Reading from the contracts — which still appear not to be publicly available, though I’m trying to get them — Frank notes that the contracts effectively insulated the managers from the company’s losses: heads – I win; tails – I don’t lose, either.

“We should bring lawsuits, as the owners, to say these people performed so badly that we’re justified in rescinding the contracts,” said Frank.  He added that the contracts even appear to have been written and signed in comtemplation of serious losses, suggesting the fraud that New York Attorney General Andrew Cuomo has said he’s investigating.

I still think the first step ought to be making those contracts public, and seeing what exactly the AIG employees were expected to do to fulfill their end of the bargain. And if there’s a real case to be made that they didn’t fulfill their obligations (as there sure seems to be, given the state of the company), then by all means — sue the bastards.

Update: The AIG contracts are now up on the House Financial Services Committee Website (PDF).

But what about what the executives promised to do under those employment contracts?  Surely those contracts required managers and executives to act in good faith on the company’s behalf and not gamble away all its assets. Even if the bonuses weren’t based on current profits, they must have been based at least on the employees doing a decent, good faith, legitimate job. And selling risky credit-default swaps — insuring really, really bad debt — may well not meet those standards.

So why haven’t we — the taxpayers who supposedly own some 80 percent of the company now — seen the contracts yet?

New York Attorney General Andrew Cuomo is probing the matter, and he has the right idea in questioning the legitimacy of the bonuses, noting that the company may have violated New York laws prohibiting “fraudulent conveyances.” If a company enters contracts to pay money it “effectively doesn’t have, it’s akin to a looting of a company,” Cuomo said in a conference call with reporters. If the AIG contracts were signed when the people in charge knew “the finances were going south,” it could be considered a fraudulent conveyance, Cuomo said.

While Cuomo investigates, Congress ought to be insisting that AIG come clean about how and when those contracts were negotiated, what exactly they say, and whether the those lucky employees in the AIG unit that triggered our global economic crisis and received $165 million in bonuses so far (a total of $1 billion was supposed to be paid out, according to Bloomberg) actually fulfilled their contractual obligations.

Money for many of the local construction projects still under way is divided up by a spoils system controlled by neighborhood politicians and tribal chiefs. “Our district council chairman has become the Tony Soprano of Rasheed, in terms of controlling resources,” said an American Embassy official working in a dangerous Baghdad neighborhood. ” ‘You will use my contractor or the work will not get done.’”

If you wanted to be uncharitable, you would call this a wealth redistribution scheme, with money moving from the U.S. taxpayer and the Iraqi victim of the war into the pockets of well-connected contractors. What I hope the commission looks at is how many of these contractors hire or have hired outgoing Bush administration officials from the agencies that helped them win these kickback-filled contracts.

Coast Guard programs are overseen by LSIs. (Flickr: crosstrippin)

Budget cuts in the 1990s forced the Pentagon’s skilled contracting workforce to shrink by more than half. When defense budgets doubled in the wake of the Sept. 11 attacks, this workforce was overwhelmed. So the Pentagon handed the responsibility for overseeing lucrative weapons programs to industry teams called “Lead Systems Integrators,” or LSI – essentially allowing defense contractors to award government contracts to themselves.

One weapons expert says LSIs are like putting “a very juicy steak in front of a very hungry dog — and expecting the steak to still be there the next day.”

It took five years of waste and abuse for Congress to even begin trying to solve the problem. But efforts at reform have been thwarted by semantics, and by the difficulty in hiring and retaining government contracting experts.

In October 2006, for example, the Senate armed services committee tried to come up with new rules restricting systems integrators. But first, the committee had to figure out which defense deals qualified as LSIs. So it sent a query to the Pentagon’s chief weapons buyer, Kenneth Krieg, who wrote back: “Only one active contract actually used the term ‘lead system integrator.’” He was referring to Boeing’s and SAIC’s $160-billion “Future Combat Systems” family of robots and vehicles.

A year later, the Pentagon panel all but admitted that the earlier definition was way too strict. In reality, the panel reported, an LSI was any arrangement that “allows one or more contractors to define a weapon system’s architecture — and then manage both the acquisition and the integration.”

By that standard, there were around a dozen major Lead Systems Integrator projects, worth a combined $300 billion. Today more than 10 percent of the military’s weapons investment is entirely under the control of private companies. LSIs now represent the single biggest programs for the Coast Guard (the $25-billion Deepwater shipbuilding scheme) and the Army (Future Combat Systems).

