The $5 Billion Misunderstanding: The Collapse of the Navy's A-12 Stealth Bomber Program by James Perry Stevenson

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In April 1990 the U.S. Navy's A-12--a replacement aircraft for the outdated A-6Intruder--had the support of the Secretary of Defense before Congress. Nine months later Secretary Cheney cancelled the A-12, making it the largest weapons program ever terminated by the Pentagon and the first cancelled for default with the Pentagon making demands that the contractors return the money already paid them. Ten years later, questions remain unanswered and lessons are still to be learned.

With access to a wealth of government and contractor documents and more than a hundred players at all levels of involvement, James Stevenson takes readers into the once-forbidden world of classified "special access" programs to examine the demise of the A-12, charging that the documents exposed fraudulent and even illegal activity. He faults the navy not just for mismanagement but for ignoring the statutes and regulations that require Congress to appropriate money before entering into contracts. Rather than a single big mistake, he finds the A-12's path from honor to derision to be littered with hundreds of mistakes and attempts to right wrongs or cover them up. In recounting the events that eventually led to the Stealth bomber's cancellation, Stevenson cites countless examples of the mismatch between perception and reality experienced by navy program managers, the defense department, Congress, and the contractors. In the process of telling the story, he takes on the entire defense acquisition process and its responsibility for the program that cost American taxpayers over $5 billion yet produced not a single airplane for their defense.

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Chapter One

A Point of Reference

It is the obligation of the United States to do right.... In the instant cases the United States has not acted in a manner worthy of the great just Nation it is. Because the dollars at stake appear to be so large the government has raised legal and factual arguments that have little or no basis in law, fact or logic.

When this proposition is put forth by the United States of America one is almost tempted to wonder if insanity is indeed a prerequisite for contracting with the government.

Loren Smith, Chief Judge,
California Federal Bank v. U.S., 39 Fed. Cl. 753 (1997)

    When Secretary of Defense Richard Cheney, the high priest of America's defenses, drove from his McLean, Virginia, home to the Pentagon on the morning of 26 April 1990, he had no idea the navy's A-12 stealth bomber, an aircraft about which he would testify that day, had been illegally financed by the Department of the Navy. Cheney had been in office for slightly more than one year since leaving Capitol Hill as the congressman from Wyoming. The previous November, the Berlin Wall had fallen. Four months before his congressional reunion, he had asked his staff to review the four largest aircraft programs, which consumed so much of the Department of Defense's budget. This review was not part of the regular Pentagon planning process. It was an anticipatory response to Congress's inevitable question: "Do we still need these weapon systems?" Cheney was to brief the House and Senate on the results of that review, which was known in the Pentagon as the Major Aircraft Review (MAR). This was Vatican II for the military-industrial complex.

    Several generations of Americans have been proselytized to believe the Soviet Union represented a threat to their existence. Most ideas beget emblems and the Cold War was no exception. The converted acquired a variety of symbols as plentiful as Hindu gods and an Indic-like caste system to administer them. Unlike the South Asian variety, however, the untouchables were at the top of this hierarchy. These children of the greater gods were called "airborne weapons systems." During the budget season, when other programs fell to the fiscal ax, Congress left these flying icons alone. But as the Berlin Wall fell, the holiest graven images of the Cold War were being reexamined.

    One of those programs was the A-12, an airplane designed to replace the A-6E, the navy's all-weather aircraft carrier-based bomber. The A-6E was capable of flying farther and carrying more bombs than the B-17 of World War II. But the A-6E was aging. Metal fatigue had grounded 60 of the navy's 342 A-6s and flight of 119 had been restricted. A-12 advocates had argued during its formative years that the Soviet defenses were too hostile to simply upgrade the A-6E; only the application of the emerging stealth technology would permit an airplane to survive.

    Cheney spoke to the House in the morning and to the Senate in the afternoon. He briefed the Senate Armed Services Committee from a yellow notepad in a style that paralleled his affable demeanor. Cheney made no judgmental comments on how well the other programs were managed. However, when he got to his review of the A-12, he said, "the program appears to be reasonably well-handled at this point." He also said there were no impediments to the completion of the A-12 research and development contract. Cheney's stamp of approval was good news for naval aviation, for it had mortgaged its future on the A-12.

    Unknown to the mortgagee, the American taxpayer, Cheney's testimony did not represent what he had been told. To compound the subterfuge, what he had been told was not a complete diagnosis of the status of the A-12 research and development contract. In fact, there were a series of meetings and events, some of which Cheney knew about, some he should have known about, and some of which he was intentionally kept ignorant before his April testimony.

