NEWS ANALYSIS : Bush Exercised Hands-On Role in Iraq Aid Effort

Early in the summer of 1990, with Saddam Hussein casting an increasingly ominous shadow over the Persian Gulf, senior officials from the CIA, State Department and other agencies met in the ultrasecure White House situation room to review the Bush Administration’s policy of funneling economic aid and sophisticated technology to Baghdad.

The agenda, classified secret, listed several options for getting tough with Hussein, who was openly threatening to destroy Israel and annex Kuwait. American food aid could be stopped. U.S. intelligence data could be withheld. President Bush could send the Iraqi dictator a strong, personal warning. But no such action was taken.

“There was a reluctance to jettison the existing policy,” said an official who attended the session. “People weren’t really too focused on Iraq. I don’t remember any heated disagreement with continuing things as they were.”

The meeting, just two months before Iraqi troops overran Kuwait, was a graphic demonstration of the failure by Bush and his top advisers to recognize that Hussein--long seen as a counterweight to Iran--had become a threat to U.S. interests. After almost a decade of fueling Iraq’s massive war machine, Bush and his most trusted aides still clung to the illusion that they could tame Hussein’s violent ambitions and manipulate him to their own ends.

The tragic consequences of that misjudgment became clear in the following months as 500,000 American troops were dispatched to the Gulf, thousands of lives were lost and billions of dollars were spent to turn back a military juggernaut developed with Western technology and financed in significant part by American dollars.

And the story of how Bush and others helped build up their eventual adversary in the Gulf offers a rare glimpse of the President’s hands-on role in making a critical foreign policy judgment. For Bush’s fingerprints are all over the series of decisions to provide and continue financial and technical assistance to Hussein.

Indeed, the question of whether the policy of helping Hussein had outlived its usefulness was sharply debated inside the Administration in the months and years leading up to the Gulf crisis. Some senior officials were convinced Hussein was becoming a threat to the region and to U.S. interests; they urged a reappraisal of U.S. policy and a pulling back on U.S. aid.

Right up to the end, sources familiar with the debate say, Bush and his inner circle were convinced otherwise.

“There were some elements of inertia, but there also was a belief that this was a viable Mideast strategy. There was still a perception that Iraq could be moderated,” says Marvin C. Feuerwerger, an analyst at the Washington Institute for Near East Policy and, until 1990, a Mideast strategist at the Defense Department.

“There were some, however, who saw Iraq as the next threat, but President Bush was not part of that group. NSD 26 reasserted the policy that had been maintained toward Iraq through the 1980s,” he said, referring to the top-secret National Security Directive, signed by the President in October, 1989, that ordered government officials to extend--not cut back--economic and political ties to Baghdad.

The names and signatures on the classified documents detailing those years of American assistance to Hussein that have emerged in recent weeks rarely say “George Bush.” Yet five months of examination and interviews with participants have made it clear that it was the President’s own hand that formulated and guided the policy.

He operated often through his most trusted adviser, Secretary of State James A. Baker III, and through the secretive National Security Council at the White House.

But it was Bush himself who--at a critical period--provided the catalyst for sweeping away internal objections to the escalating aid to Iraq by issuing NSD 26.

The secret order became the skewed lens through which events involving Iraq were viewed. After it was imposed, support for Hussein’s regime at highest levels of the Administration did not waver despite rising concerns over the wisdom of the policy.

“Once you set policy at the top, an awful lot else flows from that and continues to flow from inertia and wishful thinking,” said William B. Quandt, a Mideast expert at the Brookings Institution and former National Security Council staff member in the Richard M. Nixon and Jimmy Carter administrations.

George Bush’s role in shaping official U.S. policy toward Iraq can be traced to 1984, when he was vice president and part of a faction of top officials in President Ronald Reagan’s Administration who backed Baghdad in its war with Iran because they saw Baghdad as a buffer to the Islamic fundamentalism that the Ayatollah Ruhollah Khomeini was trying to export throughout the Middle East.