The Air Force, meanwhile, is spending $20 billion on a delayed communications satellite managed by Booz-Allen-Hamilton. The Missile Defense Agency pays Boeing billions to handle a range of complex missile and radar programs — many of which have consistently failed tests. The Dept. of Homeland Security is paying Boeing up to $2 billion for a camera-equipped border fence in California that recently failed tests. In fact, most integrator-run programs have suffered major delays and large cost over-runs.

Despite this, government outrage was, for a long time, absent. Even when present, the indignation has been mostly toothless.

In 2005, Congress slightly tightened up cost reporting on Lead Systems Integrators; and the next year there was the new attempt at rules that was thwarted by Krieg’s letter. Several times, the Government Accountability Office, the investigative arm of Congress, has questioned the LSI concept — most recently in June 2007, when it warned that Boeing’s management of Future Combat Systems “posed significant risks.”

Still, the reliance on integrators continues, with results varying between somewhat acceptable and totally disastrous.

Thanks to former a Lockheed employee, Michael DeKort [[LINK TO PART I??]], and other whistleblowers, Deepwater’s massive failings were too obvious to deny or paper over. In April of last year Coast Guard Commandant Thad Allen promised to begin phasing out the integration deal. “We’ve relied too much on contractors to do the work of government,” Allen said.

That was little comfort to DeKort, who was fired for pointing out the LSI’s problems.

In any case, with so many ships and airplanes already in production, and acquisitions staffs gutted, it was nearly impossible for the Coast Guard to untangle itself from Lockheed’s and Northrop’s management. More than a year later, flawed equipment is still rolling out of the factories and shipyards, including a $650-million patrol ship whose communications gear never passed a required Navy inspection.

That’s one of the problems with Lead Systems Integrator deals: it was a shortage of government workers that made them necessary in the first place. Railing against LSIs is meaningless until you hire a bigger acquisitions workforce – and that’s easier said than done.

It takes years and tens of thousands of dollars to train up a good contract manager. The average acquisitions worker is now nearly 50 years old, up from 40 years old in the 1970s. And the existing workforce is set to dramatically shrink, despite a renewed recruiting push, since experienced employees will retire faster than new ones can be hired and trained, according to the January Pentagon panel. “The DoD acquisition workforce must be strengthened,” the Defense Science Board reported in July.

Nonetheless, this year Congress passed legislation to ban LSIs beginning in October 2010. Whether the ban will work is an open question. As the Senate’s 2006 exchange with weapons-buyer Krieg proved, there’s always some wiggle room within the definition of “Lead Systems Integrator.” If a contractor can make a good argument why the term shouldn’t apply to them, then the ban probably won’t either — and it’ll be business as usual.

Some contractors insist that the problems in the LSI concept are a thing of the past.

“The major issues that have been raised with respect to the Deepwater LSI structure are the lack of government visibility and oversight,” said Regen Wilson, a SAIC spokesman. He says the Future Combat Systems integrator setup stacks the industry teams with soldiers and Army civilians, so that no decision gets made without a government employee in the know.

“Congressional scrutiny … is not something we fear – it’s something we welcome,” said Ralph Shrader, CEO of integrator Booz-Allen-Hamilton.

“You’ve got to have government engineers at the ground level,” one Future Combat Systems agreed. “It’s a constant reality check.”

But even adding some government workers to industry teams represents, at best, a partial solution to the problem. Total and sole government oversight was the way things were done before the dawn of the Lead Systems Integrator: the best anyone anticipates now is somewhat improved oversight — within a framework of greatly increased corporate power over government spending.

It’s telling that in 2006, at the height of Deepwater’s bad press, Dep. Dir. of Homeland Security Michael Jackson, a former Lockheed executive, stood up in front of hundreds of contractors and reporters at a trade show and practically begged for a bigger corporate role in the contracting for the “smart” California border fence, code-named “SBInet.” “We’re asking you to come back and tell us how to do our business,” Jackson said, “We’re asking you. We’re inviting you to tell us how to run our organization.”

The Lead System Integrator concept “has muddled responsibility,” said Nick Schwellenbach, an analyst at Project On Government Oversight, non-profit watchdog group. That muddled responsibility has resulted in wasted money, ruined careers, like DeKort’s, and — perhaps most gravely — huge delays in delivering equipment that the U.S. armed services need to do their jobs.

There’s no easy way out. Future LSIs might sneak in under slightly different names and clever PR — while LSI deals launched years ago will bear bad fruit for years to come.

