AGSCAM: the new world money order; the Department of Agriculture's long, dirty dance with a dictator.

• Author: Feldstein, Mark
• Position: Loan guarantee program to Iraq

Mark Feldstein is a correspondent with CNN's Special Assignment" investigative reporting team in Washington, Research assistance was provided by John Gould.

As the Bush administration toasted its military victory over a ruthless third world dictator, it was harder than ever to remember how the United States helped build Iraq up before bombing it down-including one prewar foreign policy fiasco that transpired not in the Gulf, but in the quiet hallways of the U.S. Department of Agriculture (USDA).

By now, other aspects of the story are familiar. Desperate to stop Iran's Ayatollah Khomeini, the U.S. reestablished diplomatic ties with Iraq in 1984 and began supplying Saddam Hussein with what would total more than $1.5 billion worth of helicopters, computers, electronic equipment, and other militarily vital technology. Yet, of all the American aid to Iraq, the largest-and perhaps most important-has been the least noticed: some $5 billion in U.S.-backed agricultural loans.

At its inception in the early eighties, the loan guarantee program seemed harmless, a kind of latter-day Food For Peace program that put food on third world tables while opening up a new and profitable market for the powerful American agricultural constituency. After Iraq was ushered into the program in 1983, more than 100 American companies-from Pillsbury to Pepsi-Cola, Cargill to Comet Rice-eagerly signed on. But as USDA administrators stood back, took notes, and did nothing, Food For Peace turned into Food For War.

During the final years of the Iran-Iraq war, Saddam's trade ministers began to press American businesses involved in the program to throw in free trucks, cranes, cash, and military supplies in exchange for multimillion dollar contracts for rice, grains, and other products. To some American corporations, that illegal request proved too profitable to resist-and besides, it was virtually risk-free, thanks to the USDA's faith in its agribusiness constituency. While the U.S. government guaranteed the loans and looked away, a group of renegade American companies illegally supplied Saddam's government with millions of dollars in cash and militarily useful industrial hardware.

In 1990, Iraq defaulted on its USDA loans, leaving taxpayers liable for a $2 billion bill. If that's an unwelcome surprise to the public, internal agency documents show that USDA's faith was anything but blind. As early as 1987, USDA began receiving warnings that Iraq was asking American businesses to illegally ship goods purchased with U.S. government-guaranteed loans-warnings that, in deference to State Department pressure and a desire to push American exports, USDA virtually ignored. In fact, despite four years of allegations and criticism by the General Accounting Office (GAO), Iraq was eligible for the guaranteed loans until it rolled into Kuwait.

The USDA loan fiasco did not help the Iraqis win the Gulf war. But it should nevertheless provide the United States with a powerful lesson. In the hands of dictators and dishonest businessmen, USDA's laissez-faire policy was-and is-a recipe for disaster.

Guaranteed abuse

While much of the Iraq program blackmail transpired during the Bush administration, the USDA debacle was enabled by a classic Reagan-era concept: unregulated capitalism cobbled onto a kind of welfare for the wealthy-the very philosophy that brought us the HUD and S&L crises.

In this case, the operative acronym is GSM: USDA's General Sales Manager credits. Under the program, cash-poor nations from Brazil to Bangladesh obtain loans from private banks to purchase American goods. But the program is not, USDA officials emphasize, humanitarian aid. It's self-help for the U.S. trade deficit. By negotiating the sale of billions of dollars of wheat, rice, milk, wood products, and cotton, USDA can dramatically increase its exports while funnelling money to the American farm belt. And there's no question that this aspect of the program has worked: More than $32 billion of America's overseas agricultural sales have been made with the help of USDA loan guarantees since the program began in 1980.

USDA's explicit goal has never been to regulate agricultural sales but to "facilitate" them. Here's how it works: First, after carefully analyzing the credit risk of, say, the desert nation of Narnia, USDA announces $1 billion worth of credit guarantees available for agricultural exports to the country. St. Louisbased Gringo Grain, Inc., uses that guarantee to negotiate a $20 million shipment of grain with the Narnian Import Ministry, and then brings in Paul's Bank in Des Moines, Iowa, to...