The Washington Post 013 20101219

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Politics & The Nation

EZ SU

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SUNDAY, DECEMBER 19, 2010

Senate committee allows itself, but not appointees, to own defense stock

conflict from A1

tract at thePentagon.” The prohibition is representa-

tive of how members of Congress set strict rules on investing for oth- ers in sensitive posts in the corpo- rate world and government while allowing themselves to manage their financeshowever theyplease. Congressional experts say that

such a prohibition on lawmakers would deter good candidates for office and that politicians would grow out of touch with their con- stituentsbynot sharinginthe ebbs and flows of themarket. Financial disclosure is supposed to bring transparency to congressional in- vesting. “There’s no question that it’s a

double standard, but there is an- other elementhere,” saidG.Calvin Mackenzie,aColbyCollegeprofes- sor who is an expert on presiden- tial appointees and the confirma- tion process. “Senators have to stand for reelection. If their con- stituents think they are lining their own pockets, they could be challenged.” Nineteen of the 28 senators on

the Senate Armed Services Com- mittee held assets in companies that do business with the Penta- gon between 2004 and last year, according to an analysis of finan- cialdisclosureformsbyTheWash- ington Post. Those holdings were worth a total of $3.8 million to $10.2million. The committee’s Democrats

held $1.3 million to $5 million during their tenure; Republicans held $2.3 million to $4.9 million. Under congressional rules, law- makers are required to report as- setsonly inbroadrangesonfinan- cialdisclosure forms. Ethics laws allow senators to

hold stocks in industries they oversee. They also may push and vote for programs that could im- prove the bottom lines of compa- nies inwhichtheyownstock.They are precluded, however, fromtak- ing official actions that could boost theirpersonalwealthif they are the sole beneficiaries. Most of the senators who have

holdings inPentagonvendors told The Post that they see no reason why they should have to divest. Only Sen. Joseph I. Lieberman (I- Conn.), who owned as much as $315,000 in the banned stocks, said he supports extending the prohibition to members of the ArmedServicesCommittee. Several members — including

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Sens.MarkBegich(D-Alaska), Jeff Bingaman (D-N.M.) and Christo- pherA.Coons (D-Del.)—saidthey sold some of the stocks on the prohibitionlist this year for finan- cial reasons, but the disclosures for 2010 will not become public until the end of next year, along withthose of the rest ofCongress. The Post analysis found that

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Sen. JohnMcCain (Ariz.), the pan- el’s ranking Republican; Sen. Kay R. Hagan (D-N.C.); and James M. Inhofe (R-Okla.), along with their family members, have had the largest amount ofmoney invested in companies with military con- tractsdating to 2004. Nine lawmakers either did not

haveholdings inthe companies or arenewly appointedto thepanel. Eight senators and their family

members held assets in the na- tion’s top defense contractors, in- cluding General Electric, Northrop Grumman and United Technologies. Those assets were worthasmuchas$1million. The senators and their families

also had assets in commonly held stocks that the committee prohib- its because the firms domore than $25,000 in business with the Pen- tagon. Those companies include Microsoft,Pfizer andExxonMobil. The Post requested interviews

withandsubmittedquestionsabout thedivestmentpolicytothe19sena- torswithprohibitedholdings.None agreed to an interview, although somerespondedinwriting. “I thinkthepremiseof the story

is seriously flawed, and we will decline comment,” said Gail Gi- tcho, the communications direc- tor forSen.ScottBrown(R-Mass.). “Senator McCain has always

maintained strict adherence to all Senate ethics rules, including the rules covering disclosure of fi- nances bymembers of the United States Senate,” said his spokes- woman,BrookeBuchanan,noting thatmost of the assets are held by the senator’s wife, CindyMcCain, a scion of one of the largest An- heuser-Buschdistributorships. Will Jenkins, a spokesman for

Sen. James Webb (D-Va.), said: “SenatorWebbhasbeencareful to complywithallSenateethics rules in order to avoid any conflict of interest.Likewise,whenhe served inthePentagon,he adheredto the conflict of interest requirements of theDepartment ofDefense.” The Senate ethics manual

maintains that the financial-dis- closureprocess is a sufficient safe- guard against conflicts of interest

Conflicting standards

Te Senate Armed Services Committee prohibits presidential appointees to

Pentagon posts from owning stocks or bonds in 48,096 companies that have Defense Department contracts. But the senators who sit on the panel have not extended the ban to themselves.

XXXXXXX FIVE-YEAR VIEW

From 2004 to 2009, records show 19 senators had holdings.

In 2009 MOST RECENT

Records from 2009 show that 15 senators had holdings.

