Washington D.C. Mulls A Takeover Of Troubled U.S. Navy Contractors

As American military contractors struggle to deliver, a frustrated Washington is starting to cast about for new and aggressive options to address failing Navy contractors. With security stakes increasing, a loose cadre of American defense reformers, fueled by the collapse of both the U.S. Coast Guard’s Offshore Patrol Cutter and the U.S. Navy’s Constellation Class Frigate programs, are quietly urging the Administration to nationalize underperforming defense-sector assets, mimicking U.S. government’s long-standing and highly-regarded approach to failing financial institutions.

America’s leaders have wide range of options to safeguard U.S. financial security from bad corporate actors. When an American bank fails, and is unable to meet financial obligations to either depositors or others, the U.S. government, via the Federal Deposit Insurance Corporation, or FDIC, is quick to step in and take control. But, in matters of national security, the U.S. government has few options beyond engaging in a protracted settlement process that some government-associated observers characterize as “extortion.”

While infrequent, government takeovers in the financial sector are relatively common occurrences. Between 2023 and 2025, the FDIC took over nine banks, securing some $555 billion in deposits and continuing a longstanding economic security mission that dates back from the Great Depression.

America’s defense sector has similar mechanisms to backstop America’s national security, but those authorities and procedures, sketched out in the Selective Service Act of 1940, have been forgotten, after getting watered down to be essentially unworkable. Thanks to the Supreme Court, any proposed government takeover of a failing national security contractor requires an act of Congress.

That’s a problem.

When an American defense contractor is unable to meet contractual obligations, the government has few options other than to cancel the contract (forcing the government customer to restart what can be a decades-long process) or to take unhealthy measures to try and make the contractual problems go away. To “fix” things, contracts get repeatedly re-baselined, contractors are bailed out, and, often, additional government-funded resources are poured into the contractor’s facility, in the hope that, in time, something gets delivered. Without a means to quickly sanction bad actors and forge a resolution, failing contracts, failing companies and failing programs drag on for years.

In an increasingly dangerous and competitive world, solicitous treatment of troubled U.S. defense contractors is no longer appropriate. America’s ugly habit of awarding poor performers has done more harm than good, incentivizing bad behavior.

This wasn’t always the case. In the tough days of World War II and the early Cold War, America did not tolerate poor-performing defense contractors. As the U.S. raced to confront totalitarian forces, America also built a legal framework to seize defense contractors unable to meet their national security obligations.

This wasn’t an idle threat. During World War II, the Pentagon resorted to takeovers at least 64 times, removing management at recalcitrant shipbuilders, assuming control of broken aircraft manufacturers and straightening out troubled suppliers. Nationalization was reserved for extreme cases, but the threat that the U.S. government might reach out and assume control of underperforming defense contractors pushed America’s defense industry to become better and more efficient.

It worked.

Unfortunately, the threat of nationalization was too much for industry to bear (and far too tempting for the Executive branch to try and exercise at scale. ), that the Supreme Court made performance-based nationalization an unworkable process. Since the Korean War, the prospect of aggressive government intervention in the defense industry has been uniformly dismissed.

Time For A Navy and Defense Sector FDIC:

Today, the Trump Administration has an unparalleled opportunity to refresh the rules governing the nationalization of underperforming defense contractors. And, with the Trump Administration already sitting on over $10 billion in a variety of ownership stakes, the President has obviously developed a taste for assuming ownership of private entities. For companies that receive substantial government investment but still fail to perform, a mere contract cancellation and gentle “no fault” renegotiation may not be the answer.

Restoring the threat of nationalization can help American defense contractors refocus their energy back on their businesses, incentivizing boardrooms to forgo indefensible dividends and stock buybacks to put money into recapitalization, modernization and workforce retention.

Put bluntly, troubled defense contractors are unlikely to respond unless they are incentivized to do better. For the Pentagon, an empowered defense-related equivalent of the Federal Deposit Insurance Corporation offers one heck of a deterrent. Once the threat of serious Pentagon sanctions for non-performance becomes real, defense contractors will have little alternative than to get about the business of making more weapons faster and for less cost.

Re-establishing a realistic threat of a government takeover is within reach. The long-held stigma of direct government involvement in U.S. businesses is going away, and, with the establishment of government-owned corporations, “golden shares” and other innovative Federalized investment strategies, President Donald Trump is willing to free the government to influence key industries, and, with the President focusing on restoring the defense sector, an empowered and staffed “Federal Defense Insurance Corporation” offers the President a powerful tool to goad the often-sclerotic defense industry back into a fighting trim.

Government Takeovers Can Make Navy Stronger:

Nationalization of a private asset is no trivial step. But too many U.S. defense contractors are so confident in their exclusive market position that they break contractual obligations almost at will. Without fear of sanctions, defense contractors can operate with the tacit understanding that the government will leave defense contractor boardrooms happy by sustaining troubled defense contracts for far too long.

Sending trained government managers in to rationalize management at Fincantieri’s troubled Marinette Marine shipyard, force a sale of Eastern Shipbuilding Group’s Florida facilities, or to encourage modernization and relocation of Northrop Grumman’s struggling Sunnyvale submarine industrial base manufacturing site in California would go a long way towards forcing solutions

The current situation leaves the government few options beyond cancelling the errant program or trying to artificially jump-start some sort of competitor, pushing risk reduction into the source selection process. But the development of a viable competitor can be a decades-long process, and the U.S. military has little time to lose—and, often, the government will end up sacrificing a lot of U.S. taxpayer money in government-funded improvements, direct funding, or other help directed towards the failing facility.

This process is playing out in real time. As America’s ballistic missile submarines age out, key players in the submarine industrial base are failing. And rather than fix things, some key contractors are dragging their feet, refusing to modernize facilities or to move legacy factories from areas that, due to local economic changes and lack a viable workforce, are no longer viable. A government takeover—or, potentially, just the threat of a government takeover—can help force big, substantive changes that America’s reinvestment-averse boardrooms lack the intestinal fortitude to address.

Defense contractors have enjoyed a favored place in America’s economy. But change is coming. Washington’s defense community is dusting off old case studies, studying the intricacies and challenges that once led the Pentagon to assume control of failing defense contractors. And now, with the President’s buy-in, a reserve cadre of turn-around experts and defense executives, maintained under the Undersecretary of Defense’s office, can help add the managerial muscle needed to intimidate troubled U.S. Navy contractors into getting better, fast.