The Bribes and Boondoggles
of Boeing



Sightings from The Catbird Seat

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Some of the latest poop on Boeing:

March 29, 2005

Pentagon Strips Air Force of
21 Major Weapons Programs

Las Vegas Review-Journal

WASHINGTON (AP) – In a highly unusual move, the Pentagon’s top weapons buyer on Monday took away the Air Force’s authority to oversee 21 major programs with a combine value of $200 billion.

The move, called temporary, was made because of a civilian leadership vacuum at the Air Force after the departure last week of Peter Teets, who was under secretary of the Air Force as well as acting secretary. Teets had been fillin in since James Roche resigned as secretary in January.

It also comes amid continuing controversy over the Air Force’s handling of a multibillion-dollar Boeing aircraft lease deal that fell through last year and led to the conviction of former Air Force executive Darleen Druyun on charges of conspiring to violate conflict-of-interest rules.

Druyun admitted in court that she favored Boeing on deals worth billion of dollars because the company gave jobs to her daughter and son-in-law. Her admission led to a detailed Pentagon review of her nearly 10-year tenure as a key weapons buyer for the Air Force and prompted rival defense companies to file protests over Boeing contracts awarded during that period.

The episode has taken a tool on the Air Force. Since Roche departed, the White House has not nominated anyone to replace him as the Air Force secretary, a post that requires Senate confirmation. Some believe the current Navy secretary, Gordon England, will get the nomination.

In addition, no one has been nominated to replace Teets as the under secretary. What’s more, the post of Air Force acquisition chief has been vacant since Marvin Sambur left in January.

With Teets gone, the most senior civilian in the Air Force is Michael I. Dominquez, who has served since August 2001 as assistant secretary of the Air Force for manpower and reserve affairs….

In Monday’s announcement, the Pentagon said it was giving the decision-making authority for the 21 major Air Force weapons programs to Michael Wynne, the No. 2 Pentagon civilian in charge of weapons procurement.

The No. 1 slot has not had a Senate-confirmed holder since May 2003. Wynne was nominate for the top spot but his nomination – and others in the Air Force – have been blocked by Sen. John McCain, R-Ariz, as part of a long-running dispute over the Boeing lease deal….

The 21 programs include a $59.2 billion Boeing contract for C-17A Globemaster II advanced cargo aircraft, and a $31.7 billion Boeing and Lockheed Martin contract for the Evolved Expendable Launch Vehicle….

Among other programs affected are air-to-air missiles, B-2 bomber radar modernization, C-5 cargo plane improvements, propulsion replacement for the Minuteman III intercontinental ballistic missile and a $18 billion communications satellite program….

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March 8, 2005

Boeing Forces Out CEO Over
Ethics Scandal Involving Affair

By Dave Carpenter, Associated Press

CHICAGO – Boeing Co., CEO Harry Stonecipher, brought back from retirement 15 months ago to boost the aerospace manufacturers’ tainted image, has been forced out because of a new ethics scandal involving an affair he had this year with a female executive.

In a stunning announcement that left the exact circumstances behind the ouster unclear, Boeing said Monday the 68-year-old- president and chief executive officer had resigned at the board’s request a day earlier for improper behavior while carrying out the consensual relationship.

Chairman Lew Platt said the affair by itself did not violate the code of business conduct at the company, where a string of defense scandals has raised questions about the way Boeing obtains its lucrative contracts. But an internal investigation that started because of an employee’s complaint discovered “some issues of poor judgment” involving Stonecipher, who is married.

Platt refused repeated requests to be more specific and did not identify the female executive, who he said remains with Boeing….

< < < FLASHBACKS < < <

Program Manager Interviews



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Which Defense Firms Will Survive – Meet the
Man Who Helps the Pentagon Decide

A large white banner is first thing you notice upon entering the reception area of Joshua Gotbaum’s third-floor Pentagon office. In foot-high red letters, it reads: “Please Mr. Gotbaum, Save Natick [Mass.] Labs” (referring to the Base Realignment and Closure [BRAC] recommendation to close Natick),

Secretary Gotbaum, a former Wall Street investment banker, achieved the status of Washington insider in 1 short year. He is respected both by the Pentagon brass and defense industry officials. He influences key decisions ranging from BRAC to which defense industries will survive.

Secretary Gotbaum is the right man for the job at the right time. A 44-year-old lawyer, Secretary Gotbaum is at home in the world of mergers, acquisitions, and restructurings. He heads the new 260-person Pentagon Office of Economic Security and has won the confidence of many defense industry and military officials for helping educate the Pentagon brass on their decisions which impact the nation’s troubled defense industry. And so far, both sides appear pleased with his efforts or their behalf…. For more recent poop on Joshua Gotaum, GO TO > > > Hawaiian Airlines

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Spotting the Boeotians

From The Outlaw Bank: BCCI, by Jonathan Deaty & S.C. Gwynne:

Kamal Adham was one of the true inside power players of the Middle East, a shrewd, jovial man who had for decades straddled the worlds of Middle Eastern business and politics.. He was the half brother of Iffat, the favorite wife of King Faisal, who ruled Saudi Arabia from 1964 until his death in 1975….

Like so many other enterprising Arabs in the 1960s and 1970s, when oil revenues were booming and foreign companies were lining up to sell their products, Adham had used his connection to commercial advantage. The way most commoners in the Middle East got rich off the oil boom was through a simple system know as “agency” arrangements.

In order to sell a product or service in Saudi Arabia, you had to know someone in the royal family, which authorized all expenditures. If you did not know a princeling or a royal cousin, then you hired an “agent” who provided you access for a “commission.”

Though this commission often looks very much like a “bribe” … it was nonetheless the way business was done, and few were better at it than Kamal Adham.

The list of his agency deals was long and illustrious….

By the mid-1960s Adham’s influence was such that he simultaneously came to represent three defense firms and was being ardently courted by a fourth. Said Northrop representative Kermit Roosevelt, “Adham already has a piece of the Lighting deal, the Mirage deal, and the Lockheed deal and is trying to complete the square by an arrangement with Northrup.”

He also came to be the principal broker for weapons purchased by Saudi Arabia on behalf of Egypt.

But perhaps his richest contract was with Boeing Company, which paid him millions of dollars in commissions to help it sell passenger jetliners to the fledgling Saudi airlines….