“The procurement budgets

were becoming so large and so complex,” said Arnold Punaro, who joined the committee staff in 1973 and served as its director for 13 years before stepping down in 1997. “Executive branch people know what’s going to be in these budgets, and in theory, they could be trading inthose stocks.” Although the prohibition has

238 assets $3.8

million to

$10.2 million

162 assets $1.5

million to

$5.6

Holdings in companies that do $25,000 or more in business with the Pentagon:

Senators on committee (since)

John McCain (R-Ariz.) ’87 Kay R. Hagan (D-N.C.) ’09

Number of

assets

Maximum value

of assets 27 $2,591,001

Number of

assets 1

James M. Inhofe (R-Okla.) ’95 32 $1,750,000 12 James Webb (D-Va.) ’07 Ben Nelson (D-Neb.) ’01

Joseph I. Lieberman (I-Conn.) ’93 3 Claire McCaskill (D-Mo.) ’07 3 Jack Reed (D-R.I.) ’99 David Vitter (R-La.) ’09

Jeff Bingaman (D-N.M.) ’10 Scott Brown (R-Mass.) ’10

1

7 7 6 2

Mark Begich (D-Alaska) ’09 5 George S. LeMieux (R-Fla.) ’09 5 Richard Burr (R-N.C.) ’09 Carl M. Levin (D-Mich.) ’79

5 2

Lindsey O. Graham (R-S.C.) ’03 5 Evan Bayh (D-Ind.) ’03 Roger Wicker (R-Miss) ’08 Jeff Sessions (R-Ala.) ’99

2 1 1

0

Susan Collins (R-Maine) ’01 0 Mark Udall (D-Colo.) ’09

Saxby Chambliss (R-Ga.) ’03 0 Daniel K. Akaka (D-Hawaii) ’01 0 Mark Kirk (R-Ill.) ’10 Bill Nelson (D-Fla.) ’01 John Tune (R-S.D.) ’05

Joe Manchin (D-W.Va.) ’10 Christopher A. Coons (D-Del.) ’10

on washingtonpost.com

To see holdings of the senators and view their responses, go to http://wapo.st/conflicting-standards

SOURCES: Center for Responsive Politics, Senate financial disclosure forms

and that requiring senators to di- vest is not needed. “Members should not be expected to fully strip themselves of worldly goods,” themanual says. Somedefense industry analysts

said that leeway sends a mixed message. “Themessage is: ‘It’s okay to be

fuzzy onthe edges,’ ” saidWinslow T. Wheeler, a former national se- curity analyst for severalU.S. sen- ators who runs a military reform project at the Center for Defense Information. Gordon Adams, who oversaw

military spending as a top official at the Office of Management and Budget in the 1990s, said commit- teemembers andstaffershave vir- tually unfettered access to the highest-ranking officials at the Pentagon, which, with an annual budget of nearly $700 billion, is thelargestpartof thegovernment. “Yougetagreatdealof informa-

tion about the Pentagon’s inten- tions for the future,” saidAdams, a foreign policy professor at Ameri- canUniversity. “As amember, you have vastly more information thantheaverageWallStreetadvis- er or investor.” While no committee members

have been accused of trading on inside information, the appear- ance of conflicts ishardto avoid. For example, several senators

hadafinancial interest inacompa- ny engaged in a pitched fight over fundingfor thecontinueddevelop- ment of an alternative engine for theJointStrikeFighter,alsoknown as the F-35 Lightning II Program. Pratt&Whitneyhadwontheorigi- nal contract, butmembers of Con- gress have been using anonymous and untraceable earmarks to fund a second engine built by a partner- shipledbyGeneralElectric.Propo- nents of theGE engine say it could lower costs and increase the jet’s readiness. President Obama and Defense

SecretaryRobertM.Gateswanted to end the funding to GE and its partner, Rolls-Royce, and Obama threatened to veto the defense bill over thematter. On June 26, 2009, the Armed Services Committee voted 12 to 10

THE WASHINGTON POST

to continue development of the alternative engine. Three senators on the commit-

teeheldGEstocksorbondsduring the voting on the engines. None had a financial stake in Pratt & Whitney. Webb, Hagan and Sen. ClaireMcCaskill (D-Mo.) votedfor the extension.Webb held asmuch as$65,000inGEassets;McCaskill held 100,000. It is unclear from disclosure forms how much GE stockHaganheldat the time. A spokeswoman forHagan said

that the GE stocks are in her hus- band’s family trust and that the senator will not directly benefit from them. She also said Hagan supports the GE engine because it willbringjobs toher state. A spokeswoman for McCaskill

said the senator’sGE holdings are in bonds, not stocks, that her hus- band’s financial adviser manages her assets and that she has since reversed her position on the alter- native engine. The committee re- quires its staffmembersandpresi- dential appointees to divest of their bonds in addition to their stocks.Webb did not respond to a questionabouthisGEholdings. “It’s a problem,” said Nick

Schwellenbach, director of inves- tigations for the Project on Gov- ernmentOversight, anonpartisan government watchdog group. “Theywill come back and say that it’s ludicrous that Iwould think of my stocks, that they only think about the nation’s interests and that of their constituents. “Theproblemis,we can’tknow.”

