In his upcoming memoirs, George Shultz reveals how Ronald Reagan came to trade arms for hostages--and how White House aides tried to keep the operation going long after the scandal broke

(c) 1993 by George P. Shultz. From Turmoil and Triumph: My Years as Secretary of State, to be published by Charles Scribner's Sons/A Robert Stewart Book

REVELATIONS: BIZARRE BEYOND BELIEF

On Sunday, Nov. 2, 1986, just two days before the midterm elections, I learned that David Jacobsen, an American held hostage in Lebanon for over 17 months, had been released. I was instantly full of foreboding about what lay behind it. In the text of a White House statement to be released to the press, the word hostages had the s crossed out wherever it appeared. Apparently the White House had expected the release of several or all of the hostages.

I knew little about the dealings with Iran for hostages held by its terrorist surrogates in Lebanon, and I knew nothing about what had led to Jacobsen's release. But I did know about some earlier hostage-release attempts and had fought fervently against what I viewed as an arms-for-hostages exchange. In four major battles between mid-1985 and fall 1986 I had fought to stop such a deal, and each time I felt--or had been assured--that my view had prevailed. But this snake never died, no matter how many times I hacked at it.

The day after Jacobsen was freed, the revelation came, in Al Shiraa, a Beirut Arabic-language magazine, of a trip to Tehran by former National Security Adviser Bud McFarlane, by that time a private citizen but dispatched by the White House. Later that day Hashemi Rafsanjani, speaker of Iran's parliament, said that McFarlane had come to Tehran secretly in September 1986 with four other Americans on a plane carrying military equipment for Iran. They had been held in a hotel room for five days and then released. They traveled on Irish passports and brought a Bible signed by President Reagan and a cake. The cake, in the shape of a key--supposedly the key to Iranian-American friendship--had been eaten by hungry Revolutionary Guards at the airport. The story was bizarre almost beyond belief.

I told my staff to pull everything together so that I could see what I had known and when, and what I had done about it. A few events immediately leaped to my mind.

Early in the evening of Nov. 19, 1985, the first day of the Geneva summit meeting, after a grueling session with the Soviets, I rushed back to my suite in the Intercontinental Hotel to change clothes before going to the dinner that General Secretary Mikhail Gorbachev was giving. The phone rang: Bud McFarlane was on the line. Four hostages would be released on Nov. 21. The Israelis would send a plane with 100 Hawk missiles to Portugal; if the hostages were released, the airplane would fly to Iran.

This was arms for hostages, plain and simple. With stony anger, I told McFarlane that I had been informed so late in the operation that I had no conceivable way to stop it. I hoped that the hostages would be released, but I dreaded what I feared would be an unfolding nightmare. Bud, at some point in Geneva, told me he had cleared the plan with the President. Nov. 21, the supposed release date, arrived and passed. No hostages were freed. Later I was told the episode had misfired and was over.

On Dec. 4, Bud McFarlane resigned. On Dec. 5, John Poindexter, who had been appointed to succeed McFarlane, told me that he had set up a meeting about Iran, arms sales and hostages for Saturday, Dec. 7. I told him that the operation should be stopped.

The President convened the meeting with Poindexter, McFarlane, Secretary of Defense Cap Weinberger, Deputy CIA Director John McMahon standing in for Bill Casey, and White House chief of staff Don Regan. Poindexter suggested that McFarlane should be authorized to ask other countries to sell arms to Israel to replace those Israel would transfer to Iran: this idea I opposed vigorously. Arms for hostages and arms to Iran were both terrible ideas! I argued that this was a betrayal of our policies and would only encourage more hostage taking. Cap Weinberger expressed the same point of view with genuine and unmistakable conviction. No decision was made at the meeting. But my sense was that the point of view Cap and I argued had won the day.

I heard nothing more about the issue for almost a month. Then, on Jan. 7, 1986, I was suddenly called to a meeting with the President on further developments regarding Iran. All the key players were present: Vice President George Bush, Don Regan, Cap Weinberger, Bill Casey, Attorney General Ed Meese and John Poindexter. I argued fiercely against any arms sales to Iran, especially connected to the release of hostages. "I agree with George," said Cap. No one else did. Cap and I were isolated.

I had an uneasy, uncanny feeling that the meeting was not a real meeting--that it had all been "precooked." I had the sense that a decision had already been made, though none was explicitly stated. (I learned a year later that the actual decision had been taken the day before when John Poindexter presented President Reagan with a draft "finding" authorizing arms sales to Iran. The President signed it.)

