In the latest James Bond thriller, Casino Royale, 007's mission is to stop an amoral money man for international terrorist organizations from winning a high-stakes poker game. Bond is assisted in this effort by a dashing British agent, Vesper Lynd, played by the beguiling Eva Green. And, in a modern twist on the old Ian Fleming formula, Lynd does not work for Her Majesty's Secret Service, but rather for the Chancellor of the Exchequer--she's a Treasury agent.

John B. Taylor, the Stanford economist who served as Undersecretary of the Treasury for International Affairs throughout President Bush's first term, wants everyone to know that U.S. Treasury officials play just as important--and sometimes just as daring--a role as Lynd in the real-life war against terrorism. Taylor has a new book out, Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World, that seems intended to ensure that Treasury's--or, perhaps more accurately, Taylor's--contribution to America's current war effort is not overlooked.

To drive home the point, Taylor placed an op-ed in last week's New York Times defending Treasury against California Representative Henry Waxman, who, in a hearing last month, criticized the Bush administration's decision to fly large shipments of cash into Iraq immediately after the invasion. "Who in their right mind would send 360 tons of cash into a war zone?" Waxman demanded. Taylor didn't see anything wrong with his mind; he called the cash transfers "one of the most successful and carefully planned operations of the war."

Taylor's right that Iraq really needed that cash after the invasion--and also that the conversion from old Iraqi dinars to a new currency, which he also lauded in the op-ed, went off without a hitch. But Taylor's narrative overstates the success of Treasury's efforts in Iraq, ignores Waxman's basic point--which was about oversight in the reconstruction effort--and, through omission, seeks to whitewash the Treasury's culpability in many of the policy failures that have hampered U.S. efforts in Iraq since 2003.


The story of Treasury's cash shipments is one I know well. In May 2003, Fortune magazine sent me to Iraq to chronicle efforts to get the economy back on track. I traveled in convoys that moved millions in Iraqi dinars--crammed into burlap sacks and placed in armored personnel carriers--around Baghdad. I watched vast quantities of U.S. dollars--much of it newly minted and flown from the Federal Reserve Banks of Atlanta and New York in plastic-wrapped bricks--being airlifted to Kirkuk and Mosul to pay the salaries of Iraqi government employees. (I even stood on a stack of $23 million at the airport.) Courtesy Jeremy KahnAnd I spent a good amount of time hanging out with the civilians and soldiers who were responsible for reopening Iraq's banks and figuring out how to stave off economic collapse.

April and May 2003 were chaotic months in Iraq. Most banks were shuttered; some had been looted. Saddam's son Qusay had stolen $1 billion from Iraq's Central Bank just before U.S. troops arrived. Many government ministries had also been looted and, in Iraq's socialized economy, large segments of the population were not showing up for work--except on pay day. At the same time, there was a legitimate fear of civil unrest if government workers and pensioners were not paid. So flying money in from the United States was a sensible stopgap. Besides, as Taylor points out, most of the money initially sent to Iraq belonged to the Iraqis in the first place--it had been frozen in U.S. banks since Saddam's invasion of Kuwait. Later, when U.S. troops recovered most of the money Qusay had stolen, this, too, was used in reconstruction efforts.

Taylor argues that these shipments of cash had been carefully planned. (He cites a presentation then-Treasury Secretary John Snow made to President Bush and the National Security Council in March 2003.) But, while the concept may have been, the mechanics certainly were not. Like much of the postwar planning, administration officials assumed the pieces would magically fall into place once Baghdad was liberated. From what I saw--and from interviews with Treasury staff--the actual movement of money around the country was a completely ad hoc operation. The troops, armored cars, and helicopters needed to protect cash as it was shuttled from place to place were pressed into service at the last minute. It was just lucky that officials unearthed servicemen with accounting backgrounds to assist in the operation--none had been assigned in advance of the invasion. Meanwhile, many Treasury experts with highly technical skills in economic planning and budgeting were forced to become glorified Brinks employees--spending much of their time merely moving cash around the country.

Taylor claims that "Treasury officials who watched over the payment process in Baghdad in those first few weeks reported a culture of good record keeping." I watched salaries being disbursed to Iraqis on a number of occasions--from banks, at a ministry building, and, at least once, from the back of a truck. While Iraqis needed certain papers to get paid and salaries were usually handed out by ministry supervisors (who, presumably, knew who their own employees were), in practice the payment system was often disorderly, and Taylor overstates the extent to which harried Treasury advisers were able to police the process. It was well-known, even in the spring of 2003, that Iraqi ministries were full of ghost employees who did no real work for the ministry, drew multiple salaries, or existed only on paper. In the immediate aftermath of the invasion, rooting out such ghost employees was not a high priority. But it never became one, either. The special inspector general for Iraq would later cite payments to these ghost employees as a significant waste of resources.

