Posted: 01 Aug 2010 04:29 PM PDT
From The Mises Institute
Worrying that their friends on Wall Street are liable to blow themselves up any day with complex financial products and strategies, Congress has passed and Obama has signed 2,300-plus pages of financial reform that provides “an architecture reflective of the 21st century in which we live, but also one that would rebuild that trust and confidence,” claims Senator Christopher Dodd who was the lead sausage grinder on the senate version of the bill.
Ostensibly, the purpose of this this bill isn’t to make Wall Street bigger and to consolidate the banking industry; it’s to “protect consumers and lay the foundation for a stronger and safer financial system, one that is innovative, creative, competitive, and far less prone to panic and collapse,” President Obama said after Dodd had gathered enough signatures.
Well right, in a perfect world where you wanted to inspire innovation, creativity, competitiveness, and have a financial system that’s panic free, you’d immediately start with 2,300 pages of gobbledygook that has been crafted on the fly by Washington lawyers and staffers while great financial minds like Dodd, Barney Frank, Nancy Pelosi, and Harry Reid calmly think through the details and repercussions.
Of course the constant carping has been that there just hasn’t been enough regulation: that crazy laissez-faire Bush administration dismantled all the financial regulation don’t you know. The real fact is, even the average Podunk bank operating as a holding company not only has a state regulator, but the Federal Reserve, the FDIC, or the OTS, or the OCC regulating them. Not to mention all the business licensing and whatnot that’s required on the local level.
Treasury Secretary Tim Geithner testified that AIG had
There’s been plenty of government regulating, and as regulations grow, the incidences of financial booms and panics grow in step, as Kevin Dowd and Martin Hutchinson chronicle in their wonderful new book Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System. Looking back at financial crises, the authors note “the impacts of rampant speculation, government involvement or poor government responses, misguided monetary polices, ill-designed regulation and misunderstood new financial technology, as well as the oft-repeated failure on the part of policy makers and legislators to draw the appropriate lessons from painful experiences” have been constant themes.
Dowd and Hutchinson put the latest crisis in the context of history. They point out that government intervention and misguided regulations were culprits in all financial meltdowns. Austrians may have a few bones to pick with the authors on a couple minor points, but all in all, the strength of the book is its free-market view of the current crisis that shines a bright light on the rampant belief in dubious notions like Modern Financial Theory that include the efficient-market hypothesis and Modigliani-Miller theorem.
Combine loose money with flawed financial theories and the creation of byzantine financial products, and ultimately modern financial alchemy “has a distinctly statist and paternalist tone, and one which, taken to its logical conclusion, implies the establishment of nothing less than a world government with the power to redistribute most of our income at will,” explain the authors.
The end of the partnership era on Wall Street, which allowed management and ownership to separate and shed personal liability, has lead to excess risk-taking. Of course, Washington’s new financial regulation does nothing about this. Michael Douglas’s Wall Street character Gordon Gecko famously made the point that Teldar Paper management themselves owned but a tiny fraction of company stock and weren’t acting in its best interest but were earning big salaries for merely sending memos back and forth to each other.
Managers who are not owners, Dowd and Hutchinson point out, are most interested in earning higher salaries for themselves at the expense of the long-term success of the company. So managements are as short-term oriented as Wall Street and Washington are. Managements reduce dividends, engage in creative accounting, trade equity for debt, and reduce research and development costs all to juice up short-term operating profits and their bonuses, while denigrating their company’s long-term financial health.
The authors rightly take issue with corporate-finance textbooks that claim that stock options align the interests of managers and shareholders, noting that “stock options often magnify the incentives of executives to take risks that boost short-term earnings at the expense of long-term corporate health.”
Finance was once just a small portion of the US economy, but by 2007 it had mushroomed into being over a quarter of the S&P 500, after being only 5 percent of the index back in 1980 — and this doesn’t count the financial affiliates of companies like GE. As the authors point out, finance is the largest sector of the US economy, so college graduates believe the road to riches lies with pushing paper, creating complex financial securities, and jockeying risk-management models.
Financial leverage has been heightened at all levels, blessed by the likes of Modigliani and Miller whose theorem implies leverage is irrelevant. With all institutions adopting the same risk management strategies, along with borrowing their way to gargantuan size and the major banks all being interconnected, the potential for panics is heightened and panicked governments believe no one can be allowed to fail.
Modern Financial Theory says you can diversify your way to safety because all information is known, so no one can out perform the market by picking individual investments. This meant that new financial products needed to be created to be part of the diversified portfolio basket. As the quants took over, short-term paper that masqueraded as long-term in the form of auction-rate bonds was created along with Collateralized Debt Obligations (CDOs), CDO squareds, and exotic derivatives based on these products like Credit Default Swaps (CDS).
