Bush Had Long History of Support for Iraq Aid : Arms control: Actions in the '80s are an example of how leaders bend programs to serve their own ends.

SPECIAL TO THE TIMES; Frantz is a Times staff writer and Waas is a special correspondent

In early March of 1987, Vice President George Bush met with Nizar Hamdoon, the Iraqi ambassador to the United States, to deliver some good news: Bush's lobbying efforts were about to pay off handsomely for Saddam Hussein.

First, Hamdoon was told, two long-awaited licenses permitting Hussein's government to buy militarily sensitive American technology had been approved--over the objections of the Pentagon, according to classified documents. Moreover, Bush had telephoned the chairman of the Export-Import Bank and pressed him to end his opposition to new loan guarantees for Iraq.

Good news indeed. During the months that followed, more than $600-million worth of technology with dual commercial and military application was licensed for sale to Iraq, government documents and numerous interviews show. And not long after Bush's call, the Export-Import Bank reversed its position and approved $200 million in new loan credits for Iraq, which earlier had been denied further loans because it was not paying its debts.

Bush's efforts reflected a pattern of personal intervention and support for aid to Iraq that extended from his early years as vice president in the Reagan Administration through the first year of his own presidency and almost to the eve of the Persian Gulf War.

And, while Bush's actions appear not to have violated any laws, taken together with the activities of other senior officials, they form a textbook example of how powerful political leaders seek to bend obscure government programs to serve their own ends--sometimes with costly results.

At the Export-Import Bank, at the Commerce Department and at the Department of Agriculture, Bush and officials following his lead repeatedly worked to overcome the objections of other officials to what they regarded as unwise aid for Iraq.

In the case of the Export-Import Bank, Bush and others succeeded several times in changing its course, but its officials offered surprisingly stubborn and effective resistance--a rear-guard action that ultimately held down the cost to American taxpayers and reduced the indirect U.S. contribution to the Iraqi war machine that engulfed the Middle East in war.

At the beginning, Bush's efforts on Iraq's behalf were part of an unannounced U.S. "tilt" toward Baghdad that was intended to prop up Hussein during his long war with Iran. Behind the tilt was a desire to use Iraq as a buffer against Iranian influence and radical Islamic fundamentalism in the Middle East.

But the policy was pursued well beyond the end of the Iran-Iraq War in the summer of 1988.

Apparently Bush and his supporters failed to recognize that the original reasons for the tilt toward Iraq had been overtaken by events and that their efforts to turn Hussein to more benign directions were not bearing fruit.

As revealed in dozens of classified documents obtained by The Times, Bush and others who shared his views continued to press for financial aid and access to sensitive technology for Iraq even after it became clear that Hussein was building an arsenal far larger than he needed to defend his country and was actively developing both nuclear and chemical weapons.

The White House has declined comment.

For instance, a license was approved for the sale of a laser-guided welding system to Iraq for $1.4 million in January, 1988, at a time when the Iran-Iraq War was in its final months, even though the exporting firm acknowledged in its application that the system would be used for general military repairs on such items as jet engines and rocket casings.

When U.N. inspectors began examining Iraqi nuclear-weapons facilities late last year, they discovered that the welding system had been configured to manufacture centrifuges, a key component in Iraq's massive program to enrich uranium for nuclear weapons.

This export was no isolated case. Front companies for every known site at which Iraq developed nuclear and chemical weapons bought American computers with licenses approved by the Commerce Department, according to an analysis by the Wisconsin Project on Nuclear Arms Control, a Washington-based group that monitors arms-proliferation issues.

Eventually, officials at the Commerce Department began to resist aid for Iraq but not as quickly or tenaciously as some at the Export-Import Bank.

The Export-Import Bank, known in Washington simply as Ex-Im, was created by Congress in 1934 to help American companies sell more goods abroad. The bank does this by offering loan guarantees to foreign customers purchasing U.S. goods. Virtually all developed countries have similar programs.

While Ex-Im has always made its loan decisions with an eye on American foreign policy interests, the bank is prohibited by law from guaranteeing loans for foreign countries without "a reasonable assurance of repayment."

In the case of Iraq, the bank's economists consistently concluded that there was little chance Iraq could or would repay the debts.

Numerous classified documents and interviews with officials show that efforts to bring Ex-Im into line with overall U.S. policy toward Iraq date at least to 1983. But not until Bush took a personal role in 1984 did it authorize the first guarantees for Iraq in a decade.

The early U.S. strategy for helping Iraq was laid out in a cable written by Richard Murphy, assistant secretary of state for the Middle East. Key elements described by Murphy were to:

* Liberalize export controls on high-tech goods to Iraq. Among the items Murphy proposed exporting were "armored ambulances, communications gear and electronic devices for the protection of VIP aircraft."

* Help Iraq finance and construct a $1-billion oil pipeline to the Jordanian port of Aqaba. This project was seen as a way for Iraq to get around an Iranian blockade of its Persian Gulf shipping terminals.