On May 4, 1986, I received a cable from London. An embassy officer had learned from Roland ("Tiny") Rowland, a British entrepreneur, of various arrangements to get arms to Iran with the use of Swiss banks. Rowland said he was told, "The scheme is okay with the Americans. It has been cleared with the White House. Only four people in the U.S. government are knowledgeable about the plan. The State Department has been cut out."

As soon as I got this message, I sought out the President. He was not available, but I did find Don Regan. I expressed strong opposition across the board: on policy, legal and moral grounds, as well as my concern for exposing the President to a seamy and explosive situation. "Stop!" I said. "This is crazy. Get the President to end this matter once and for all." The deal was all wrong. "If this activity continues," I said, "the President will be gravely damaged." I then went to Poindexter, who told me that we were not involved in "that deal." In mid-June both Casey and Poindexter told me that at the end of May the operation had been ended and that the people involved had been told to "stand down."

THE WHITE HOUSE STONEWALLS

With the public revelations surrounding the release of Jacobsen on Nov. 2, 1986, the Administration faced a full-blown crisis. My attention shifted from what had happened to what was still going on and what had to be stopped and reversed. I had to persuade the President to call off the Iran arms-for-hostages operation, get the NSC staffers out of the action altogether and return direction of our Iran policy and the hostage crisis to me. No battle of my official life would be more brutal and intense. "The only way to contain the damage," I told Poindexter, "is to give the essential facts to the public as quickly as possible: get everything out in the open, and fast."

Poindexter's response the next day only sharpened my apprehensions. "Not only will such [a decision to put out the facts] complicate our efforts to secure the release of other hostages, but may also undermine opportunities for eventually establishing a correct relationship with Iran. At some point we will have to lay out all of that, but I do not believe that now is the time to give the facts to the public...I have talked with the Vice President, Cap and Bill Casey. They agree with my approach."

I began to sense that, far from admitting that arms-for-hostages trades had been tried in the past, Poindexter was seeking secretly to carry this disastrous operation forward. On Saturday, Nov. 8, I learned that the White House team was fully engaged in going ahead with further deals. NSC staffer Oliver North, I was told, was even this weekend headed off somewhere on a secret mission. I was being kept entirely out of the loop, and I was also being given an unmistakable signal: I should get on the team and cease my opposition. That I would not do.

A political tidal wave, I felt sure, was bearing down on President Reagan and would, in my opinion, destroy his presidency unless the arms-for-hostages dealings were stopped immediately. I felt that the President was clearly being misled and deceived by his staff in the White House. I knew now that I must fight for the President by fighting against members of his own staff.

A BATTLE ROYAL

What bothered me immediately was a comment made on television by Vice President Bush. His adviser, Nick Brady, had telephoned me Saturday night, Nov. 8, 1986, to ask whether I planned to resign. I told Brady, "What concerns me is Bush on TV saying it is inconceivable even to consider selling arms to Iran for hostages. The Vice President was in one key meeting that I know of, on Jan. 7, 1986, and he made no objection to the proposal for arms sales to Iran, with the clear objective of getting hostages released in the process. Cap and I were the only voices of dissent. The Vice President could get drawn into a web of lies. If he blows his integrity, he's finished."

The next day, Bush telephoned. My wife and I went over for a drink with him and Barbara. I put my views to him: I didn't know much about what had actually transpired, but I knew that an exchange of arms for hostages had been tried on at least one occasion. Bush admonished me, asking emphatically whether I realized that there were major strategic objectives being pursued with Iran. He said he was very careful about what he said. "You can't be technically right; you have to be right," I responded. I reminded him that he had been present at a meeting where arms for Iran and hostage releases had been proposed and that he had made no objection, despite the opposition of both Cap and me. "That's where you are," I said. There was considerable tension between us when we parted.

(I was astonished to read in the Aug. 6, 1987, Washington Post about an interview by David Broder during which Bush said, "If I had sat there and heard George Shultz and Cap express it [opposition to Iran arms sales] strongly, maybe I would have had a stronger view. But when you don't know something, it's hard to react. We were not in the loop." Cap called me. He was astonished too. "That's terrible. He was on the other side. It's on the record. Why did he say that?")