These products served to grow Wall Street exponentially. All stocks in the S&P in 1957 had a market value of $220 billion. By the end of 2008, that index had a value of $9 trillion, according to the authors, but the real action was in derivatives, which totaled $518 trillion that year, “or about ten times the Gross Global Product.”
With government cheerleading for homeownership, Wall Street got in the game with “rating agency mathematicians … ‘proving’ that default rates would be low,” no matter the poor quality underwriting, done not by Jimmy Stewart à la It’s a Wonderful Life, but by an aggressive mortgage salesman on commission. CDS owners jumped on this opportunity to profit by the new financial nonsense and the CDS market grew to $62 billion at its peak, while the entire market for home mortgages was only $12 trillion. Sold as an insurance to hedge against credit risk, the CDS market morphed into speculation.
Dowd and Hutchinson write that it is government meddling that creates the environment for financial crisis. Deposit insurance and other consumer protection schemes like Securities and Exchange Commission regulation make the average Joe and Jane believe that the government will make them whole no matter what happens. The authors also believe the destigmatization of bankruptcy has caused Americans to overborrow, lowering savings rates along with ethical standards.
Booms and busts, crises and crashes will continue ad infinitum, and the authors believe eventually this will lead to declines in the real economy as well as the financial-services sector. As Austrian theory dictates, malinvestments must be liquidated in the bust, and that includes financial-sector jobs, leaving New York with ghost buildings in the financial district and empty luxury condo towers. For the city of London, Hutchinson and Dowd see the future as being even worse.
Mr. Dowd has written plenty about free banking, and he’d like to fix all of this not with 2,300 pages of additional regulation, but “with a commodity standard, free banking (no central bank) and financial laissez-faire, restrictions on the use of the ‘limited liability’ corporate form, and the most limited government.” The authors seek a “new Age of Economic Reason,” abandoning “the philosopher’s stone of universal government meddling sought by that sublime Paracelsus of economic alchemy — John Maynard Keynes.”
Unfortunately, the Keynesians in the Obama White House likely aren’t asking for Messrs. Dowd and Hutchinson’s phone numbers: their program is to stimulate, regulate, and keep the zero rate.
Never mind that this hasn’t worked any other time and won’t this time either.
Posted: 01 Aug 2010 11:01 AM PDT
From Veterans Today
– Between 1962 and 1971, the US military sprayed an estimated 80 million litres of Agent Orange and other herbicides on Vietnam, the journal Nature reported in 2003 –
By Chris Arsenaul
When Hillary Clinton, the US secretary of state, visited Vietnam on Thursday she extolled the country’s “unlimited potential” and strong trade relations with the US. But the words must have rung hollow for Ngyuen Ngoc Phuong, who has seen his potential destroyed by American chemical poisoning.
Phuong, 19, was born long after the US cut and run from the Vietnam war, evacuating its last remaining personnel by helicopter from the roof of its Saigon embassy in 1975.
But the results of that war, which officially ended 35 years ago, affect every aspect of Phuong’s life.
The young man has severe physical deformities, and like an estimated three million Vietnamese, he suffers from exposure to Agent Orange, a toxic chemical US forces sprayed during the war to defoliate the dense jungles Viet Cong rebels used for cover.
In its manufacture, the chemical was contaminated with TCDD, or dioxin, “the most toxic substance known to humans”, according to an investigation in the journal Science.
In his book Agent Orange on Trial published by Harvard University Press, Peter Schuck reported that companies who manufactured the defoliant knew “as early as 1952″ that deadly dioxin had contaminated the chemical.
“I met one family of victims with four blinded children, no eyes – period,” Dr Nguyen Thi Ngoc Phuong, a Vietnamese researcher, said in a 2007 interview.
In a now declassified report for the US department of veterans affairs, Admiral ER Zumwalt Jr wrote that Dow Chemical and other manufacturers knew Agent Orange exposure could cause “general organ toxicity” and “other systematic problems” as early as 1964.
These and other studies show that the American military, and the chemical companies who serviced it, were well aware of the dangers posed by the chemicals on the general population.
On this front, Agent Orange elucidates an alarming trend in modern warfare, particularly counter-insurgency fighting: civilians and the environment tend to be main casualties.
Brutality clearly defined World War I and II and previous conflicts between standing armies, but soldiers usually made up the majority of the dead.
From the jungles of Vietnam to the plains of Sudan, Iraq’s cities to the Afghan mountains, civilians now bear the highest cost for wars not of their making.
“In Vietnam it was chemical [weapons] … Agent Orange and napalm,” Len Aldis, secretary of the Britain-Vietnam friendship society,told Al Jazeera.
