Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World

• Introduction
• Remarks
• Questions and Answers

Introduction

JOEL ROSENTHAL: Good morning. I want to begin with a hearty Happy New Year. This is our first event of the new season.

Also, an apology for those of you—and I think that is most of you—who are regular members of the Carnegie Council. Joanne Myers is with her family on the West Coast. She has asked me to fill in today. I apologize to John Taylor. Joanne Myers is well-known in New York City for her marvelous introductions. I'm no Joanne Myers in that regard, but I'll do the best that I can.

We feel very fortunate to have John Taylor with us today, especially in light of recent events. I am sure most of you listened to the President last night, and are listening to the commentary this morning, about the war on terror and the military aspects of the war on terror. But there are, as John Taylor is reminding us in his book, Global Financial Warriors, other aspects of the war on terror that are not purely military.

You may recall that, just after 9/11, President Bush talked about the need to mobilize all elements, or all instruments, of power in the war on terror. The principal other instrument was economic. As John Taylor points out in the book, this is a largely untold story of the progress that has been made in the financial sector and in the economic sector in the war on terror.
It is especially appropriate for us here at the Carnegie Council to be discussing this. For those of you who are watching carefully, two of the major themes that we have been focusing on are ethics and war, and also ethics as it relates to the global economy, the moral and ethical challenges that arise from the integration of the global economy.

In John's book, he talks a lot about some of the progress that is being made, particularly in the economic sector, international cooperation—and, I suppose, even within Washington interagency cooperation; reconstruction and reconciliation, principally obviously in Iraq; promoting accountability and legitimacy in the financial sector; and working with international agencies and institutions to set rules and institutions.

If I could just read one paragraph from the book, which will tell you a little bit about the success in this area, this is a little section called "Top Grade." It is on page 27, where John Taylor writes:

In December 2005, just four years after the story I tell in this chapter, a panel of members of the 9/11 Commission issued a report card on various security and intelligence aspects of the war on terror. They were apparently tough graders. They gave many C's and D's and quite a few F's. But the top grade, an A minus, and the only grade in the A category, was for the efforts described in this chapter, the war against terrorist financing. They especially mentioned that the government has made significant strides in using terrorism finance as an intelligence tool.

We have passed out the biographical information on John Taylor. He is a distinguished academician, a distinguished public servant, and we thank him for joining us this morning.

Remarks

JOHN TAYLOR: Thank you, Joel, for the kind introduction and for inviting me to the Carnegie Council. It is a real honor for me to have a chance to chat with all of you people, who have very similar interests, I think, in making the world a better place.

I am going to talk a lot about the book. I am glad Joel started off with a little reading. I think I might do a little reading here and there. But I really want to tell you about the subject of this book, because I think it is different in many ways from other things we are reading.

I will start with a somewhat personal story to set the theme, which maybe got me thinking about the title of the book, Global Financial Warriors, and where that comes from. My personal story is about a meeting in the Oval Office in 2003. It was about halfway through my term as the person in charge of international finance in the Treasury, which began at the start of the Bush Administration and went through the summer of 2005, so about halfway through.

The President wanted to show my immediate family around the Oval Office, just to basically chat, be personal. So there we were, my wife, my son, my daughter, and the President showing us around, a nice informal conversation.

But one thing interesting about it—certainly in retrospect, although at the time it meant a lot too—is my son, who had just graduated from college in 2002—9/11 was still on his mind quite a bit—decided to join the military. So there he was in the Oval Office, having just graduated from college, just graduated from Officer Candidate School in Quantico, in his Marine uniform, second lieutenant, just commissioned. That obviously attracted the President's conversation quite a bit.

He asked, "How many other people in your graduating class joined the Marines?"

"Well, none, sir, but there will probably be some coming up."

"What was OCS like? Many wash out?"

"Yes. Well, 160 went in, ninety came out."

"Oh, that's pretty tough. Really appreciate what you're doing, serving your country." Then the President said, "You know, America is a powerful country. We need to defend ourselves. People rely on us. That's why we need the Marines, right, sir?"

My son, somewhat taken aback that this person who is the Commander-in-Chief of the entire Armed Forces of the United States is calling a second lieutenant "sir," shot back, "Yes, sir," without any thinking.

