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July 4, 2009

Iraq, Bush I, and BNL and Barack Obama's DOJ

By Stephen Pizzo

I wrote the story that appears below a decade and half ago. Why am I reposting it here, now? It has to with those pesky non-existent WMD and what the George H. Bush administration knew and what they did about it. And, since they knew a lot, if what they told sonny, W. Bush, when as he greased up the wheels of war.


The Mysterious BNL Affair
By Stephen Pizzo,

published on October 22, 1992.
Awarded one of 1992 -  Sonoma State University's  10 Most Censored Stories Award

I wrote the story that appears below a decade and half ago. Why am I re-posting it here, now? In part, it has to with those pesky non-existent WMD and what the George H. Bush administration knew and what they did about it. And, since they knew a lot, if what they told sonny, W. Bush, when as he greased up the wheels of war.

At the time I wrote the original piece, then Chairman of the House Banking Committee, Rep. Henry Gonzalez (D-Tx) was conducting an aggressive investigation into the failure of an Italian bank that happened to have a branch in Atlanta, Georgia. The reason the failure drew the attention of the crusty old congressman was that the bank had been a conduit for billions of dollars in US government guaranteed loans to Iraq. The money was supposed to be used to buy US agricultural products but instead had gone to beefing up Saddam Hussein's military machine. There were also hints the money had been used to buy chemicals for the production of chemical weapons.
Few people gave Gonzalez much credit pursuing the case, even when the CIA hinted that they would prosecute him if he kept disclosing classified information he got out of them using his subpoena powers as chairman of the banking committee. Despite his best efforts the investigation died when Bush was defeated by Bill Clinton the January following the publication of the story that follows. ( I have more to say about that at the end of the story.)

So why dredge this old news up now? Because the Obama Department of Justice is still withholding many documents from that era as well as documents from the Bush II era. It's time to cough that stuff up. Because otherwise we can never understand the chain of events that led to war with Iraq. It began long, long ago....

One final note before I let you dive in to this remarkable tale. What you are about to read is, in my experience as a journalist, the most aggressive and successful cover-up in modern times. Punishing those responsible is less important than understanding how wrong things go when government officials choose to operate in the shadows, depriving themselves of dissenting voices and alternative views.

Story as it was published on October 22, 1992

Washington: Amidst the din of election year rhetoric a new "gate" has been added to the political lexicon: "Iraqgate." What hasn't yet been understood is how serious a matter this new scandal is. The gravity of the Iraqgate affair was brought home to me one day when I went to the mailbox. There I found a reporter's most blessed sight – a fat manila envelope with no return address. Even better, it bore a Washington, D.C., postmark.

When I opened the package, I found a stack of government documents still arrogantly sporting their official "Classified" and "Secret" stamps. The documents had been organized in chronological order beginning with a June 12, 1984, Department of State document memo addressed to Donald Gregg at the White House.

Gregg was then Vice President George Bush's national security adviser. The memo was a cover letter for "talking points for the Vice President in calling Eximbank Chairman William Draper concerning Exim financing" for Iraq.

As I peeled back page after page, a remarkable drama unfolded before my eyes. Even before I reached the final page, I had concluded that President George Bush had participated in at least two felonies and could be impeached. Here is what the documents showed.

First a bit of history
 The Reagan/Bush administration had spent a good portion of its first term in office secretly selling arms to Iran in an abortive attempt to get our hostages in Lebanon released and a more successful program to fund a rogue Contra supply network. The nation would not loam much about that until well into their second term.

Meanwhile war had broken out between Iran and Iraq and by 1984 Iran was licking Iraq. The administration had to figure out how to balance the fight so that neither side could actually win. But they could hardly go to Congress for funding to aid Iraq since then they might have to explain why Iran was so well equipped.

So the administration again chose the now familiar covert route. They had already gotten Congress to remove Iraq from the list of countries harboring terrorists, clearing the way for non-military trade. All Iraq needed now was funding. The administration decided to supply the funding via two federal loan-guarantee pre-grams administered by two executive branch departments, Agriculture and Commerce, and overseen by the State Department.

The two loan programs-the Export/Import Bank (Exim) and Commodity Credit Corporation-could funnel billions of dollars secretly to Iraq by simply authorizing that the bank loans made to Iraq carry a 100 percent U.S. payback guarantee. Of course, the law limited the loan proceeds to specific, non-military uses, such as buying grain from American farmers. But never mind. That little problem could be easily overcome if they used the right bank.