“In Iraq, Kosovo, [and] Afghanistan the US, UK and Nato have used depleted uranium, cluster weapons … and drones that are controlled from military bases in the US.”
These conflicts tend to continue even after the wars officially end.
“We did a number of soil samples and followed [dioxin contamination from Agent Orange spraying] though the food chain into ponds, to fish, into ducks and then into humans. We found it in children who had been born long after the war ended,” Dr Wayne Dwernychuck, who led the first team of western scientists to study the long-term affects of sprayingin Vietnam, said in an interview.
“We concluded the only way they could be contaminated is through food and nursing,” he said, referencing his 1994 study.
Former US military bases including Bien Hoa, Phu Cat and the infamous Danang are the worst sites of present day contamination.
“We have been working with Vietnam for about nine years to try to remedy the effects of Agent Orange,” Clinton said at a press conference in Hanoi.
Since 2007, the US congress has appropriated $9m to help Vietnam clean up contaminated areas and for related health activities, or an amount roughly equal to the cost of 12 Tomahawk cruise missiles.
‘Wounds still remain’
In June, a joint panel of US and Vietnamese policymakers, citizens and scientists estimated the cost of a proper clean-up and rehabilitation for the sick at $300m.
Despite public pressure, Vietnamese victims were unable to win justice in US courts [AFP]
“The war is over but the wounds from the war still remain in many areas of Vietnam,” Nguyen Van Son, a member of Vietnam’s National Assembly, said during the report’s launch in Hanoi.
Vietnamese civilians are not the only ones suffering from exposure. Veterans in the US, Canada and beyond also have historieswith the chemicals.
In 1984, US veterans reached an out-of-court settlement for $180m with companies who produced the chemicals, including Monsanto and Dow Chemical.
Remarkably, Dow maintains that there is no evidence to link Agent Orange to illnesses from US veterans and Vietnamese civilians.
The Institute of Medicine (IOM),the pre-eminent scientific authority in the US when it comes to setting government policy, links exposure to a raft of conditions including cancers, diabetes and spina bifida.
Like their American counterparts, Vietnamese victims have tried to gain justice in US courts, but after a series of cases, the US supreme court refused to hear their case in 2009.
However, American conservatives were some of the first to recognise the moral quagmire around giving pensions and other benefits to US veterans and not Vietnamese civilians, even though both groups were poisoned by the American government and the companies who provided it with chemicals.
‘Difficult to rationalise’
It is “difficult to rationalise why [American] Vietnam vets are compensated for Agent Orange exposure but Vietnamese civilians shouldn’t be,” Steve Milloy, a scholar at the Cato institute, wrote in a commentary for Fox News.
During her visit, Clinton criticised Vietnam for jailing rights activists and censoring the internet and urged the single party, nominally communist state to “strengthen its commitment to human rights”.
However, in the broader schema of rights, Vietnam’s transgressions against courageous lawyers and journalists seem positively minor compared to three million destroyed lives: children born missing eyes, grossly elongated heads or misshapen legs where their arms ought to be.
Posted: 01 Aug 2010 08:44 AM PDT
From The Washington Post
In June, a stone carver from Manassas chiseled another perfect star into a marble wall at CIA headquarters, one of 22 for agency workers killed in the global war initiated by the 2001 terrorist attacks.
The intent of the memorial is to publicly honor the courage of those who died in the line of duty, but it also conceals a deeper story about government in the post-9/11 era: Eight of the 22 were not CIA officers at all. They were private contractors.
To ensure that the country’s most sensitive duties are carried out only by people loyal above all to the nation’s interest, federal rules say contractors may not perform what are called “inherently government functions.” But they do, all the time and in every intelligence and counterterrorism agency, according to a two-year investigation by The Washington Post.
What started as a temporary fix in response to the terrorist attacks has turned into a dependency that calls into question whether the federal workforce includes too many people obligated to shareholders rather than the public interest — and whether the government is still in control of its most sensitive activities. In interviews last week, both Defense Secretary Robert M. Gates and CIA Director Leon Panetta said they agreed with such concerns.
The Post investigation uncovered what amounts to an alternative geography of the United States, a Top Secret America created since 9/11 that is hidden from public view, lacking in thorough oversight and so unwieldy that its effectiveness is impossible to determine.
It is also a system in which contractors are playing an ever more important role. The Post estimates that out of 854,000 people with top-secret clearances, 265,000 are contractors. There is no better example of the government’s dependency on them than at the CIA, the one place in government that exists to do things overseas that no other U.S. agency is allowed to do.
Private contractors working for the CIA have recruited spies in Iraq, paid bribes for information in Afghanistan and protected CIA directors visiting world capitals. Contractors have helped snatch a suspected extremist off the streets of Italy, interrogated detainees once held at secret prisons abroad and watched over defectors holed up in the Washington suburbs. At Langley headquarters, they analyze terrorist networks. At the agency’s training facility in Virginia, they are helping mold a new generation of American spies.
