Speaking of balderdash in the Pentagon, check out this headline in today’s NYT:

From Rockets to Ball Bearings, Pentagon Struggles to Feed War Machine

The Navy admiral had a blunt message for the military contractors building precision-guided missiles for his warships, submarines and planes at a moment when the United States is dispatching arms to Ukraine and preparing for the possibility of conflict with China.

“Look at me. I am not forgiving the fact you’re not delivering the ordnance we need. OK?” Adm. Daryl Caudle, who is in charge of delivering weapons to most of the Navy’s East Coast-based fleet, warned contractors during an industry gathering in January. “We’re talking about war-fighting, national security, and going against a competitor here and a potential adversary that is like nothing we’ve ever seen. And we can’t dillydally around with these deliveries.”

His open frustration reflects a problem that has become worryingly apparent as the Pentagon dispatches its own stocks of weapons to help Ukraine hold off Russia and Washington warily watches for signs that China might provoke a new conflict by invading Taiwan: The United States lacks the capacity to produce the arms that the nation and its allies need at a time of heightened superpower tensions.

Industry consolidation, depleted manufacturing lines and supply chain issues have combined to constrain the production of basic ammunition like artillery shells while also prompting concern about building adequate reserves of more sophisticated weapons including missiles, air defense systems and counter-artillery radar.

The Pentagon, the White House, Congress and military contractors are all taking steps to address the issues.

Procurement budgets are growing. The military is offering suppliers multiyear contracts to encourage companies to invest more in their manufacturing capacity and is dispatching teams to help solve supply bottlenecks. More generally, the Pentagon is abandoning some of the cost-cutting changes embraced after the end of the Cold War, including corporate-style just-in-time delivery systems and a drive to shrink the industry.

“We are buying to the limits of the industrial base even as we are expanding those limits,” Deputy Defense Secretary Kathleen Hicks said this month at a briefing on the Biden administration’s 2024 budget plan.

But those changes are likely to take time to have an effect, leaving the military watching its stocks of some key weapons dwindle.

Artillery shells are cleaned and polished by two workers on an assembly line.
Industry consolidation, depleted manufacturing lines and supply chain issues have combined to constrain the production of basic ammunition like artillery shells.

In the first 10 months after Russia invaded Ukraine, prompting Washington to approve $33 billion in military aid so far, the United States sent Ukraine so many Stinger missiles from its own stocks that it would take 13 years’ worth of production at recent capacity levels to replace them. It has sent so many Javelin missiles that it would take five years at last year’s rates to replace them, according to Raytheon, the company that helps make the missile systems.

If a large-scale war broke out with China, within about one week the United States would run out of so-called long-range anti-ship missiles, a vital weapon in any engagement with China, according to a series of war-game exercises conducted by the Center for Strategic and International Studies, a Washington-based think tank.

The shortcomings in the nation’s defense industrial base are vividly illustrated by the shortage of solid rocket motors needed to power a broad range of precision missile systems, like the ship-launched SM-6 missiles made by Raytheon.

It was the shortage of SM-6 missiles in particular that had Admiral Caudle fuming; they are used to defend ships against enemy aircraft, unmanned aerial vehicles and cruise missiles.

There are only two contractors today that build large numbers of rocket motors for missile systems used by the Air Force, the Navy, the Army and the Marines, down from six in 1995.

A recent fire disrupted the assembly line at one of the two remaining suppliers, Aerojet Rocketdyne, causing further delays in delivering the SM-6 and other precision missile systems, even as Pentagon orders for thousands of new missiles pile up.

From the article:

When he led the Chicago school system, mayoral candidate Paul Vallas took actions that resulted in more than $1.5 billion being transferred out of the city’s budget-strapped public schools and to some of the wealthiest individuals and banks on the planet, a new report shows.

Now, Vallas is in an election runoff against Cook County Commissioner Brandon Johnson to lead the city of Chicago, with big support from wealthy investors and other corporate interests — including from executives at law firms and banks that benefited from the controversial financing methods he used as CEO of Chicago Public Schools from 1995 to 2001.

With less than two weeks left before the April 4 election — which polls show is a tight race — Vallas has faced little scrutiny over his tenure as the Chicago Public Schools chief, even though he helped create a slow-moving financial disaster for America’s fourth-largest school system.

With Vallas at the helm, Chicago Public Schools issued $666 million worth of so-called “payday loan” bonds, according to a report from the Action Center on Race and the Economy (ACRE).

The interest payments on the bonds totaled $1.5 billion. A 2016 analysis from the Texas Comptroller’s office found that the type of bonds Vallas issued can be three times more expensive than traditional bonds — meaning that Chicago Public Schools could have faced up to $1 billion in additional interest payments above a normal rate.

That $1 billion is almost exactly the budget shortfall that former Chicago Mayor Rahm Emanuel, the current Ambassador to Japan, cited as justification to shutter 50 Chicago public schools a decade ago. Some of Emanuel’s largest donors, like Citadel hedge fund CEO Ken Griffin and executives at private equity firm Madison Dearborn Partners, are currently backing Vallas.

“[Vallas] got Chicago Public Schools into really bad deals that we’re still paying for a quarter century after he left,” said Saqib Bhatti, the co-director of ACRE. “And the fact that his strongest base of support comes from Wall Street should in and of itself be a big red flag.”