The little bank that could
 The bank they chose for this specialized operation was the Banco Nazionale del Lavaro (BNL), an Italian-owned bank that just happened to have a branch in Atlanta, Georgia. This was no ordinary bank. BNL also just happened to have former Secretary of State Henry Kissinger on its board of advisers, and his consulting firm, Kissinger Associates, represented BNL. At the time the loan program began in 1985 the vice chairman of Kissinger Associates was Larry Eagleburger (now acting Secretary of State) and the KA's president was Brent Scowcroft (now White House National Security Adviser.)

(On the international scene BNL had even more interesting connections. Its wholly owned subsidiary in Zurich, Lavaro Bank, AG, was headed by Dr. Alfred Hartmann, a mysterious Swiss banker who was also a director of the Bank of Credit and Commerce International (BCCI). Hartmann also was president of the Swiss Chemical Manufacturer's Society. Sto-ries in the Swiss press quote Hartmann in 1986 complaining that sales of Swiss chemical producers was way down and that new markets had to be developed. In 1989 the U.S. Federal Reserve would report that tens of millions of dollars were funneled from BCCI through Lavaro Bank to BNL/Atlanta and then to Iraq at the very time Saddam Hussein was building his chemical warfare capabilities.)

With the CCC/Exim loan program in place at BNL/Atlanta, the administration approved $1 billion a year for five years in CCC and Exim bank loans to Iraq – $5 billion in all. At least $2.6 billion of the money was directly spent on military equipment, particularly on Iraq's chemical, nuclear, and ballistic missile programs. What American pain and rice Iraq did buy with the money was more often than not shipped to third countries and bartered for additional military equipment.

When George Bush became president in 1988 the loan program was perking right along. Not only had a rearmed Iraq fought Iran to a stalemate, but Bush had the added bonus of being able to brag to U.S. farmers that he was helping them sell grain through the CCC loans to Iraq. After the 1988 election, Larry Eagleburger and Brent Scowcroft left Kissinger Associates and joined the new Bush administration. Henry Kissinger remained on BNL's board and his firm continued providing advice to BNL.

But by early 1989 the Iraq loans began making some administration officials nervous. The classified documents show that Treasury Secretary Nicholas Brady, Commerce Secretary Robert Mosbacher, and Agriculture Secretary Clayton Yeutter were getting squeamish. One 1989 memo from Exim Bank officials warned the White House, Commerce, and Treasury that Iraq was a very bad credit risk and probably would not repay the money, leaving the taxpayer to pick up the tab. Also CIA memos to the White House warned that Saddam Hussein was using his money to buy gear for his budding nuclear bomb program. Still the White House pushed for continued approval for Iraq's CCC loans.

Then in August 1989 a monkey wrench was thrown into the machinery that threatened not only to end the loan program, but to expose the White House's role in the scheme. The Iraqi loan program's real purpose had been considered so sensitive by the administration that no one had briefed the FBI or Customs. So when those two agencies got a tip that something was rotten at BNL, they raided the bank and hauled off its records.

The raid caused panic in both Washington and Rome. If the U.S. Congress got wind of the loan scam, it could strip the CCC loans of their U.S. guarantee, leaving Italy holding the bag for Baghdad's $5 billion in loans. A still classified cable to the State Department from the U.S. ambassador to Italy expressed the Italians' alarm. Also Italy had seen how Israel had been embarrassed when its involvement with the Reagan administration in the Iran/Contra affair was aired during congressional hearings. The Italian ambassador told the U.S. ambassador to let the White House know that his government wanted the BNL affair "raised to a political achieve some kind of damage control."

But damage control was already on the White House agenda. An uncontrolled investi-gation into BNL would certainly compromise the White House. To further complicate

Bush's life, all this happened just when Iraq was due for its 1990 fiscal-year CCC loan. And Iraq sent its foreign minister, Tariq Aziz, to Washington to personally collect. No one ever accused Iraq of being either shy or subtle and Aziz was not interested in George Bush's little problem down in Atlanta. He said Iraq wanted its $1 billion, all of it, and right now – BNL scandal or not.

It was around this time that House Banking Chairman Henry Gonzalez (D-Texas) began asking the White House just how this crooked little Italian bank had gotten approval to make so many U.S. guaranteed loans to Iraq. Attorney General Thornburgh tried to silence Gonzalez by inviting him to a private briefing. Gonzalez told Thornburgh if he had anything to reveal about BNL, he could do so under oath when he testified before his committee. Fearing they'd be dragged deeper into the BNL affair, the secretaries of Treasury, Commerce, and Agriculture began hedging their support of the Iraqi loan demand.