Indeed, in April, Jackson’s border fence, built by Boeing, was revealed to be a technical disaster “because of its reliance on contracting practices that have led to severe cost and schedule overruns,” according to a House testimony by Laura Peterson, an analyst from the non-profit Taxpayers for Common Sense. Her explanation? “Two-thirds of the individuals that designed the SBInet acquisition plan were contractors.”

David Axe is the author of “Army 101: Inside ROTC in a Time of War.” He blogs at www.warisboring.com.

A Boeing 777 touches down. (Flickr: News46)

At 12:01 a.m. Pacific time Saturday, 27,000 Boeing Co. machinists, protesting a lack of job security, went on strike. A lengthy walkout would halt the assembly of several pricey Boeing planes, including its 777.

The aeronautic giant’s 777 is supposed to have enough fuel capacity to win the Air Force’s most lucrative contract: a $35-billion deal to replace 179 aging aerial refueling tankers. Even before the strike, Boeing said that it needed more time to put in a contract bid.

For the past month now, the Pentagon has been unable to lay out it final bidding specifications for a contract expected to pit Boeing against the combo of Northrop Grumman and Airbus, a subsidiary of the European Aeronautic and Defense Space Co., or EADS.

Illustration by: Matt Mahurin

In February, Northrop Grumman and EADS surprisingly won the contract to build the aerial tankers. Boeing immediately filed the protest with the Government Accountability Office, the investigative arm of Congress. The company also claimed that 40,000 U.S. jobs were on the line — including ones held by the striking machinists– to make the jet aircraft and then install mounted tanks for midair refuel transfer. Boeing and its allies in Congress pointed out that Northrop Grumman/EADS tankers would at least be partly designed and built in France.

GAO had upheld the Boeing protest and voided the deal in June, assailing the Air Force for not communicating contract requirements and not accurately computing costs. Because Boeing is asking for more time to submit its latest bid, the Pentagon’s third attempt to reward the aerial tanker contract could now be delayed until the next administration.

In other words, Boeing’s labor dispute is just the latest twist in a tangled seven-year defense contracting fiasco to procure “gas stations in the sky.” But it’s also something more. It raises questions about whether Sen. John McCain (R-Ariz.), the Republican presidential nominee, is the crusader against Washington corruption that he claims to be.

In 2001, the Air Force handed the tanker contract to Boeing, the largest aircraft manufacturer in the world. But in 2005, the Air Force terminated the deal after McCain led a three-year investigation by the Senate Armed Services Committee that unearthed potentially illegal conduct by Air Force and Boeing officials. At the time, the media hailed McCain as a heroic, lonely crusader who had saved taxpayers millions of dollars.

But there may have been another side to McCain’s investigation — one that may undercut a central premise of his presidential campaign: that he will be a reformer as president.

Illustration by: Matt Mahurin

Here’s the issue. The Associated Press revealed in March that five registered lobbyists for EADS were working for McCain’s presidential campaign, including Tom Loeffler, who served as the campaign’s co-chairman. Also, in 2006, McCain wrote two strongly worded, and likely influential, letters to the Pentagon, arguing that EADS acceptance of European Union subsidies should not be factored into who gets the tanker contract.

A top McCain Senate aide, Chris Paul, has said the Arizona senator wrote the letters without lobbyist’s help and that they reflect his interest in “full and open competition.”

But McCain’s presidential campaign rarely details the Boeing investigation as evidence of his reformer bona fides. Instead, it has been mostly Democrats, with Boeing employees as constituents, who bring up the case. They highlight a different side of McCain — his campaign’s continued ties to current and former lobbyists.

The McCain-spearheaded investigation, which began in 2002, discovered that Darleen A. Druyan, then the No. 2 weapons buyer for the Air Force, had awarded Boeing a $23-billion contract to lease rather than buy 100 aerial tankers — though purchasing the aircraft would have been far cheaper.

Druyan’s reason: She was grateful that Boeing had given her daughter and her boyfriend jobs. Boeing had also promised Druyan a job. In 2005, the Air Force ended the contract. That year Druyan, along with former Boeing Chief Financial Officer Michael Sears, were sentenced to prison.

At the time, McCain’s investigation mostly got rave reviews in the media and from taxpayer watchdog groups. “It’s the best example of congressional oversight that we’ve seen in a decade,” said Keith Ashdown, vice president of Taxpayers for Common Sense. “It was before the completely bone-headed decision to bring on all those EADS lobbyists.”

EADS Lobbyists in the McCain Campaign

Chief among the EADS lobbyists was former Texas Rep. Tom Loeffler. “Loeffler has been at the intersection of special-interest money and politics for decades,” said Andrew Wheat, research director at Texans for Public Justice, a non-partisan, nonprofit policy and research organization.

