Making A Killing In Iraq

by Nomi Prins

Left Business Observer, August 6, 2003

Faced with a wobbly economy and a thirst for global domination, the Bush administration set off to invade and divvy up the spoils of Iraq. The cost of war occupation and reconstruction would be funded with oil, they said. (Of course, they also said the war wasn't about oil.) But it's going to be a while before Iraq's oil production is back to its pre-war, pre-sanctions levels. So since up-front cash is short, the easiest way to pay for it all is with debt. The U.S. is quickly sinking back into 1980s-style deficits -- and Iraqis are about to be deprived of both their oil and their future.

The gravy train. There are some big winners in this strategy, starting with arms contractors. The Pentagon is a generous subsidizer of U.S. corporations, who suck up almost half its annual spending, and with military spending on the rise -- up 44% at an annual rate in the second quarter -- their take is rising too.

To pay for a huge military binge while simultaneously cutting taxes by the trillions means lots of fresh borrowing. Congress recently raised the debt ceiling -- a ritual almost forgotten in the surplus era of the late-1990s -- to $7.4 trillion, about twice where it stood in Reagan's day.

And it was back in Reagan's day that plans to control Iraq's oil were first hatched by then-Secretary-of-State/former-Bechtel-president George Shultz. The plan was to create a pipeline that would bypass the Persian Gulf and head through Jordan's Aqaba port towards the Red Sea. Saddam Hussein nixed the plan in 1985, putting a temporary end to U.S. dreams to control Iraq's oil flow.

Contracting. With Iraq now in American hands, many contracts are at stake. But since these are "national security" matters, the bidding process has been closed, since disclosure was deemed both threatening and time-consuming.

At least, that was the reasoning the U.S. Army Corps of Engineers (ACE) gave to open the contract floodgates to KBR, energy and services subsidiary of Halliburton, half of whose revenue comes from U.S. government contracts. The parent company faces huge asbestos liabilities, which it's meeting by shifting responsibility for them to a portion of KBR that doesn't get government contracts and bankrupting it.

Almost everyone knows that Dick Cheney is the former CEO of Halliburton. Less well-known is that he's still linked to the firm through a 1999 deferred compensation agreement. Those compensation arrangements are standard procedure for the Bush administration. Phillip Carroll, the U.S. designee to run Iraq's oil industry, still receives $1 million per year from Fluor, the largest U.S. public engineering and construction firm, a firm he used to run. Coincidentally, Fluor was one of three recipients of open-ended "future contingency" contacts awarded by the ACE in early April. And Fluor is still angling to get a piece of the oil contracting pie.

Keeping track. Because contract money flowed so quickly, it was hard to keep track of it all. Awards seeped out of multiple apertures: from the ACE, other parts of the Pentagon, the Agency for International Development (AID), and Congress. Conveniently, all the key prime contract awards were handed out to U.S. firms before the UN lifted sanctions on Iraq.

There are many ways to examine the contracting pattern. One is noting campaign contributions. The six companies invited by the AID to bid on the initially allotted $900 million in engineering contracts gave $3.6 million from 1999-2002, 66% to Republicans.

But campaign contributions don't tell the whole story. The $77 million of arms industry donations over the past decade is dwarfed by other sectors -- like energy, communications, and finance. The defense industry exerts most of its influence through personal connections. There is no point in paying for what you can get for free. Air Force Secretary James Roche and former Navy Secretary Gordon England gave 9% of their budgets -- $26 billion -- to their old companies, leading defense firms Northrop Grumman and General Dynamics. And there's always Bechtel. CEO Riley Bechtel sits on Bush's international advisory council.

Many top contractors have histories of paying small fines on gigantic cost overruns and other scandals. There's Bechtel again, fined $31 million for jacking up the costs of Boston's disastrous Big Dig -- $1.1 billion worth of overruns, as the Boston Globe showed, which increased Bechtel's profits by $264 million above the original contract specs. Halliburton was fined $2 million for defrauding the army out of many more millions of dollars by inflating repairs and maintenance contract prices. Rent-a-cop giant DynCorp was accused of sexual misconduct in the Balkans, but was awarded patrol of Iraq under the old Balkan contract (as was KBR). And last but not least, there's WorldCom, who paid a $750 million fine for committing $11 billion of fraud.

Halliburton. Soon after Project Incorporate Iraq started, Halliburton settled a $445 million fraud class action suit with a $6 million fine. The settlement absolved Cheney of all liabilities associated with accounting games that took place while he was CEO. Shares jumped 2% on the news. They got a $7 billion contract from the ACE and a pardon from the government for just $6 million -- a 0.13% fine. I'd buy their stock too.

Iraq has been good to Halliburton, which has received $500 million from Iraq-related projects over the past two years, a nice down payment on the $7 billion deal.

Today, three months after KBR engineers began specking out Iraq's oil infrastructure from a Kuwait City hotel room, Iraq suffers from California-style blackouts, an odd situation for a country sitting on top of the world's second largest oil reserves. But, it's been clear that the corporate carve-out has prioritized pocketing of contract money above insuring that the country has electricity or running water.

Bechtel. Bechtel, the country's sixth largest private engineering firm, bagged the $680 million prime "capital reconstruction" contract to rebuild Iraq on April 24, 2003, starting with the Baghdad airport.

To combat allegations of favored status, and convey the appearance of inclusion, Bechtel held conferences in Washington, London, and Kuwait City. These were designed "to inform the worldwide contracting community of its role in Iraq's Infrastructure Reconstruction Program." There was no admission fee: American taxpayers took care of the tab. Sadly, over 1,000 people from European and Asian firms crammed into the London hotel where Bechtel listed the tiny crumbs they'd share with subcontractors to have. "Look around the room -- these are your competitors," encouraged Tom Elkins, the Bechtel executive in charge of procurement. Notably absent were Iraqi firms.

