Regan Says Diversion Shocked the President : Tells Reaction to Use of Iran Arms Profits

President Reagan “visibly was shook . . . and recoiled” when he was told that profits from U.S. arms sales to Iran had been diverted to Nicaragua’s contras , former White House Chief of Staff Donald T. Regan told Congress’ Iran-contra investigating committees Thursday.

Reagan’s shock upon hearing the news was so convincing, Regan testified, that “I’d give him an Academy Award” if the former actor was feigning surprise. Regan is expected to conclude his testimony today, and will be followed by Defense Secretary Caspar W. Weinberger.

Regan’s account, lauded by both Democrats and Republicans on the committees as candid and credible, reinforced the claim of John M. Poindexter, Reagan’s former national security adviser, that the President knew nothing of the diversion of money to the contras during the period when Congress had banned U.S. aid to the rebels.

Became Central Issue

The congressional investigators had made the President’s knowledge of the diversion, which apparently was carried out in his name by White House aide Oliver L. North, into the central issue of their three months of hearings, which probably will end early next week.

As chief of staff for a President who did not involve himself in details, Regan was known for putting an iron grip on most aspects of White House operations. His testimony provided the committees with their first Oval Office perspective on the foreign policy disasters that plummeted the Administration into its worst crisis.

In vivid, salty and often humorous detail, he described how the President became the victim of a frustrating “bait and switch” operation by the Iranians on whom he had pinned his hopes of opening a long-range relationship with the regime of the Ayatollah Ruhollah Khomeini and gaining the release of Americans held hostage by Iranian-backed terrorists in Lebanon.

Regan Tells Impatience

Regan recalled expressing his own impatience as early as February, 1986, when the Iranians failed to secure the release of U.S. hostages after receiving their first direct shipment of 1,000 TOW anti-tank missiles from the United States.

“I told (Reagan) I thought we ought to break it off, that, you know, we’d been snookered again,” Regan testified. “And how many times, you know, do we put up with this rug-merchant type of stuff?”

However, the Administration was to be “led down the garden path,” as Regan put it, four more times before public exposure last November forced the end of the secret arms sales.

The former chief of staff also expressed bitterness over his own unceremonious ouster from the White House last February. He made it clear that he believed he was the victim not of the President’s political adversaries but of others within the White House.

“I don’t mind spears in the breast,” he said. “It’s knives in the back that concern me.”

Regan added a wry note to his explanation of why Reagan hesitated before he allowed Poindexter, one of the architects of the Iran arms sales and diversion of profits to the contras, to resign. Regan said of the President: “He’s not the type that likes to go around firing people--ironic statement coming from me.”

A Friendly Reception

In marked contrast to six months ago, when Regan’s truculent disregard for congressional sensibilities had made him an unpopular figure among both Democrats and Republicans on Capitol Hill, Regan’s testimony drew a friendly and supportive reception from the committees.

“I am delighted to be discussing these issues with a man who has the ability to tell the truth,” said Rep. Jack Brooks (D-Tex.), who has been harshly critical of many witnesses.

Regan, now earning his living on the lecture circuit and from a $1-million contract for his White House memoirs, undercut the significance of a key piece of evidence in the investigation: a memo found by Justice Department officials in North’s office that describes the diversion scheme.

He said the undated, unsigned document, for which investigators have found no cover letter, did not appear to have been one that would have reached the President. “This thing here is much too loose,” Regan said. “It’s not in the proper form.”

Poindexter’s Testimony

Poindexter, a rear admiral, told the committees several weeks ago that he deliberately did not inform Reagan of the diversion because he sought to protect his commander in chief from what he realized would be enormous political embarrassment if the scheme ever became public.

However, Regan said Poindexter offered a dramatically different explanation when Regan asked for his resignation last Nov. 25. At that time, Regan said, Poindexter pretended to be ignorant of the details of the diversion.

The former chief of staff said Poindexter “was sitting at the end of his conference table having breakfast from a tray. . . . John is a deliberate man. He adjusted his glasses, he dabbed at his mouth with his napkin, put it down. He said, ‘Well,’ he said, ‘I guess I should have looked into it more but I didn’t.’ He said: ‘I knew Ollie was up to something.’ ”

When Poindexter handed his resignation to the President later that morning, Regan quoted Reagan as saying: “This is a shame that it’s happened . . . this way, that a man with your great naval record, and so on, has come to this end.”

‘An Awkward Silence’

“And there was sort of an awkward silence,” Regan said. “Then Poindexter left the room.”

Regan said he was “startled” when Poindexter told the committees two weeks ago he felt he had a broad mandate from the President that gave him the right to authorize something as sensitive as the diversion without consulting anyone.

“I never dreamed that the admiral was that much involved in the technical details of the diversion, never knew anything like that could have occurred if he were aware of it,” Regan said.

Regan added to the uncertainty over whether the late CIA Director William J. Casey knew of the diversion while it was going on. North told the committees that he worked under Casey’s close guidance, while Atty Gen. Edwin Meese III expressed doubt that Casey, who died last May, was aware of the diversion before the scandal began to break.

Met With Casey

Regan indicated that he may have been the first to tell the CIA director that evidence of a diversion had been uncovered. Regan met with Casey at CIA headquarters on the night of Nov. 24, one day before Meese announced the diversion publicly during a nationally televised press conference.

The former chief of staff described Casey’s reaction as “stolid, phlegmatic or unreadable.” Casey’s initial comment, Regan said, was to urge that the diversion not be made public.

