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US: Lockheed Talks, the Pentagon Listens

by William HartungWashington Post
June 26th, 1996

His name is not a household word, but Norman Augustine is one of those rare Washington power brokers for whom a Cabinet-level position would be a demotion. Pentagon contracts than its closest rival. In an unprecedented government contracting trifectaAugustine is the chief executive officer of Lockheed Martin Corp., the world's largest defense conglomerate, and a key player in the network of quasi-official military-industrial interest groups. He will probably have as much to say about how much money the United States spends on weapons through the end of this decade as any secretary of defense.

Consider Augustine's domain: Lockheed Martin has 50 percent more , the Bethesda-based firm is now the number one contractor for the Pentagon, the National Aeronautics and Space Administration and the Energy Department. And the company has the largest political action committee of any weapons manufacturer.

On the softer side of his resume, Augustine is president of the Boy Scouts of America and chairman of the board of the American Red Cross. The Red Cross's executive director is would-be first lady Elizabeth Dole. She is on leave to campaign for her husband but has said she will return to the job if he is elected president.

While long a leading figure in the defense industry, Augustine has come into his own as an unofficial policymaker in the Clinton years. In recent years, he has secured the creation of two new arms-export subsidy programs: a government-backed, $ 15 billion arms export loan guarantee fund and a $ 200-million-a-year tax break for foreign arms purchasers. And the Republican-controlled Congress has approved substantial funding increases in programs of direct interest to Augustine's company, including the new F-22 stealth fighter plane and the "Star Wars" strategic missile defense program.

He was also instrumental in securing a new Pentagon policy in 1993 that for the first time authorized spending taxpayer funds to implement major defense industry mergers. When Sen. Tom Harkin (D-Iowa) offered an amendment earlier this month to freeze Pentagon payments for these "restructuring" costs, Lockheed Martin lobbyists prevailed upon the Senate to table it.

Augustine's power extends far beyond his CEO position. Since 1987, Augustine has served as chairman of the Defense Policy Advisory Committee on Trade, which provides confidential guidance to the secretary of defense on arms export policies. He is also chairman of the Defense Science Board, a Pentagon advisory panel that has the power to approve or reject multibillion-dollar weapons projects. In addition, Augustine is president of the Association of the United States Army, a politically potent interest group made up of retired Army personnel and major Army contractors. An engineer by training and a policy wonk by inclination, he is conversant with all of the major technical and policy issues affecting Lockheed Martin, and he feels perfectly comfortable making the case for the company's priorities himself.

By his own account, Augustine fell into the defense business by accident and would have been just as happy pursuing his original career goal as a forest ranger. He grew up in Denver and attended Princeton in the mid-1950s, majoring in geological engineering. But after being "shocked" by the Soviet Union's successful launch of the Sputnik satellite, he took a job with the Douglas Aircraft Co. (the predecessor of McDonnell Douglas). He has been in the aerospace field ever since.

Over the next three decades Augustine spun through the revolving door from industry to government and back again. From 1965 to 1970, he served as assistant secretary of defense for research and engineering. He then moved over to the private sector as vice president for advanced programs at LTV Missiles and Space. After three years he returned to government as assistant secretary and then undersecretary of the Army in the Nixon and Ford administrations. In 1977 he joined Martin Marietta. Within a decade, he was chairman and CEO.

The heady -- and lucrative -- days of the Reagan military buildup were over. Augustine had to decide whether to keep the firm in the defense sector and fight over a shrinking pie or sell off the company's defense assets and seek out new commercial markets. It was not a close call. Augustine chose not merely to compete in the defense sector but to dominate it. His strategy has been to buy up parts of other defense firms.

"I want to build a super company," he said in a 1994 interview. In March 1995, he and Daniel Tellep, the CEO of Lockheed, agreed to merge, forming Lockheed Martin Corp. With $ 23 billion in revenues last year, the new corporation dwarfs its competition. And it's getting bigger: In January, Augustine arranged to buy Loral Corp., a deal worth $ 9.1 billion.