That and other similar transactions had led to a three-year investigation of Boeing’s commission payments by the U.S. Securities and Exchange Commission, whose goal in part was to figure out exactly who Boeing was using to accomplish these sleights of hand.

Curiously, in the words of a 1976 Wall Street Journal article, Boeing’s efforts to suppress those names, particularly Adham’s, “has been accomplished with significant help from the State Department, which entered a court fight between the SEC and Boeing to argue that disclosure of Boeing’s ‘highly placed’ consultants abroad could harm U.S. foreign policy interests.”

How could the mere disclosure of Adham’s name affect U.S. foreign policy? In two ways.

First, Adham was the head of the Saudi internal security service – arguably the most important agency of the government, since it protected the royal family – and the General Intelligence Directorate of Saudi Arabia.

In that role he was the principal liaison between the CIA and European intelligence agencies, and he even had an agency code name: Tumbleweed.

In geopolitical terms, Adham was the five-hundred-pound gorilla of Saudi intelligence, an outfit known and feared for its merciless hunts for dissidents and brutal methods of repression….

But the second and more important foreign policy concern was that Adham was the kingdom’s key link to Egyptian President Anwar Sadat in the years leading to the Camp David accords in 1979 – the years following the 1973 war, when the Saudi-Egypt axis acquired key strategic importance….

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July 25, 2004

Former Boeing CFO to Plead Guilty

NEW YORK (Reuters) – Former Boeing Co. Chief Financial Officer Michael Sears agreed to plead guilty to conspiring to deceive the U.S. government about negotiations for a contract to provide the Air Force with refueling jets, according to a report by Bloomberg News on Sunday.

Sears is cooperating with federal prosecutors who are probing negotiations that Sears had with a former Pentagon official who had been offered a job by Boeing, a report on Bloomberg’s Web site said, citing an unnamed source.

The former Pentagon official, Darleen Druyun, pleaded guilty to the same charge in April, and confirmed that she received the job offer while negotiating for the Air Force….

The investigation may delay the awarding of the $23 billion contract, which includes providing the Air Force as many as 100 planes that refuel aircraft in mid-air.

The agreement to hire Boeing was suspended pending review in November, when Druyun and Sears were fired from Boeing.

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July 17, 2004

Boeing settles sex discrimination case

The Courier-Journal

Boeing Co. has agreed to pay between $40.6 million and $72.5 million and change some practices to settle charges that it discriminated against 29,000 women who have worked for Boeing in the Seattle area.

The settlement of the class-action suit filed in 2000 received preliminary approval in U.S. District Court in Seattle yesterday. It calls on Boeing to change the way it determines starting salaries, modify its performance-evaluations and monitor salaries and overtime to reduce the risk of gender discrimination.

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July 6, 2003

Air Force deal with Boeing draws heat

Cox News Service

The Air Force needed tanker planes to refuel its jets.

Boeing Co. needed orders.

So the two got together and crafted what they see as a stroke of bureaucratic brilliance, said Business Week (July 7) – a $19.6 billion deal to lease 100 new 767s to replace the Air Forces’ rusting KC-135s tankers.

But the deal has drawn heat from all sides. Watchdog groups on the right and left see it as a brazen Boeing bailout. Defense Department civilians say Boeing asked too much, and others say a lease’s finance charges drive up the cost.

At least three congressional committees are looking into the deal.

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June 26, 2003

Ex-Boeing Workers Charged Over Lockheed Documents

By Renae Merle, Washington Post

Two former Boeing Co. employees were charged last night with stealing Lockheed Martin Corp. documents to help Boeing win an Air Force contract.

The U.S. attorney’s office in Los Angeles said William Erskine, 43, and Kenneth Branch, 64, face criminal charges of conspiracy, theft of trade secrets and violating the Procurement Integrity Act. A lawyer who represented Erskine and Branch in a wrongful-termination lawsuit against Boeing did not return a call for comment.

The charges mark the latest escalation in a four-year fight over a multibillion-dollar contract to build the next-generation rocket launcher known as the Evolved Expendable Launch Vehicle. Earlier this month, Lockheed Martin sued Boeing as well as Erskine and Branch, accusing them of using corporate espionage to steal the high-profile Air Force contract.

“By covertly using a competitor’s secret information, they caused harm not only to Lockheed Martin, but also to the Air Force and taxpayers who finance government operations,” U.S. Attorney Debra W. Yang said in a statement. “Their improper conduct had huge ramifications because of the value of the contract.”

If convicted on all three counts, Erskine and Branch could be sentenced to a maximum of 15 years in prison and a fine of $850,000.

Boeing acknowledges that some employees “behaved unethically” during the competition. The company fired Erskine and Branch in 1999 and has turned over more than 37,000 pages of Lockheed documents, including some that contained sensitive cost and technical information and Air Force critiques of Lockheed’s proposal.

Lockheed declined to comment on the charges. “We are cooperating fully with the Justice Department’s investigation and the Air Force’s inquiry,” said Boeing spokesman Daniel Beck.

The repercussions from the various investigations could profoundly affect Chicago-based Boeing, industry analysts said. If the Air Force punishes the firm by reversing its decision on the rocket-launch competition, the multibillion-dollar hit to the company’s already struggling space business would be severe, they said.

© 2003 The Washington Post Company

For more on Lockheed Martin, GO TO > > > Tarnished Wings

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November 3, 2002

French defence company in bribery scandal in Seoul

Dassault denies graft claims in Seoul

By Andrew Ward in Seoul and Victor Mallet in Paris, Financial Times

In March 2002, Dassault Aviation said it was the victim of a smear campaign after the French aircraft manufacturer was accused in a corruption scandal embroiling the race for a South Korean fighter jet contract.

The company denied bribing a South Korean air force colonel to improve its chances of winning the deal to build 40 aircraft.

Newspapers in Seoul linked Dassault to a Won11m ($8,300, £5,900) sweetener allegedly paid to the colonel in return for advice about the bidding process.

Dassault said it was being smeared by people that did not want its Rafale jet to beat Boeing’s F-15 to the estimated $3.2bn contract. “There’s nothing between Dassault and the colonel,” a Dassault spokesperson told the FT.

“Everybody knows the evaluation process has put the Rafale at the top. We fear that there is manipulation by people who are annoyed to see the Rafale at the top.”

Any bidder proved to have paid bribes could be barred from the so-called FX contract, which is among the biggest defence deals currently being contested.