    Two months before Cheney's December 1989 request for the MAR, a middle-echelon analyst in the comptroller's office, Tom Hafer, determined that the A-12 was at least $500 million over budget and somewhere between one to two years behind schedule. As a result, he recommended that the comptroller's office withhold $1.5 billion from the production phase until the A-12 research and development contract got back on track. When Deputy Secretary of Defense Donald Atwood's special assistant, David Addington, saw the comptroller's recommendation to Atwood, he wrote Atwood a note recommending that Atwood consult with the other senior members of Cheney's staff. These were John Betti, the undersecretary of defense for acquisition, the senior acquisition person in the Pentagon; David Chu, the director of program analysis and evaluation, whom Cheney considered the devil's advocate in his circle of advisers; Larry Garrett, the secretary of the navy, who could always be counted on to take the navy's position; and General Colin Powell, the newly appointed chairman of the Joint Chiefs of Staff. The chairman had recently been statutorily imbued with the status of personal adviser to the secretary of defense.

    Addington's note attached to Hafer's report said: "Hold off a couple of days on deciding this one. Have John Betti, David Chu, Larry Garrett and Colin Powell review this for you (or with you) immediately and make recommendations. This is a major decision—too big to make in isolation."

    But isolate is what the navy attempted to do. Recognizing the comptroller's power, the navy went on alert-five status. It went so far as to get the undersecretary of defense for acquisition, the number three position in the Pentagon, to write Comptroller Sean O'Keefe in an attempt to mitigate the effect of Hafer's analysis. Hafer was not present to rebut the navy's presentation to Undersecretary Betti. Betti was ready to throw in with the navy completely but one of his lieutenants, Frank Kendall, suggested he move forward one of the standing committees—designed specifically to examine the health of acquisition programs—in order to focus on the A-12. Betti agreed. Navy Secretary Garrett also attempted to undermine Hafer's recommendation. Garrett wrote O'Keefe that everything was under control. When he paid a visit to O'Keefe, his position was, "who are you going to trust, Sean, your analyst or me and the Navy."

    Kendall held a meeting in early November 1989 to examine Tom Hafer's assertions. It became a platform for the navy's A-12 program manager, Capt. Larry Elberfeld, to monopolize the discussion. Elberfeld acknowledged that there were issues but said the navy had things under control. Tom Hafer was given a brief opportunity to voice his concerns. His major uneasiness was the delay in the schedule. If the A-12 was not meeting its very aggressive schedule, there was no need to leave money in the budget. His second concern was based on the nature of the A-12 research and development contract: it was for a fixed target price of $4.4 billion and fixed ceiling price of $4.8 billion. Hafer's superficial analysis told him that the team of General Dynamics and McDonnell Douglas would exceed the ceiling price by at least $500 million and probably much more. Regardless of the final amount, Hafer believed no contractor would absorb that kind of loss. Captain Elberfeld was quick to placate the members of Frank Kendall's Conventional Systems Committee. He told them the program was funded to ceiling and the navy had a fixed-price contract so the navy was protected.

    Nevertheless Elberfeld saw that the A-12's costs were escalating. Within six weeks of his presentation to Kendall's group, Elberfeld came to the conclusion that the cost, schedule, and performance of the A-12 were going to change enough that the law required him to notify the Office of the Secretary of Defense and Congress. The navy did not want to expose its dirty laundry to either of these entities because in doing so it risked confirming Tom Hafer's assertions. Worse, it risked a possible slowdown in congressional support.

    Just as Addington thought removing money from the A-12 budget was too big a decision for Secretary Atwood to make on his own, Captain Elberfeld believed it was not his decision to make alone either, although the law gave him that authority. Consequently, he scheduled a meeting with Navy Secretary Larry Garrett. On 29 January 1990, three months before Secretary Cheney's Major Aircraft Review presentation to Congress, Captain Elberfeld gave a state-of-the-A-12 program address to Secretary Garrett and company. The attendees included everyone from Undersecretary of the Navy Dan Howard and Adm. Leon Edney, the vice chief of naval operations, to Captain Dewispelaere, the navy's special access security officer. Everyone in the navy who needed to know was there.

    Elberfeld told Garrett that if the navy maintained its original production quantity estimates, the A-12 program acquisition unit cost would stay below the amount that would require him to report the change in the Selected Acquisition Report (SAR). This report was required by and intended for Congress. To keep the cost below the threshold, the navy would have to maintain that the U.S. Marine Corps was still going to buy the A-12, something the marines had said nine months earlier they would not do. Elberfeld then discussed the baseline document.