Early on Nov. 10, 1986, rumors reached us that an arms-for-hostages operation was still under way at this very moment. An Iranian aircraft reportedly had been expected in Vienna to pick up an arms shipment, but it had not come on time, the deal fell through, and "the Iranians are no longer answering Ollie's telexes."

Poindexter and North were clearly continuing their efforts undaunted by the disasters of their own making. They had entangled themselves with a gang of operators far more cunning and clever than they. By dressing up this arms-for-hostages scheme and disguising its worst aspects, first McFarlane, then Poindexter, apparently with the strong collaboration of Bill Casey, had sold it to a President all too ready to accept it, given his humanitarian urge to free American hostages. "Ultimately," I said, "the guy behind it who got it going, and the only guy who can stop it, was and is Ronald Reagan."

At 11:30 the President's national-security group gathered in the Situation Room. The President had watched the Sunday talk shows, he said, and we were being taken apart without justification--because what we are doing was right and legal and justifiable. We were trying to turn around a strategic situation in the Persian Gulf area, to move Iran toward a constructive role, to help them with their problem with the Soviets. And of course, he added, we wanted the hostages back.

Poindexter then made a long presentation. There had been a "finding" on Jan. 17, 1986. CIA Director Bill Casey had been told, presumably by the President, not to brief Congress on it. The finding emphasized, Poindexter said, our strategic objectives toward Iran. Potential moderates in Iran would be given credibility with the military by getting an arms relationship with us. That, Poindexter suggested, was why we had to give arms to Iran before expecting to get hostages freed in return. "This is the first I ever heard of such a finding," I exploded. Cap was equally astounded. I was also astonished to learn of all the arms sales that had already occurred: a total of 1,000 TOWs and 240 Hawk missile battery parts. These were small amounts, defensive in nature, Poindexter said, and were designed to establish good faith.

I started asking tough questions about Poindexter's preposterous assertions. I could see immediately that Poindexter, and the President, regarded me as a problem. "If the TOWs plus other items have been supplied to Iran in the context of hostage releases," I asked Poindexter, incredulously, "how can you say this is not an arms-for-hostages deal?"

The President jumped in, asserting, "It's not linked!" Poindexter undercut him. "How else will we get the hostages out?" he asked me in accusing terms. In this flash of candor, Poindexter had ripped away whatever veil was left to the notion of a "changed Iran" as the rationale for our arms sales.

Casey produced a draft press release, saying that all the President's advisers were fully aware of this operation and supported it. "Everyone must support this policy," the President said. That I was not prepared to do. "Our policy is what we do, not what we say," I argued forcefully.

The session ended with a dangerous electricity in the air. As I returned to the State Department, I felt that I had become the most unpopular man in town. I was in a quandary, however, because of Poindexter's assertion that hostages would be released in a few days. I feared doing anything that might block an imminent release. The President, in his desire to free the hostages, had allowed himself to be sold a bill of goods. "Iran is playing us for suckers," I said, "and we are paying extortion money to them."

Later that day the White House wanted me to agree to the press release. The President, Vice President, Casey, Weinberger and Meese had all cleared the statement that there was "unanimous support for the President's decisions" regarding the hostages and Iran. "That's a lie," I said. "It's Watergate all over again." I told Poindexter that I could not accept the release as drafted. I did not support this operation and I would not join in lying about it. After sharp disagreement, he agreed to change the sentence to read there was "unanimous support for the President." I said I would not object to the statement, "but I am very uncomfortable with it." That, Poindexter said, "is most unfortunate," and hung up.

I would have to keep fighting the policy and refuse to be part of it. I must convince the President to halt this operation--permanently. I had to awaken him to the reality of what was taking place, persuade him that something was deeply wrong, and warn him that his staff was "rearranging the facts." My past position--being cut out--was, if humiliating, explicable in terms of my not knowing what had taken place; my present position--being cut out of what the President was treating as a major American foreign policy effort--was not sustainable. I would have to get the President to see that grave mistakes were being made, get control over the mess, or go.

On Nov. 13, in a nationally televised address, President Reagan stated that he had authorized a small shipment of arms to Iran, but not as part of a trade for hostages: "We did not--repeat--did not trade weapons or anything else for hostages, nor will we." The speech convinced me that Ronald Reagan still truly did not believe that what had happened had, in fact, happened. To him the reality was different. I had seen him like this before, on other issues. He would go over the "script" of an event, past or present, in his mind, and once that script was mastered, that was the truth--no fact, no argument, no plea for reconsideration could change his mind.