WorldCom. Just when you thought they were bogged down with bankruptcy court proceedings, class action lawsuits, and SEC settlement discussions, WorldCom pulled off a triple coup.

They changed their name back to MCI, the company they acquired in 1998, as part of an intricate plan to cook their books with fictitious MCI line costs. A few days later, they agreed to settle with the SEC and bankruptcy courts, eventually paying a $750 million fine, a figure that amounts to two-tenths of one percent of the market value WorldCom erased through fraud, fabricated goodwill, debt, and general incompetence. And to top it all off, they bagged the no-bid contract to reconstruct Iraq's mobile phone network even though they'd never built a mobile network in the U.S.. Perhaps ashamed, the Department of Defense neglected to list the contract in its daily rosters. MCI's latest call-diversion scandal may finally do them in, but they've shown remarkable staying power.

Oil and paper. Since the official start of Gulf War II, aside from the standing defense budget, $80 billion was appropriated for the war budget, $2.5 billion for U.S. AID contracts, $7.3 billion for U.S. ACE contracts, and $200 million for State Department contacts. An estimated $100 billion for reconstruction looms ahead. None of that includes Iraq's $326 billion existing debt.

Even with the rather optimistic projection of $25 billion in annual oil revenues -- a figure that's only attainable at a rate of pre-Gulf War I levels of 3.5 billion barrels per day, and doesn't include extraction or reconstruction costs or any remainder for the Iraqi people -- paying for it all is a tall order. But, that's what financial engineering is for.

It was only a matter of time before the U.S. decided to use future oil revenues to collateralize new Iraqi loans: Iraqi oil would essentially be transformed into paper owned and traded by foreign investors, while the oil itself would be administered by U.S. corporations (with some foreign junior partners sprinkled in). The leading proponents of the estimated $3.4 billion securitization of Iraqi oil are none other than Halliburton and Bechtel.

The Ex-Im Bank, the federal entity that kept a credit line open for two years after Hussein nixed the Bechtel pipeline project in the mid-1980s, said they'd be happy to use the oil for reconstruction collateral. Iraq doesn't have a voice in the matter.

The IMF is also looking for a piece of the action. Today, Iraq has no outstanding loans with the IMF. That will change. If the U.S. has its way, as much of Iraq's debt -- little of it owed to the U.S., much of it owed to Russia and France -- as possible will be erased. That will leave plenty of room for the IMF, World Bank, and private banks to extend more. The sooner the oil is pumping, the quicker the loans can be floated.

Exporting American finance. Remember last year's corruption scandals, the $66 billion that executives siphoned off the ignorance of their shareholders, the $3.3 billion pocketed by the elite of the bankrupt firms? Then came reform: a few perp walks, some tiny settlements paid, and toothless new laws. It follows that no one knows how to restructure a financial system better than the U.S..

That is why a pack of Washington representatives from the Pentagon, General Accounting Office (GAO), White House Office of Management and Budget, and the Treasury department have gone to Iraq to rebuild their banking system.

On April 25, Peter McPherson, president of Michigan State University, was tapped to be the top architect of the financial rethink. Par for the course, he's got connections. He was deputy secretary of the Treasury Department under Reagan, and a Bank of America exec in the early 1990s. Before his Reagan post, McPherson served on two of the key agencies responsible for funding U.S. international expansion policies and private corporate contracts -- AID and the Overseas Private Investment Corporation (OPIC), where he was CEO (a post held today by former Bechtel exec Ross Connelly).

Iraq's banking district lies in the heart of Baghdad. It was targeted by many a U.S. bomb, because you can't fix what you don't break. And what the U.S. didn't destroy completely, looters adopted as their project. The central bank collapsed inward and vaults were exposed. Banks in all major cities received similar treatment. However, it is not the physical infrastructure the U.S. is interested in changing.

Marketizing Iraq. Because oil and money are inextricably linked, you need to control both to maximize regional domination. Oil is the central piece of the extraction puzzle, but it will take time and money to get it to flow profitably, which is not in keeping with Bush's ME! NOW!! mentality. One way to cut down waiting time is to monetize profits by issuing loans backed by future oil revenues. Debts floated on anticipated profit was the crux of the 1990s bubble, but that was then, this is now. Oil has replaced broadband as collateral.

As such, at the top of the U.S. Treasury's to-do list is privatizing the nationalized financial system and transforming it into a free market. No one knows free markets better than the Bush crew, who have never missed an opportunity to score from connections with the state.

In the days preceding Gulf War II, just nineteen banks operated in Iraq, but most of the money and credit flow emanated from four state-run banks. Reconstruction will uproot this in favor of international players and open the field for bond and loan issuance. Look for JPMorgan Chase, in particular, to extend loans. Shultz is the honorary chairman of their advisory council (which also includes Henry Kissinger and a former Saudi Arabia finance minister). Riley Bechtel serves on the board.

The U.S. Chamber of Commerce (that still boasts Gary Winnick, former head of the now-busted bubble sensation Global Crossing as a director) chimed in with their own plan for Iraq, focused on "liberating" five key sectors: agribusiness, transportation, telecommunications, financial services, and power (energy power -- political power was a given).

According to them, "Emphasis on a free marketplace for goods and services reinforces an emphasis on a free market in politics." Goods equals oil. Services equals finance. Politics equals occupation and control. Debt makes it all possible. Not happy portents of things to come.


Nomi Prins is a former investment banker and author of the forthcoming Money For Nothing (New Press, 2004)


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