Business as Usual at the Bailout Window : Defense: McDonnell Douglas is getting what amounts to a taxpayer-financed subsidy as a reward for mismanagement.


The McDonnell Douglas Corp. has made some high-quality weapons over the years, and that activity has proved very profitable. Even as its commercial programs struggled, the company made more than $3 billion in profits from its defense contracts over the last 10 years. But past performance is no reason for the government to reward current mismanagement with a sweetheart deal paid for by taxpayers.

Earlier this year, the company’s investment in its new commercial jetliner, the MD-11, had soaked up so much cash that the company claimed that it was unable to pay its half of a $1.35-billion debt incurred to the government when it and project partner General Dynamics defaulted on the navy’s A-12 jet-fighter program. The company filed for a two-year deferral of the debt, using an obscure regulation that allows the government to delay payments owed it by small and financially weak companies.

The Navy, which was technically owed the money, does not usually grant deferments to its contractors. So the case was taken over personally by the Pentagon’s director of defense procurement policy, Eleanor Spector, when she first learned of it on Jan. 24. In barely a week, she and her staff hustled through the paperwork and their recommendation for approval. Why the hurry? Because, according to documents obtained by the House Government Operations Committee, the company wanted that approval to take place by “close of business Feb. 4,” in time to declare a $150-million stock dividend.


These documents also indicate that Eleanor Spector adjusted the cash-flow summaries provided by McDonnell Douglas to make it appear that a cash shortage the company expected in July would actually occur in January or February, making the appeal for a deferment more urgent. The company made the job easier still by providing the draft-deferral agreement, which the government only slightly modified. Apparently, the cozy old boys’ network at the Pentagon continues unabated.

The deferral--the largest in history--was signed on Feb. 5. And there’s not even a guarantee that the debt will be paid at the end of the two-year deferral.

This month, both McDonnell Douglas and General Dynamics stocks were trading near record levels. General Dynamics paid its executives $5 million in bonuses in May and is seeking to buy other companies with the cash it has accumulated. The projected cash-flow crisis never occurred and the two companies are again teaming up to bid on the plane that the Navy wants to replace the failed A-12. Meanwhile, Eleanor Spector received a $20,000 performance bonus from the White House.

If events in the Soviet Union continue to diminish the threat once posed by that country’s monolithic military machine, we can expect the defense budget to continue to decline. That means companies with substantial investment in weapons production will have to turn to commercial sales or face extinction. The government’s policies should facilitate this conversion and should include retraining and placement programs for the workers who would otherwise bear the brunt of the retrenchment. With crushing national budget deficits, we cannot-- as in this sordid episode--reward mismanagement with billion-dollar bailouts hidden from public view.

We will need to choose which weapons to build much more carefully and demand much more from our contractors. If defense officials believe we must subsidize a given corporation, than it should be done openly with the public scrutiny of the country’s elected representatives. The workers and the taxpayers deserve no less.