Fri Feb 29, 2008 9:50pm EST

By Kevin Drawbaugh

WASHINGTON (Reuters) - A U.S. Air Force decision awarding a $35 billion aircraft contract to a team including the European parent of Airbus landed like a bomb in Congress on Friday, drawing howls of protest from lawmakers aligned with the loser, America's Boeing Co.

The Congressional delegation from the Seattle area said they were "outraged." Kansas Republican Rep. Todd Tiahrt vowed to seek a review of the decision "at the highest levels of the Pentagon and Congress" in hopes of reversing it.

Boeing has big facilities in both Seattle and Wichita, which stood to gain from the long-term project to build up to 179 aerial refueling tankers. Although Boeing was favored to win the contract, the Air Force awarded it to a partnership between Northrop Grumman and Europe's EADS.

Conventional wisdom was running so strongly against Northrop-EADS in some corners of Capitol Hill that Texas Sen. Kay Bailey Hutchison's office issued a statement late on Friday declaring Boeing the winner. It was swiftly retracted.

Lawmakers from Alabama, where Northrop and EADS plan to do some tanker work, were effusive in praising the Air Force.

"I thought all along that the Northrop Grumman-EADS proposal was the best," Sen. Richard Shelby, an Alabama Republican, told reporters. He said the contract would bring nearly 7,000 jobs to the state.

On the disappointment of Chicago-based Boeing's allies, Shelby said he understood. "If Boeing had won this contract ... I would have been concerned about it."

As for Tiahrt's vow to seek a review, Shelby said, "The Pentagon and the Air Force have made their decision and I think it was for the right reasons and I'll stand by that."

The decision was sure to result in a debate, with a formal protest also possible, said defense consultant Jim McAleese.

The tanker deal will give EADS a huge boost in the U.S. defense market, making it the second biggest foreign supplier behind Britain's BAE Systems, analysts said.

"We are so very excited about having the opportunity to help the Air Force acquire the most modern and capable refueling tanker -- a tanker assembled in America -- by Americans," said Alabama Republican Rep. Jo Bonner.

Bonner represents Mobile, Alabama, where assembly work on the aircraft will be done, although it will largely be constructed in France at facilities of EADS' unit Airbus.

Airbus, with large facilities in Toulouse, is Boeing's arch-rival in the global commercial airliner business.

Wichita's Rep. Tiahrt said, "I am deeply troubled by the Air Force's decision to award the KC-X tanker to a French company that has never built a tanker in its history.

"We should have an American tanker built by an American company with American workers. I cannot believe we would create French jobs in place of Kansas jobs."

Tiahrt said he will seek to have the decision reviewed by both the Pentagon and Congress. "At the end of this laborious process, I hope the Air Force reverses its decision."

Washington Senators Patty Murray and Maria Cantwell, both Democrats, along with six other lawmakers from the state said in a joint statement: "We are outraged that this decision taps European Airbus and its foreign workers to provide a tanker to our American military.

"We will be asking tough questions about the decision to outsource this contract. We look forward to hearing the Air Force's justification."

(Additional reporting by Andrea Shalal-Esa, editing by Richard Chang)

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Turkey’s military announced it had withdrawn all of its troops from northern Iraq by Friday morning, bringing an eight-day ground offensive against Kurdish guerrillas to a close, just one day after Defense Secretary Robert M. Gates warned Turkey to pull out its troops.

Even so, reports differed on the extent of the withdrawal, with an American military official in Iraq and a representative for the Kurdish fighters saying some troops were still in the country.

The Turkish military bristled at the suggestion that it had been influenced by the United States, and said that the ground campaign in which 24 Turkish soldiers and as many as 243 Kurdish fighters were killed had simply run its course as its goals had been met.

“Both the start and the ending of the operation were fully determined on our part,” the military said in a statement. “Any internal or outside influence on the decision of the Turkish armed forces is out of discussion.”

Iraq’s foreign minister, Hoshyar Zebari, said in a telephone interview that the Turkish troops began pulling out of Iraq and crossing back into Turkey early Friday morning.

Despite the reports that it was only a partial pullout, he said that his contacts in Iraqi Kurdistan had assured him that all of the Turkish forces had crossed over the border back into Turkey.