A unique prohibition The Armed Services Commit-

tee’s prohibition on presidential appointees holding assets in con- tractors thatdobusinesswiththeir agencies is unique on CapitolHill. The panel’s ban dates back de- cades. As the size and influence of the “military industrial complex” grewinthe 1950sand1960s, sodid concerns about conflicts and the possibility that presidential ap- pointees could benefit frominside DefenseDepartment information. Early on, senators on the panel

recognized the growing potential for conflicts.

2 6 7 6 2 5 5 5 1

million

never been applied tomembers of thecommittee,senatorsonthepan- el have raised the question of the fairness of exempting themselves whilerequiringothers todivest. During a closed-door hearing

held before the 1961 confirma- tions of Defense Secretary Robert S.McNamara and other presiden- tial appointees, some committee members said it was time to ad- dress thediffering standards. “Wehavegot togothewholeway

andput thesamerulesonourselves that we put on these people in the government,” saidSen.StuartSym- ington(D-Mo.),accordingtoatran- scriptof thehearing. “I want to concur in that thor-

Maximum value

of assets $15,000

64 $1,754,000 64 $1,754,000 $650,000

44 $1,340,000 30 $1,130,000 17 $1,097,000 15 $315,000 $250,000 $190,000 $175,000 $154,206 $150,000 $146,000 $90,000 $86,864 $65,000 $61,000 $30,000 $15,000 $15,000

0 0 0 0

. 0 . 0 . 0 . 0

0NO HOLDINGS . 0 0 0

. 0 . 0

NO HOLDINGS

$897,000 $100,000 $65,002 $125,000 $175,000 $154,206 $150,000 $146,000 $90,000 $86,864 $15,000 . . . . . . . . . . .

oughly,” saidSen.StromThurmond (S.C.),whowas thenaDemocrat. Other senators on the panel ob-

jected. “When you pass a law like that,

you will have the greatest mass resignationthat theworldhas ever seen,” said Sen. Prescott Bush (R- Conn.), whose son and grandson were both president. “For heaven’s sake, ifyouwant tobringtogethera lot of people that do not have any touchwithrealityinthiscountryto makethelaws,GodhelptheUnited States, inmy judgment.” Thematternever cametoavote, andthe exemptioncontinued.

‘Very painful’ John J. Young Jr., an assistant

secretary of the Navy and then undersecretaryofdefenseacquisi- tions under President George W. Bush, saidhewasperplexedbythe senators’ reluctance to apply the same standard to themselves. “It’s clearlyadoublestandard,”hesaid. When Bush named him to the

conflicts PROOF3

LOID: 12.0 Topic: politics/invest FPO

Run Date: XX / XX / 2010 Size: 23p2x 10.8” Artist: stanton

Pentagon on July 1, 2001, Young’s stocks were just beginning to bounce back from the dot-com bust. The committee gave him90 days to sell. After terrorists struck Sept. 11 thatyear,Young’sportfolio plummeted. He pleaded with the committee to let him keep his stocks until themarket stabilized andthensell. “I beggedthemto givememore

time until things could rally,” he said. “Theywouldn’t budge.” Former defense secretary Wil-

liamJ. Perry said the senators are making a mistake. He and other appointees made financial sacri- fices, he said, and he askswhy the senators shouldn’tdo the same. When President Jimmy Carter

nominated Perry to be undersec- retary of defense for research and engineering in 1977, the commit- tee told himto sell all the stock he owned in a firmhe founded, Elec- tromagnetic SystemsLaboratory. At first, Perry balked.He asked

whetherhe couldput the stocks in a blind trust. But he said the com- mittee chairman, Sen. John C. Stennis (D-Miss.), ordered himto sell or withdraw his name. Soon afterPerrysold,TRWboughtElec- tromagnetic Systems Laboratory, andthe stockprice tripled. Perry said he missed out on

more than$1millioninprofits. In 1993, Perry took another fi-

nancial hit when President Bill Clintonasked himto become dep- uty defense secretary. Perry had joined the boards of several com- panies, including SAIC and Unit- ed Technologies, and he had re- ceived lucrative stock options, whichhewas forcedto surrender. He lost out on $5million to $6

million,he said. “Thatwasverypainful,”saidPer-

ry,whowent ontobecomedefense secretary from1994 to 1997. “But I do not disagree with the impor- tance of doing this. The potential for corruptionis veryhigh. Ithelps tokeepourgovernment clean.” England, the former deputy de-

fense secretary, said that even though he was willing to sell his holdings, he found it difficult to recruit talented job candidates whowoulddo the same. “People aren’t going to give

away their stock options that they haveworkedalifetime toaccumu- late,” he said. “I had dozens of people turnmedown.” England also said that the poli-

cy should be limited to assets in defense industries. “Weweren’t allowed to buy Co-

ca-Cola stock because military guys drink Coke, and we couldn’t have stock in cereal companies because military guys eat cereal,” he said. “That seems a far stretch.” highams@washpost.com kindyk@washpost.com keatingd@washpost.com

Staff researcher Lucy Shackelford and graphics editorKaren Yourish contributed to this report.

© DAVID YURMAN 2010

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