As part of that doomed courtship, the Administration agreed to help build a $1-billion pipeline to carry oil from the interior of Iraq to the Jordanian port of Aqaba, enabling Hussein’s oil to reach world markets without confronting Iranian gunboats in the Gulf.

The pipeline was to be built by a subsidiary of Bechtel, the giant San Francisco construction and engineering firm with close ties to the Reagan Administration. But the Iraqis needed help on two fronts: financing and security.

The security problem was that the proposed pipeline would pass within five miles of Israel, which rightly considered Hussein a major foe, and would therefore possibly be expected to attack or sabotage the pipeline. To protect against that possibility, Washington helped obtain a secret pledge from the Israeli government not to harm the pipeline if it were built.

On the financial front, in April, 1984, Bechtel sought financing from the Export-Import Bank, an independent federal agency. The company had received assurances that the State Department would assist at Exim, according to classified documents.

But the bank balked. Its economists doubted that Iraq would repay the loan, and the bank’s charter prohibits it from providing credits without a reasonable assurance of repayment.

Records show that then-Deputy Secretary of State John Whitehead and Reagan’s national security adviser, Robert C. McFarlane, lobbied the bank’s chairman, William H. Draper III, without success.

Then, on June 12, 1984, Charles Hill, a top-ranking State Department official, sent a confidential memo to the office of Vice President George Bush recommending that he, too, contact Draper. The memo did not mention that Bush and Draper had been friends at Yale University and that the top Exim post is a presidential appointment.

Classified documents show Bush asked Draper to provide the pipeline guarantees shortly after receiving the memo and, a few days later, the bank approved $500 million in guarantees for Iraq--the first and only time Exim authorized such a massive, long-term loan to Iraq.

Less than two years later, Bush was back on the phone to a new chairman of the Exim bank. A bank program to provide loan guarantees for Iraq had been cut off after Iraq defaulted on the loan repayments, but the vice president was seeking a new $200-million aid commitment.

Classified accounts show that in late February, 1986, Bush telephoned John A. Bohn Jr., the Exim chairman, and urged him to reverse the bank’s economists and approve the new aid for Iraq.

“Exim’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,” records show Bush told Bohn.

A few days later, Bush met with Nizar Hamdoon, the Iraqi ambassador to Washington, and informed him that the Exim credits would be renewed. According to classified material prepared for Bush in advance of the meeting, he also told Hamdoon the Reagan Administration was going to permit Baghdad to buy more sophisticated U.S. technology.

Records show the Commerce Department in both the Reagan and Bush administrations approved licenses to sell Iraq more than $600 million worth of American technology between that meeting and the invasion of Kuwait. Much of this equipment fell into the highly sensitive category of “dual use technology”--equipment with both civilian and military applications.

At the same time, the Agriculture Department stepped up food aid to Iraq.

The flow of U.S. technology to Iraq has been perhaps the most controversial aspect of American assistance to Baghdad. While U.S. officials maintain the goods were for commercial purposes, United Nations inspectors and other independent investigators have found extensive evidence that American technology played a vital role in Iraq’s development of nuclear, chemical and biological weapons.

Reagan policy during the Iran-Iraq War was contradictory at times.

While Bush and others arranged for Iraq to receive billions in U.S. economic aid, the Administration was selling missiles and other arms to Iran in an attempt to free American hostages. Bush has maintained that, while he knew of the arms sales to Iran, he was unaware the deals were swaps for hostages. But there is no evidence that he advised against the Iranian arms sales.

Officials in the Bush White House defend the President’s role in the Reagan tilt toward Iraq, saying American interests were well served by stopping an Iranian victory over Baghdad. And Bush himself has indicated no second thoughts about his role on behalf of Iraq in the Reagan years.

“As you may remember in history, there was a lot of support at the time for Iraq as a balance to a much more aggressive Iran,” he said in late February in response to disclosures of the extensive aid in The Times. “So that was part of the policy of the Reagan Administration. I was very proud to support that.”