The corruption scandal emerged when a colonel, identified by his surname, Cho, was arrested on bribery charges. He is believed to be the same man that appeared on South Korean television with his identity concealed, to allege that the selection process was rigged in favour of Boeing.

Mr Cho was part of the air force’s evaluation team that assessed the four bids – Eurofighter’s Typhoon and Russia’s Sukhoi, the other two candidates, are considered outsiders.

Dassault’s more modern Rafale outstripped Boeing’s ageing F-15 in flight tests, according to information leaked to the South Korean press.

However, defence chiefs were reported to favour the US product because of Seoul’s close military alliance with Washington.

Last week, opposition lawmakers accused the government of succumbing to political pressure from Washington to select the F-15.

Dassault said it was “totally confident in the transparency of the process”.

Boeing denied involvement in the alleged bribery….

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January 19, 2002

China Finds Bugging Devices on Jet

Associated Press

BEIJING – China has discovered 27 bugging devices in a U.S.-made Boeing 767 it bought for the personal use of President Jiang Zemin, published reports said Saturday. The tiny, highly sophisticated devices were hidden in the jetliner’s upholstery, including in the president’s bathroom and the headboard of his bed, the London-based Financial Times said, citing unnamed Chinese sources. It said Jiang was outraged at the discovery.

The bugs were discovered when they emitted static during a test flight after the plane’s delivery in August, the newspaper said. In a separate report, The Washington Post said Chinese army communications experts found the bugs in October, days before the plane’s first official voyage. It said the jet is now sitting with its insides torn out on an air base north of Beijing.

The Washington Post report said Chinese officials blamed U.S. intelligence agencies for the bugs. It said the incident would be raised during President Bush’s Feb. 21 summit with Jiang in Beijing.

The reports described the devices as satellite-controlled and more complex than those available commercially. Chinese officials were puzzled as to how and when the bugs were planted, the reports said. They had carefully monitored the plane’s construction at the Boeing plant in Seattle, Wash., and the fitting of its interior by several aircraft maintenance companies in San Antonio, Texas.

Two of the companies, Gore Design Completions and Dee Howard Aircraft Maintenance, issued a statement Friday saying they had received no complaints about their work on the plane, the San Antonio Express-News reported.

”I know that we had no culpability whatsoever in this. All we did was put an interior in it,” Jerry Gore, president of Gore Design, told the paper. The plane was parked in a Dee Howard hangar and work began shortly after a contract was signed in October 2000, the Express-News reported, continuing through a contentious period the following spring when Beijing and Washington had a standoff over the forced landing of a U.S. Navy spy plane and China’s detention of its 24-member crew. Chinese officials were concerned Washington would seize the plane, so security was tight, Gore told the Express-News.

The hangar was guarded by Dee Howard security staff and Chinese troops. The reports said 20 Chinese Air Force officers and two employees of the China Aviation Supply Export & Import Corp., which bought the plane, were being questioned. Officials at the State Department in Washington and the U.S. Embassy in Beijing had no comment. China’s Foreign Ministry did not answer calls. Employees at the Chinese aviation company refused to comment.

Randy Harrison, a Boeing spokesman in Seattle said he had no knowledge of the reports….

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For a closer look at some of the Boeotian birds and their nests,




Akin, Gump, Strauss, Hauer & Feld – One of the largest nests of Lobbyists in the world.

In 1998, this firm declared total lobbying income of $11,800,000. Among their clients are the likes of Alliance of American Insurers; America Online; American Express; American Financial Group; Apollo Advisers; AT&T; Biotechnology Industry Organization; Boeing Co.; Capital Gaming International; CBS Corp; Citigroup; Korean International Trade Assn; Miller & Chevalier; National Hockey League; Pfizer; PG&E Corp; Pharmaceutical Rsrch & Mfrs of America; Philip Morris; Pohang Iron & Steel; Samsung Electronics; Sri Lanka Apparel Exporters Assn; AOLTime Warner; and Warner-Lambert, just to mention a few.

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December 11, 2001

The White House connection: Saudi ‘agents’ close Bush friends

by Maggie Mulvihill, Jonathan Wells and Jack Meyers, Boston Globe

A powerful Washington, D.C., law firm with unusually close ties to the White House has earned hefty fees representing controversial Saudi billionaires as well as a Texas-based Islamic charity fingered last week as a terrorist front.

The influential law firm of Akin, Gump, Strauss, Hauer & Feld has represented three wealthy Saudi businessmen – Khalid bin Mahfouz, Mohammed Hussein Al-Amoudi and Salah Idris – who have been scrutinized by U.S. authorities for possible involvement in financing Osama bin Laden and his terrorist network.

In addition, Akin, Gump currently represents the largest Islamic charity in the United States, Holy Land Foundation for Relief and Development in Richmond, Texas.

Holy Land’s assets were frozen by the Treasury Department last week as government investigators probe its ties to Hamas, the militant Palestinian group blamed for suicide attacks against Israelis.

Partners at Akin, Gump include one of President Bush’s closest Texas friends, James C. Langdon, and George R. Salem, a Bush fund-raiser who chaired his 2000 campaign’s outreach to Arab-Americans.

Another longtime partner is Barnett A. “Sandy” Kress, the former Dallas School Board president who Bush appointed in January to work for the White House as an “unpaid consultant” on education reform. . . .

For more, GO TO > > > Birds in the Lobby; The Nests of Osama bin Laden


Miller & Chevalier – A Washington, DC-based nest of Lawyers and Lobbyists.

From their web-site, 8/1/00: . . .

In 1920, Robert Miller and Stuart Chevalier founded Miller & Chevalier as the nation’s first law firm specializing in tax matters. Mr. Miller had served as Solicitor and Mr. Chevalier as Asst Solicitor of the Internal Revenue Service shortly after the first federal income tax laws were enacted….

Like our firm’s founders, many of our tax lawyers have worked in federal government service….

Our firm’s tax practice is diverse, responding to the increasing complexity of the international tax system and the need for Washington representation to deal effectively with important tax policy issues. We serve clients in numerous industries: … aerospace, automobile, banking and finance, natural resources and energy, chemicals, electronics, pharmaceutical, retail, and health care insurance….