Through the federal budget process, the George W. Bush administration and Congress made it much easier for the CIA and other agencies involved in counterterrorism to hire more contractors than civil servants. They did this to limit the size of the permanent workforce, to hire employees more quickly than the sluggish federal process allows and because they thought – wrongly, it turned out – that contractors would be less expensive.
Nine years later, well into the Obama administration, the idea that contractors cost less has been repudiated, and the administration has made some progress toward its goal of reducing the number of hired hands by 7 percent over two years. Still, close to 30 percent of the workforce in the intelligence agencies is contractors.
“For too long, we’ve depended on contractors to do the operational work that ought to be done” by CIA employees, Panetta said. But replacing them “doesn’t happen overnight. When you’ve been dependent on contractors for so long, you have to build that expertise over time.”
A second concern of Panetta’s: contracting with corporations, whose responsibility “is to their shareholders, and that does present an inherent conflict.”
Or as Gates, who has been in and out of government his entire life, puts it: “You want somebody who’s really in it for a career because they’re passionate about it and because they care about the country and not just because of the money.”
Contractors can offer more money – often twice as much – to experienced federal employees than the government is allowed to pay them. And because competition among firms for people with security clearances is so great, corporations offer such perks as BMWs and $15,000 signing bonuses, as Raytheon did in June for software developers with top-level clearances.
The idea that the government would save money on a contract workforce “is a false economy,” said Mark M. Lowenthal, a former senior CIA official and now president of his own intelligence training academy.
As companies raid federal agencies of talent, the government has been left with the youngest intelligence staffs ever while more experienced employees move into the private sector. This is true at the CIA, where employees from 114 firms account for roughly a third of the workforce, or about 10,000 positions. Many of them are temporary hires, often former military or intelligence agency employees who left government service to work less and earn more while drawing a federal pension.
Across the government, such workers are used in every conceivable way.
Contractors kill enemy fighters. They spy on foreign governments and eavesdrop on terrorist networks. They help craft war plans. They gather information on local factions in war zones. They are the historians, the architects, the recruiters in the nation’s most secretive agencies. They staff watch centers across the Washington area. They are among the most trusted advisers to the four-star generals leading the nation’s wars.
So great is the government’s appetite for private contractors with top-secret clearances that there are now more than 300 companies, often nicknamed “body shops,” that specialize in finding candidates, often for a fee that approaches $50,000 a person, according to those in the business.
Making it more difficult to replace contractors with federal employees: The government doesn’t know how many are on the federal payroll. Gates said he wants to reduce the number of defense contractors by about 13 percent, to pre-9/11 levels, but he’s having a hard time even getting a basic head count.
“This is a terrible confession,” he said. “I can’t get a number on how many contractors work for the Office of the Secretary of Defense,” referring to the department’s civilian leadership.
The Post’s estimate of 265,000 contractors doing top-secret work was vetted by several high-ranking intelligence officials who approved of The Post’s methodology. The newspaper’s Top Secret America database includes 1,931 companies that perform work at the top-secret level. More than a quarter of them – 533 – came into being after 2001, and others that already existed have expanded greatly. Most are thriving even as the rest of the United States struggles with bankruptcies, unemployment and foreclosures.
The privatization of national security work has been made possible by a nine-year “gusher” of money, as Gates recently described national security spending since the 9/11 attacks.
With so much money to spend, managers do not always worry about whether they are spending it effectively.
“Someone says, ‘Let’s do another study,’ and because no one shares information, everyone does their own study,” said Elena Mastors, who headed a team studying the al-Qaeda leadership for the Defense Department. “It’s about how many studies you can orchestrate, how many people you can fly all over the place. Everybody’s just on a spending spree. We don’t need all these people doing all this stuff.”
Most of these contractors do work that is fundamental to an agency’s core mission. As a result, the government has become dependent on them in a way few could have foreseen: wartime temps who have become a permanent cadre.
Just last week, typing “top secret” into the search engine of a major jobs Web site showed 1,951 unfilled positions in the Washington area, and 19,759 nationwide: “Target analyst,” Reston. “Critical infrastructure specialist,” Washington, D.C. “Joint expeditionary team member,” Arlington.
“We could not perform our mission without them. They serve as our ‘reserves,’ providing flexibility and expertise we can’t acquire,” said Ronald Sanders, who was chief of human capital for the Office of the Director of National Intelligence before retiring in February. “Once they are on board, we treat them as if they’re a part of the total force.”