Augustine was among the first to propose that the public should pay for the restructuring of the defense industry. He and three other top defense executives proposed the idea in a June 1993 letter to William Perry, then the deputy secretary of defense. (Besides Augustine the other signers were Tellep of Lockheed, C. Michael Armstrong of GM-Hughes and Bernard Schwartz of Loral.)

The next month, Undersecretary of Defense John Deutch sent a one-page memo to the Pentagon's Defense Contract Management Command adopting the suggestion. Deutch's decision overruled the Pentagon's auditors, who had questioned the merger subsidies. His directive made contractors eligible for federal money to close plants, relocate equipment, pay severance to laid-off workers and pay bonuses to affected executives and board members. "Restructuring costs are the price that we must pay today to realize cost savings tomorrow," the Pentagon has said.

Lockheed Martin then sought reimbursement for $ 330 million in connection with its acquisitions of General Dynamics' space division and General Electric's defense unit. As of last October, at least $ 38.5 million had been paid out by the Pentagon.

Augustine defends the arrangement as beneficial to the government, saying Lockheed Martin is being "very generous."

"When you merge, you pay the costs of consolidation and you take all the profits -- I'd take that deal in a minute," he explained in a recent interview. "But the government wanted us to pay the costs and take all the profits themselves in the form of reduced prices" on the systems that it buys from Lockheed Martin. "That was a non-starter."

Instead, Augustine says, "we have in every one of our plants government auditors who watch every nickel of our costs," so they can assess savings that he says are "very measurable." He cites closing a headquarters building and having one CEO instead of two as examples of how mergers result in savings.

"The government is never out of pocket on this; it puts in zero money," he said. The Pentagon's $ 38.5 million payment, in Augustine's view, does not come out of the government's pocket. It is simply the government repaying Lockheed Martin for officially certified -- though still-unspecified -- savings already reaped by the Pentagon.

Behind these complex accounting procedures is a network of old business associates. In July 1994 Newsday reporter Patrick Sloyan raised questions about the past business relationships among Perry, Deutch and Augustine. Sloyan reported that Perry's firm, Technology Strategies & Alliances, had a contract with Martin Marietta through 1992; Deutch, he noted, had been a consultant to Augustine's firm for nine years, collecting a total of $ 42,500.

The Pentagon's office for government ethics previously had issued a ruling prohibiting Deutch and Perry from dealing with issues relating to Martin Marietta for at least a year. This ethical lapse was officially excused. According to the Pentagon, then-secretary of defense Les Aspin "made written determinations for both Dr. Perry and Mr. Deutch that the interest of the government outweighed the concern that a reasonable person would question their impartiality."

In September 1994 the House Armed Services Committee took a look at the issue of reimbursing major defense contractors for "restructuring costs" associated with industry mergers. Lawrence Korb, a top Pentagon official in the Reagan administration now at the Brookings Institution, testified that "taxpayer subsidization is not necessary to promote acquisitions and mergers." Augustine also testified, stating that the long-term savings to the Pentagon from encouraging mergers "could be in the tens of billions of dollars in the next five years alone."

Lockheed and Martin Marietta merged three months later. The combined company immediately indicated that it might apply for up to $ 1.8 billion to cover plant closings, relocation of equipment, executive bonuses, severance packages and other costs involved in combining the two companies. Augustine stood to earn a merger-related windfall of $ 8.2 million in performance incentives, stock options and deferred compensation. He agreed to donate $ 2.9 million -- the portion eligible for federal reimbursement -- to a charitable foundation to "avoid the appearance of personal enrichment," according to Lockheed Martin spokesperson Chip Manor.