More importantly, by talking only about "those first few weeks," Taylor simply ignores the inspector general's later report concluding that "the [Coalition Provisional Authority] did not establish or implement sufficient managerial, financial, and contractual controls to ensure [Development Fund for Iraq] funds were used in a transparent manner." The system of importing dollars to pay salaries and reconstruction projects in cash--which made sense in the first few months after the invasion--was never replaced with a system that would have provided better oversight. A non-cash economy was never established. The inspector general found that "the CPA disbursed over $8.8 billion ... without assurance the monies were properly used or accounted for." And the staff of the House Committee on Oversight and Government Reform (which Waxman chairs) uncovered some illuminating anecdotes:

In addition to these audit reports, officials in Baghdad have provided first-hand accounts of lax physical controls. One CPA official described an environment awash in $100 bills. One contractor received a $2 million payment in a duffel bag stuffed with shrink-wrapped bundles of currency. Auditors discovered that the key to a vault was kept in an unsecured backpack. They also found that $774,300 in cash had been stolen from one division's vault. Cash payments were made from the back of a pickup truck, and cash was stored in unguarded sacks in Iraqi ministry offices. One official was given $6.75 million in cash, and was ordered to spend it in one week before the interim Iraqi government took control of Iraqi funds.

Just before the CPA handed over sovereignty to the interim Iraqi government, it flew billions of dollars into the country--including one shipment of $2.4 billion that was the largest in the history of the Federal Reserve. Where did this money go? Many of the Iraqis picked by the CPA to lead ministries after the handover proved corrupt. In one case, an Iraqi official appears to have stolen more than half a billion dollars earmarked for fighting the insurgency.

This isn't entirely the Treasury's fault--the Pentagon and the CPA also share blame. But the Treasury could have sent more people to Iraq, raised more objections in Washington to the way the CPA was being run, helped Iraq move away from a cash-based system of payments, and made sure American and Iraqi money was not being misused. It is this larger point--about accountability and oversight--that Waxman was making when he asked "who in their right mind would send 360 tons of cash to a war zone?" and which Taylor artfully dodges in his op-ed.


Finally, missing from Taylor's account is the role that free-market ideologues representing Treasury played within the CPA. As is well-documented in Rajiv Chandrasekaran's stinging account of the U.S. occupation, Imperial Life in the Emerald City: Inside Iraq's Green Zone, the Treasury and the USAID had planned in the months before the invasion to privatize many state-owned companies, to create a world-class stock exchange, and to implement a comprehensive income-tax system. The man Treasury hired to carry out this mission was Peter McPherson, a former Reagan official and the president of Michigan State University, who took a summer sabbatical to advise the Iraqi Ministry of Finance. McPherson, who I interviewed in Iraq, was committed to dispensing economic shock therapy--he wanted Iraq's industries privatized within weeks, even if this meant selling off valuable assets at rock bottom prices to foreign investors. Nor did he seem to care that such a policy might violate the international laws governing occupation.

As I reported in Fortune, McPherson's insistence on immediate privatization created serious tension among the Treasury experts in Iraq. Some of these advisers knew from previous experience (working with formerly socialist states in Eastern Europe) that shock therapy could prove disastrous. They believed McPherson's privatization drive was a distraction from more pressing priorities, such as making sure government workers were being paid. And they felt the decision was best left to the Iraqis themselves.

Treasury officials back in Washington did nothing to rein McPherson in. And, when McPherson realized privatization was impractical under the circumstances, he tried to shrink the size of Iraqi government in a back-door maneuver: He eliminated government subsidies to state-owned industries by canceling all existing intra-governmental debt. This had disastrous consequences, leaving key factories without enough money to replace dilapidated, damaged, or looted infrastructure, while less important ones wound up with valuable assets at no cost (which, in some cases, were then sold off by corrupt company officials, who pocketed the profit). McPherson's decision kept a number of state factories idled, leaving thousands of Iraqis out of work. This, in turn, may have helped feed the growing insurgency.

What about those other Treasury priorities--the stock exchange and the tax code? Well, McPherson drew up a plan to shift Iraq to a flat tax, but it was never implemented. (Most Iraqis never paid taxes any way.) And the stock exchange project eventually fell to a 24-year-old Yale grad with no financial background. He was hired and sent to Iraq by the Pentagon, but, if the Treasury had any serious objections, it never made them known. After months spent reworking Iraq's securities laws and tinkering with a plan to bring state-of-the-art computerized trading to Baghdad, the 24-year-old went home and the Iraqis reopened the stock exchange using the same chalk boards and paper trading chits they had always used. They could have done so months earlier had the administration not been so fixated on creating a world-class exchange.


Of course, none of this came up in Taylor's op-ed. Perhaps that's because he'd rather have us believe in the dashing 007 image of Treasury officials. But another cinematic take on the treasury official's role in counterterrorism is a better fit: In Steven Spielberg's Munich, about the Israeli effort to hunt down and assassinate those involved in the 1972 massacre of Israeli Olympians, Avner must meet with an old Mossad bookkeeper before he is sent off on his secret mission, financed with millions from the Israeli Treasury. The bookkeeper has a simple admonishment for the young Avner--one that the Treasury would do well to remember the next time the United States invades and occupies a foreign country: Just bring me receipts.

By Jeremy Kahn