By the time Bush became President, the situation had changed dramatically but his position had not.

The Iran-Iraq War ended in August, 1988, leaving Iran flat on its back. Saddam Hussein had wasted no time reasserting his drive for hegemony in the Persian Gulf, gassing thousands of his own Kurdish population and embarking on a course of menacing conduct that would bring him into bloody conflict with his Arab neighbors as well as the Western world.

Iraq was no longer able to extort payoffs from its Arab neighbors to finance its war against Iran. Rather than turning his limited resources from guns to butter, Hussein ratcheted up arms development and relied more than ever on his friend in Washington.

President Bush turned out to be as adamant a backer of Hussein as Vice President Bush. Instead of restricting economic aid, the new Bush Administration increased the subsidies. Instead of stopping the flow of technology, the new Bush Administration expanded the sales over objections from its own Commerce Department. This time, however, Bush had his own proxies to execute the policy.

A potential turning point in the relationship occurred on Aug. 4, 1989. FBI agents raided the small Atlanta branch of Banca Nazionale del Lavoro, one of Italy’s largest banks. They uncovered evidence that the BNL branch had made $4 billion in unauthorized loans to Iraq, including $900 million guaranteed by the U.S. Agriculture Department.

The investigation quickly implicated Iraqi government officials and two government-owned banks in a massive scheme involving millions of dollars of the improper loans to buy arms and weapons technology. But classified documents show the State Department and National Security Council struggled to keep a lid on the scandal and avoid disrupting ties with Baghdad.

Whether it was precipitated by the burgeoning bank scandal is unknown, but in early October, 1989, Bush issued NSD 26, the binding order requiring federal agencies to increase economic and political ties with Iraq.

The Agriculture Department had responded to the Atlanta bank investigation by trying to cut food aid to Iraq to $400 million from $1 billion. The Treasury Department and Federal Reserve argued that the aid should be halted. But State Department officials, from Secretary of State Baker and Deputy Secretary of State Lawrence S. Eagleburger on down, cited NSD 26 in arguing that the aid should be retained at the full level.

Documents show that the National Security Council and its chief, Brent Scowcroft, fought to retain the full aid, too. The NSC, which is supposed to advise the President, went so far as to review and approve an Agriculture Department administrative inquiry into the food aid program with Iraq. Records show the NSC also took the highly unusual step of monitoring the Justice Department’s investigation of BNL.

“The NSC’s role in the Agriculture Department administrative review raises serious questions because the review was an almost complete whitewash of the problems found during the BNL investigation,” said Rep. Henry B. Gonzalez (D-Tex.), chairman of the House Banking Committee.

Scowcroft and Eagleburger are former employees of Kissinger Associates, the international consulting firm run by former Secretary of State Henry A. Kissinger. At the time of the BNL scandal, Kissinger served on the Italian bank’s international advisory board and the bank was a client of his firm, according to investigators for Gonzalez, who has been examining the BNL case for more than two years.

The State Department’s pro-Iraq position was demonstrated clearly on Oct. 31, 1989, when Baker telephoned Clayton K. Yeutter, the secretary of agriculture, and urged him to restore the full $1 billion in food aid for Baghdad “on foreign policy grounds.”

According to Baker’s own classified account of the conversation, Yeutter responded: “I think we’re seeing it the same way you guys are. I’ll get into it.”

At a Senate hearing in February, Sen. Patrick J. Leahy (D-Vt.) asked Baker about the motive for his call to Yeutter. Baker responded, “I suppose it would not come as a surprise to you that the secretary of state would be supportive of the position reflected by the President in his national security decision directive.”

Through the spring of 1990, the Administration continued to back aid to Iraq and, documents show, the federal investigation of BNL dragged on and dates for indictments were postponed. The business-as-usual approach continued in the face of mounting evidence that Saddam Hussein’s raw ambition had not been checked by Washington’s pleasantries.

