The Government Accountability Office handed Boeing a huge win, finding that the Air Force improperly awarded a $35 billion contract to build new midair refueling planes to its competitors Northrop Grumman and Airbus.

The Wall Street Journal, Financial Times, and Washington Post all go big with the news on their respective front pages, while The New York Times puts the news on its Business Day cover. The European FT leads with the “heavy blow” for Airbus parent European Aeronautic Defence & Space Company, while Boeing’s hometown Chicago Tribune calls it a “stunning achievement” for its local airplane company. The Air Force doesn’t have to abide by the GAO’s wishes, but the papers agree it’s extremely unlikely it won’t do so.

The papers say the GAO lit into the Air Force, which comes across as bumbling and plain incompetent. Indeed, it’s already in turmoil with the firing of its top two officials two weeks ago after a number of mishaps, including sending sensitive equipment to Taiwan and flying nuclear-armed fighters over the U.S. The Journal and Bloomberg note that the GAO in 2006 sided with the protestors on a $10 billion helicopter contract awarded to Boeing. And

The report found that the Air Force’s actions were done “unreasonably,” that it “conducted misleading and unequal discussions,” and just plain made “significant errors.” The Seattle Times, Boeing’s ex-hometown (where it still has lots of workers) paper, has a nice bullet-point list of the GAO’s findings. And here’s Bloomberg:

“The GAO has identified so many mistakes by the Air Force that it calls into question the credibility of their process for picking weapons systems,” (an analyst) said. “They’re basic things, like whether Boeing’s cost estimates were correct or not.”

The outcome will be a big deal. The Air Force is using ancient refueling tankers, according to the Journal and Bloomberg—their average age is forty-seven years. Jobs are on the line. The Journal says if Boeing wins, more work would likely be done in the U.S. And while it’s worth $35 billion now, it could be expanded to a whopping $100 billion.

Meanwhile, the FT scoops that the defense secretary fired those two top officials in part because the Air Force can’t find more than 1,000 “sensitive nuclear missile components.”

Smoking e-mail

The Journal scoops on A1 that an e-mail between two then-Bear Stearns hedge-fund managers shows that they were talking about shutting down their funds because the market was “toast” just four days before they assured their investors that everything was a-okay. The note will be a key part of an indictment the Journal says may be announced today on fraud charges for the two, Ralph Cioffi and Matthew Tannin.

Ahh, the incriminating “paper” trail. The paper has a nice info-box with a rogue’s gallery of Wall Street biggies brought down by ill-considered electronic correspondence.

The story is just more great work by Kate Kelly, whom we’re sure the Journal is glad it brought back from the movie beat last year. She even gets in to talk with the suspects themselves… err… “people familiar with their view of the events.”

The two say that after thinking about it, they decided the market really wasn’t toast, and thus they weren’t deceiving their investors to cover their rear ends. Their funds, of course, collapsed in June—canaries in the coal mine on the health of Bear Stearns and the financial industry in general.

Um, Iraq was about freedom, not oil, right?

The Times leads page one with a report saying the Western oil giants Exxon Mobil, Shell, Total, and BP are about to be back in business in Iraq, something that’s sure to inflame cynicism about American intentions even if it helps the country modernize the crumbling infrastructure that threatens its (practically) sole source of wealth.

The Times says the short-term, no-bid contracts are “unusual for the industry” and beat out those from companies in Russia and China. We’re sure these deals are absolutely on the up and up.

There was suspicion among many in the Arab world and among parts of the American public that the United States had gone to war in Iraq precisely to secure the oil wealth these contracts seek to extract. The Bush administration has said that the war was necessary to combat terrorism. It is not clear what role the United States played in awarding the contracts; there are still American advisers to Iraq’s Oil Ministry.

Sensitive to the appearance that they were profiting from the war and already under pressure because of record high oil prices, senior officials of two of the companies, speaking only on the condition that they not be identified, said they were helping Iraq rebuild its decrepit oil industry.

The Times says it’s potentially a black-gold mine for oil companies at a time when they’re having trouble getting access to big oil fields and when prices are at record highs. But it notes the security “nightmares” that await the companies. It buries too low in its story information that these firms aren’t the first to get oil contracts since the war started.