The Post’s investigation is based on government documents and contracts, job descriptions, property records, corporate and social networking Web sites, additional records, and hundreds of interviews with intelligence, military and corporate officials and former officials. Most requested anonymity either because they are prohibited from speaking publicly or because, they said, they feared retaliation at work for describing their concerns.
The investigation focused on top-secret work because the amount classified at the secret level is too large to accurately track. A searchable database of government organizations and private companies was built entirely on public records. [For an explanation of the newspaper’s decision making behind this project, please see the Editor’s Note.]
The national security industry sells the military and intelligence agencies more than just airplanes, ships and tanks. It sells contractors’ brain power. They advise, brief and work everywhere, including 25 feet under the Pentagon in a bunker where they can be found alongside military personnel in battle fatigues monitoring potential crises worldwide.
Late at night, when the wide corridors of the Pentagon are all but empty, the National Military Command Center hums with purpose. There’s real-time access to the location of U.S. forces anywhere in the world, to granular satellite images or to the White House Situation Room.
The purpose of all this is to be able to answer any question the chairman of the Joint Chiefs of Staff might have. To be ready 24 hours a day, every day, takes five brigadier generals, a staff of colonels and senior noncommissioned officers – and a man wearing a pink contractor badge and a bright purple shirt and tie.
Erik Saar’s job title is “knowledge engineer.” In one of the most sensitive places in America, he is the only person in the room who knows how to bring data from far afield, fast. Saar and four teammates from a private company, SRA International, teach these top-ranked staff officers to think in Web 2.0. They are trying to push a tradition-bound culture to act differently, digitally.
That sometimes means asking for help in a public online chat room or exchanging ideas on shared Web pages outside the military computer networks dubbed .mil – things much resisted within the Pentagon’s self-sufficient culture. “Our job is to change the perception of leaders who might drive change,” Saar said.
Since 9/11, contractors have made extraordinary contributions – and extraordinary blunders – that have changed history and clouded the public’s view of the distinction between the actions of officers sworn on behalf of the United States and corporate employees with little more than a security badge and a gun.
Contractor misdeeds in Iraq and Afghanistan have hurt U.S. credibility in those countries as well as in the Middle East. Abuse of prisoners at Abu Ghraib, some of it done by contractors, helped ignite a call for vengeance against the United States that continues today. Security guards working for Blackwater added fuel to the five-year violent chaos in Iraq and became the symbol of an America run amok.
Contractors in war zones, especially those who can fire weapons, blur “the line between the legitimate and illegitimate use of force, which is just what our enemies want,” Allison Stanger, a professor of international politics and economics at Middlebury College and the author of “One Nation Under Contract,” told the independent Commission on Wartime Contracting at a hearing in June.
Misconduct happens, too. A defense contractor formerly called MZM paid bribes for CIA contracts, sending Randy “Duke” Cunningham, who was a California congressman on the intelligence committee, to prison. Guards employed in Afghanistan by ArmorGroup North America, a private security company, were caught on camera in a lewd-partying scandal.
But contractors have also advanced the way the military fights. During the bloodiest months in Iraq, the founder of Berico Technologies, a former Army officer named Guy Filippelli, working with the National Security Agency, invented a technology that made finding the makers of roadside bombs easier and helped stanch the number of casualties from improvised explosives, according to NSA officials.
Contractors have produced blueprints and equipment for the unmanned aerial war fought by drones, which have killed the largest number of senior al-Qaeda leaders and produced a flood of surveillance videos. A dozen firms created the transnational digital highway that carries the drones’ real-time data on terrorist hide-outs from overseas to command posts throughout the United States.
Private firms have become so thoroughly entwined with the government’s most sensitive activities that without them important military and intelligence missions would have to cease or would be jeopardized. Some examples:
*At the Department of Homeland Security (DHS), the number of contractors equals the number of federal employees. The department depends on 318 companies for essential services and personnel, including 19 staffing firms that help DHS find and hire even more contractors. At the office that handles intelligence, six out of 10 employees are from private industry.
*The National Security Agency, which conducts worldwide electronic surveillance, hires private firms to come up with most of its technological innovations. The NSA used to work with a small stable of firms; now it works with at least 484 and is actively recruiting more.
*The National Reconnaissance Office cannot produce, launch or maintain its large satellite surveillance systems, which photograph countries such as China, North Korea and Iran, without the four major contractors it works with.
*Every intelligence and military organization depends on contract linguists to communicate overseas, translate documents and make sense of electronic voice intercepts. The demand for native speakers is so great, and the amount of money the government is willing to pay for them is so huge, that 56 firms compete for this business.
*Each of the 16 intelligence agencies depends on corporations to set up its computer networks, communicate with other agencies’ networks, and fuse and mine disparate bits of information that might indicate a terrorist plot. More than 400 companies work exclusively in this area, building classified hardware and software systems.