“Sources on the ground informed us that they started pulling back their troops in the early hours of the morning,” Mr. Zebari said.

Mr. Zebari, who is himself a Kurd, said he believed that pressure from American officials including from Mr. Gates was critical to convincing the Turks to withdraw.

“It was a combination of reasons, but the United States’ position was very instrumental,” Mr. Zebari said.

“The United States position was admirable for reminding the Turkish side of the gravity of the situation,” he added.

The Turks have not made any promises ruling out another invasion again. But Mr. Zebari said the Iraqi government does not want to see any more operations inside its own borders.

“This has been a serious distraction for all of us,” he said. “It was very awkward for everybody, for the United States, for the Iraqi government, and even for Turkey.”

The Kurdish guerrillas — from the Kurdistan Workers’ Party, known as the P.K.K. for its initials in Kurdish — have bases in Turkey and Iraq and have been fighting the Turkish military since the 1980s. The United States lists the P.K.K. as a terrorist organization.

Panel to Assess Management

By David S. Hilzenrath

Washington Post Staff Writer
Friday, February 29, 2008; Page D01

Freddie Mac said yesterday it lost $2.5 billion in the fourth quarter and separately disclosed that its board has formed a special committee to investigate allegations of mismanagement by the company's directors, senior officers and outside auditors.

The McLean-based mortgage funding company said the board received two letters "from purported shareholders" late last year demanding that it take legal action to recover damages from the responsible parties.

"The formation of a special committee to look into a derivative demand letter from a purported shareholder is actually a pro forma action on the part of a corporation to determine whether or not there is any validity to an allegation," spokeswoman Sharon J. McHale said in an e-mail.

The disclosure was contained in a 190-page report the government-chartered company released as it returned to timely financial reporting five years after an accounting scandal exposed pervasive problems in the systems it uses to track its results. Freddie Mac said it is still assessing the effectiveness of certain internal controls.

The $2.5 billion loss ($3.97 a share) for the last three months of 2007 compares with a loss of $401 million (73 cents) in the fourth quarter of 2006. For all of 2007, Freddie Mac lost $3.1 billion ($5.37 per share), compared with a profit of $2.3 billion ($3) in 2006.

Changes in accounting methods improved Freddie Mac's bottom line for 2007 by $2.1 billion, according to the annual report.

Like its larger competitor, Fannie Mae, which reported a fourth-quarter loss of $3.6 billion Wednesday, Freddie Mac is widely thought to represent the most stable segment of the nation's housing market. With worse-than-expected results this week, both companies underscored the severity of the market's problems.

"After many years of effort, we are finally delivering timely financial reports," Freddie Mac chief executive Richard F. Syron said in a conference call with investors. "Unfortunately, the financials we're delivering are far from pretty."

"This is a very ugly situation we're in," and Freddie Mac is assuming that home prices have fallen only a third as far as they are going to, Syron added.

Syron declined to comment in detail on a pending probe of suspected inflation in home appraisals, which determine the value of the collateral for the loans Freddie Mac buys. However, Syron said he believes there was an increase in the volume of loans Freddie Mac has asked sellers to repurchase from the company based on flawed appraisals.

Saying it wanted to give investors a clearer view of the company's performance, Freddie Mac yesterday outlined an alternative financial measure -- adjusted operating income -- alongside the standard numbers prescribed by accounting rules.

Analyst Bradley Ball of Citigroup expressed skepticism about the new financial measure during the conference call.

"Just at a glance, it looks like you're essentially eliminating . . . all the stuff that's bad and keeping all the stuff that's good," Ball said.

Freddie's chief financial officer, Anthony "Buddy" Piszel, said Freddie Mac committed to making the change in 2006 and was not trying to make its results look better.

Freddie Mac's current leadership was brought in to clean up the company after the accounting scandal of 2003. Freddie Mac did not identify the shareholders who wrote to the board with the new allegations of "improper conduct" or the members of the special committee formed to investigate.

The company said the letters alleged "corporate mismanagement and breaches of fiduciary duty in connection with the company's risk management." One of the letters demands that the board "implement corporate governance initiatives to ensure that the alleged problems do not recur."

Freddie Mac's annual report did not elaborate on the allegations. A spokesman for PricewaterhouseCoopers, the company's auditor, also declined to comment.