Plan for Terrorism Futures Market Killed

Times Staff Writer

The Pentagon unceremoniously jettisoned plans Tuesday to establish a futures market in Middle Eastern terrorist attacks, handing another in a long string of defeats to Iran-Contra figure John M. Poindexter, the point man for the program.

Responding to widespread outrage over the idea of setting up a commodity-style market for investors to bet on the likelihood of attacks, assassinations and other mayhem, Pentagon officials agreed to abandon the plan only three days before registration of participants was to begin.

The plan was being carried out by a unit of the Defense Department headed by Poindexter, a retired admiral and onetime national security advisor to President Reagan. Trading was to begin Oct. 1.

Poindexter, in a public career of more than three decades, has pushed space-based weapons, Star Wars-style command bunkers and computer-controlled surveillance techniques as solutions to national security needs.


In the process, he alarmed critics across the political spectrum and landed himself five felony convictions -- later overturned -- for lying to Congress and obstructing an investigation into the guns-for-hostage trade that came to be known as Iran Contra.

“There’s a quality of Greek tragedy to John Poindexter’s career,” said John Arquilla, an expert on unconventional warfare at the U.S. Naval Postgraduate School in Monterey, Calif. “Sometimes, he has gotten caught up in the beauty of an idea, which has blinded him to its long-term consequences.”

Efforts to reach Poindexter for comment were unsuccessful.

Poindexter’s latest setback was triggered Monday when Democratic Sens. Byron L. Dorgan of North Dakota and Ron Wyden of Oregon disclosed the futures trading project and demanded that the Pentagon abandon it.


It would have established a market, similar to those used to predict the prices of oil and other commodities, in which anonymous investors would bet on the likelihood of political turmoil in the Middle East.

The theory was that the collective wisdom of informed investors -- Arab policy experts, for example -- would be reflected in the prices of these futures contracts, helping national security officials to predict trouble such as assassinations or terrorist attacks.

On the project’s Web site, which was taken down during the day, organizers contended that markets are often more accurate than other methods of predicting the future, such as experts’ opinions.

But once the proposal was aired publicly, members of Congress from both parties reacted with outrage. Top-ranking Republicans such as Sen. John W. Warner of Virginia contacted the Defense Department, and by the end of the day the program was history.

Caught off-guard, Deputy Defense Secretary Paul D. Wolfowitz told lawmakers that he only learned of the plan when he read about it in a newspaper Tuesday morning on the way to a Senate Foreign Relations Committee hearing on Iraq.

“I share your shock at this kind of program,” Wolfowitz said. “We’ll find out about it, but it is being terminated.”

Lawmakers said more than $600,000 in taxpayer funds had been spent to get the program started. Registration of traders was supposed to begin Friday. The Pentagon had requested another $8 million over the next two years.

Dorgan said Tuesday, “I’d like to know who thought it up. I’d like that person to be earning a salary from the private sector, not the public sector.”


Asked later whether Poindexter would retain his job as head of the Information Awareness Office of the Defense Advanced Research Project Agency, Pentagon spokesman Lawrence DiRita said, “At the moment, Adm. Poindexter continues to serve in DARPA.”

The defense research agency, including the unit Poindexter heads, was created to find unorthodox methods for pursuing national security. On its face, the futures market idea seems to fit that bill.

“I think it might really provide some signals about where the next terror attack will be,” said Yale economist Robert Shiller, one of the nation’s leading financial theorists.

The problem, said Shiller, is that such a market could have produced horrendous side effects.

For example, it could have provided attackers with a means of enriching themselves by their very attacks.

Terrorists or organizations connected with them could have placed bets on the bombing of a particular building or the assassination of a political figure, then collected when they pulled off the attack.

To be of any use to counter-terrorism officials, the bets would have had to be fairly specific. But that could effectively have given terrorists a road map of the most destructive options.

Beyond these specifics, analysts said the proposal suffered a grander flaw.


“It’s morally repugnant,” said Shiller.

But it is precisely such problems that analysts said Poindexter has had trouble recognizing.

“The fellow has a tin ear,” said John Prados, a senior fellow with the National Security Archive, a Washington-based research organization.

Poindexter set off political alarms last year by pushing a “Total Information Awareness” project, an experimental system that would let the Pentagon scan electronic transactions performed by millions of people around the globe every day to look for patterns and flag suspicious activity.

“He didn’t see any civil liberties problem with this,” Prados said.

During his years with the Reagan administration, Poindexter was equally controversial, first as a deputy and then as national security advisor.

He played a key role in the “Star Wars” program, helping to convince Reagan to push for space-based weapons despite the lack of any existing technology.

Poindexter advocated a 1984 presidential national security directive that would have given the administration broad powers to control even unclassified information by, among other things, requiring federal employees to take polygraph tests.

Poindexter, appointed national security advisor in December 1985, helped create the electronic back door to the White House computer system that allowed former Marine Lt. Col. Oliver L. North to conduct the secret sale of missiles to Iran as ransom for American hostages in Lebanon and the diversion of profits to support U.S.-backed Nicaraguan rebels.

Like Poindexter, North was indicted and convicted for these actions, but the convictions were later overturned.

Poindexter graduated at the top of his class at the U.S. Naval Academy in 1958 and earned a doctorate in nuclear physics at Caltech.

His office at the Pentagon had two partners in the new futures market venture, a San Diego company called Net Exchange, whose Web site says is headed by Caltech economist John Ledyard and the Economist Intelligence unit, the research arm of the Economist magazine.

But for all the brainpower brought to bear on Poindexter’s project, said Arquilla, “it should have been obvious to him that this thing could never have passed the smell test.”


Times staff writers Doyle McManus and Janet Hook contributed to this report.