* Arrange financing for U.S. sales to Iraq through the Export-Import Bank. "Such major Ex-Im financing could boost Iraq's credit rating, leading to increased commercial financing for Iraq," Murphy wrote.

In all three areas, Bush played a central role, beginning with the oil pipeline.

Strapped for money to fight the war and feed his people and cut off from most creditors, Hussein persuaded State Department officials to seek Ex-Im financing.

But the bank, which is run by an independent board, declined. Its objections were outlined by Murphy in a memo to Lawrence S. Eagleburger, then undersecretary of state for political affairs, on Dec. 22, 1983.

"Ex-Im currently opposes loans to Iraq because it considers that loans to Iraq lack a reasonable expectation of repayment," wrote Murphy.

Two days later, Eagleburger wrote William H. Draper III, then Ex-Im chairman, and urged him to be "receptive to financing American sales to and projects in Iraq. . . . From the political standpoint, Ex-Im financing would show U.S. interest in the Iraqi economy in a practical, neutral context."

Ex-Im remained reluctant until June, 1984--after Bush weighed in. Classified documents show that Bush telephoned Draper, a friend from their college days at Yale University, and asked him to reconsider financing the pipeline.

Government agencies prepare "talking points" as guides or scripts for sensitive conversations. In the case of Bush's call to Draper, the talking points suggested that the vice president couch his request in terms of the Administration's interest in bolstering Iraq as a means to ending the war.

"Early and favorable action on applications for Ex-Im financing for these pipeline projects would be clear and very welcome evidence of U.S. commitment to these objectives," said the talking points.

The following week, the bank approved $500 million in loan guarantees for the project. Draper, now an official at the United Nations, said in an interview that he does not recall the telephone conversation with Bush.

For unrelated reasons, the pipeline was eventually abandoned by Iraq, so the guarantees were never used.

Other Ex-Im assistance did begin to flow to Iraq not long after Bush's intervention. In July, 1984, the bank began providing $200 million in short-term credit for Iraq.

Within months, however, Iraq fell $35 million behind in its payments, and the bank suspended further assistance. Only after further intervention by Bush was credit to Iraq renewed.

In May, 1986, David Newton, the U.S. ambassador to Iraq, went to Ex-Im headquarters to press its new chairman, John A. Bohn Jr., to resume the guarantees.

"The ambassador was quite downtrodden considering both the status on the war as well as the economy," according to an internal bank account of the meeting.

Yet the memo said that Newton pressed Bohn not only to resume the program but to expand it. The $200 million on which Iraq had fallen behind was for short-term loans, for which repayment was required within a year. Newton wanted medium-term guarantees, which could total billions of dollars and give Iraq five to seven years to repay.

Bohn held fast. His enthusiasm for "doing any new business in Iraq varies from zero to not much," according to the memo.

Iraq's economic fortunes continued to decline throughout 1986 as world oil prices fell and the costs of its war with Iran rose. Baghdad's payment record to creditors deteriorated, and most commercial banks cut off loans, leaving Iraq scrambling to pay for essential civilian goods. Yet the Ronald Reagan Administration kept pressing Ex-Im.

In November, 1986, Ex-Im board member Richard Heldridge was lobbied by Murphy. The State Department official picked an unusual venue--a dinner at the residence of Iraqi Ambassador Hamdoon. Also attending was Houston bank executive A. Robert Abboud, chairman of the U.S.-Iraqi Business Forum, an organization of businesses set up to foster trade with Baghdad.

Heldridge was sympathetic to the pleas, telling other Ex-Im officials in a memo the next day: "Regardless of Iraq's bleak financial picture, I feel we should review our position there and discuss opening for short-term (loans)."

But the bank stuck to Bohn's earlier decision.

In early February of 1987, Iraq brought its payments up to date on loans guaranteed by Ex-Im. Numerous U.S. government reports indicated, however, that the only creditors being repaid by Iraq were those granting the country new loans.

In late February, Bohn received a telephone call from Bush. The vice president was calling in preparation for his meeting in a few days with Hamdoon, the Iraqi ambassador.

"I understand that the Iraqis have resolved some outstanding arrearage to Ex-Im and that the Ex-Im board will decide soon whether to resume short-term credit insurance for Iraq," read talking points prepared for Bush. "I urge you and your colleagues on the board to give that favorable consideration."

The talking points also suggested that Bush tell Bohn: "As you know, there are major U.S. policy considerations at work in this issue. Iraq has apparently countered the latest Iranian offensive, and we are taking advantage of that to put some life into peace efforts. Ex-Im's support for continued trade for Iraq would be a powerful, timely signal--both to Iraq and to the Gulf Arab states--of U.S interest in stability in the Gulf."

At the time, the analysis of Iraq's financial condition by Ex-Im economists was more dismal than when Bohn had rated the chance of new guarantees as "zero to not much."

"While no official figures are available on Iraq's external debt, various estimates put it at (the) end (of) 1986 at approximately $50 billion," said the internal analysis.