But none of this reduced President Bush's enthusiasm for the Iraqi loan program and he insisted that the full $1 billion loan be ap-proved. In order to give his three nervous agency secretaries the political and legal cover they needed, Bush signed National Security Directive 26 on Oct. 4, 1989, less than two months after BNL was raided. NSD-26 ordered all executive branch agencies to do everything possible to facilitate and expand cooperation and trade with Iraq. Under cover of NSD-26 the agencies fell into line, and under intense lobbying from Eagleburger at State, they each approved the release of the first $400 million of Iraq's $1 billion in 1990 CCC loans.

But Saddam decided not to wait for the rest of the money. In August 1990 he used his U.S.-financed arms to attack and occupy Kuwait. Now the White House had a real problem. Bush had to rally the nation and a shaky coalition of Arab states into a unified force to fight a righteous battle.

How could he pull off such a feat if it was revealed that he had been Saddam Hussein's personal banker?

The cover-up begins
Phase 1 of the BNL scandal ended as phase 2, the cover-up, began. The White House General Counsel's Office phoned Gale McKenzie, the assistant U.S. attorney in Atlanta. Department of Justice officials in Washington phoned her, too – just to inquire about the case, they later said, nothing improper. But notes of that conversation scribbled by a department official indicate that the Atlanta prosecutor "was sensitive to the embarrassment potential" of the case. Sensitive enough, it turned out, to hold off bringing indictments in the case until one day after the shooting stopped in the Gulf.

But even when the war in the Gulf was over, the danger the case posed to the administration was as great as ever, and now the administration turned its attention to solving the problem once and for all. First the U.S. attorney in Atlanta was replaced. But the new appointee, Joe Whitley, was forced to recuse himself from the BNL case when the Atlanta Joumal disclosed that his law firm had represented an Ohio company, Matrix-Churchill, which had been one of the key U.S.-Iraqi front companies funneling the CCC loan money into illegal military purchases. Just a coincidence, Whitney said. Small world.

The case was then turned completely over to Assistant U.S. Attorney Gale McKenzie, who in early 1992 announced she had finally cracked the case. Indicted and blamed for the entire $5 billion scheme was Christopher Drogoul, BNL's Atlanta lowly branch manager. Drogoul, 45, was charged with over 300 counts of bank fraud and agreed to plead guilty to 65 counts. No U.S., Iraqi, or Italian officials were charged – or even questioned.

But U.S. District Judge Marvin Shoob was uneasy about accepting Drogoul's plea. He complained from the bench that he believed that federal prosecutors were not revealing anything they knew about about BNL. Ms. McKenzie assured the judge that it was a simple case and that Drogoul was the culprit The only culprit. Unconvinced, Judge Shoob put off Drogoul's sentencing until September 1992.

But as his sentencing approached, Drogoul began to realize that neither the Italian government nor anyone in U.S. intelligence was going to come to his rescue. Drogoul began to openly complain to the media that he was being made the fall guy for what he claimed was an. approved covert operation. His complaints reached famed Atlanta trial lawyer Bobby Lee Cook, who agreed to represent Drogoul with-out charge.

In court, Cook savaged the prosecutor's case, peppering the court with classified government documents he claimed had been "shoved under his hotel room door during the night." However Cook got the documents, they were the final straw for Judge Shoob, whose angry glare finally convinced Ms. McKenzie to agree to allow Drogoul to withdraw his guilty plea and go to trial.

Two weeks later another shoe dropped. The court now knew that someone within the U.S. government had deliberately withheld evidence from the court. With a full-blown trial coming up, Cook was certain to produce even more government documents that the prosecutor had earlier claimed didn't exist. That's obstruction of justice – a felony. Someone had to cook up an explanation for the missing documents, and pretty quick.

On Oct. 5, CIA Director Robert Gates suddenly admitted that the CIA had withheld documents relating to the BNL affair. The Department of Justice breathed a sigh of relief and was quick to claim that, had the CIA told it of this evidence, it would have certainly shared it with the court.