In a way, that to me sets the theme for this because, just as our president was saying why we need the military, I'd like to suggest in this book and in this talk that we need a cadre of financial experts, if you like, to participate, not only in the war narrowly speaking, but the war broadly speaking, that is, to make the world a better place, which is less prone to terrorists. So that's what the book is about. The idea is that there are these people out there, a cadre of financial experts. They are the global financial warriors.

They are people like, for example, a person who we sent to Baghdad to start talking to the finance ministry people in the central bank right after Saddam fell. This is a guy named David Nummy. His picture is in the book. His job was to plan in advance. He sat outside the country, in Kuwait, waiting. So when the time was right, he went in and started to try to make contacts.

Remember, at that point the looting was terrible. There's a picture of what the central bank looked like. It's a gutted building. It is like the worst structure that we used to see driving through the South Bronx, just a completely gutted place. So they had to go in and find people to talk to.

"Who do we talk to?" After a few days, they made some contacts and started implementing our plan for financial reconstruction with these people. Obviously, what's this person's affiliation? Is he a political hack that was appointed, or is this a person who knows what was going on? But, as I said, I had to look through and find the right people. So that's one of the examples.

There are some quotes in the story from David Nummy, what it was like those first few days. It was tough. It was really, really tough.

Another example is Larry Seale. We sent Larry Seale to Afghanistan. His job was to set up the first budget for the Karzai government. He did it on his laptop computer. It was really the first budget that they had, so they could really have some semblance of finance.

Larry also went to Liberia. Remember, Liberia is something we forget about right now. Liberia doesn't have Charles Taylor any more—by the way, no relation. He is gone and they have a democratically elected woman president and things are running pretty well. So the Treasury sent people there to get that going.

There was a—I'm not sure if it's still there—but there was a poster which all these people would walk by when they went in and out of the Treasury. I use it as the frontispiece for my book. I realized not too many books have frontispieces anymore, but my wonderful publisher suggested a frontispiece. The frontispiece is a picture of Uncle Sam pointing at you, the classic, that says: "We're at war. Are you doing all you can?" This was actually posted in the Treasury as our financial warriors went in and out. This is to me a measure of the mission and the teamwork.

The global financial warriors, by the way, do not include just people who work for the Treasury. Many are in State, many in other parts of our government. But it also does not include just Americans.

For example, there is Ashraf Ghani. I call him the Alexander Hamilton of Afghanistan. Ashraf Ghani was appointed the finance minister by Karzai right after the loya jirga, which appointed Karzai officially. What was his job? He had to set up a finance ministry. It was a shambles. The Taliban had just not been running things. So he had to set up a finance ministry. He also had to find a way to rein in the warlords, who were collecting their own revenues at the borders, and try to find a way for them to send some of their money back into the central government so he had some sense of a national government. The Karzai government didn't have a way to collect Customs revenues. And, by the way, Customs were the only source of revenue a country like that has, so they had to find a way to bring in those governors, just like Alexander Hamilton had to find a way to bring in the states and get them to pay the federal government when he was the first Treasury Secretary. So there is that similarity as well.

There are other people. Just one more example is the central bank governor of the UAE [United Arab Emirates]. His name is Al-Suwaidi. He was so helpful to the United States. Because of the Dubai ports issue you forget, but the UAE is a tremendous ally. He helped us try to fight the war on terror by looking for the terrorists' assets and helping us in many ways. So these are what I mean by the global financial warriors.

Now, I think in many respects this idea of the financial side being important is a post-9/11 issue, because it definitely changed a lot on 9/11. Of course, finance has always been important in international politics and foreign policy, but I think it just expanded tremendously. That was my observation. After all, I went to the Treasury not thinking I was going to be doing what I'm talking about in this book.

I was in Japan, ready to do some negotiations with the Japanese, when 9/11 occurred. To get back to the United States fast—of course, there were no commercial flights—we took a military plane, a C17, a big jet, just a few people in it, and we flew back. To get back fast, we had to have an aerial refueling over Alaska. It was night, twilight, as we got there. I don't know how many of you have witnessed an aerial refueling, especially with two large jumbo jets flying through the air at 500 miles an hour just a few feet apart. Seeing the pilot, with a joystick basically, with the other plane, the tanker, up above. The plane being refueled is down below. It's about that kind of distance. A hose comes down and locks in. To me it was the most amazing combination of technology and raw guts I have ever seen.