Hiring contractors was supposed to save the government money. But that has not turned out to be the case. A 2008 study published by the Office of the Director of National Intelligence found that contractors made up 29 percent of the workforce in the intelligence agencies but cost the equivalent of 49 percent of their personnel budgets. Gates said that federal workers cost the government 25 percent less than contractors.
The process of reducing the number of contractors has been slow, if the giant Office of Naval Intelligence in Suitland is any example. There, 2,770 people work on the round-the-clock maritime watch floor tracking commercial vessels, or in science and engineering laboratories, or in one of four separate intelligence centers. But it is the employees of 70 information technology companies who keep the place operating.
They store, process and analyze communications and intelligence transmitted to and from the entire U.S. naval fleet and commercial vessels worldwide. “Could we keep this building running without contractors?” said the captain in charge of information technology. “No, I don’t think we could keep up with it.”
Vice Adm. David J. “Jack” Dorsett, director of naval intelligence, said he could save millions each year by converting 20 percent of the contractor jobs at the Suitland complex to civil servant positions. He has gotten the go-ahead, but it’s been a slow start. This year, his staff has converted one contractor job and eliminated another – out of 589. “It’s costing me an arm and a leg,” Dorsett said.
Washington’s corridors of power stretch in a nearly straight geographical line from the Supreme Court to the Capitol to the White House. Keep going west, across the Potomac River, and the unofficial seats of power – the private, corporate ones – become visible, especially at night. There in the Virginia suburbs are the brightly illuminated company logos of Top Secret America: Northrop Grumman, SAIC, General Dynamics.
Defense Secretary Robert M. Gates says he would like to reduce the number of defense contractors to pre-9/11 levels.
Of the 1,931 companies identified by The Post that work on top-secret contracts, about 110 of them do roughly 90 percent of the work on the corporate side of the defense-intelligence-corporate world.
To understand how these firms have come to dominate the post-9/11 era, there’s no better place to start than the Herndon office of General Dynamics. One recent afternoon there, Ken Pohill was watching a series of unclassified images, the first of which showed a white truck moving across his computer monitor.
The truck was in Afghanistan, and a video camera bolted to the belly of a U.S. surveillance plane was following it. Pohill could access a dozen images that might help an intelligence analyst figure out whether the truck driver was just a truck driver or part of a network making roadside bombs to kill American soldiers.
To do this, he clicked his computer mouse. Up popped a picture of the truck driver’s house, with notes about visitors. Another click. Up popped infrared video of the vehicle. Click: Analysis of an object thrown from the driver’s side. Click: U-2 imagery. Click: A history of the truck’s movement. Click. A Google Earth map of friendly forces. Click: A chat box with everyone else following the truck, too.
Ten years ago, if Pohill had worked for General Dynamics, he probably would have had a job bending steel. Then, the company’s center of gravity was the industrial port city of Groton, Conn., where men and women in wet galoshes churned out submarines, the thoroughbreds of naval warfare. Today, the firm’s commercial core is made up of data tools such as the digital imagery library in Herndon and the secure BlackBerry-like device used by President Obama, both developed at a carpeted suburban office by employees in loafers and heels.
The evolution of General Dynamics was based on one simple strategy: Follow the money.
The company embraced the emerging intelligence-driven style of warfare. It developed small-target identification systems and equipment that could intercept an insurgent’s cellphone and laptop communications. It found ways to sort the billions of data points collected by intelligence agencies into piles of information that a single person could analyze.
It also began gobbling up smaller companies that could help it dominate the new intelligence landscape, just as its competitors were doing. Between 2001 and 2010, the company acquired 11 firms specializing in satellites, signals and geospatial intelligence, surveillance, reconnaissance, technology integration and imagery.
On Sept. 11, 2001, General Dynamics was working with nine intelligence organizations. Now it has contracts with all 16. Its employees fill the halls of the NSA and DHS. The corporation was paid hundreds of millions of dollars to set up and manage DHS’s new offices in 2003, including its National Operations Center, Office of Intelligence and Analysis and Office of Security. Its employees do everything from deciding which threats to investigate to answering phones.
General Dynamics’ bottom line reflects its successful transformation. It also reflects how much the U.S. government – the firm’s largest customer by far – has paid the company beyond what it costs to do the work, which is, after all, the goal of every profit-making corporation.
The company reported $31.9 billion in revenue in 2009, up from $10.4 billion in 2000. Its workforce has more than doubled in that time, from 43,300 to 91,700 employees, according to the company.
Revenue from General Dynamics’ intelligence- and information-related divisions, where the majority of its top-secret work is done, climbed to $10 billion in the second quarter of 2009, up from $2.4 billion in 2000, accounting for 34 percent of its overall revenue last year.
