Pentagon Retreats From Terror Futures In Face of Criticism

By Shailagh Murray

30 July 2003
The Wall Street Journal
C1

Washington -- IT WOULD HAVE given a new meaning to the term "strike price."

The Pentagon, responding to a congressional backlash, yesterday did an 
about-face on helping launch a futures-trading market that would have 
allowed participants to profit by correctly predicting assassinations and 
terrorist strikes in the Middle East.

The decision to cancel government support for the effort was announced by 
Senate Armed Services Committee Chairman John Warner, a Virginia Republican, 
following a conversation with Tony Tether, head of the Department of 
Defense's Defense Advanced Research Projects Agency, or Darpa, which was in 
charge of the project. "We mutually agreed that this thing should be 
stopped," Mr. Warner said.

The project was a twist on a concept that has gained popularity in recent 
years. An April report by Credit Suisse Group's Credit Suisse First Boston 
said that what are known as "decision markets" had been "proven to be 
uncannily accurate" in predicting everything from election outcomes to 
Hollywood blockbusters. The key to their success, the report found, is that 
the markets "aggregate information across traders, allowing them to solve 
hard problems more effectively than any individual can."

The Pentagon wouldn't have been the first to offer wagers on disaster. The 
CSFB report cites an Irish exchange that trades on war outcomes. Even 
traditional futures markets allow traders to factor in death and 
destruction. Investors make bullish wagers on cocoa and soybeans, for 
example, because they anticipate a revolution in a cocoa-growing country or 
a Midwest flood that wipes out a soybean crop.

Still, Deputy Defense Secretary Paul Wolfowitz got an earful about the 
project when he showed up at the Senate yesterday morning for a hearing on 
Iraq reconstruction. "We'll find out exactly how this happened," he assured 
the Foreign Relations Committee. Darpa "is brilliantly imaginative in places 
where we want them to be imaginative," he said. "It sounds like maybe they 
got too imaginative in this area."

Republican reaction to the program yesterday was as fierce as the response 
from Democrats when they disclosed it at a Monday news conference. Some 
lawmakers said they had known about it but didn't realize money was at 
stake. Senate Majority Leader Bill Frist (R., Tenn.) ordered that funding 
for the program be cut off. "I can't disagree more with the approach," said 
Sen. Pat Roberts (R., Kan.), chairman of an armed-services subcommittee. He 
said his panel would seek to hold hearings to "fully explore" how the idea 
came about.

The Pentagon's aim was to help create an alternative way of anticipating 
events in one of the world's most volatile regions. Middle East specialists 
would buy and sell futures contracts from self-financed accounts, and 
defense officials would monitor their trading patterns to glean insights 
into the likelihood of certain events.

The system was to have been operated by San Diego-based Net Exchange, a 
10-person firm founded by California Institute of Technology faculty 
members. Net Exchange President Charles Polk said the specific concept "is 
not going to happen as any sort of product funded by the U.S. government. 
It's over." But Mr. Polk said, "There's certainly a life beyond this" for 
the technology involved.

Democrats decried the exchange as tasteless, disrespectful, and possibly a 
way to aid and abet terrorists, by giving them a way to profit from their 
actions.

Critics noted the project came out of the Information Awareness Office, the 
Pentagon office that previously proposed electronic spying on Americans as a 
way to detect terrorist plots. The office is run by former Reagan 
administration official John Poindexter, who was convicted of lying to 
Congress during the Iran-Contra affair. The conviction was later reversed on 
the grounds that he had been given immunity for the testimony in which he lied.

--- Not So Brazen? "Terror futures" have been dropped under fierce 
criticism. But in fact, many legitimate futures-trading markets already 
allow profits from death and destruction. -- CRUDE OIL: Prices move on 
bloodletting in Middle East -- WEATHER: Profits from tornadoes' effects -- 
GOLD: Prices rise on war and unrest, as they did after 9/11 -- COCOA: Prices 
rallied after bloody coup in Ivory Coast -- NATURAL GAS: Parlay on 
hurricanes in the Gulf