A look back at capitalism, Pentagon-style.

In Bailout Nation, Barry Ritholtz’s fiery Bible of corporate welfare, the 1971 bailout of Lockheed is depicted as original sin. Lockheed was teetering on the edge of bankruptcy, despite being the largest military contractor in the country and having received multibillion-dollar commissions for the Cheyenne helicopter and C-5A transport plane. Ritholtz labels 1971 "a sea change in the history of American bailouts," calling the $250 million in government-guarnateed loans "the very first time the United States bailed out an industrial firm whose own financial management had driven it to the brink of extinction." For Ritholtz and many others, the government rescue of Lockheed set the mold for future bailouts, from Chrysler in 1980 to Long-Term Capital Management in 1998 to our current bank bonanza.

Lockheed was indeed the largest and best-known bailout of the period, and almost certainly the first time that the American public debated the merits of saving a private—though government-contract-dependent—company from going under.  But Lockheed was not the first; it was one of thousands of Pentagon interventions to save companies deemed to be failing, going back to the 1950s. Unlike Lockheed, these smaller bailouts were doled out without congressional authorization (and at least on some occasions, without the knowledge of the Secretary of Defense). Instead, the Pentagon relied on an obscure emergency provision of the War Powers Act, which is technically still valid today, because the Korean War was never ended by treaty. Nearly $86 million in outright government grants went to private companies in this manner, dating back to 1958.

One especially strange bailout was for a Long Island company called Belock Instrument Corporation. As a subcontractor for Raytheon (RTN), Belock made devices for the Army’s Hawk surface-to-air missile. (It also ran a classical music label.) In 1962, when Belock began losing money, the Army and Navy each gave the company just under $500,000.

That bailout came on top of a $3.2 million government loan that had been made to the company in 1958; even though Belock did not pay back one dime of that loan, it was renewed every year throughout the 1960s. In 1972, the Navy said it wanted its loan back, and the company threatened to file for bankruptcy. Rather than let that happen, the Department of Defense converted the loan into shares of preferred stock that were convertible into 1.3 million shares of common stock—a very early instance of the Defense Department owning a majority stake in an ostensibly private company.

Another significant pre-Lockheed bailout was of Memcor, Inc., a company in Huntington, Ind., that made radio equipment and gyroscope parts for the Army and Navy. It, too, was unable to stay healthy despite government loans, and so, in 1966, the Army and Navy gave it $3.8 million outright. That infusion suddenly made the company an attractive takeover target, and it was bought by the LTV conglomerate.

One especially questionable Pentagon bailout was revealed in 1972, for another Long Island firm called Gap Instrument Corporation. The company had a contract in the late '60s to build fire-control consoles for Navy destroyers. But it had dramatically underbid and could not meet its costs. It petitioned the government for a direct handout right around the same time as Lockheed; when the government refused, Gap created a class of preferred stock, which it sold to the Navy for $1.7 million. This was a terrible deal by any normal market standards; the entire market capitliazation for this penny-stock company was charitably $200,000, and the preferred stock was worthless from a market standpoint.