The company’s profitability is on display in its Falls Church headquarters. There’s a soaring, art-filled lobby, bistro meals served on china enameled with the General Dynamics logo and an auditorium with seven rows of white leather-upholstered seats, each with its own microphone and laptop docking station.
General Dynamics now has operations in every corner of the intelligence world. It helps counterintelligence operators and trains new analysts. It has a $600 million Air Force contract to intercept communications. It makes $1 billion a year keeping hackers out of U.S. computer networks and encrypting military communications. It even conducts information operations, the murky military art of trying to persuade foreigners to align their views with U.S. interests.
“The American intelligence community is an important market for our company,” said General Dynamics spokesman Kendell Pease. “Over time, we have tailored our organization to deliver affordable, best-of-breed products and services to meet those agencies’ unique requirements.”
In September 2009, General Dynamics won a $10 million contract from the U.S. Special Operations Command’s psychological operations unit to create Web sites to influence foreigners’ views of U.S. policy. To do that, the company hired writers, editors and designers to produce a set of daily news sites tailored to five regions of the world. They appear as regular news Web sites, with names such as “SETimes.com: The News and Views of Southeast Europe.” The first indication that they are run on behalf of the military comes at the bottom of the home page with the word “Disclaimer.” Only by clicking on that do you learn that “the Southeast European Times (SET) is a Web site sponsored by the United States European Command.”
What all of these contracts add up to: This year, General Dynamics’ overall revenue was $7.8 billion in the first quarter, Jay L. Johnson, the company’s chief executive and president, said at an earnings conference call in April. “We’ve hit the deck running in the first quarter,” he said, “and we’re on our way to another successful year.”
In the shadow of giants such as General Dynamics are 1,814 small to midsize companies that do top-secret work. About a third of them were established after Sept. 11, 2001, to take advantage of the huge flow of taxpayer money into the private sector. Many are led by former intelligence agency officials who know exactly whom to approach for work.
Abraxas of Herndon, headed by a former CIA spy, quickly became a major CIA contractor after 9/11. Its staff even recruited midlevel managers during work hours from the CIA’s cafeteria, former agency officers recall.
Other small and medium-size firms sell niche technical expertise such as engineering for low-orbit satellites or long-dwell sensors. But the vast majority have not invented anything at all. Instead, they replicate what the government’s workforce already does.
A company called SGIS, founded soon after the 2001 attacks, was one of these.
In June 2002, from the spare bedroom of his San Diego home, 30-year-old Hany Girgis put together an information technology team that won its first Defense Department contract four months later. By the end of the year, SGIS had opened a Tampa office close to the U.S. Central Command and Special Operations Command, had turned a profit and had 30 employees.
SGIS sold the government the services of people with specialized skills; expanding the types of teams it could put together was one key to its growth. Eventually it offered engineers, analysts and cyber-security specialists for military, space and intelligence agencies. By 2003, the company’s revenue was $3.7 million. By then, SGIS had become a subcontractor for General Dynamics, working at the secret level. Satisfied with the partnership, General Dynamics helped SGIS receive a top-secret facility clearance, which opened the doors to more work.
By 2006, its revenue had multiplied tenfold, to $30.6 million, and the company had hired employees who specialized in government contracting just to help it win more contracts.
“We knew that’s where we wanted to play,” Girgis said in a phone interview. “There’s always going to be a need to protect the homeland.”
Eight years after it began, SGIS was up to revenue of $101 million, 14 offices and 675 employees. Those with top-secret clearances worked for 11 government agencies, according to The Post’s database.
The company’s marketing efforts had grown, too, both in size and sophistication. Its Web site, for example, showed an image of Navy sailors lined up on a battleship over the words “Proud to serve” and another image of a Navy helicopter flying near the Statue of Liberty over the words “Preserving freedom.” And if it seemed hard to distinguish SGIS’s work from the government’s, it’s because they were doing so many of the same things. SGIS employees replaced military personnel at the Pentagon’s 24/7 telecommunications center. SGIS employees conducted terrorist threat analysis. SGIS employees provided help-desk support for federal computer systems.
Still, as alike as they seemed, there were crucial differences.
For one, unlike in government, if an SGIS employee did a good job, he might walk into the parking lot one day and be surprised by co-workers clapping at his latest bonus: a leased, dark-blue Mercedes convertible. And he might say, as a video camera recorded him sliding into the soft leather driver’s seat, “Ahhhh . . . this is spectacular.”
And then there was what happened to SGIS last month, when it did the one thing the federal government can never do.
It sold itself.
The new owner is a Fairfax-based company called Salient Federal Solutions, created just last year. It is a management company and a private-equity firm with lots of Washington connections that, with the purchase of SGIS, it intends to parlay into contracts.