To me, in a sense, that's a watershed, because before then I was going to be negotiating agreements in the halls of finance in Tokyo and Paris, and now I realized I was going to working a lot with the Defense Department and the military. I was really happy there were such competent pilots in that plane. The sense was they were going to have to trust what we were doing, just as we had to trust what they were doing. That's the interagency cooperation, which was so important.

But getting back to Washington after that flight, it was a different world. It was a different world in New York, a different world in Washington, a different world all over the place.

Our first job was to start finding terrorist money and freezing it and getting an international coalition to continue and to join us in this fight.

I think Joel referred briefly to some of the terminology that was used right at the start. This is actually for the epigraph for the book. On September 24, 2001—this is an indication of the sort of charge the Treasury was given—this is a quote from the President in the Rose Garden. And this is before any action was taken in Afghanistan. That occurred a week later. He said the following:

"This war on terrorism will be fought on a variety of fronts. The front lines will look different from the wars of the past. It is a war that will require the United States to use our influence in a variety of areas in order to win it, and one area is financial."

So, in many respects, that is the theme of this book. The first chapter following that is called "The First Shot in the War on Terror," because it was the freezing of the assets. It was before our troops went into Afghanistan. From then on, one story after another related to this general theme.

I have a set of five points that describe the book and describe the themes, which I would like to go through, rather than chapter by chapter, case by case.

Actually, I must say that Joel kindly got me started on my first point. I call it the "high marks" point. It relates to the fact that the 9/11 Commission gave the highest grade to the work in this area.

But it is more general than the terrorist financing. If you look through the chapters, actually every one is a success story. Now, I'm writing the book, so you have to question my objectivity, but there are a lot of facts here and a lot of detail, so you can make your judgment. It is my view.

By the way, the book is dedicated to George Shultz, who is a good, good friend, and who encouraged me to write this book. When he would say, "Why don't you write the book?" I'd say, "Oh, it's just my view. I'm just coming out of Washington." He said, "No. Get your view out now. There will be plenty of people to challenge your view. They'll be out there. But that's what history is all about. You have people debating what happened, and ultimately historians will use these records to come back." So this is my view, and it is a positive view, but the facts are there.

Right after 9/11 we put together an international coalition of 172 countries to freeze assets, and it very quickly got $150 million or so frozen and 1,400 accounts were closed very quickly. I would say that personally I have never seen such international cooperation in all my dealings or in looking at history. To me it was much like the cooperation that occurred right after World War II in setting up the IMF and the World Bank. But it was broader, because most countries in the world participated. In World War II the major powers on the other side did not participate. So it is remarkable.

We have lost a lot of that, as you know. We don't have that spirit of cooperation that we had at that point, for many reasons. But it was quite remarkable.

But it wasn't just that. It was right after that coalition was formed, that another one was formed to raise money for Afghanistan. So by January 2002, $5 billion was pledged for Afghanistan, just very quickly. That was in Tokyo. Again, the spirit of cooperation was tremendous.

That carried through to other areas, which people don't know about. For example, the World Bank. When I went to Washington, that's one of the things that I wanted to do, was to make the World Bank more active in poverty reduction. My first trip was to Africa. I really wanted to show to the Treasury that we're going to be interested in poverty reduction.

The goal with the World Bank was to change the lending which they were making, and poor countries weren't paying them back and getting into all sorts of problems, to change it to just outright grants. That was our proposal. It was looked at a little suspiciously—"Why is a Republican administration going to just give out money, rather than loaning?—but we thought it was the right thing to do. It took a long time to convince people it was the right thing to do, but ultimately the place was reformed and they are now giving out grants much more than loans, and the countries are able to pay it back.

A similar thing was to just cancel the debt of the poorest countries. A hundred percent cancellation. That was an idea that actually came right out of the Treasury. A rather strange thing for a finance minister or Treasury to propose, 100 percent debt cancellation, but we thought it was the best thing to do to get these countries moving again. Again, international cooperation made that happen, because it was a rather contentious proposal. That's an example where my good friend Bono of U2 helped a lot, and getting him on our side was very important. So the international cooperation is really one of the reasons why this occurred.

Another good aspect of this is, because of changes in the World Bank and in the IMF and better policies generally, since 2002 we, fortunately, have not had any financial crises anywhere in the world. There are none now. Remember Russia in 1998? It blew up the whole world. Nothing like that anymore. Just a tremendous change. I hope it continues. Of course, we are not going to be able to rule out crises and recessions, but it is different now. I think it is ultimately because of that spirit that occurred right after 9/11.