In February, Hussein had given a virulent anti-American speech at a gathering of Arab leaders in Amman, despite attempts by Jordan’s King Hussein to persuade him to tone it down. Two months later, Hussein threatened to destroy half of Israel with chemical weapons. Peppered throughout his rhetoric were demands that Saudi Arabia and Kuwait forgive billions in loans to Iraq and that Kuwait turn over two disputed islands.

But the reaction in Washington was a sleepy one, as evidenced by the May 29, 1990, meeting in the White House situation room attended by senior officials from the CIA, NSC, and departments of State, Justice, Treasury, Defense, Agriculture and Commerce.

“The BNL business was raising questions that we had to deal with, but I don’t remember anybody raising Iraq policy in a general sense as far as a big change,” said an official who attended the meeting.

One of the options discussed, however, was having Bush send a personal message to Hussein urging him to tone down his rhetoric. Hussein is well known to relish such personal touches, although there is no way to know if the untaken step would have changed the course of events in the Gulf.

“I don’t think our policy toward Iraq was a mistake,” says Robert G. Neumann, a former Reagan-era ambassador to Saudi Arabia and an adviser to the Bush Administration on the Mideast. “When you live in a dangerous world, you cannot always deal with just the pure of heart.”

Earlier this month, Bush acknowledged grudgingly that, with hindsight, he might “rethink our position” of providing massive aid and support to Baghdad until virtually the eve of the invasion of Kuwait.

But he insisted he saw no relationship between the years of U.S. aid and the causes of the Gulf War.

“We are dealing with the facts as they came down the pike,” said the President.

How Bush Helped Hussein

George Bush was heavily involved in the series of decisions to provide financial and technical assistance to Iraq. Here is a chronology of his involvement:

* June, 1984: Vice President George Bush telephones the chairman of the federal Export-Import Bank and persuades him to reverse policy and approve $500 million in financing for a controversial Iraqi pipeline.

* August, 1986: Saudi Arabia transfers an unknown number of 2,000-pound, American-made bombs to Iraq. Sources say the transfer was made with U.S. permission, which the State Department denies.

* February, 1987: Bush convinces the new chairman of the Export-Import Bank to overrule bank economists and renew a $200-million aid program for Iraq.

* March 2, 1987: In a meeting with Iraqi Ambassador Nizar Hamdoon, Bush says Export-Import Bank aid will be renewed, and the Administration plans to allow Iraq to buy more sophisticated U.S. technology.

* Aug. 19, 1988: Iraq and Iran sign an official cease-fire ending their eight-year war. Senior State Department officials advocate no radical change in U.S. policy toward Iraq.

* Aug. 4, 1989: FBI agents raid the Atlanta branch of Italy’s Banca Nazionale del Lavoro, uncovering evidence of $4 billion in improper loans used in part to finance Iraq’s military buildup and implicating Iraqi officials and two government-owned banks.

* October, 1989: President Bush signs a top-secret national security directive ordering federal agencies to expand political and economic ties with Iraq. The order proves pivotal for officials who are fighting to continue aid to Iraq and downplaying the Atlanta bank investigation.

* May 29, 1990: Senior Administration officials meet at the White House and decide not to change the policy of assisting Iraq despite Saddam Hussein’s threats to Israel and Kuwait and his anti-American rhetoric.

* Aug. 2, 1990: Iraq invades Kuwait. The Agriculture Department officially ends a $5-billion loan program to Baghdad, leaving $2 billion in debts that must be paid by U.S. taxpayers.

* Feb. 25, 1992: Secretary of State James A. Baker III defends aid to Iraq in 1989 and 1990, telling a Senate committee he was acting in response to the President’s national security order.

* Feb. 25, 1992: Bush says he is proud of his role in the Ronald Reagan Administration’s tilt toward Iraq, citing the necessity of stopping a victory by Iran.

* April 9, 1992: Bush acknowledges that he might “rethink our position” on massive aid to Iraq if he thought halting it would have deterred Hussein’s aggression. But he sees no link and says, “We are dealing with the facts as they came down the pike.”

Source: Interviews and documents compiled by The Times.