THE WHITE HOUSE CRACKS

In an appearance on CBS's Face the Nation on Sunday, Nov. 16, I wanted to make clear where I stood. "It isn't the right thing for governments to trade arms or anything else for hostages," I said, "just because it encourages taking more." Moderator Lesley Stahl then asked, "Will there be any more arms shipments to Iran?" I answered swiftly, "It's certainly against our policy." Stahl followed up, "Do you have the authority to speak for the entire Administration?" I looked her straight in the eye and said, "No." On that stark note, the program ended.

I had thrown down the gauntlet in my final exchange. I flew off to Chicago the next morning, half expecting to be ousted from office before returning to Washington that evening. When I got back, I was met by State's executive secretary Nick Platt. "The White House blinked," he said. They had issued a statement saying that I did speak for the Administration and that "the President has no plans to send further arms to Iran." Asked directly, President Reagan concurred. The whole issue had come to a head in public and shifted the weight of the argument in my direction. The White House simply could not stand up to saying publicly that we would continue to sell arms to Iran.

On Wednesday evening, Nov. 19, the President was to hold a press conference. I saw him at 1:30 and put my argument to him again as gravely and persuasively as I could: terrible mistakes had been made. The time was long past to tell the full story, to put a stop to any further arms sales to Iran, and to return to adherence to our own stated policy. I read to the President a statement that I wanted him to make on television, saying that there would be no more arms sales and that our Iran policy would be managed by the Secretary of State.

The President responded by saying, again, that the operation was a good one and that Iran--the CIA had assured him--had tempered its support for terrorism. I strongly disagreed and countered that "even if the Iranians agreed to cease targeting Americans in return for arms--which, in reality, they have not--that's a terrible deal to make!" I presented detailed factual material that Iran had clearly not ceased support for terrorism: three American hostages had been taken in September and October 1986 by Lebanese groups associated with Iran--and much more.

"This is news to me," Reagan said. "Mr. President," I said, "you are not fully informed. You must not continue to say we made no deals for hostages. You have been deceived and lied to. I plead with you," I said, "don't say that Iran has let up on terrorism."

"You're telling me things I don't know!" the President said. "Mr. President," I replied, "if I'm telling you something you don't know--I don't know much--then something is terribly wrong here!"

But I could see I had not convinced him. As I left, I told him, "What I said the other day stands." He knew I meant my offer of resignation. Despite our differences, he seemed to want me around, perhaps out of an instinct that, unwelcome as my statements were, I was leveling with him.

The President strode into the East Room of the White House at 8 p.m. He started the press conference with a statement affirming "the correctness of my decision." But "to eliminate the widespread but mistaken perception that we have been exchanging arms for hostages," he said, "I have directed that no further sales of arms of any kind be sent to Iran." He concluded with the defense, "I don't think a mistake was made. It was a high-risk gamble that, as I've said, I believe the circumstances warranted. And I don't see that it has been a great failure of any kind. We got our hostages back--three of them. And so I think that what we did was right, and we're going to continue on this path."

The President's statement that there would be no further arms shipments to Iran was a crucial victory. But the fact that he still maintained "what we did was right, and we're going to continue on this path" was incredible to me. Many of the President's statements were factually wrong. He was defensive and lacking in his usual confidence.

I telephoned the President. I told him that I wanted to come over to the White House in the morning to show him, chapter and verse, the factual errors he had made. He was shaken by what I said and agreed to listen to me.

Back at State I met with the department's legal adviser, Abe Sofaer, and Under Secretary for Political Affairs Mike Armacost to go over the information we had gathered about the arms-for-hostages attempts so they would be prepared to assess Casey's upcoming congressional testimony. Armacost had noticed that the contractor named in the Iran affair had also been involved in support for the contras--Southern Air Transport. This set off a warning bell in the back of my mind. It sounded as if the list of revelations had not yet been exhausted.

THE PRESIDENT LOSES HIS TEMPER

At 5:15, Nov. 20, I showed up at the family quarters, along with Don Regan. The content of my discussion with the President was tough. I had detailed material on the erroneous statements he had accepted as accurate information from the CIA and NSC staff. For nearly an hour we argued back and forth, hot and heavy. I never thought I would talk to a President of the United States in such a direct and challenging way.