So anyway, that's the first theme, the "high marks" theme.

My second point is that in many respects, this book raises questions about some conventional wisdom. I have already alluded to it a little bit.

Of course, we have the conventional wisdom that our diplomacy has fallen apart, that America doesn't have a diplomatic policy, it's a failure. Well, as I record and remember this, it looks like a pretty robust diplomatic effort. Now, you could say, "Oh, it's just the finance side." I don't know. I'm just reporting on the finance side. But it is strategies that to me are diplomacy at its best.

One little example of that. We wanted to reduce Saddam's debt, the $120 billion that he ran up. Why people lent him that money I don't know. But anyway, $120 billion. So, rather than have the Iraqis have to pay off that debt, we wanted to cut it so they could get a fresh start with the new government. Well, there was a lot of contention, especially right after the initial operation. The French didn't want to participate in this debt reduction. Chirac said, "Well, we'll forgive some, but we won't cut the whole thing. We'll cut 50 percent." We wanted to cut at least 80 percent of it; we thought that would be reasonable. So here you had to work on initially a very contentious situation, where the French, the Germans, and the Russians were all against cutting the debt. Of course, the Americans, the British, the Japanese, and our close allies, Italians as well at this point, wanted to cut it by a large amount. So here you had to have a diplomatic effort. There were negotiations. A lot of people participated. John Snow, the president, Secretary Baker were all involved in that, and ultimately there was an agreement to cut the debt by 80 percent. So that's another example where, if you look at it carefully, there was diplomacy going on.

One other conventional wisdom, which I will just mention briefly, is the idea of no advance planning. That was not my experience, working in the Treasury. We started planning for the possibility of a military intervention in the summer or fall of 2002. It's all documented, exactly all the things that we did. What were we supposed to do? Prevent a financial collapse if Saddam fell; if there was an intervention, try to prevent the economy from having a hyperinflation or a financial collapse.

A plan was put together. It involved, first, paying Iraqis in U.S. dollars, $2 billion. You might say, "Where are you going to get $2 billion?" Well, actually it was the money frozen in 1990, which was still in U.S. banks, and we used that money. And, because we didn't know what would happen, we knew we had to have a new currency ultimately in Iraq for financial stability, but we had to wait until some new government or some entity was there to talk to. So it was a two-part plan, and the second part of the plan was to have a new currency in Iraq. So that was all planned in advance.

Quite remarkably—and I'm so thankful—that plan worked. A whole new currency was put in place in Iraq.It was a tremendous logistic effort. Just one example: twenty-seven 747 planeloads of currency had to be shipped to Baghdad, printed in record time at seven different printing plants around the world, and then distributed to 250 distribution points around the country so that people could come with their old currency with Saddam's face on it and trade it for this new currency, which turned out to be very popular. And, remarkably, no glitches. I knew something was going to go wrong and I was going to get blamed for it. Fortunately, it worked quite well.

Okay, so that's the conventional wisdom issue.

Number three of my points is vantage point. This is something that my publisher, Norton, has emphasized a lot. I think it's correct. They say, and I agree, that the author of this book (me) had a rather unique vantage point here. If you think about it, it's unusual. Of course, yes, I was in many meetings at the top levels, with the President, making presentations, presenting our plan for Iraq and many other things—so there are the quotes from Rice and from Bush, and so forth—but, in some sense more importantly, I was also on the ground. My point in the chain of command required me to be at the top but also to be on the ground. So I made 120 trips to different countries—three times to Iraq, three times to Afghanistan, six times to Africa. The idea was to help implement what we were doing at the top. So it is like a top-to-bottom view. Therefore, there are lots of quotes and lots of stories about what went on on the ground.

If I might, I want to read from one section to illustrate that, because I think it is important for understanding what actually goes on in government. I've mentioned Ashraf Ghani, the Alexander Hamilton of Afghanistan. Well, I helped him rein in some of these unruly governors by traveling to some of the provinces. I thought we needed to do that in order to help the country.

One province I went to was Herat. It's the westernmost part of Afghanistan, right next to Iran. The warlord governor, named Ismail Khan, was a tough guy. He had fought the Taliban. He had fought the Soviets. He had been put in jail. He had been tortured. But a wonderful person, tough. Anyway, my job was to go out there and talk to him.

