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Pentagon nixes futures market on terror

The Pentagon's plan is met with astonishment and derision almost from the moment two senators disclosed its existence.

WASHINGTON--The Pentagon office that proposed spying electronically on Americans to monitor potential terrorists has quickly abandoned an idea in which anonymous speculators would have bet on forecasting terrorist attacks, assassinations and coups in an online futures market.

Deputy Defense Secretary Paul D. Wolfowitz said Tuesday that the program would be dropped. And he asserted that he first learned of the Pentagon-sanctioned futures market through news accounts after two Democratic senators disclosed the concept on Monday.

"I share your shock at this kind of program," Wolfowitz told the Senate Foreign Relations Committee. "We'll find out about it, but it is being terminated."

Sen. John W. Warner, the Virginia Republican who heads the Senate Armed Services Committee, said he had conferred with the program's director at the Pentagon, "and we mutually agreed that this thing should be stopped."

The discarded program was met with astonishment and derision almost from the moment it was disclosed.

In the proposed futures market, traders bullish on a biological attack on Israel, say, or bearish on the chances of a North Korean missile strike would have had the opportunity to bet on the likelihood of such events on a new Internet site established by the Defense Advanced Research Projects Agency (DARPA).

The Pentagon called the idea a new way of predicting events and part of its search for the "broadest possible set of new ways to prevent terrorist attacks." But the two Democratic senators who disclosed the plan on Monday called it morally repugnant and grotesque. The senators said the program fell under the control of Adm. John M. Poindexter, who is director of the Terrorism Information Awareness Office and was previously President Reagan's national security adviser.

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One of the two senators, Byron L. Dorgan of North Dakota, said the idea seemed so preposterous that he had trouble persuading people it was not a hoax. "Can you imagine," Dorgan asked, "if another country set up a betting parlor so that people could go in--and is sponsored by the government itself--people could go in and bet on the assassination of an American political figure?"

After Dorgan and his fellow critic, Ron Wyden of Oregon, spoke out, the Pentagon sought to play down the importance of a program for which the Bush administration has sought $8 million through 2005. The White House also altered the Web site so that the potential events to be considered by the market that were visible earlier in the day at could no longer be seen. But by that time, Republican officials in the Senate were privately shaking their heads over the planned trading. One top aide said he hoped that the Pentagon had a good explanation for it.

But it seemed obvious today that no explanation would suffice politically. Sen. Bill Frist of Tennessee, the Republican majority leader, said as much in a letter to Sens. Warner and Ted Stevens, the Alaska Republican who heads the Appropriations Committee.

"I cannot conceive of any reason why the United States should be involved in a project of this nature," Frist wrote. Sen. Pat Roberts, the Kansas Republican who serves on both the Intelligence and Armed Services Committee, called the market plan "absurd" and added, "It seems to me they are way off base and somebody should bear that responsibility, and I think we know who that is."

The Pentagon, in initially defending the program, said such futures trading had proven effective in predicting other events like oil prices, elections and movie ticket sales. "Research indicates that markets are extremely efficient, effective and timely aggregators of dispersed and even hidden information," the Defense Department said in a statement. "Futures markets have proven themselves to be good at predicting such things as elections results; they are often better than expert opinions."

But it became abundantly clear this morning, at the hearing of Warner's committee, that whatever the logic of the Pentagon's position it had no chance of surviving politically.

"I must say this is perhaps the most irresponsible, outrageous and poorly thought-out of anything that I have heard the administration propose to date," said Sen. Tom Daschle of South Dakota, the Democratic leader.

According to descriptions given to Congress, available at the Web site and provided by the two senators, traders who register would have deposited money into an account similar to a stock account and win or lose money based on predicting events. "For instance," Wyden said, "you may think early on that Prime Minister X is going to be assassinated. So you buy the futures contracts for 5 cents each. As more people begin to think the person's going to be assassinated, the cost of the contract could go up, to 50 cents.

"The payoff if he's assassinated is $1 per future. So if it comes to pass, and those who bought at 5 cents make 95 cents. Those who bought at 50 cents make 50 cents."

The senators also suggested that terrorists could participate because the traders' identities will be unknown.

"This appears to encourage terrorists to participate, either to profit from their terrorist activities or to bet against them in order to mislead U.S. intelligence authorities," they said in a letter to Poindexter. The opponents to the futures market said Poindexter's Terrorism Information Awareness Office had developed the idea.

The program, called the Policy Analysis Market, had intended to begin registering up to 1,000 traders on Friday. It instead became the latest problem for DARPA, a Pentagon unit that has run into controversy for the Terrorism Information Awareness Office. Poindexter once described a sweeping electronic surveillance plan as a way of forestalling terrorism by tapping into computer databases to collect medical, travel, credit and financial records.

Worried about the reach of the program, Congress this year prohibited what was called the Total Information Awareness program from being used against Americans. Its name was changed to the Terrorism Information Awareness program.

This month, the Senate agreed to block all spending on the program. The House did not. Wyden said he hoped that the new disclosure about the trading program would be the death blow for Poindexter's plan.

The Pentagon did not provide details of the Policy Analysis Market, like how much money participants would have had to deposit in accounts to participate. Until now, trading had been scheduled to begin on Oct. 1, with the number of participants initially limited to 1,000 and possibly expanding to 10,000 by Jan. 1.

"Involvement in this group prediction process should prove engaging and may prove profitable," the market's Web site said.

The overview of the plan said the market was planning to focus on the economic, civil and military futures of Egypt, Jordan, Iran, Iraq, Israel, Saudi Arabia, Syria and Turkey and the consequences of United States involvement with those nations. The creators of the market envisioned other trappings of existing markets like derivatives.

In a statement, DARPA said the trading idea was "currently a small research program that faces a number of major technical challenges and uncertainties."

"Chief among these," the agency said, "are: Can the market survive and will people continue to participate when U.S. authorities use it to prevent terrorist attacks? Can futures markets be manipulated by adversaries?"

Dorgan and Wyden called for an immediate end to the project and said they would use its existence to justify cutting off financial support for the overall effort. In the letter to Poindexter, they called the initiative a "wasteful and absurd" use of tax dollars.

"The American people want the federal government to use its resources enhancing our security, not gambling on it," the letter said.

The two lawmakers said the program needed to adhere to a high standard because of the involvement of Poindexter, who was convicted of lying to Congress about weapons sales to Iran and illegal aid to Nicaraguan rebels. His conviction was later reversed on the ground that he had been given immunity for testimony in which he lied.

In their letter, the senators cited the example from the Pentagon of a bioterror attack on Israel.

"Surely, such a threat should be met with intelligence gathering of the highest quality--not by putting the question to individuals betting on an Internet Web site," they wrote.

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