Our firm represents over half of the Fortune 50 companies. We also work with foreign-owned companies of similar size …

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Taxation – Representative Engagements

Amoco Corp v. Commissioner (a.k.a. US Taxpayers) . . . The U.S. Court of Appeals … held that Amoco was entitled to foreign tax credits for Egyptian income taxes paid on its behalf by the Egyptian National Oil Co . . . The amount of the asserted deficiency was over $450 million….

Atlantic Richfield Co v. Commissioner (a.k.a. US Taxpayers) . . . This case involves over 200 issues and a deficiency in excess of $700 million. Some of the issues involve hedging, tax accounting, foreign source income, and capitalization questions….

B.F. Goodrich v. United States (a.k.a. US Taxpayers) . . . This case involved whether interest expenses incurred on corporate owned life insurance were deductible. The taxpayer sought a refund of approximately $2.5 million. The case was settled. . . .

The Boeing Co v.United States (a.k.a. US Taxpayers) . . . This case involves the allocation and apportionment of research and development expenses for purposes of computing combined taxable income for DISC/FSC purposes. The taxpayer is seeking a refund of over $450 million. The District Court granted Boeing’s motion for summary judgment; the govt’s appeal to the Ninth Circuit is pending. . . .

Cheng v. Commissioner and Pen v. Commissioner . . . The issue in these companion cases was whether commissions earned as compensation for the performance of personal services in Taiwan were taxable as income effectively connected to a U.S. trade or business. The total amount at issue exceeded $40 million in deficiencies, penalties, and interest. The government conceded. . . . (Those must have been some personal services! I wonder what kind?)

Exxon Corp v. Commissioner (a.k.a. US Taxpayers) . . . The Tax Court held that the Commissioner’s proposed allocation of over $6.5 billion in income was precluded under Code sections 61 and 482 due to a foreign legal restriction. . . .

General Electric Co v. Commissioner (a.k.a. US Taxpayers) . . . This case involved whether the taxpayer properly elected … to deduct currently approximately $118 million in research and development expenses.

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In addition to their legal services, Miller & Chevalier declared lobbying income of $1.4 million in 1998, with total lobbying expenditures of $320,000 (all to the lobbying firm of Akin, Gump).

Among Miller & Chevalier’s lobbying clients: Assn of Financial Service Holding Cos; Atlantic Richfield; Blue Cross/Blue Shield; Boeing Co; Boston Edison; Chevy Chase Bank; Gallo Winery; Monsanto Co; Nuclear Fuel Services; and the Arkansas-based Wal-Mart Stores.

For more, GO TO > > > Buzzards of Paradise


Philip Condit – Chairman and Chief Executive Officer, BOEING CO.

From the Boeing website (

Phil Condit is chairman and chief executive officer of The Boeing Company, the world’s largest aerospace company. As the largest manufacturer of satellites, commercial jetliners, and military aircraft, the company employs close to 167,000 people and serves customers in 145 countries. It is also a global market leader in missile defense, human space flight, and launch services. Boeing has headquarters in Chicago, Ill., and is the largest exporter in the United States, with revenues of more than $54 billion in 2002.

Under Condit’s leadership, several mergers and acquisitions have transformed the company into a broad-based, global enterprise. The acquisition of Rockwell Aerospace, the merger with McDonnell Douglas and the addition of Hughes Space & Communications has established a company with great strength and breadth. Today, Boeing is strongly positioned in commercial airplanes, defense, space, information technology, financing, and communications.

Elected president and member of the board of directors of Boeing in 1992, Condit added the title of chief executive officer in 1996. In 1997, he was elected chairman. He is the seventh chairman since the company was founded in 1916….

Condit serves on the board of Hewlett-Packard Company, is co-chairman of the Trans Atlantic Business Council, chairs the United States––China Business Council, and is a member of the Business Roundtable.

Elected a member of the National Academy of Engineering in 1985, he is also an honorary fellow of the Royal Aeronautical Society and an honorary fellow of the American Institute of Aeronautics and Astronautics. He belongs to the Society of Automotive Engineers and has chaired the NASA Advisory Council’s Aeronautics Advisory Committee….

A native of Berkeley, Calif., Condit was born on Aug. 2, 1941. He has been an aviation enthusiast his entire life and earned a pilot’s license at the age of 18.

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From AFL-CIO Executive PayWatch … ( …

In 2001, Philip Condit raked in $4,037,035 in total compensation including stock option grants from BOEING CO.

And Philip Condit has another $3,897,304 in unexercised stock options from previous years….


Technology Strategies and Alliances – Another company that knows the meaning of “quid pro quo”.

From The Buying of the President: . . .

Defense Dollars and Deal Making

In Feb of 1995, the administration announced that for the first time it would consider the financial state of U.S. defense contractors when negotiating overseas arms sales. The administration has also pushed to relax export restrictions on high-tech equipment used to manufacture sophisticated weapons systems.

Part of what has ingratiated the Clinton administration to weapons manufacturers has been the presence of William J. Perry, first as Deputy Secretary and later as Secretary of Defense.

Perry is a former defense consultant who headed Technology Strategies and Alliances (TSA) between 1985 and 1993. TSA’s 1994 clients included Boeing, Grumman, Lockheed, Martin Marietta, McDonnell Douglas, Northrop, Textron, Texas Instruments, TRW, Westinghouse, and 20 other defense contractors.

While Perry severed his ties with the company, he had amassed more than a million dollars in consulting fees from TSA’s clients. Not long after he joined the Defense Department, Perry began going to bat for the industry.

One of Deputy Defense Secretary Perry’s extra base hits came when he and then-Defense Undersecretary for Acquisitions and Technology John Deutch quietly agreed to provide U.S. defense contractors with taxpayer-finance subsidies for mergers and acquisitions. That was a dramatic shift in Pentagon policy. Usually, such issues are taken before Congress.

Instead, Deutch, in a July 21, 1993 memo, reversed the Pentagon’s ban on the subsidies and underwrote $270 million worth of TSA client Martin Marietta’s acquisition of General Electric’s Aerospace Division.

Just seven weeks earlier, on June 3, 1993, industry CEOs, including Martin Marietta’s Norman Augustine, had sent a letter to Perry and Deutch asking for DOD funding of “restructuring costs” for mergers and acquisitions. Perry also approved Northrop’s $2.1 billion acquisition of Grumman. Both were TSA clients. The Pentagon called the policy shift a “clarification” that did not require congressional consent….