    The baseline document was a trip wire designed to give the secretary of defense notice that a program was above a specified percentage of its approved cost. A copy would also go to Congress. Elberfeld told Garrett and the assembled group that the estimated costs in the baseline document were going to be breached, which meant the A-12 program needed to be rebaselined. Rebaselining would require the navy to notify the Office of the Secretary of Defense (OSD) as well as Congress that the financial health of the A-12 program was declining.

    When the meeting was over, Garrett told Elberfeld to take care of the necessary paperwork on both the Selected Acquisition Report and the baseline breach. Undersecretary of the Navy Dan Howard remembers quite clearly that Garrett gave these directions. The notes of other attendees confirmed this. Nevertheless, neither the Congress nor Secretary Cheney ever saw these reports.

    Less than six weeks later, a large group from OSD met at the General Dynamics plant as part of the MAR. During the meeting, the General Dynamics A-12 program manager told the MAR Steering Group that the contractor team would exceed its $3.981 billion A-12 target cost by 20 percent. That meant the team would reach the contract ceiling price of $4.777 billion and earn no profit on the contract.

    Two months after Elberfeld's attempt to send the message upstairs and three weeks after the meeting at General Dynamics, an analyst in Undersecretary of Defense John Betti's office, Gary Christie, did a quick analysis on the estimated cost of the A-12 contract. Christie concluded that the estimate at completion would be at least $1 billion over the fixed ceiling price of the contract. Someone would have to pay for it. In theory, that someone was the contractor team. Even though a fixed-price contract for a large research and development contract was contrary to law and regulations, such law and regulations had never been enforced.

    Secretary Cheney had two formal briefings in preparation for his Major Aircraft Review briefing to Congress. The first was in late March; the second was on 5 April. At the first meeting, Cheney was told that the A-12 was a few hundred million over the estimated cost at completion. The day before the second meeting, Gary Christle told Undersecretary Betti of his $1 billion estimate. The next day Frank Kendall told Secretary Cheney the A-12 would cost at least $1 billion over ceiling and would make its first flight at least one year late. "Did you say a billion?" Cheney asked.

    Cheney received additional negative comments about the A-12. On April 19 Undersecretary Betti sent him a memorandum, with copies to Cheney's senior advisers, in which Betti wrote that of all of the Major Aircraft Review aircraft, the only one about which he had cost and schedule concerns was the A-12. Betti's comments were important because he was in charge not only of all acquisitions in the Pentagon but also of the MAR. In spite of this, Cheney ignored Betti's 19 April caution. Cheney did not even review his final prepared statement with Betti. He cut Betti completely out of the preparations to brief Congress. Instead, Cheney turned over the responsibility for last-minute tweaking to his comptroller, Sean O'Keefe, and his special assistant, David Addington.

    In spite of what he had been told, when Cheney briefed Congress, he gave the A-12 the highest rating of all the aircraft in the Major Aircraft Review. Yet in less than nine months, Cheney would find the navy in default on its deed of trust and would cancel one of the largest weapons programs ever terminated by the Pentagon. Furthermore, it was the only major weapons system in eighty years ever canceled for default in which the Department of Defense pressed a demand that the contractors return the money already paid them.

    "The A-12 I did terminate," Cheney said a few weeks after he canceled the A-12. "No one could tell me how much the program was going to cost even just through the full-scale development phase or when it would be available." This was a false statement. "The end result of this sad chapter in our history," said Representative Nick Mavroules, "is that we have spent $3 billion on the now deceased A-12 and have not one single aircraft—only some engineering drawings and a handful of parts—to show for the money."

    In the end, it became one of if not the largest and most complex government contracts case ever litigated, in terms of the amount at stake ($3-4 billion), the volume of relevant documents (54-59 million pages of contractor documents, 4 million pages of government documents, and an unknown quantity of subcontractor documents), the number of likely witnesses (hundreds of government, contractor, and subcontractor personnel), the intricacies of the legal and technical subject matter (twenty counts in the complaint, three years of attempted design and production of a stealth aircraft underlying the action), and the fact that the information relevant to the contractors' allegation was contained in a classified, special access program imposing cumbersome procedures and restraints on every litigation activity.

    How could the A-12, the only aircraft in the Major Aircraft Review to receive laudatory comments, travel from honor to derision in nine months? The fact that the navy's first stealth bomber went from a "well-handled" program in April 1990 to a foreclosed mortgage on naval aviation is not about a single big mistake, although the use of an underfunded fixed-price contract would qualify. It is about hundreds of mistakes and the attempts to right these wrongs in some cases, and in others, to cover them up. And if you want a conspiracy, at least from a legal perspective, that element is also available.