We flew into Herat airport, a very remote town. We were greeted on the tarmac by a long line of officials. They were all men, mostly older or middle-aged, with full beards, sun-worn, leathery skin. Each one was eager to shake hands and welcome us. American soldiers and State Department security forces were carrying M-16s. They were there to guard us, scanning the tarmac and beyond for possible terrorists or disgruntled former Taliban. A contingent of Ismail Khan's militia was also there, armed with their AK-47 rifles. It occurred to me that our guys may have been protecting us from his guys. But the truth is the American military and the Herat militia were working together, and had been for months.

After coming to the end of the long line of official handshakes, I was greeted warmly by Ismail Khan, who asked me to ride with him back to his house in town so we could begin our talks informally. Khan wore a traditional Afghan turban, a distinctive knee-length white overcoat over a flowing white robe, and a large white beard.

(By the way, The New York Times put a picture of Ismail Khan's face on the front of the magazine just after this. There's almost nothing but the beard with the eyes coming out of it. But anyway, just to finish:)

As I sat with Khan in the backseat of his SUV and started talking with him, I thought how different this scene was from the kind of financial diplomacy I had imagined I would be doing when I joined the Treasury. This was no plush negotiating room with high ceilings, huge chandeliers, stuffed chairs, and long tables, like those in the corridors of finance in the Western world. Instead, as I looked out over the dashboard from Khan's SUV, I saw his mujahideen with their AK-47s in the pickup truck ahead.

So that was kind of another example of the way the world had changed, but also of my vantage point—I think "unique" is the word.

My fourth point is that there are a lot of inspirational stories in this book about people, global financial warriors, doing good things. I just can't say how lucky we are to have people like this.

The person who we chose to be in charge of the currency exchange in Iraq was a former brigadier general. His name is Hugh Tant. Here's what he wrote to me about this operation:

Memories are still overwhelmingly powerful. Thank you for writing this important story and for including our efforts in it. I retired from the military on October 1, 2001, after saying good-bye to people I had worked closely with for five-and-a-half years in the Pentagon. Thirty-three of these budget personnel, who regularly got me smart to go and briefed me, perished on 9/11, as well as two of my close friends. I had been a banker with South Coast Community Bank for only four months [he had just retired] when I received a call to serve as the director of the Iraqi currency exchange.

So here's a guy who volunteered to go into this difficult situation, a difficult job, likely to fail, and made a tremendous difference. There's lots of people like that, which I'm inspired by myself.

Then finally, just to finish, I think this comes at a timely episode in our questions about the way forward. The 9/11 Commission recommendations are being looked at carefully by the new leadership in Congress. They want to do some things, make more recommendations, sort of—let me put it this way, work on the items that were given low grades by the Commission, implement the low-grade issues. I say that's great, but don't forget the high-grade things. They are working well. If anything, you want to bolster them. We can do a lot more. We can help even in the proliferation areas by working on the financial system, sanctions with respect to Iran and North Korea. Indeed, that has begun, and it seems to be working quite well.

Then, finally, just think of the speech last night. I don't know how many of you noticed that the President said that the Iraqis were going to spend $10 billion on this new reconstruction effort that they are starting. I didn't hear many commentators mention that. That's tremendous.

They have the resources to do that, but their government has not been able to find a way to disburse their own funds. This requires financial expertise. Of course, they are earning money from the oil—that's where this is coming from—but they are not even spending it. Ten billion dollars is a lot of money, if it is spent well and spent timely. So finding a way to do that is important.

Of course, the President also said that Condi Rice is going to appoint an economic coordinator, presumably to help on this area. So to that economic coordinator I say please read my book, because there's lots of lessons here, lots of lessons about why some things work well, some things don't work well. Learn from what worked right as well as from what worked wrong.

So those are my comments. I'm happy to take any questions you have. Thank you.

Questions and Answers

QUESTION: Having studied economics and finance, I would have to agree with you and look forward to reading your book.

When you follow the money trail, I think it serves as sort of an X ray as to what goes on in this world. When you speak of the topography of finance you're speaking about mostly the institutional topography, but we read about a different sort of money that moves around the world. We had the man [Moises Naim] who wrote the book Illicit about the various types of unconventional money, and we read more about the Taliban and opium, and we read about the black market out of Turkey. It seems to me that your analogy about the tanker is interesting. Where are these tankers and what sort of tankers are they—that is, not the institutional tankers, but the other tankers that seem to be fueling a flow of money?