Loeffler, who was finance co-chairman for George W. Bush’s 2000 presidential campaign, joined McCain’s campaign in February 2006, before McCain officially announced his candidacy. “If needed,” Loeffler said at the time, “I’ll wash bottles and change tires on the Straight Talk America van.”

McCain’s cash-strapped campaign become dependent on Loeffler, who assumed a central role as fund-raiser. In 2007, the Loeffler Group earned $220,000 lobbying for EADS. Loeffler resigned in May, when McCain purged his staff of registered lobbyists to signal that his campaign does not have conflicts of interests

While Loeffler has formally left McCain’s presidential campaign, Loeffler Group lobbyist William Ball, a former Navy secretary, remains an unpaid McCain adviser.

Meanwhile, Susan Loeffler has stayed as the campaign’s co-finance chairman and recently left her position at the Loeffler Group. The Loeffler Group said it was their policy not to talk with the press.

The other two EADS lobbyists formerly associated with McCain’s presidential campaign are Kirk Blalock, a lobbyist at Fierce, Iskowitz and Blalock and the president of Young Professionals for John McCain, and Wayne Berman, who works for Oglivy Government Relations.

Blalock, who has bundled more than $250,000 for MCain’s presidential bid, did not return calls for comment. The Arizona Republic reported that he has stayed on the campaign as an unpaid fund-raiser. A spokesman for Berman said that he no longer holds his former campaign title of deputy finance chairman, and is instead an unpaid adviser and fund-raiser.

Loeffler and the other EADS lobbyists joined McCain’s presidential campaign soon after the Arizona senator, in his capacity as chairman of the Airland Subcommittee of the Senate Armed Services Committee, asked the Pentagon to rewrite its bidding requirements for the aerial tanker program. In September 2006, the Pentagon’s request for a contract proposal was still in draft stage. But it appeared the Air Force would take into consideration a suit filed by the U.S. in the WTO court that sought to end the European Union’s policy of giving no interest loans to EADS.

McCain argued in the letter (pdf), obtained by The Washington Independent, that there was no legal right for the Air Force to include a WTO matter in the contract proposal, and that including the dispute amounted to giving Boeing the contract. On Dec. 1, 2006, McCain wrote a similar letter (pdf) to Secretary of Defense-nominee Robert Gates, who four days later appeared before McCain and the rest of the Senate Armed Services Committee for his confirmation hearings. The committee and full Senate swiftly confirmed Gates.

Indeed, after assuming his Cabinet post, Gates wrote a letter (pdf) to McCain confirming that the Pentagon’s thinking had changed — the final request for proposal would not include the WTO dispute.

McCain says that EADS lobbyists did not help write any of his letters to the Pentagon or influence his actions. But he does not deny that he used his role as a high-profile reformer and subcommittee chair to ensure Northrop Grumman/EADS could bid on the aerial tanker contract.

“I had nothing to do with the contract,” McCain said in March in response to audience questions in St. Louis, home of a Boeing plant, “except to insist in writing, on several occasions, as the process went forward, that it be fair and open and transparent.”

Criticism from Across the Aisle

Infuriated Democratic lawmakers who have Boeing employees in their districts — like Rep. Norman Dicks (D-Wash.) — have called the letters “a game changer” in tilting the second contract to Northrop Grumman/EADS.

“I hope voters of this state [Washington] remember what John McCain has done to them and their jobs,” said Dicks after the contract was rewarded. Washington state has more than 70,000 Boeing employees, including the vast majority of the machinists on strike.

The criticism hasn’t stopped. At the Democratic National Convention in Denver two weeks ago, Kansas Gov. Kathleen Sebelius, who has about 3,000 constituents employed by Boeing, said that if McCain becomes president, “the tanker will be made in England and France instead of Wichita and Seattle.” Sebelieus subsequently told Crain’s Chicago Business that, “It really comes down to a American company versus a European company.”

If Boeing wins the contract, the aircraft is expected to be modified into refueling tankers in Kansas.

McCain’s campaign press office did not return repeated calls for comment. McCain’s last statement on the contract was in July when he approved of Gates re-opening the contract and facilitating “full and open competition.” McCain did say in his presidential nomination acceptance speech Thursday at the Republican National Convention in St. Paul that he “fought crooked deals at the Pentagon.” But he did not elaborate.

“It’s tough to read McCain,” said Bill Allison, a senior fellow at the Sunlight Foundation, a nonpartisan watchdog organization seeking greater government transparency. “He’s makes a lot of moves toward reform, and the next moment does something that’s questionable.”