“It Was A Gimmick”
The criticisms of Vallas’ budget management center on two opaque areas of municipal financing: “capital appreciation bonds” and “interest-rate swaps.”

Cities, states, and school districts routinely issue debt to pay for new infrastructure projects and to fund ongoing cash needs. For decades, municipal bonds were considered a plain vanilla sector of finance: Municipalities would issue debt at a 20 or 30-year fixed interest rate, like a traditional mortgage. But starting in the 1990s, more exotic forms of financing came to the fore.

One example of those exotic forms of financing was capital appreciation bonds. Called “the school district equivalent of a payday loan” by former California State Treasurer Bill Lockyer, these bonds don’t allow borrowers to make any principal or interest payments for many years — as long as 14 years in the case of Chicago Public Schools — allowing governments to defer payments and investors to compound their interest and thus earn huge interest rate payments.

The report from ACRE found that Vallas issued $666 million in capital appreciation bonds during his tenure at Chicago Public Schools, resulting in $1.5 billion in interest payments — an effective interest rate of 223 percent on bonds issued to fund general operations of the school district.

Financial firms involved in the marketing of the capital appreciation bonds included Goldman Sachs, Bank of America, Lehman Brothers, and the Royal Bank of Canada.

“As a policy, I thought [capital appreciation bonds] was a bad idea,” Lockyer, who was California’s treasurer from 2007 to 2015, told The Lever. “Bonds ought to pay for the project that’s contemplated… Interest charges are fine. But building in capital appreciation bubbles seemed to me to be a bad idea.”

Capital appreciation bonds were routinely marketed on assumptions of higher property values in the future due to the improved public services funded by the bonds. That optimistic modeling, in theory, justified the years of delayed payments, which allowed the bondholders to capitalize interest.

“To tie it to some speculative increase in local property values just doesn’t make sense,” said Lockyer. “I do give [the municipal finance industry] credit for always figuring out a new clever scam, but that’s what I thought it was. It was a gimmick that allowed them to claim that the costs of the bond were going to be significantly less than the workout justified.”

Citing Lockyer’s concerns, California cracked down on capital appreciation bonds in 2013.

“They’re Unpredictable”
Vallas also oversaw bond deals that led to costly interest-rate swaps.

Interest rate swaps involve a municipality initially issuing variable rate debt, like a variable rate mortgage, and then “swapping” the debt for a fixed interest rate in a transaction with a bank.

Under Vallas in 2000, Chicago Public Schools issued $303 million in variable rate debt, some of which was later subject to interest rate swaps that cost the city’s schools $32 million, according to the ACRE report.

Interest-rate swaps have been a subject of enormous controversy in Chicago, with routine protests at banks and financial firms that profited from the deals. Those protests were often led by the Chicago Teachers Union (CTU), which is backing Johnson, a teacher and former CTU organizer, in the mayoral race. In total, all of the swaps deals initiated by the school district — not just under Vallas’ watch — have cost the city’s schoolchildren $508 million, said Bhatti at ACRE.

When Vallas was the Superintendent of the School District of Philadelphia from 2002 until 2007, Vallas made $691 million in swap deals, with the total cost to the school district being $162 million, the ACRE report found.

Jack Wagner, a former Auditor General of Pennsylvania who routinely audited swap deals, told The Lever that the swaps were too risky and that they should be banned.

“With concern in the banking system again, there is greater potential that certain entities that are involved in interest rate swaps could be subjected to losses,” Wagner said. “The big issue there is they’re unpredictable. And unpredictable financial sources should not be part of public money because obviously you are gambling with public money. And it’s very difficult to understand swaps, let alone follow them.”

Those concerns were echoed by Joe Fichera, a former Wall Street executive who has studied interest-rate swaps.

“Most municipalities don’t have the in-house expertise to evaluate swaps, so they have a swap advisor who only gets paid if a deal gets done,” he noted.

“You’re taking on multiple risks that you may not be able to manage,” Fichera continued. “The unwinding of swaps creates enormous payments that you have to fund, which shows the kinds of risks you have. The structure is built for the bank, not the government, because the banks are smarter.”

Vallas has received $5,000 in campaign cash from Allan Muchin, whose firm Katten Muchin did legal work on some of the capital appreciation bonds, as well as $5,000 from Paul Crimmins, a partner at Mayer Brown, which also did legal work on the bonds.

Additionally, Vallas has received $1,000 from an executive at the Royal Bank of Canada, the bank that did the Chicago Public Schools swap deal which emerged from the variable rate debt issuance overseen by Vallas.

“The absurdly complicated deals that were so ruinous for Chicago’s and Philadelphia’s public schools were the emperor’s new clothes of public finance,” said former Rep. Brad Miller (D-N.C.), a critic of Wall Street municipal finance deals. “Vallas thought he was in the small circle of sophisticates who understood the deals and the emperor’s new clothes were beautiful. When the deals went to hell, the Wall Street banks told everybody that the deals were great but they just got unlucky, and Vallas believed that too.”

As $CS fails last week, and $DB stock caters, someone drew $60 billion from the foreign central bank facility.

The max amount possible. pic.twitter.com/DCZkrbscZC

— unusual_whales (@unusual_whales) March 24, 2023

We’ll have music, headlined by Chicago’s own @VicMensa! Help us spread the word. No matter who your team is, we have a poster for you: pic.twitter.com/pMrLCABBaX

— Brandon Johnson (@Brandon4Chicago) March 24, 2023