and incompetents,” Dingell said. “You have a bad system presided over by bad or incompetent or indifferent men.”

Also contributing to this story were John M. Broder and John Hurst in Washington and Carla Lazzareschi in Los Angeles.