On May 4, 1987, two senior bank economists warned its board in a confidential memo: "Our balance-of-payment projections, even under the (most) optimistic assumptions . . . indicate that Iraq will be unable to service scheduled debt repayments over the next five years." The two economists recommended: "Ex-Im Bank should remain off-cover for all programs concerning Iraq."

Yet on May 15, 1987, the bank renewed short-term loan guarantees for Iraq, with a cap of $200 million.

In an interview, Bohn said that he does not recall specifics of his conversation with Bush. He said that, as head of the bank, he talked with the vice president several times.

"I can be absolutely sure that I was never directed to loan money to anybody," said Bohn, now head of Moody's Investors Service in New York. "Nor did I ever feel pressured."

Two of Bohn's fellow board members, Heldridge and William F. Ryan Jr., said they were unaware of any contact by the vice president.

"Oh lord, no, I never had such a call or heard about such a thing," said Ryan, who was vice chairman of the board in 1987. "It would be most extraordinary if that occurred."

A few days after telephoning Bohn, Bush met with Hamdoon.

In classified talking points for the March 2 meeting, it was suggested that Bush tell Hamdoon that the Administration was working to expand trade and strengthen relations with Iraq. Bush was told to sympathize about the licensing delays and explain that "a special look" was being taken at high-tech sales to Iraq and similar cases.

"I am pleased that Commerce has recently issued licenses for some long-pending items for Iraq," read Bush's script. "You should take that as a sign of our seriousness in addressing this issue."

Another classified document described the two export licenses that had been approved only as "long-pending licenses for two high-priority scientific projects, including one at the Iraqi Space and Astronomical Center." The document said the licenses had been opposed by the Defense Department.

Stephen D. Bryen, deputy assistant secretary of defense at the time and an opponent of dual-use exports to Iraq, said he believed that one license was for advanced equipment used to relay satellite information to ground stations. Such equipment could be used to monitor weather--or to watch troop movements and perform other aerial spying.

Commerce Department documents list hundreds of export licenses for more than $600 million worth of dual-use technology approved for Iraq between the time of Bush's meeting with Hamdoon and Iraq's invasion of Kuwait. Much of that material found its way into Hussein's program to develop nuclear, chemical and biological weapons.

Eventually, the flow of high-tech goods to Iraq raised objections within the Commerce Department, but proposals to cut back were killed at the Bush White House.

Classified material and internal reports show that after Bush became President, the Administration intensified the push to expand Ex-Im's loan program to provide medium- and long-term guarantees to Iraq even though the Iran-Iraq War had ended in 1988 and evidence of Hussein's arms buildup was mounting.

Skeptical of Iraqi means and intentions to repay foreign debts, the bank wanted to stick with less risky short-term credits. The bank's April, 1989, analysis found that Iraq remained a poor credit risk.

At an interagency meeting on April 24, 1989, the State Department objected to the harsh assessment, according to documents, and Ex-Im's economists were pressed to rewrite the report to be more favorable to Iraq. But the assessment that followed was equally tough.

"Iraqi leaders, in the wake of their technology-driven 'victory' over Iran, believe that advanced military technologies--bombers and missiles, chemical and bacteriological weapons and nuclear capability--are the key to military power," said the second analysis.

On June 15, 1989, Ryan, who had succeeded Bohn as acting chairman of the bank, went to the State Department to discuss long-term credits to Iraq with Robert Kimmitt, then undersecretary of state for political affairs and now U.S. ambassador to Germany.

Ryan said that if the State Department wanted to make a big push to help Iraq with medium-term credits, Ex-Im would "crank it in," according to a classified State Department account of the meeting. Otherwise, Ryan said, "we'd say the time isn't right."

But, Kimmitt cautioned, "if Ex-Im concludes the economic risks are too high, we will defer to the bank's judgment."

Even though documents indicate that other State Department officials continued to seek bigger guarantees for Iraq, Ryan said in a recent interview that, faced with bleak prospects of repayment, the decision was made not to offer Iraq further assistance.

The billions in longer-term credits sought by the Reagan and Bush administrations were not provided. As a result, when Iraq invaded Kuwait on Aug. 2, 1990, and stopped all payments to U.S. creditors, the bank was owed only $50 million.

After the Iraqi invasion, Congress began examining the assistance provided to Saddam Hussein's regime under the Reagan and Bush administrations. At a hearing last April, the House Banking, Finance and Urban Affairs Committee raised the issue of whether Administration pressure had caused the bank to alter its policy toward Iraq.

In his testimony, John D. Macomber, who succeeded Ryan as Ex-Im chairman later in 1989, denied that such pressure was applied.

"I have not been, nor do I know of any other board member . . , subjected to the word 'pressure,' if you will, to bend policies that have been long in adherence at the bank and, in fact, are a matter of law," Macomber said in response to a question from Rep. Henry Gonzalez (D-Tex.), the committee chairman. "There has been no pressure of that type."

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