The policy shift required both Perry and Deutch to seek ethics waivers from rules that call for a one-year “cooling off” period before Pentagon officials can deal with former clients. They got them from then-Defense Secretary Les Aspin, whom Perry replaced in February 1994.

Paul Kaminski got an ethics waiver in November of 1994, when he was named to head the Pentagon’s Acquisitions and Technology Department, replacing Deutch.

Deutch remained in the Pentagon loop a while longer and became Deputy Secretary of Defense before moving to the CIA.

Kaminski, who worked at TSA, is responsible for awarding $43 BILLION in defense programs to Pentagon contractors.

The Kaminski appointment marked the first time former defense industry consultants filled the Pentagon’s top three policy posts….

For more, GO TO > > > Nests in the Pentagon


Thayer Capital Partners – A private equity investment fund where some very big birds privately nest.

June 29, 1998

Thayer Capital Partners Makes Its Mark as a New Player Among Old-Time Investment Firms

By Jerry Knight, Washington Post

In an office 31 floors above Park Avenue in New York, a congregation of executives, lawyers and investment bankers is scheduled tomorrow to perform a ritual symbolic of contemporary business trends: the marriage of two companies.

If all goes as planned, three hours of voting and affirming, signing and witnessing will join together the two telemarketing firms to create Aegis Communications Inc., a $230 million-a-year business that will have 8,500 employees, offices in 30 cities and shares traded on the Nasdaq Stock Market.

Playing matchmaker, as well as mother of the bride and dowry donor, is Thayer Capital Partners, Washington’s newest player in the big-money private investment business.

Two-year-old Thayer is the newest of the financial powerhouses that have emerged in Washington in the past five years as the mid-Atlantic region has grown into a world-class player in finance and technology.

Washington’s “old money” institutions, symbolized by Fannie Mae and Freddie Mac, has been joined by a clique of newcomers, including Friedman, Billings, Ramsey Group Inc. of Arlington, one of the nation’s largest underwriters of new stock offerings; J.E. Robert Co. of McLean, a real estate investment empire soon to expand into Asia; and Carlyle Group, the merchant banking firm that Thayer resembles on a smaller scale.

Thayer, bankrolled by two dozen banks, pension funds and financial institutions that put up $364 million in capital, has invested in businesses as varied as mail-order meat sales, multinational bicycle manufacturing, travel wholesalers and telemarketing.

Almost $40 million has gone into the Aegis telemarketing group, one of several Thayer investments that are turning the crucial corner from private ownership to publicly financed companies, allowing Thayer to convert its equity in the private companies into stocks that can be sold.

One of Thayer’s eight portfolio firms, meat marketer Colorado Prime Foods, has produced no gains after a year, a disappointment in a business in which investors demand a quick payback. Two other deals have been done in the past few weeks, but its earlier investments are on the fast track:

Aegis, an unusual “reverse IPO” in which a large privately held Los Angeles-based company backed by Thayer will go public by merging with a smaller, Dallas company listed on Nasdaq. Thayer will end up owning about 38 percent of the stock of the companies that handle phone inquiries for client companies and make telephone sales calls.

Global Vacation Group Inc., a Washington-based travel wholesaler that is planning a conventional IPO later this summer to raise $63 million.

Derby Cycle Corp., with headquarters in Nottingham, England, raised $160 million last month by selling bonds in the United States and Germany.

Software AG Systems Inc. of Reston — which has given Thayer the kind of home run that big investors often long for but rarely hit. The $29.7 million investment was worth more than $460 million after Software AG stock soared to a record $32.25 Friday.

Based on its track record with those companies, Thayer is talking to institutional investors that put money into its first fund about raising a second pool of capital. With this funding, the firm would have as much as $1 billion to make more investments.

Big-League Lineup

Though Thayer has been in business in its existing form for only a little more than two years, Thayer’s players are three longtime starters in the big leagues of business:

Company founder Fred Malek, 62, who first made a name in Washington as a top aide to President Richard M.Nixon.

Malek went on to become president of Marriott Corp. of Bethesda and then was president of Northwest Airlines after leading a buyout of that company with fellow Marriott alumni Al Cecchi and Gary Wilson.

Malek led a management buyout of CB Commercial Real Estate Group, then returned to the hotel business, forming a pair of hotel investment partnerships and arranging a buyout of the Ritz-Carlton hotels in partnership with Marriott.

Paul G. Stern, 59, was a top corporate manager before he got into the buyout business as a partner in Forstmann Little & Co. in 1993. By then his resume listed stints as chairman of Braun AG in Germany, vice president for strategic planning and acquisitions of Rockwell International Corp. and president of Burroughs Corp. He spent four years as chairman of Canada’s Northern Telecom Ltd. before joining Forstmann.

Rick Rickertsen, 38, hooked up with Malek in 1994 after working at Hancock Park Associates, a Los Angeles venture capital and buyout firm and Brentwood Associates, the biggest venture capital investor in Southern California. He worked on Thayer’s two hotel funds and the Ritz-Carlton transaction. He also has coordinated fund-raising for Thayer Equity Investors III, the partnership behind the company’s current deals.

The principals are backed by a coterie of apprentice dealmakers — half a dozen Harvard MBAs — a small support staff and a heavyweight advisory board that includes Washington power lawyer Vernon Jordan; former vice presidential nominee Jack Kemp; Frank Zarb, chairman of the National Association of Securities Dealers; Jim Robinson, former chairman of American Express Co.; and Drew Lewis, former transportation secretary and current chairman of Union Pacific Corp.

Fred Malek is the driving force. He has built a very fine and very focused organization,” said Ed Mathias, a principal at Carlyle Group, Washington’s bigger and better-known buyout firm. Malek and Stern have the management experience and worldwide contacts essential for success in the relationship-based business, he said, while Rickertsen “is the right age and the right kind of guy” to complement the two veterans.

“With the people they have now and the results they have shown, they should be able to raise a sizable amount of money,” Mathias said.

Target Return: 30 Percent

Though they are in the same business, Thayer and Carlyle do not compete directly for deals or financing. Much of Carlyle’s funding comes from overseas and is focused on bigger deals and venture capital, which are not part of Thayer’s strategy.

In the taxonomy of finance, Thayer Capital Partners is classified as a private equity investment firm, which means it generally invests in privately owned companies rather than publicly traded companies. It also is considered a leveraged buyout firm because, in addition to its own capital, it uses borrowed money to finance transactions.

