Farewell Crusader? Insiders Will Cash In Regardless

A year and one-half into his tenure and on the brink of pushing the military budget over $400 billion per year, Secretary of Defense Donald Rumsfeld has finally decided to cancel a major weapons program in the name of military “transformation.” His weapons cut of choice is the Army’s $11 billion Crusader program, the largest project of United Defense, whose largest shareholder is the Carlyle Group, an investment firm that employs such former Republican luminaries as former Reagan Defense Secretary Frank Carlucci (chairman), former Secretary of State James Baker, and former President George Herbert Walker Bush (for the occasional $100,000 speech or overseas marketing trip).

Despite the program’s strong political ties, Rumsfeld and his inner circle decided that the system just doesn’t meet the needs of the lighter, more rapidly deployable, precision-targeted military force they are hoping to build. The formal announcement of the cancellation was moved up after lobbyists for the Army leaked the decision to key supporters of the system on Capitol Hill–most notably Senators Don Nickles and James Ihnhofe and Rep. J.C. Watts, all of Oklahoma, where an assembly plant for the Crusader was scheduled to be built. The Army lobbyists also distributed talking points to Congress that suggested that foregoing the Crusader would put U.S. ground troops at risk in future conflicts.

Initially, it appeared that the lobbying snafu was going to be the end for Army Secretary Thomas White, who was already enmeshed in problems stemming from his relationship with his former employer, Enron. But instead, Rumsfeld spared White after forcing him to make a mea culpa in front of the Pentagon press corps, which one observer suggested had the tone of a Stalinist show trial. The decision to save White seemed to come from two directions: 1) The Bush administration’s posture of never admitting a mistake; and 2) the fact that Rumsfeld feels that a duly chastised White will be a “team player” from now forward.

The Crusader decision still needs to get through Congress, but veteran Pentagon correspondent Pat Towell of Congressional Quarterly expects Rumsfeld to prevail, primarily because unlike the V-22 Osprey, which was rescued by the Texas and Pennsylvania delegations despite efforts by former Defense Secretary Dick Cheney to cancel it, the Crusader doesn’t have a big enough “pork barrel posse” (in the form of delegations from large states) to buck the Pentagon. But the fight over the Crusader may create a smokescreen that will distract attention from the larger question raised by George C. Wilson in the May 11th edition of National Journal: “Is the Crusader the Beginning, or the End, of Reform?” Wilson cites an April 29th memo by Deputy Secretary of Defense Paul Wolfowitz, which notes that even without moving the missile defense program into production mode, existing Pentagon weapons purchasing plans will cost $250 billion between now and 2007, and $600 billion thereafter, just to pay for systems already in the pipeline. That doesn’t count new spending for equipment needed to prosecute the administration’s war on terrorism (e.g., replacement bombs, ammunition, and so forth). Wolfowitz’s memo puts missile defense spending at $46.3 billion between 2003 and 2007, but lists a big “TBD”–to be determined–thereafter.

So something has to give, even with a $400 billion Pentagon budget. Wilson’s question is whether Rumsfeld and President Bush will have the staying power to cut other high-profile programs like the V-22 Osprey and the F-22 fighter (which may have its production run cut from 339 to less than 200), or whether they will cave to pressure from industry, Congress, and the military services. As former Marine Corps Commandant Charles Krulak has noted, “When you say ‘I’m going to stop a program,’ the political-military-industrial complex rolls in there and says, ‘No you aren’t’.” Wilson ends by noting that “If Bush wimps out on Crusader and other cancellations, the military-industrial-political complex will roll on its merry way and continue to take taxpayers to the poorhouse in Cadillacs.”

You may be wondering what will happen to the “truly needy” executives of the Carlyle Group if Rumsfeld succeeds in canceling the Crusader. Not to worry. According to an excellent investigative piece by Walter Pincus that ran in the Washington Post on May 14th, after purchasing Carlyle in 1997 for $173 million in cash and $700 million in borrowed funds, Carlyle has already “reaped more than $400 million in dividends and capital gains from United.” The company also distributed over $4 million in lobbying funds from 1998 to 2001 to well-connected Washington insiders like former Pennsylvania Representative Joseph McDade, former Indiana Senator Dan Coats, and the late Marvin Leath, former Democratic representative from Texas.

When Carlyle moved to make a public offering of United Defense shares in 2001, shareholders and executives cashed in again. Prior to the offer, the company refinanced $180 million of its original purchase price with a $600 million loan, more than half of which ($387 million) went straight back to shareholders as dividends. When the actual public offering took place in December 2001, the company raised $225 million, much of which went to stockholders and executives, including “performance bonuses” of over $100,000 each to United Defense board members Gen. J.H. Binford Peay III and former chairman of the Joint Chiefs of Staff John Shalikashvili. Performance bonuses are rarely given to board members, who are not involved in the day-to-day operations of a firm.

Pincus further notes that even if Crusader is canceled, United Defense will seek a big, fat cancellation fee from the Pentagon. It looks like Donald Rumsfeld’s ex-college roommate and long-time associate Frank Carlucci won’t do so badly after all, even with the cancellation. While Rumsfeld deserves some credit for canceling a program so dear to the hearts (and wallets) of his political cronies, it would be interesting to know if his one-and-one-half year delay in canceling the program, which had already been targeted by Bush on the campaign trail, had anything to do with letting his good old friend milk some more money out of United Defense before the program was eliminated.