But wait. Why would the CIA, which rarely admits or denies anything it does, voluntarily step forward and admit this? The same question occurred to Senate Intelligence Commit-tee Chairman David Boren, who summoned the. CIA behind closed doors and demanded straight answers. Gates owed his confirmation as director of the CIA to Boren, who vouched for him when others on the committee wanted to deny confirmation because of his role in the Iran/Contra affair. On Oct. 8, under Boren's angry questioning, Gates admitted that the CIA had not withheld the documents on its own. He said the agency had been instructed to withhold the documents by senior officials at the Justice Department. Attorney General Barr, who now headed the depart-ment, had come there from the CIA several years earlier.

(It was not the first time an administration had tried to have the CIA take the fall in order to stop a growing scandal. Richard Nixon's first tried containing Watergate by pinning it on the CIA and to throw the cloak of national security over the whole matter.)

The Justice Department angrily denied the CIA's charge, and a remarkable public fight broke out between the two federal agencies. FBI Director William Sessions had been watching all this from the sidelines. When federal Judge Shoob first began complaining that he believed someone in government was hiding information from the court, Sessions had suggested to his Justice Department superiors that the FBI investigate the charge. But Sessions was denied permission to investigate. On Oct. 10, after the CIA admission, Sessions acted on his own, announcing that he had ordered the FBI to open an investigation. On Oct. 12 the Justice Department's Office of Public Integrity announced that it had opened a criminal probe, too-a probe into anonymous allegations that Sessions had charged private phone calls and travel to the agency.

Sessions had earned a reputation as a straight-shooter since his appointment in 1986. Close associates were outraged and went public, charging that Sessions was being punished for his long-standing refusal to politicize the FBI for the current administration. Sessions has been in frail health since he was appointed. When he was made FBI director, he did not take his job for six weeks while he recuperated in hospital for a chronic bleeding ulcer.

But things had gone too far now to stop the great unraveling of the BNL scandal. Sen. Boren called on the Justice Department to step aside and appoint a special prosecutor. Last Friday, Oct. 16, Attorney General Barr held a news conference and announced that he would not appoint a special prosecutor, but did name retired federal Judge Frederick Lacey to con-duct an independent investigation of the Justice Department's handling of the BNL case. This investigation would not be completed before the November election.

The presidential campaign and congressional recess have kept the Iraqgate scandal from exploding into full bloom. But once the dust settles in January, that will quickly change. First Drogoul's trial will be marked by sensational public testimony about how the Bush administration circumvented Congress to secretly fund Saddam Hussein's military buildup and the cover-up that followed.

Those revelations will in turn spark congressional hearings as Democrats, now in con-trol of the White House for the first time in a dozen years, smell Republican blood. By piling this scandal atop the Iran/Contra affair, they will try to drive a final nail in the coffin of the Republican Party for many years to come.

But for George Bush and those he dragged into this sordid scheme, things look particu-larly bleak. Out of power, presumably, and no longer in control of the Department of Justice, Bush can no longer manipulate events. Even the shredder won't save him this time. Rep. Henry Gonzalez grabbed the incriminating documents confirming administration complicity in the scheme before they could be shredded-and if he should misplace his copies, he is welcome to mine.

End of original story

2001 Update: As I promised in the introduction there is more to tell. During the 1992 Presidential campaign I spoke to the folks in the Clinton/Gore campaign in Little Rock. They were fully aware of the BNL scandal having better contacts within the Gonzalez investigation than I had. I asked them why they were not using it in the campaign. Rank and file workers for the campaign, particularly those working in opposition research, were equally baffled, and frustrated. They had presented the materials to the campaign leadership and had received an icy reception.
The campaign ended with a Clinton/Gore victory and, it was only months later that Republicans were dragging out dirt on Clinton's dealings with Madison Guarantee Savings and loan in Little Rock. Sources I had among savings and loan regulators in Washington assured me that the Bush administration had been fully briefed on Madison Savings and the Clinton loans during the campaign. Why didn't they use them then?
We move now from what I know to what I believe. I believe that the Bush people got a message to the Clinton/Gore people; "We know about the Madison Savings deals. Use BNL against us and we will use Madison Savings against you. Mutually assured destruction.. political style.

It's the only explanation that makes any sense to me. The BNL caper was pure dynamite. Clinton could have made plenty of political hay with it had he chosen to. He didn't, I believe, because he blackmailed not to.

It's become just a footnote in history now.

Submitters Bio:

Stephen Pizzo has been published everywhere from The New York Times to Mother Jones magazine. His book, Inside Job: The Looting of America's Savings and Loans, was nominated for a Pulitzer.