The money that Thayer invests comes from two dozen investors, most of them institutions.

Backers include the pension funds of AT&T Corp., Boeing Co., Textron Inc. and Aluminum Co. of America; Howard Hughes Medical Institute; Hawaii’s Bishop Estate; Travelers Insurance Co. (now owned by Citigroup); CreditSuisse First Boston; Bank of Nova Scotia; and Dresdner Bank.

There also is one individual investor — Roger Penske, the race car driver turned truck and transportation magnate.

Pension funds put most of their money into conservative investments intended to produce a return with little risk, but they usually allocate a small part of their cash to venture capital and buyout funds with more ambitious profit goals.

Thayer’s target is a return on investment of 30 percent a year, a goal the company told investors two years ago when it set out to raise its pool of capital. The original plan was to raise $250 million — enough to finance a dozen or so of what are considered medium-sized deals these days — but eager investors pledged $364 million. The fund is officially named Thayer Equity Investors III LP.

Thayer I and Thayer II are a pair of hotel real estate partnerships set up previously by Malek and named for one of his favorite figures, Col. Sylvannus Thayer, the father of West Point, Malek’s alma mater.

Thayer’s three partners also put their own money into the company’s deals so they can share directly in the profit. But the primary source of the company’s earnings is based on what is considered the standard formula for the industry: Thayer gets 20 percent of the profit it generates, after expenses.

“The key to our business is to make a good rate of return for our partners,” Rickertsen said. Investors measure performance as internal rate of return — how much they make on their original investment every year. The longer a transaction takes to produce a profit, the more money the partners expect, he said. “The IRR clock is vicious. Time is very, very critical.”

To boost the return Thayer borrows money — using “leverage,” in financial jargon.

“Our style is to use debt and equity in every deal,” Malek said. If you spend $100 million to buy a business and sell it a year later for $150 million, you earn a 50 percent profit on your investment, he said. But if you put up $25 million of your own cash and borrow the rest, you double your money — for a 100 percent return.

“Our objective is to put a fairly sizable amount, but a prudent amount, of leverage into the transactions,” Malek said, stressing “prudent.” In the 1980s, buyout firms like Thayer often had only 8 percent to 10 percent equity in their investments, he said. Today Thayer’s capital structure typically includes one-third equity, two-thirds debt.

But in practice, the structure of Thayer’s investments is much more complicated than simply buying stock and borrowing money. The prospectuses of Thayer companies selling stock to the public are replete with multiple classes of shares, convertible preferred stocks and other exotic securities, often engineered by Rickertsen.

For example, Thayer made its investment in one company half in common stock and half in convertible preferred stock, paying a deferred dividend of 20 percent a year. If the value of the company’s stock increases as hoped, Thayer will pass up the dividends, convert the preferred to common and sell it for a big gain. If that doesn’t happen, the dividend provides downside protection.

While the kind of investing Thayer does can be risky, Rickertsen acknowledged, it’s not as risky as venture capital. Investors expect to lose the venture capital they put into some start-up companies — and routinely do. Thayer, instead, invests in companies with assets that can be sold and cash flow that can be tapped to repay investors. The worst that can usually happen is that Thayer will get all or most of its money back. It won’t make a profit, but it won’t be wiped out.

Malek said he likes technology companies but avoids ventures in which success depends on a technological breakthrough and ailing companies seeking financing for a turnaround.

But Malek is willing to start his own companies from scratch, launching three ventures in the travel business, which he knows well from his days at Marriott and Northwest.

For those ventures, Malek recruited Roger Ballou, who has served as president of Alamo Rent-a-Car Inc. and American Express’s travel services group.

Thayer is backing Ballou in Global Vacation Group Inc., a Washington company that is buying travel tour wholesalers and Associated Travel Network. Associated is a collection of what are known in the industry as “marketing service organizations,” which buy airline tickets and hotel rooms in bulk for independent travel agents.

Malek and Ballou reportedly have a third travel industry business in the works, but won’t identify it.

Because Global Vacation Group has filed an IPO with the Securities and Exchange Commission, neither Malek nor Ballou would discuss details of that company.

But in an interview last week, Ballou said he and Malek, old friends, began discussing business ideas after Alamo was sold a few months ago.

“I took my basic business idea to them and literally in the space of a week they had agreed to back it with capital,” he said. “We took another week to hammer out some terms.”

“I felt like the dog that had finally caught a car,” Ballou said.

With $50 million of Thayer’s capital, Ballou began buying tour wholesalers, which create tours by making deals with airlines, hotels, car rental firms and other services providers.

By May — just nine months after going into business with Thayer — Ballou had spent $108 million acquiring five tour companies, creating Global Vacation Group, which now is one of the biggest operators of tours to Hawaii, the Caribbean and the United States with annual revenue of $114 million last year.

Thayer put $50 million into Global Vacations and will own 60 percent of the company’s stock, worth about $155 million if the IPO is completed on schedule this summer.

Thayer’s money was not the most important part in the equation. “The largest part of my coming together with them and a big part of what makes the thing tick is personal relationships,” Ballou said. “They have the contacts . . . and in Fred’s case, a guy who’s well-known in the travel industry, and that’s helpful.”

Lunch Leads to a Deal

The crucial mix of contacts, cash and quick decision-making also is behind Thayer’s most successful investment, the buyout of Software AG Systems of Reston from its parent company in Germany.

Software AG President Daniel F. Gillis set out to buy his division because he knew the German parent company had financial problems and needed cash.

Gillis met Thayer through classic networking. Developing contacts in the Virginia technology community, Rickertsen went on the board of MLC Holdings Inc., a Reston computer leasing firm. MLC’s chief financial officer was a friend of the Software AG chief financial officer.

The three men got together for lunch in the fall of 1996 at the Hyatt Reston Town Centre, Rickertsen recalled. That led a few weeks later to a sit-down between Software AG and Thayer executives and then a trip to Germany by Gillis and Rickertsen in January 1997.

“We were looking for a firm with a certain philosophy,” Gillis said. “We had to select a partner that understood the strategy, liked the management team and wanted to fund it.” Some of the firms Gillis talked to had their own ideas about how Software AG should be run. “We told them, if you don’t like the story, don’t invest.”