President Reagan didn't seem to resent my efforts, but I didn't shake him one bit. To him, the problem was with the press. I told him about McFarlane's telephone call to me in Geneva in November 1985 describing an arms-for-hostages deal. "Oh, I knew about that," the President said, "but that wasn't arms for hostages." I replied that no one looking at the record would believe that. The President said his information was different from mine: "George, I know what happened, and we were doing the right thing." He refused to recognize that there was a problem.

Early in the afternoon of Nov. 21, a secure call came through to me that Attorney General Ed Meese had been asked by the President to investigate the affair. Meese wanted to start the investigation by interviewing me the next morning.

I went through chapter and verse on what I knew. Toward the end of our session, Meese said, "Certain things could be a violation of the law. The President didn't know about the Hawk shipment in November 1985. If it happened and the President didn't report it to Congress, it's a violation." Meese was definitive in the view that the President had not known of the November 1985 arms shipment that might be illegal, and that the shipments he did know of were not illegal. I had already told him that the President had said to me that he "knew all about" the November shipment. "I hear what you are saying," I said to Meese, "but I would not want to be the President arguing it in public."

I found out later that on Nov. 23 Bill Casey had written the President, "The public pouting of George Shultz and the failure of the State Department to support what we did inflated the uproar on this matter. If we all stand together and speak out I believe we can put this behind us quickly." Casey continued, "You need a new pitcher! A leader instead of a bureaucrat. I urge you to bring in someone like Jeane Kirkpatrick or Paul Laxalt, whom you may recall I recommended for State in 1980. You need this to give your foreign policy a new style and thrust and get the Carterite bureaucracy in State under your control. Time is short."

On Monday afternoon, Nov. 24, an NSC meeting was called so that, I presumed, Meese could present the results of his quick probe. The meeting was as perplexing as it was peculiar. Meese said almost nothing while Poindexter took charge, reviewing the Iran operation just as if no objections had ever been raised. Bill Casey followed with an account of how well placed we were regarding intelligence on Iran. Poindexter stressed that our effort toward Iran was correct and that it would continue on course.

I interrupted with a starkly different view. I made no impact whatsoever. Cap Weinberger did not take my side of the argument with the vigor he had in such sessions long ago. Poindexter ignored what I said. The point of the meeting, Poindexter said, was to inform us all--President Reagan, Vice President Bush, Weinberger, Casey, Regan, Poindexter, George Cave (present as an analyst for the CIA, although he had been involved in Iranian affairs as an operator), Meese and me--that we would proceed without changing the project or the policy.

The President remained unmoved by my words. He was in a steamy, angry mood clearly directed at me--which sent an unmistakable message: understand me, and get off my back. He was angry in a way I had never seen before. He pounded the table. "We are right!" he said. "We had to take the opportunity! And we were successful! History will never forgive us if we don't do this!"

At 6 o'clock that evening a call for Deputy Secretary of State John Whitehead came from Poindexter, whose attitude was entirely different now: understanding, cooperative, mild. "State can take the lead on Iran if it wants to," Poindexter said. "I want to get out of it."

I was stunned. "We just crossed the great divide," I said. Something dramatic must have happened. What, I did not know. I was mystified but elated at this dramatic shift from the White House.

An NSC meeting was called on Tuesday, Nov. 25. Ed Meese gave us explosive news: some funds from the sale of arms to Iran had been diverted to support of the Nicaraguan contras. Poindexter and North were both out. Al Keel, Poindexter's deputy, would become acting National Security Adviser.

Then came the public announcement from Meese: from $10 million to $30 million in payments made by Iran for U.S. arms in 1986 had been diverted to rebels fighting the Sandinistas. The President had not been informed. An investigation would be conducted by the Justice Department. Meese had uncovered shocking behavior by the NSC staff. President Reagan had acted quickly, getting rid of the key offenders and making instant public disclosure. He instructed me and everyone involved to make available all the information we had to the various investigating groups.

THE SNAKE WOULD NOT DIE

I went to see President Reagan on Nov. 26, 1986, and asked Don Regan and acting NSC Adviser Al Keel to join me. "I'm ready to sign on for the duration," I told the President. "That's what I want, and I'm looking to you as my point man on foreign policy," the President responded.