The diversion, Regan said, had violated the cardinal rule that he had set as chief of staff: that he and the President should never be confronted with surprises, particularly unpleasant ones.

Regan said he had not, for example, known that the arms were being sold to Iran at a profit, creating millions of dollars in surplus.

‘A 600% Markup’

“Was a 600% markup consistent with the vision of a new, bilateral relationship with Iran?” asked Terry A. Smiljanich, associate counsel for the Senate investigating committee.

“Well, I’ll say one thing,” Regan quipped. “That may be another way to balance the budget.”

Regan, who had attended most of the President’s morning national security briefings, noted that they often included detailed updates on the contras, who were among Reagan’s top priorities.

The President was kept apprised of efforts to raise contributions for the contras from private donors--although he was not aware that some had provided money that went toward weapons--and he even occasionally dropped in on meetings of those benefactors at the White House, Regan said.

However, the former chief of staff said, he could not recall any mention that the White House National Security Council staff, of which Poindexter was the director and North a member, was directly supporting the contras’ military operations. Nor, he said, could he recall mention that the NSC did not consider itself subject to the congressional ban on aid.

Poindexter’s Routine

But Regan also acknowledged that Poindexter reported directly to Reagan and sometimes gave him memos and other documents to sign without channeling them through Regan.

“I protested that several times,” Regan said. “ . . . I thought it had (been corrected), but I found out now from some of these hearings that it hadn’t.”

In particular, Regan said, he was not informed that the President had signed three drafts of a presidential “finding” authorizing U.S. participation in the covert arms sales. He said he assumed the President had signed one version on Jan. 17, 1986, but did not actually find the document until October.

Regan, repeating his earlier account of how the transfers began, said the President was dragged unwittingly into the sales in 1985.

Transfer of Missiles

He said Reagan had been unaware until after the fact that Israel had transferred 500 U.S.-made TOW anti-tank missiles to Iran in August and September, 1985, and that the United States had replenished the Israeli stocks.

This account conflicts with the testimony of Robert C. McFarlane, then Reagan’s national security adviser, who said he gave Israel the go-ahead only after checking with Reagan. The President has said he does not remember whether he approved the initial transfers.

When Reagan found out about the Israeli shipment, Regan said, he was “quite upset that his hand was being forced this way.”

“He had told McFarlane . . . to go slow on this and let’s make sure that we know who we’re dealing with before we get too far into this,” Regan recalled.

Second Arms Shipment

In November the Israelis sent Iran a second shipment of weapons, but this time McFarlane told Reagan in advance, Regan said.

When key Administration officials met on Dec. 7, 1985, to discuss whether the United States should sell weapons directly to Iran, Regan testified, he opposed the idea.

Regan, a former head of Merrill Lynch, Pierce, Fenner & Smith Inc., said he believed the President should borrow a Wall Street maxim and “cut your losses. We had taken a chance here. We thought it was an endeavor that was worth exploring. We weren’t getting anywhere.”

But when Administration officials revived the arms deals through new Iranian intermediaries, Regan testified, he “sort of lost track of what was going on” as he involved himself in that year’s budget battle and tax-overhaul legislation.

‘Cover Is Blown’

After the Iran arms sales became public in early November, Regan said he pressed the President to disclose as much information as possible. “The cover is blown here,” he quoted himself as saying. “We’ve got to go public.” But by Regan’s account, Poindexter strongly opposed that course, saying: “Absolutely not.”

Regan recalled that the President sided with Poindexter when just-freed hostage David P. Jacobsen visited the White House on Nov. 7. Jacobsen, in an impassioned appeal to the news media to stop asking questions about the Iran arms sales, suggested that further publicity would jeopardize the lives of those still being held in Lebanon.

“That made quite an impression on the President,” he said.

Even as the President was preparing for a news conference on Nov. 19, Regan said, Poindexter refused to give him sufficient information--causing Reagan’s stumbling performance on television that night.

“I think this sort of confused the presidential mind as to what he could say and what he couldn’t say,” Regan said.

A Sheepish Poindexter

When Poindexter told the President to say that all the munitions sold to Iran could fit into a “small plane,” Regan recalled that he asked the admiral to check his facts. He said a sheepish Poindexter later returned to the room to say, “Make that a C-5”--a giant cargo plane. It has since been learned that even a C-5 would have been too small.

It was not until Nov. 20, the day after the news conference, that Regan said he began to suspect that perhaps Poindexter was trying to mislead the President. He said his first indication came when Secretary of State George P. Shultz cited five or six obvious “mistakes” that Reagan had made during the press conference.

Then, almost by accident, Regan learned that the National Security Council staff was preparing a chronology of events in the Iran arms sales. Although Poindexter supplied him with a copy, he recalled, the national security adviser returned to his office a few hours later asking to have the chronology back.

‘Something Was Screwy’

Suddenly, Regan said, he realized that something was wrong.

Instead of returning the chronology to Poindexter, he said he gave a copy of it to then-White House counsel Peter J. Wallison to study. And the next morning, he testified, he told the President “that something sure as hell was screwy.”

Regan said Poindexter and North failed the President in three ways--by not consulting him about the diversion, by failing to tell him about it after the scandal was exposed and by allowing him to go into a nationally televised press conference without the facts.

Sen. Warren B. Rudman (R-N.H.) agreed: “I happen to think that the greatest tragedy of this entire event is that this President, who has been good to people, who has been (reluctant) to fire people, who was known to be kindly and decent, was so ill-served and deceived by key members of his own staff. I think that’s an outrage.”