Thayer liked the story and the executives in Germany liked Thayer. Though Rickertsen spearheaded the deal and became chairman of Software AG’s board, it didn’t hurt that Stern once ran Braun AG in Germany and is fluent in both the language and business practices of the country.

Software AG Germany agreed to sell the U.S. division for $85 million in cash plus a 24 percent royalty on sales of its software. Thayer put $29 million of its own cash into the company, borrowed the rest and completed the buyout in April 1997.

Hoping to take advantage of the hot IPO market and cash out quickly, Thayer brought in BancAmerica Robertson Stephens and Donaldson, Lufkin & Jenrette * to underwrite a stock offering.

The timing turned out to be terrible. Software AG began its roadshow for investors last Oct. 27, the day the Dow Jones industrial average fell more than 500 points because of financial turmoil in Asia.

Instead of $14 a share, for which Software AG had hoped to sell stock, the company had to settle for $10 a share. That was enough, though, for Thayer’s investors to recoup their entire original investment — and retain a 59 percent stake in the company.

After doubling its profit, Software AG went back to the market last month and sold its stock for $24.25 a share. Thayer sold enough shares to pay $115 million to its investors and still keep 10.8 million shares worth about $345 million at current prices.

“It’s been a great deal for everyone,” said Software AG President Gillis — everyone including Gillis.

Before the Thayer-backed buyout, he was an employee, albeit an employee earning almost half a million dollars a year. He sold $4.8 million worth of stock in the May offering and still owns or has options to buy more than 2 million shares. That’s a $60 million nest egg that Thayer would be more than happy to help him invest.

* For more on William Donaldson, the new head of the Securities & Exchange Commission, GO TO > > > Spotting the SEC


The Lobbyists – Highly paid pimps to the powerful.

From Washington on $10 Million a DayHow Lobbyists Plunder the Nation:


Lobbyists and the Destruction of Democracy

The link between campaign donations and political policy was brought into sharp focus by the campaign finance scandals that erupted during the 1996 campaign. Even jade observers were started by the Clinton administration’s selling of the Lincoln bedroom to the highest bidder, and its organizing of White House coffee klatsches to reward donors and encourage them to make additional contributions.

But political contributions are only one way that big business wins favors in Washington….

Understanding how the capital works, and how business prospers here, requires a trip through the world of beltway lobbying and a review of the vast army of hired guns working at the behest of Corporate America.

Dollar for dollar, lobbying is a better investment than campaign contributions— one reason business spends far more on the former than on the latter.

In 1996, Philip Morris coughed up $19.6 million for lobbying programs vs. $4.2 million for campaign donations (making it the leader in both categories). The same pattern holds true with other firms.

For 1996, Georgia Pacific spent $8.9 million for lobbying and handed out $527,000 in political money. Corresponding figures for AT&T are $8.4 million vs. $1.8 million; for Phizer, $8.3 million vs. $775,000; for Boeing, $5.2 million vs. $770,000; for ARCO, $4.3 million vs. $1.4 million; for Lockheed, $3.5 million vs. $1.26 million; for FedEx, $3.1 million vs. $1.9 million; for Dow Chemical $1.5 million vs. $578,000.

In addition to in-house efforts, most big corporations spend lavishly for outside lobbying firms. Lockheed, for example, retains at least two dozen beltway lobby shops to supplement its own efforts, while FedEx has an additional 10 firms on retainer.

In 1996, Boeing hired seven outside lobby shops for the sole purpose of pushing renewed Most Favored Nation trade status for China, paying them a combined total of at least $160,000 for their efforts.

While corporate lobbying has long been a major force in American politics, it has been greatly transformed during the past few decades. Today, many efforts involve stealth lobbying— the chief tactic here is mobilizing fake “grassroots” campaigns— or with indirect methods, such as buying research from friendly think tanks” in order to influence Congress and public opinion.

All of this makes calculating corporate lobbying expenditures nearly impossible, though it’s safe to say that lobbying has now become a multi-billion dollar-per-year industry….

When you consider the enormous benefits bestowed on Corporate America by the White House and Congress, the big sums companies spend to win favors are revealed as chump change….

After winning control of Congress in 1994, the GOP house leadership met weekly with “The Thursday Group,” a pack of lobbyists and activists who helped plot legislative and media strategy on the “Contract With America”.

Included in this elite troupe were hired guns representing the U.S. Chamber of Commerce, the National Federation of Independent Business, and Americans for Tax Reform….


In the Belly of the Beast

If the post-Cold War environment has left arms makers exposed, the industry still has plenty of assets when it comes to getting its way in Washington. Chief among them is that weapons makers, to an even greater extent than other industries, have especially tight links to the government bureaucracy.

When the Pentagon in 1997 needed a team to prepare a report on “reshaping the U.S. military for the 21st century,” it picked for the job a task force headed by Philip Odeen, president of BDM, one of the country’s big defense companies, including Robert Riscassi, a former Army general who now serves as a vice president at Lockheed.

The task force, known as the Quadrennial Defense Review, predictably concluded that force levels should be cut further, but the Pentagon’s procurement budget should be increased, thereby ensuring future profits for the arms industry.

The Pentagon’s Defense Policy Advisory Committee on Trade provides confidential recommendations to the Secretary of Defense on the sale of weapons abroad. Members have included CEOs from Lockheed, Boeing, Northrop Grumman and McDonnell, as well as a number of former Pentagon officials who now serve as consultants to the arms industry.

Needless to say, the Advisory Committee invariably favors elimination of any barrier to foreign sales and the introduction of a host new public subsidies to arms companies.

Then there’s the Pentagon’s Defense Science Board, where Defense Department officials and industry executives join hands to lard out vast sums of money to fund research on future boondoggles.

Past members at the science board have included former Defense Secretary William Perry; former CIA chief John Deutsch, and Paul Kaminski, the assistant secretary for defense.

Worthy of more detail is the Defense Trade Advisory Group (DTAG), the panel set up by the State Department to offer counsel in regard to the Direct Commercial Sales (DCS) program, by which defense contractors make private sales to foreign military and police forces….

In theory, State allows the sale of weapons destined for a “defensive” role. It will not vend arms to an “aggressor” nation.

In practice, State authorizes sales to virtually any nation capable of paying for its purchases. Of some 20,000 requests for licenses made by vendors in 1994, State rejected just 209. During the Clinton years, State has sanctioned the sale of tank engines to Israel, trainer aircraft to Taiwan, and Black Hawk helicopters to Mexico.