Regional banks still heading down, down

In credit-crisis land, the Times in a C1 story on the woes of regional banks in general says things are going to get worse for many of them. Fifth Third Bancorp says it will raise capital, slash its dividend, and sell assets to help it deal with a wave of bad loans (the Journal reports this on C3). Its shares got trashed, down 27 percent.

Investors are worried that the banks are going to get hit by their heavy exposure to commercial real-estate loans (which include lots of condo construction loans), and that their shares are going to be devalued by the fact that they must raise capital to stay afloat—check out the NYT’s nifty share-price chart. The paper has our Goth Kid’s Diary Quote of the Day:

“You are in this death spiral of dilution,” said David Ellison, the chief investment officer of FBR Funds, a mutual fund company based in Arlington, Va. “It’s this toxic math.”

Meanwhile, Thornburg Mortgage said the Securities and Exchange Commission issued it subpoenas in an investigation of its accounting and that its ability to stay in business is “in doubt,” the Journal reports inside its Money & Investing section. It wouldn’t be unusual. Reuters says more than 100 lenders have gone bust or gotten out of the business in the last year and a half.

Hedge fund head John Paulson said the credit crisis could get much worse, with total losses reaching $1.3 trillion, more than three times what have been realized so far, the FT reports. Why should he be listened to? He made $3.7 billion last year predicting the subprime collapse.

That other Paulson, the Treasury Secretary known as Henry, will call for more power sooner for the Federal Reserve in a speech today, the Journal says on A3.

And for my next trick…

The Journal says on C1 that banks are rewriting the way they classify which loans are nonperforming in order to make themselves look healthier.

From lengthening the time it takes to write off troubled mortgages, to parking lousy loans in subsidiaries that don’t count toward regulatory capital levels, the creative maneuvers are perfectly legal.

Yet they could deepen suspicion about financial stocks, already suffering from dismal investor sentiment as loan delinquencies balloon and capital levels shrivel with no end in sight.

Pretty friggin’ brutal, indeed

Morgan Stanley’s first-quarter profit plunged 60 percent from a year ago, due mostly to asset sales, the Journal says on C1 and the Times on C4. Its chief financial officer was admirably forthright:

“The truth of the matter is this is pretty frigging brutal.”

The FT focuses on news that a rogue trader cost Morgan Stanley a $120 million in revenue write-downs in the quarter after it caught him inflating his positions’ value.

The Journal’s Heard on the Street says Morgan Stanley was “tripped up by bad trades, poor management and investments, as well as less-than-stellar risk management.” It says the company’s shares aren’t cheap and the writing in the column (the Journal recently swiped the FT’s Lex column writers) appears to be getting tarted up:

Morgan Stanley can’t fumble this way and hope to be spoken of in the same breath with Goldman.

Absolutely, positively bad news

In a bad sign for the economy, FedEx reported its first loss in eleven years on a one-time accounting charge and weak results, and said its outlook is slow and that it is cutting back on investment and operations, the Journal says on B3 and the FT says on its Companies & Markets front. The economic bellwether’s package volume was up 1 percent in the last quarter and its fuel costs soared. The WSJ:

Results from other big transportation companies in the coming weeks are likely to reflect similar pressures on profits, as low retail spending continues to restrain U.S. demand for shipments of manufactured goods and threatens to delay the start of the peak shipping season in late summer.

The Los Angeles Times says overnight shipping is suddenly not as crucial as it was not so long ago, in part because of hefty fuel surcharges.

Pfizer sticks it to consumers on Lipitor

The NYT and the Journal both go C1 with news that Pfizer has reached a deal with an Indian generic drug maker that will give its blockbuster Lipitor cholesterol drug another twenty months of zero competition—until late 2011. That’s a lot of money it’s making there—Lipitor is the biggest selling drug in the world with 2007 sales of $13 billion.

Apparently Pfizer doesn’t consider the deal a payoff, even though it granted the Indian company licenses to sell the drug early in seven countries and ended a dispute about another drug in its favor. The Federal Trade Commission rightfully frowns on such deals, and the Times quotes a commissioner saying it will take a “very close look” at it.

One thing’s for sure: consumers are hurt by this. The Times says Lipitor costs about $3 a day, while a generic might cost “well below $1.”

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.