I went through how I intended to bring the Iran mess under control. The President seemed to like my proposals. But he was subdued. He normally reminded me of a star shortstop eagerly waiting for the batter to hit a hard-to-handle grounder at him--because he knew he could handle it. But at his last press conference, Reagan had fumbled the ball. His message had not generated public confidence. He wasn't used to this. Now his own confidence was shaken, not from a feeling that he had done something wrong, but because he saw that his support among the American people had slipped.

On Dec. 1, I exchanged calls with Bill Casey. He told me that Amiram Nir, the Israeli who had been involved in our arms dealings with Iran, was going to meet Mohsen Kangarlou, director of intelligence for Iran's revolutionary guards, in Geneva to discuss hostages. Manucher Ghorbanifar, the operator in earlier deals, would be there. Prime Minister Shamir wanted the meeting to happen but also wanted to be sure we had no objections.

Though I was relieved that Casey was informing me, this continuing effort was idiotic. How could the same gang still be playing the same old game? Because the meeting involved representatives of two other governments, I did not see what we could do to stop it, but I told Casey to make clear that the United States was in no way involved. I told Mike Armacost to double-track through his own channels with the CIA and make sure that this U.S.-Israeli link was severed.

Casey was not to be trusted. He had now changed his story in testimony to Congress on Dec. 2 and admitted that he had known about the arms-for-hostages trade described by Bud McFarlane in his phone call to me in Geneva in November 1985. I heard that Casey had tried to get his deputy, John McMahon, to cook up a way to place that shipment ex post facto under a presidential finding. McMahon, I was told, had resisted.

When I told the President about the Nir-Kangarlou-Ghorbanifar meeting in Geneva and that I had ordered that the United States get out of that loop, he was taken aback. He said nothing, but I could sense that my action had riled him.

Because of the President's mood--and Bill Casey's--and because of the continuing Israeli activity in this matter, I feared that, despite the press, congressional and public uproar, some version of the operation was still alive. Those who were responsible for the operation now seemed desperate to vindicate their judgment in the face of overwhelming criticism.

The CIA's George Cave, who had accompanied Oliver North on past operations, was pressing for authorization to contact Iranians again. Cave could see his contacts only to advise them that from now on anything they wished to convey should come through the State Department, I said. I was coming to realize more and more how heavily Casey and the CIA were involved in the Iran deals.

On Dec. 12, Armacost and Casey had agreed that a State Department official and George Cave would meet with Iranians to inform them that future contacts with Iran would not deal with arms for hostages. Casey agreed; everything was satisfactory, he said.

Casey then went straight to the White House to get the President to overrule State. Casey wanted to stay in the loop and in command. He had called Don Regan, and Regan had gone to see the President to say Casey wanted to keep going with Iran but Shultz was trying to shut it off. The President said he wanted to build upon the "dialogue" that had been established. So the agreement between Casey and Armacost had been overturned: the Cave channel would stay open and would again mix operations and intelligence analysis.

The CIA and the NSC staff, with apparent support of the President and Vice President, were still proceeding just as though nothing had happened. Congress was being misled now, a month and a half after the revelation first appeared. What was worse, John Whitehead said, "the CIA has told the Iranians that the State Department is just a `temporary impediment' and that after it calms down, Cave and Secord will be back in action. The President is being ripped to pieces, and the CIA is reassuring the Iranians."

Foreign service officer and Farsi speaker Charles Dunbar was to meet the Iranian representative, Mehdi-Najat, with Cave at his side. I insisted that they go together so there would be no impression of a divided U.S. Administration.

On Dec. 13, Dunbar reported in. He and Cave had met the Iranian in Frankfurt, West Germany. The Iranian had urged that the project continue as before, saying "much has been accomplished by North, Secord and Cave." Mehdi-Najat wanted the U.S. to produce more military equipment for Iran, and he referred, Dunbar said, to a "nine-point agenda" on which the U.S. and Iran had agreed to work.

Cave talked openly to the Iranian about future U.S. help with their military requirements. Mehdi-Najat stated that Iran had been pressuring Kuwaiti authorities--at Poindexter's request--to free the Dawa terrorists from prison to help facilitate the release of Americans held hostage in Lebanon. Dunbar read his talking points to the Iranian. Openly scornful, Mehdi-Najat was supported in his attitude by Cave. Dunbar "should go back to Washington and get briefed on where this situation stands. A lot of commitments have been made, and we are far down the road," the Iranian said.