Also approved were deals with Guatemala, El Salvador, Colombia and Saudi Arabia.

None of this is surprising after examining the roster of DTAG, State’s advisor on these deals. In 1995, 57 of the 60 panel members came from the arms industry. The group was headed at the time by William Schneider, a veteran of the military-industrial complex who served as undersecretary of state for security assistance during the Reagan/Bush years….

As late as 1991, the ten biggest defense companies had a total of 108 lobbyists registered in Washington.

As of mid-1997, Lockheed Martin alone has 87 lobbyists registered with Congress, 26 working out of the company’s own offices and 61 at outside firms that the company had on retainer. Lockheed’s total lobbying expenditures for 1996 totaled $3.8 million, 10 times more than the combined lobbying expenditures for the ten biggest defense contractors in 1985.

While Boeing has fewer lobbyists on its payroll – 70 – it spent more than Lockheed, shelling out $5.2 million for lobbying in 1996. Other arms makers have similarly huge efforts, with Northrop employing 58 lobbyists and McDonnell Douglas 53….

The United States accounts for about half of all military spending on the planet …

Here’s an example of just how ridiculous things have become:

A few years ago, it appeared that Congress might kill off a relic of the Cold War, the V-22 Osprey, a vertical lift-off plane whose prime contractors are Boeing and Bell Helicopter.

From the perspective of Pentagon porkers and arms makers, the V-22 has special appeal: since it is incapable of carrying any of the military’s current inventory of fighting vehicles, it has opened the door to a subsidiary boondoggle, the armored dune buggy. Said buggy, which is capable of attaining speeds of 80 miles per hour, is being designed especially to fit on the V-22.

To help save the plane, lobbyists for the V-22 dreamed up Alyssa, Albert & the Magic Plane, a cartoon book that was distributed to members of Congress. The comic book opens with little Alyssa playing in her backyard with Albert, a stuffed animal who springs to life. The pair dream of attending the 1996 Olympics in Atlanta but grow despondent upon concluding they won’t be able to get to the games by bicycle (too far), truck (no drivers license), boat (no water near atlanta), the Space Shuttle (not practical), or a variety of other means.

Just as the cuddly duo have reached the point of despair a V-22 – the “Magic Plane” – lands in the backyard to fly them to Atlanta….

The dramatic tale of Alyssa and other lobbying, combined with hefty campaign donations from Boeing and Bell, led Congress to save the V-22.

Coming next: The arms makers sign up Barney the Dinosaur to lobby for Star Wars….

For more, GO TO > > > Birds in the Lobby; Mocking Democracy; Nests in the Pentagon; The Secret Nests


The Media – You know, the source of your knowledge.

From Derailing Democracy: . . . It has been almost 40 years since President Eisenhower, in his final address to the nation before leaving office in 1961, issued a rather extraordinary warning to the American people that the country “must guard against unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”

Following the same course that virtually every other major industry has in the last two decades, a relentless series of mergers and corporate takeovers has consolidated control of the media into the hands of a few corporate behemoths.

The result has been that an increasingly agenda has been sold to the American people by a massive, multi-tentacled media machine that has become, for all intents and purposes, a propaganda organ of the state….

And it is certainly true that by all outward appearances the United States does appear to have the very epitome of a free press. . . . Yet behind this picture of plurality there are clear warning signs that an increasingly incestuous relationship exists between the media titans and the corporate military powers that Eisenhower so feared.

For example, the number-one purveyor of broadcast news in this country— NBC, with both MSNBC and CNBC under its wing, as well as NBC news and a variety of “news magazines”– is now owned and controlled by General Electric, one of the nation’s largest defense contractors.

Is it not significant that as GE’s various media subsidiaries predictably lined up to cheerlead the use of U.S. military force in Kosovo, it was at the same time posting substantial profits from the sale of the high tech tools of modern warfare it so shamelessly glorifies?…

For more, GO TO > > > Parrots in the News Room


The Money Men – The birds who invented the term “quid pro quo”.

From The Money Men, by Jeffrey H. Birnbaum: . . . If you assume that campaign money is so distasteful that you don’t want to hear any more about it, you’re closing your mind to one of the most fundamental and most fascinating stories in American politics. It’s okay to be outraged— more than okay. But it’s wrong to be so disgusted that you don’t want to read another word.

Take, for example, the real-life picture we should have of our elected officials. It’s wrong to think of them sitting studiously through boring congressional hearings or making speeches to Rotary Club luncheons.

Think of them, instead, in windowless offices grubbing for money almost every spare moment they get. Fund-raising is so essential to their reelections yet takes so much time that politicians have invented a virtual science of efficient solicitation.

Here’s the typical scene: The lawmaker or would-be lawmaker sits at a desk surrounded by telephones. Aides seated nearby (there are usually 2 or 3 aides, but I’ve heard about instances involving as many as 8) dial up contributors and stay on the line until the would-be fund giver comes on. Then they put that person on hold until the lawmaker gets to their line.

The politician is thus able to move seamlessly from one begging session to another, and groveling can go on nonstop.

So there’s a picture for the ages: democracy on hold, literally.

Here’s another one: Around a conference table in the suite of the Speaker of the House … a dozen lobbyists and trade-association executives plot strategy with the highest-ranking lawmakers in Congress. This isn’t an occasional meeting. It happens every week. On Thursday. At 11 AM. It even has a title: the Thursday Group….

The point is that money men are players. They aren’t dark figures lurking in the background, plotting political intrigue. They are central to the drama. They make a difference in the way laws are made and implemented. Without them, the politicians wouldn’t be politicians. And they insist on, and invariably get, politicians’ attention.

That’s the way it works….

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Money, money everywhere.

But not all of it carries the same weight. And not all of it goes to candidates. The laws and rules that govern political fund-raising are many and peculiar. They also are largely ignored….

At the federal level, the most that any person can donate to a candidate is $1,000 per election. Political-action committees (PACs), which are amalgams of individuals, can give $5,000. But that’s just the start. Individuals, labor unions, and corporations can give as much as they want to political parties.

That’s the so-called soft money or, more appropriately, sewer money.

This money, in effect, is used to make a mockery of the limits on direct giving to candidates.

Think of it as legal cheating….

For more on sewer money, GO TO > > > A Simple Solution to Campaign Finance Reform

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Last update August 28, 2005, by The Catbird.