    The A-12 is also a story of the failure of "special access," the premier version of classification. The government created special access programs, sometimes called "black programs," to add an extra layer of access difficulty for a potential enemy. Regardless of the level of clearance you held—confidential, secret, or top secret—you could not have access to the information contained in the A-12 program without a specific clearance into it. To gain access to the A-12 program you had to know the code word. The "level three" code word for the A-12—equivalent to secret—was "Bravery." Even the code word "Bravery" and its abbreviation "BRR," known as a "trigraph," were classified. "Bravery" applied to most of the A-12's characteristics except for some of the exotic stealth aspects. The stealthy features were separately classified at level four under another code word, which, at the time of publication, was still classified.

    Americans ridiculed the Soviets' penchant for concealment and claimed that their obsession with secrecy prevented the free flow of ideas. The negative side of special access was that it had the same effect: it prevented communication among the aerospace intelligentsia. The classification surrounding the A-12 was worthy of the most byzantine Soviet apparat. However, insulation from Congress was the real purpose of keeping the program "in the black."

    While special access was designed to keep the Soviets ignorant, its effectiveness was suspect after the Aldrich Ames case. America's ability to keep secrets from the Soviets was made more questionable by Boris Aleksandrovich Solomatin, the Washington-based KGB overseer of the American spy operations, who said "we knew everything." Thus while secrecy's ability to keep the Soviets ignorant was questionable, it was effective in one area: it contributed to the A-12's demise. The prohibition against openly discussing special access issues prevented the navy from performing damage control as deftly as it could have in a less covert program.

    The history of the A-12 involves more than its research and development failure. It is the story of a complaisant Congress, a malignant military, and a passionless press. Each loitered while taxpayers were compelled under the threat of imprisonment to finance more than $5 billion for technology that was never used.

    The press was in a torpor, languorous over years of suppressed malfeasance. While it was willing to discuss on the front page of the New York Times the $500 million wasted on the FAA's updated computerized air traffic control system, the squandering of ten times that amount merited only a mention in its business pages. This lack of interest by the press was paralleled by lack of government oversight, and for the same reason: neither has the stomach for subject matter more complex than a one-sentence explanation. Sound-bite television has made impotent formerly invigorated newspaper journalism.

    The A-12 was born in a Roaring Twenties period of rising budgets. President Reagan was committed to bringing down the evil empire by throwing money at the budgets. Navy Secretary Lehman's strategy was to build up to fifteen carrier battle groups instead of the previously planned twelve, at a new cost of $54 billion. Lehman believed that by changing the spending culture in the U.S. Navy, he could finance the weapon systems he had in mind. He would do it by front-loading the 1982 and 1983 budgets to get the ships under way.

    By the time the A-12 program was finally over, it may have cost the American taxpayers more than $5 billion, for which the taxpayers received not a single airplane. One reason the navy spent so much money and suffered development delays that postponed the A-12's first flight was the air forces's complete unwillingness to share the lessons it had learned developing the F-117 and the B-2. Its obstinacy in refusing to share information was designed to fulfill its post-World War II claims that aircraft carriers were an unnecessary expense because bombers could perform the same mission. Because the air force, like all services, sees its mission primarily as achieving dominance through budget share, it was successful in taking the deep strike mission from the U.S. Navy and is not likely to return it.

    At no point during the development of the A-12 did the U.S. Navy stop to ask, Why do we need to perform the deep strike mission or, Is the deep strike mission still necessary? However, the evidence suggests that OSD asked those questions and came to the conclusion that the navy did not need to perform that mission. Indeed, as the tenth anniversary of the termination of the A-12 approached, the U.S. Navy still did not have an aircraft to perform the mission originally slated for the A-12. Furthermore, the Department of Defense did not ask the U.S. Navy's aircraft carriers to strike the target in Khartoum in response to the U.S. embassy bombings in Kenya and Tanzania, even though the Sudanese target was within range of an aircraft carrier in the Red Sea.

    The story of the A-12 is about more than the mismanagement of the taxpayers' money by the Office of the Secretary of Defense; it is also about the U.S. Navy's felonious conduct against the very document its members have sworn to defend, the U.S. Constitution. The navy's conduct was not accidental. With the same mentality that created the Vietnam War phrase "we had to destroy the village to save it," the U.S. Navy, in pursuit of the A-12, behaved as though it had to violate the U.S. Constitution to protect it.

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Excerpted from THE $5 BILLION MISUNDERSTANDING by JAMES P. STEVENSON. Copyright © 2001 by James P. Stevenson. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

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