Just a last comment I wish you would address. Some people would say on an analogous level that the weapons of mass destruction after 9/11 was the amount of illegal money that was being funded to our worst enemies around the world. Once again, a flow of money. So could you address the non-institutional flow of money?

JOHN TAYLOR: By "non-institutional" you mean outside of the formal financial sector?

QUESTIONER: Yes.

JOHN TAYLOR: There is a tremendous amount that comes through cash couriers. But also the hawalas. The hawalas are a fascinating institution which we should learn a lot more about. They are ways that mostly immigrants can send money back to their home country. They are usually in storefronts and various places. I'm sure there are many in New York. Say a taxi driver wants to send money back to Somalia or somewhere. He can go in and say, "I'd like $1,000 delivered to my mother," or my wife, or whatever. They'll say, "Okay." The next day it will be delivered. There is no money that moves whatsoever. But this, of course, is a way to transfer money to terrorists as well.

So here what can you do? Well, you can require that these hawalas register. At least they can go to the "know your customer" concept of other financial institutions. So that's a big effort. It is required now in the United States. It wasn't required before.

It is also important that UAE or other countries register these entities too. A tremendous amount of money goes through Dubai into South Asia, Pakistan, and so on. So they need to register as well. So you expand the efforts that way.

Cash couriers are a really difficult problem. You know, we still have trouble getting other countries to agree that travelers have to report if they have currency over a certain amount, as we do in the United States. You might say, "Well, what difference does that make?" Well, at least it's a start. Ultimately, you can obviously track currency through various machines if you want to. So there is a way to expand it.

But, ultimately, you are not going to be able to stop all the money. You can't. Wherever there is illegal activity beneath the law, it is going to be ready to go for bad uses, whether it is drugs in Afghanistan, whether it's diamonds in Africa. So that's always going to be there and you are never going to get it all, but you can disrupt it.

Now, in terms of the weapons of mass destruction, that does require a lot of money. Just earlier this week, the Treasury took action against an Iranian bank, Bank Sepah, which had been financing purchases of missile technology for Iran. The evidence was, for example, that the purchases of some technology which was in Iran and had been produced by North Korea, was financed by this bank. So they basically have taken actions to sanction them.

Unfortunately, there is not yet an international agreement to do this, except what came out of the UN Resolution on December 23rd, which was financial sanctions against Iran. But there are lots of exceptions and they are quite loose. So right now the United States is fulfilling the Security Council Resolution commitments, but probably more actively and more aggressively than others.

That's probably too long an answer to your question, but it is a good one.

QUESTION: One of the constraints, I think, on cooperation early on among countries and ministries on these financial flows were contradictory rules on personal privacy, data privacy. This was, I think, a concern of the Europeans, for example, but also domestically in the United States. Could you say a word on the state of play there now? Were those kind of constraints removed so that cooperation can go ahead?

JOHN TAYLOR: Early on, there were two countries that were not as cooperative as others, let's put it that way. One was Switzerland and the other was Saudi Arabia. This was for different reasons. The Swiss were because of their tradition of secrecy. But they came around. I'd say I don't think there is much difference anymore, with the Swiss.

And the Saudis came around too. Not that people were putting money in Saudi banks, but we had to have them help to go after charities that we knew were funneling money to al Qaeda or something. So they eventually helped in that. It is actually related to when the terrorist attacks started in Riyadh. But they are cooperating more now.

More generally, I think the perspective of our financial institutions is important here, so I appreciate your making this statement. I think there is a real concern of the government asking too much of the banks, the financial institutions. All of the suspicious activity reports they have to do, the "know your customer," are a lot of work. I hear about the numbers all the time being very high. So I would say that the government needs to look carefully at how to streamline this, make it more efficient, and also not ask for things that aren't being used. I just worry that there are too many piles of suspicious activity reports that are on people's desks and just are not being used. So we need to make it more efficient.

And also, convincing the private sector that the reports are useful would be important as well.

QUESTION: Clearly, the President's new strategy depends on the cooperation of the Iraqi government. You mentioned the $10 billion that the Iraqi government claims they are going to be spending on development. We know, as you pointed out, that there were enormous amounts of money that they had up until now and they haven't spent it. Now, what changes are going to take place do you think in the Iraqi government so that they in fact will go forward and spend the $10 billion, when they haven't been able to do that in the past?