“We have an objective,” says chief executive and President Brad Antle, “to make $500 million in five years.”
Of all the different companies in Top Secret America, the most numerous by far are the information technology, or IT, firms. About 800 firms do nothing but IT.
Some IT companies integrate the mishmash of computer systems within one agency; others build digital links between agencies; still others have created software and hardware that can mine and analyze vast quantities of data.
The government is nearly totally dependent on these firms. Their close relationship was on display recently at the Defense Intelligence Agency’s annual information technology conference in Phoenix. The agency expected the same IT firms angling for its business to pay for the entire five-day get-together, a DIA spokesman confirmed.
And they did.
General Dynamics spent $30,000 on the event. On a perfect spring night, it hosted a party at Chase Field, a 48,569-seat baseball stadium, reserved exclusively for the conference attendees. Government buyers and corporate sellers drank beer and ate hot dogs while the DIA director’s morning keynote speech replayed on the gigantic scoreboard, digital baseballs bouncing along the bottom of the screen.
Carahsoft Technology, a DIA contractor, invited guests to a casino night where intelligence officials and vendors ate, drank and bet phony money at craps tables run by professional dealers.
The McAfee network security company, a Defense Department contractor, welcomed guests to a Margaritaville-themed social on the garden terrace of the hotel across the street from the convention site, where 250 firms paid thousands of dollars each to advertise their services and make their pitches to intelligence officials walking the exhibition hall.
Government officials and company executives say these networking events are critical to building a strong relationship between the public and private sectors.
“If I make one contact each day, it’s worth it,” said Tom Conway, director of federal business development for McAfee.
As for what a government agency gets out of it: “Our goal is to be open and learn stuff,” said Grant M. Schneider, the DIA’s chief information officer and one of the conference’s main draws. By going outside Washington, where many of the firms are headquartered, “we get more synergy. . . . It’s an interchange with industry.”
These types of gatherings happen every week. Many of them are closed to anyone without a top-secret clearance.
At a U.S. Special Operations Command conference in Fayetteville, N.C., in April, vendors paid for access to some of the people who decide what services and gadgets to buy for troops. In mid-May, the national security industry held a black-tie evening funded by the same corporations seeking business from the defense, intelligence and congressional leaders seated at their tables.
Such coziness worries other officials who believe the post-9/11 defense-intelligence-corporate relationship has become, as one senior military intelligence officer described it, a “self-licking ice cream cone.”
Another official, a longtime conservative staffer on the Senate Armed Services Committee, described it as “a living, breathing organism” impossible to control or curtail. “How much money has been involved is just mind-boggling,” he said. “We’ve built such a vast instrument. What are you going to do with this thing? . . . It’s turned into a jobs program.”
Even some of those gathered in Phoenix criticized the size and disjointedness of the intelligence community and its contracting base. “Redundancy is the unacceptable norm,” Lt. Gen. Richard P. Zahner, Army deputy chief of staff for intelligence, told the 2,000 attendees. “Are we spending our resources effectively? . . . If we have not gotten our houses in order, someone will do it for us.”
On a day that also featured free back rubs, shoeshines, ice cream and fruit smoothies, another speaker, Kevin P. Meiners, a deputy undersecretary for intelligence, gave the audience what he called “the secret sauce,” the key to thriving even when the Defense Department budget eventually stabilizes and stops rising so rapidly.
“Overhead,” Meiners told them – that’s what’s going to get cut first. Overhead used to mean paper clips and toner. Now it’s information technology, IT, the very products and services sold by the businesspeople in the audience.
“You should describe what you do as a weapons system, not overhead,” Meiners instructed. “Overhead to them – I’m giving you the secret sauce here – is IT and people. . . . You have to foot-stomp hard that this is a war-fighting system that’s helping save people’s lives every day.”
After he finished, many of the government officials listening headed to the exhibit hall, where company salespeople waited in display booths. Peter Coddington, chief executive of InTTENSITY, a small firm whose software teaches computers to “read” documents, was ready for them.
“You have to differentiate yourself,” he said as they fanned out into the aisles. Coddington had glass beer mugs and pens twirling atop paperweight pyramids to help persuade officials of the nation’s largest military intelligence agency that he had something they needed.
But first he needed them to stop walking so fast, to slow down long enough for him to start his pitch. His twirling pens seemed to do the job. “It’s like moths to fire,” Coddington whispered.
A DIA official with a tote bag approached. She spotted the pens, and her pace slowed. “Want a pen?” Coddington called.
She hesitated. “Ah . . . I have three children,” she said.
“Want three pens?”
She stopped. In Top Secret America, every moment is an opportunity.
“We’re a text extraction company. . . ,” Coddington began, handing her the pens.