This was horrendous. The President, the Vice President, Casey and Regan had all either supported or known about a change in the instructions that would keep the previous dealings with Iran alive. President Reagan was withdrawn and, to a degree, out of action. Bill Casey had the bit in his teeth and apparently was able to enlist the support of Don Regan and the President. Whatever the President told me, I didn't have confidence that key people around him would deal squarely with me.

At 11 o'clock Sunday morning, I went to see President Reagan. I told him that this was a moment, if ever there was one, for him to be decisive on both procedure and substance. I went over my dispute with Casey's persistent drive to meld policy with intelligence analysis. Then I went through the material that emerged from the Saturday meeting in Frankfurt: there was a nine-point agenda covering the release of the Dawa terrorists held in Kuwait and of Shi`ite prisoners held by Israel, and extensive arms shipments to Iran that the Iranian seemed to regard as a set of U.S. commitments. There was a dedicated telephone line for Iran to use at any time with the CIA. There was Cave's continuing talk of further arms transfers. There was the indication that the U.S. had put itself on the side of Iran in the Iran-Iraq war. And there was the revelation, I told him with anger, that Iran, at Poindexter's request, had been pressuring Kuwait to let the Dawa terrorists out of jail.

President Reagan was dumbfounded by this news. He could not believe that we had agreed, in effect, to press Kuwait to release the convicted Dawa terrorists in exchange for the U.S. hostages in Lebanon. It was as though someone had kicked him hard in the belly. I felt that, for the first time, Ronald Reagan was convinced that he really had been misled and that terrible violations of our policy had taken place.

The next day, Monday, Dec. 15, the news was even worse. After Dunbar left to return to Washington, a second meeting was arranged between Cave and Mehdi-Najat. After cutting Dunbar out, Cave was back in business on his own. As a result, the Iranians wanted to push ahead with the "nine-point agenda."

At 9:30 a.m. that Monday, I went back to the White House to see the President. George Bush and Don Regan were also there. I described the Cave meetings in Frankfurt and the revelations that had emerged. "We have an obligation to pass this information on to Congress," I said. "It is explosive." I let everyone know that I had asked to testify before the Senate Intelligence Committee to set out in closed session what I knew of this whole story.

When I got back to the State Department I was told that Bill Casey had been taken to the hospital. That evening, Don Regan informed me that Casey had a brain tumor and that he might be out of action "forever." Robert Gates, as Casey's deputy, became acting CIA director.

On Dec. 17, I telephoned Bob Gates at the CIA. "I would like to know," I said, "what is the nine-point agenda? I want to see it." My fury was no doubt apparent to Gates, even over the telephone.

The document I received the next day was shocking: dangerously amateurish and totally at odds with the rigorously stated policies of the U.S. It was dated Oct. 8! Now in mid-December, Poindexter was gone; North was gone. Casey, the street fighter, had clearly been driving this catastrophic effort.

TALKING A NEW LINE

As 1986 came to an end, I felt that I was slowly getting things under control. The key to this resolution was the departure of Bill Casey. The zeal went out of the operation when he left the CIA; it was as though a festering boil had been lanced.

President Reagan could still not bring himself to believe that the concept underlying this Iran initiative, let alone the execution, was fatally flawed. He respected me, I knew, and recognized that I had been fighting for his interests, that I had been right in my claim that he was being deceived. Poindexter's effort to get the Kuwaitis to release the Dawa prisoners drove that point home to him more than anything else had before. But I was sure that the President felt that somehow I should have been able to make his Iranian hostage-release effort work.

I wished we had been able to bring about the hostages' release, but certainly not through any arms deal, which created a hostage-taking industry. The key was quiet, patient work to lower the value and raise the costs of taking and holding hostages. That strategy is tough to follow in a free and open society. Politicians must learn how to handle the inevitable pressure to "do something," and the population at large and the media must also appreciate the importance of raising costs to terrorists and denying them gain and massive publicity from their actions. The searing publicity about Ronald Reagan's well-intentioned but ill-fated effort ironically contributed to this educational process.

We should always be willing to talk to any credible person about our hostages. But we owe the millions of Americans at risk throughout the world the assurance that they will not be turned into targets by the known willingness of our government to pay money, sell arms, or in any other way make it profitable to take Americans hostage.

The operation had now been stopped, but the crisis of the Reagan presidency was not over by any means. The investigative process had just begun.

A second excerpt will appear in the spring.