JOHN TAYLOR: Well, I'm not there right now or on the ground, so I can't give a specific statement. But what I do know from my own experience is that you have to work closely with people like this. They've got a lot of pressures. One of the reasons I think they are not disbursing—and by the way, it is not that the money is not there; it is that it is not being spent. It is actually also true of the donors. You know, a lot of people pledged money for Iraq—other countries, IMF, World Bank, and so on—but very little is being spent. It is because this new government has trouble executing its budget. So it is very much of an implementation thing.

It is finding a way to spend the money quickly on projects that are going to work. So you can imagine—you know, "We want to do this," "No, we want to do this," "Let's do this."

I have an example from Afghanistan about what can go wrong here. We thought it would be very useful to set up a big industrial park in Kabul so that firms could come and have some security and do some business. Not a fancy industrial park like you see in Silicon Valley, just a basic thing. Everybody agreed. I went to one meeting they were having about this. One group would come and say, "Oh no, the industrial park has to be just for the women. We need a special place for the firms that are going to be run by women." Another group would come in and say, "Oh, you know, we have to have a hookup for the Internet." So this squabbling about how we'd do it seemed to delay it. You know, what can I do at that point? To myself I said, "Well, this is democracy at work." But in the meantime we were seeing delays on something which we know could be very important. So my guess is that that's what is happening.

So how can you fix it? You can have timelines—get this done by this date. Have some carrots and sticks. But I think ultimately it is really a detailed thing and requires a lot of hard work by people who really want to get it done. It can be done. You can spend money. A lot of people want to do it.

QUESTION: I find a lot of the work that you and some others in the Treasury have done to stave off terrorism truly inspiring. But as you know, this year Grameen Bank, a microfinance institution, was one of the recipients of the Nobel Peace Prize. Within the Treasury and within other governments, to what extent has the ideas of access and inclusion and making sure the 4 billion people who live on less than $3.00 a day have access to financial systems and the ability to transmit money—how do you balance that with the importance of preventing the terrorists' financial flows?

JOHN TAYLOR: Thank you for that question.

With respect to the transmission of money to support this activity, there is about $150 billion a year that is now sent from immigrants in the developed world back home to the developing world: $150 billion. For Latin America, it is more than foreign investment. It is way bigger than IMF, World Bank. It is way bigger than USAID. So you are right, there is a tremendous amount of potential here that is untapped, and finding good ways to use that, that's exactly what Grameen Bank can tap into.

My sense also is that that's a demonstration of how very small type of lending, micro-lending—but also even a little bit larger than that, very small business lending—can make a huge difference for development.

The International Financial Corporation (IFC) is the arm of the World Bank whose job it is to deal with the private sector. Right now, the IFC makes loans in the $100 million category. They are loans to Brazil. They are loans to countries that can borrow money very easily. Why not have them go into the small business lending to support groups like Grameen Bank? We argued for that very strongly in the Treasury. I'm sure it is still being argued for.

But it is hard to reform these institutions. Here's the reason: it is much easier for a person at the IFC to make one $100 million loan than to make a hundred $1 million loans. That's what happens. But that's a terrific point, and it is very much part of what I'd say the global financial order should be doing.

QUESTION: My question is: How severely have the frequent attacks on the Iraqi oil pipelines affected output and revenue?

JOHN TAYLOR: Well, quite a bit. It is an ongoing struggle to secure them, to fix them, and to make sure that they are coming in. So the production is not as high as it could be because of this. It has been maybe a million-barrels-a-day difference. But in the meantime, though, there is revenue coming in, and that's what I was referring to a minute ago. In a way, it's not so much the revenue not coming in, it's the revenue being spent. We don't realize that, but it's a point. But in the meantime, there is money that can be used constructively.

QUESTION: The title of your book indicates that we are waging war financially. Right now the focus has been mainly on development, which is being carried out by other aspects of the government as well.

But I'd like to go back to that waging financial war against the terrorists. The recent actions on the banks in Iran also mean that they are trying to make the economy wobble in many ways. This was a strategy that was used in the 1980s to make the Soviet Union wobble a little bit. Now, where is this being coordinated from? Is it being coordinated internationally? It is being coordinated only by Washington with some reluctant participation by others?

The other aspect of that is: When you come up with a strategy in Washington, what prevents nations that are not so sympathetic to that kind of strategy from leaking to either Iran or other countries that have some vested interest in, say, the terrorists or the organizations and the like, so not sympathetic with American policy?