While Harkin's amendment to freeze the merger reimbursement program failed, an unusual left-right coalition has emerged in the House with the same goal. In June, Rep. Bernard Sanders (I-Vt.), the only socialist in Congress, denounced what he calls "payoffs for layoffs" and joined forces with conservative Republican Christopher Smith (N.J.) to win unanimous support for an amendment that would ban Pentagon reimbursements for merger-related costs.

The company already has received a favorable ruling from the Defense Contract Audit Agency that will allow them to charge at least half of the original $ 31 million in taxpayer funding they sought for executive bonuses to federal contracts in effect prior to 1996. If the Sanders-Smith legislation does eventually pass, Lockheed Martin officials are prepared to argue that the firm should be exempted because the merger of Lockheed and Martin Marietta was completed before the legislation passed.

Augustine also has been a central figure in the defense industry's effort to get the U.S. government to provide additional taxpayer support for arms exports. With fighter planes costing between $ 25 million and $ 50 million and potential foreign clients facing major budgetary crises, the number of cash-paying foreign weapons customers has been shrinking. New subsidies for arms exports have been on the industry's agenda since 1988, when the Defense Policy Advisory Committee on Trade (DPACT) recommended them to the incoming Bush administration. DPACT's chairman, then and now, is Norman Augustine.

The Bush administration rejected the idea, but Augustine found the Clinton administration more receptive. When Les Aspin took the helm as President Clinton's first secretary of defense in February 1993, the Aerospace Industries Association sent him a letter promoting the idea of "a financing facility for defense exports" beginning with "an initial program of $ 5 billion in guarantees for arms sales loans." Augustine followed up with personal letters to the members of the House Armed Services Committee, urging them to dip into the funds that had been set aside for helping defense firms convert to civilian production to fund arms export subsidies instead. At the same time, Lockheed Martin's constituent companies, Lockheed and Martin Marietta, were doling out $ 1.1 million to congressional candidates.

Augustine's campaign finally succeeded when the Republicans gained a majority in the House of Representatives in November 1994. In 1995, the new Congress approved a government-backed, $ 15 billion arms export loan-guarantee fund and a $ 200-million-a-year tax break for foreign arms purchasers. Clinton signed the measures last December.

The result will be the sale of more U.S. weaponry overseas, with a greater proportion of those sales subsidized by U.S. taxpayers. The irony is that Lockheed Martin will then turn around and point to these foreign sales as a reason for the Pentagon to buy more advanced weaponry for U.S. forces.

A brochure for Lockheed Martin's new F-22 stealth fighter plane, subtitled "Peace Through Conventional Deterrence," does just that: The pamphlet displays a map of the world showing the countries that now possess top-of-the-line fighters. Of the 48 countries listed, 24 of them received their advanced fighters, including more than 1,300 Lockheed F-16s, from the United States.

Lockheed Martin's solution for the perils of arms proliferation: Buy more planes from Lockheed Martin.

Augustine is a formidable opponent of post-Cold War proposals to cut defense spending. He argues that past efforts to convert defense contractors to civilian work have a record "unblemished by success" because "it has proven very difficult to produce pigs by running the sausage machine backward." In his 1990 book "The Defense Revolution" (co-authored with Kenneth Adelman), Augustine advocated increased spending for a potent array of new weapons, from B-2 bombers to strategic missile defenses to "smart" munitions. In a speech last December, he referred to the defense industrial base as "the fifth armed force" and argued for stepped-up spending on weapons modernization to maintain a "dominant military force."

The issue raised by Augustine is ultimately one of power, not personality. He is a talented executive, and his company has brought together an impressive group of skilled people to build some of the most sophisticated high-tech products of the modern era. But as fewer weapons manufacturers wield more and more political and market power, the executive branch and Congress have to make sure that companies such as Lockheed Martin are not also allowed to subsidize themselves. So far, in his winning battles to get everything from federal subsidies for defense mergers to taxpayer-backed loans to sell weapons overseas, Norman Augustine has been shaping the rules to his advantage, with far too little government oversight.





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