Defense bill stalls at president’s desk

President Bush said Friday that he would effectively veto a $696-billion defense bill because it included a provision that the administration feared could be used to tie up billions of dollars in Iraqi assets in U.S. lawsuits.

The provision was included in the extensively debated bill setting broad Pentagon spending and policy priorities (not the spending bill that funds U.S. military operations in Iraq and Afghanistan). The provision drew close attention only in recent days, when the White House realized it posed the risk of what Bush called a “devastating” financial effect for Iraq.

Democratic congressional leaders expressed irritation at the White House for not earlier flagging the provision as objectionable. They said Friday that they expected a quick remedy when lawmakers returned to session next month.

At issue is whether plaintiffs with legal claims against countries deemed by the State Department to be sponsors of terrorism should be allowed to ask American courts to freeze those countries’ assets in U.S. financial institutions while lawsuits make their way through the courts.

The provision does not refer specifically to Iraq. But the White House said Friday that it would affect Iraq’s assets in the United States, estimated to be as much as $30 billion, and affect funds for construction projects involving U.S. firms. Those funds could be frozen if American plaintiffs sought damages for actions carried out under Iraqi President Saddam Hussein.

Bush did not formally veto the bill. Normally, his refusal to sign the bill when Congress is not in session -- a maneuver known as a pocket veto -- would effectively kill the measure. The Senate has not formally shut down for the holiday break, but the president argued Friday that with the House in recess, Congress is in adjournment.

Officials said that Bush was forced to object to the bill because the alternative -- signing it and asking Congress to quickly amend it to remove the controversial provision -- would have left Iraqi funds vulnerable for several months.

Democratic leaders said the president’s decision jeopardized vital initiatives in the larger measure that would help the military personnel, including a 3.5% military pay raise and expansions to care for wounded veterans.

“I am deeply disappointed that our troops and veterans may have to pay for their mistake and for the confusion and uncertainty caused by their snafu,” said Senate Armed Services Committee Chairman Carl Levin (D-Mich.).

Sen. John F. Kerry (D-Mass.) criticized the president by invoking a famous exchange from 2004, when he ran for president.

“We fought against this White House to provide our men and women in uniform a decent pay raise, and now three days after Christmas, George Bush says he’ll veto it. What a disgrace,” Kerry said. “Only George Bush could be for supporting the troops before he was against it.”

Tony Fratto, a White House deputy press secretary, said that military personnel would receive an automatic 3% pay raise as scheduled and that the remaining 0.5% raise would be retroactive once a new bill was passed and signed.

Bush said in his written message informing Congress he would not sign the bill that “its full impact on Iraq and our relationship with Iraq has become apparent only in recent days.”

Last week -- after the defense authorization bill had passed the House and Senate -- Iraq’s ambassador to the United States, Samir Sumaidy, publicly criticized the provision, which he said would make present-day Iraq liable for crimes committed under Hussein.

“This legislation offends the basic sovereignty of Iraq and threatens the important U.S.-Iraqi alliance,” Sumaidy said Dec. 19.

The controversial provision was written by Sen. Frank R. Lautenberg (D-N.J.) and was added to the defense authorization bill in September.

The White House was unable to say how many lawsuits might be affected.

But a senior administration official, speaking anonymously under ground rules imposed by the White House, said the provision could cost Iraq “multiple billions of dollars.”

Congress is likely to consider a fix when lawmakers return from their holiday recess Jan. 15.

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james.gerstenzang@latimes.com

noam.levey@latimes.com

Gerstenzang reported from Crawford and Levey from Washington.