(4 of 5)
The Navy was not eager to pay the $843 million extra charge, but General Dynamics threatened to halt production of the submarines if the Pentagon refused to absorb the overrun. Company documents reveal that Lewis told Assistant Navy Secretary Edward Hidalgo that "it might well become necessary to close down those operations at Electric Boat relating to the 688 program." Charges Veliotis: "General Dynamics was prepared to hold the nation's vital submarine program hostage in order to squeeze more money out of the Government."
Rather than call the company's bluff, Hidalgo and Navy Secretary W. Graham Claytor tried to negotiate an agreement. The Navy even invited General Dynamics' help in persuading Congress to authorize funds for the overruns. In June 1978 the two sides made a deal. In the largest settlement of its kind in Navy history, the Pentagon agreed to swallow $484 million of the company's $843 million claim. Veliotis recalls that it was a "wonderful deal" for General Dynamics. Says he: "The Navy gave us the money up front for overruns we had yet to incur, so we had the use of those millions at a time when interest rates were high."
Hidalgo became Secretary of the Navy in 1979 and left the Pentagon when the Carter Administration departed in 1981. Within eleven months he was hired as an outside consultant for General Dynamics. Veliotis says that the company never specifically offered Hidalgo a reward for helping get it a good overrun settlement. But Veliotis contends there was an unspoken understanding that General Dynamics would take care of the Secretary in the future. Responds Hidalgo: "If anyone says that, I would call him a confounded and blasphemous liar."
Despite the $484 million settlement, the troubles at the Electric Boat division were not over. In 1981 the company's own inspectors discovered that workers had neglected to make critical welds in several submarines and covered up the errors with faked welding reports. The fiasco forced Electric Boat to reinspect all the welds and make repairs costing about $100 million. To recoup its loss, General Dynamics decided to turn to, yes, the Pentagon. The company argued that the Navy was liable for paying the repair bill under an obscure but standard clause in the submarine contract that called for the Government to act as an insurance underwriter in cases of worker negligence.
John Lehman, the new Secretary of the Navy appointed by Reagan, called General Dynamics' claim "preposterous." But Lehman found that General Dynamics had a strong legal case and soon began negotiating with Lewis. One of the Veliotis tapes contains Lewis' account of an inconclusive meeting that the chairman had with Lehman in the Secretary's office. As Lewis was leaving the Pentagon, Sawyer (the Assistant Navy Secretary who later took a job at General Dynamics) rushed up to the chairman's chauffeur-driven car and hitched a ride. According to Lewis, Sawyer said, "This is just between us. We've got to figure out a way to sit down here and negotiate some contracts." Two months later General Dynamics dropped its $100 million claim against the Navy. In turn, the Pentagon accepted the company's bid to build an additional attack submarine. Veliotis contends that a deal had been struck, but General Dynamics denies that there was any quid pro quo.