The Navy as Banker

For the U.S. economy as a whole, the Federal Reserve Board has traditionally been the "lender of last resort" --but for some troubled defense contractors that role is now being filled by the Navy. Officially, the Navy, like the other armed services, is taking a tough line with suppliers, insisting that they deliver weapons at contract prices even if cost overruns hurt the companies. In particular, the Navy has come to the edge of a court battle with Long Island's Grumman Corp., which has flatly refused to build more than the first 86 of 313 F-14 Tomcat fighter-bombers called for in a contract unless the Navy increases the $16.8 million price per plane. Yet at the very time that their squabble was being aired a month ago, the Navy was advancing Grumman millions of dollars in loans that commercial banks had refused to make. Last week the New York Times disclosed that the full loan amounted to $18 million more than had previously been admitted, bringing Grumman's total indebtedness to its banker in blues to $54 million.

Nor has Grumman been the only beneficiary of the Navy's bankroll. Over the past year the Navy has shelled out about $1.7 million to a small Long Island subcontractor named Gap Instrument Inc., by purchasing new issues of the company's preferred stock. The Navy is now the single largest stockholder in the company, but its shares appear for the moment to be almost worthless; they carry no voting power and cannot be resold commercially.

Gap is supposed to begin buying back the stock with its profits in 1976. However, since the company has lost money in all but one of the past four years, the Navy's chances for a quick recovery seem less than certain.

Why did the Navy make two such dubious investments? The answer seems to be that both companies were contractors on work that has been judged vital to the national security--and thus, when they exhausted their ability to borrow privately, they were able to make offers that the Navy could not refuse. If the Pentagon had scuttled Gap as the builder of a fire-control system in the new $1.4 billion DE1052 model destroyer program, another contractor, according to a Navy official, "would have had to gear up and in the long run spend a hell of a lot more" than the Navy paid to salvage Gap. In Grumman's case the Navy simply had nowhere else to go in time:

the F-14 is the only plane equipped to carry the Phoenix missile, which in turn is the sole U.S. defense system capable of knocking out the new high-altitude Soviet MIG-23 (NATO code name: Foxbat).

Some Congressmen nevertheless seriously question the propriety of the Navy using taxpayers' money to bail out contractors who have allegedly let costs get out of hand. In addition, these legislators are convinced that the Navy has been less than candid in portraying itself to Congress and the public as a tough customer for weapons suppliers.

Senate Pentagon Critic William Proxmire declares that "the Navy and Grumman are not slugging it out but doing a minuet to deceive the American public." Whether or not culpability extends that far, the hyphen that separates the military-industrial complex--the phrase that President Dwight D. Eisenhower popularized twelve years ago this month--may have grown one notch shorter.

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