JOHN TAYLOR: I would say that the United States is out in front of this more than any country, trying to be aggressive with respect to freezing assets or otherwise taking sanctions against financial institutions in Iran and North Korea.

I might say as an aside, by the way, it is in some sense unfortunate that the United States always has to be out in front on issues. I experienced it a lot. In fact, one comment sometimes people raise about my book is, "Why were you doing all of these things? Why weren't other people doing these things?" I think to some extent people just look for the United States to do it. It would be much better if others shared. Believe me, I think we've got too much to do. But that's the reason, I think, that there is sort of a vacuum and people rely on us, they expect us to do it. And then, of course, when we get started, they can criticize. Like anything, you get somebody do it; then, if it doesn't work out, you can point your finger. So that's the way the world is.

So it is coming from the United States, but there is cooperation, and there was a lot more right after 9/11, freezing assets of Taliban and other terrorist groups.

It is harder in the nonproliferation area. For example, the policy of just a little over a year ago was to take actions against a bank in Macao that had been doing business for North Korea's government. Their business had been twofold, mainly: one was to distribute counterfeit hundred-dollar bills, which is a big source of North Korea's income; then, second, to money launder the drug money that North Korea participates in. We had evidence that they were doing that. All we did was put in the Federal Register that the United States was going to require that U.S. financial institutions not deal with this bank. It hadn't even been decided yet. It was the notification. That was enough to change everything completely. The Macao government went in and look at what had happened—they ultimately shut the bank down. Twenty-three million dollars was frozen in the bank. Nobody will deal with that bank anymore. And North Korea is furious. That's one of the things they keep mentioning in the six-party talks. They say, "We're not going to the six-party talks unless you let that bank back in business." So it is powerful. They are definitely a concern. But since then, and especially since the tests that they did, others are participating more. Even the Chinese are participating.

In the case of Iran, just on Monday, we took action in the United States against Bank Sepah. A number of financial institutions are privately deciding not to deal with them—UBS for example, and Commerce Bank just recently decided to participate in this, if you like, agreement not to deal with these banks. We have evidence that they are really financing large-scale operations regarding in this case long-range missile production.

Finally, in terms of international cooperation here, the UN is definitely necessary to make all this happen. In the Resolution passed on December 23rd, there is a whole section, Section 12, which says "all members are required to freeze the assets of these people," which are largely the ones producing the weapons-grade materials or the missiles. But there are a lot of exceptions.

So here what is happening is the United States is fulfilling the obligations of the Resolution more aggressively than others. But we've got to get others to participate.

QUESTION: It seems there is a surge of nationalization and renegotiation of deals in the world. Are companies going to have to deal with this by themselves, or are governments—not just the United States, other governments—likely to help, and how can they help?

JOHN TAYLOR: Do you mean nationalization like in Venezuela?

QUESTIONER: Venezuela, Russia, Bolivia, others.

JOHN TAYLOR: First of all, I'd say the United States tries to help as much as possible. The State Department has a whole apparatus to help firms in various countries. In terms of financial services, Treasury has as part of its mission to help when there is a problem like that. Of course, one of the things with an OPEC guarantee is if the country does nationalize, there is the insurance for that, which can help. So it is something that I would say is part of U.S. foreign policy, as with many other countries, to look out for nationalizations. It's not in the U.S. interests to do that. In terms of how much help, I don't know.

Now, just to give you an example on the other side as to something which I think may help clarify, Argentina, which is discussed in this book quite a bit, decided to default on its debt in 2001. A lot of people felt that we should help the bondholders get a better deal in the restructuring. Actually my view is that we shouldn't, we should be neutral and let Argentina and the bondholders work it out. It is better for the financial system, and there is no real reason why the U.S. government should be trying to get the bondholders a better deal. That was their decision to do.

But when it is a foreign policy type of thing regarding the actions of a country taking an illegal action against our law, then we should definitely be in there and taking some action in my view.

QUESTION: Over the years, I have seen occasional reports in the press about counterfeiting, usually hundred-dollar bills. You mentioned it in the case of North Korea recently. I've always assured myself that it is, at worst, an asterisk or a footnote. But every once in a while, somebody alleges that the activity is going on to such an extent and the technology is improving to such an extent that debasing the currency overseas, and possibly even here, is actually a possibility. Could you put that into context with your experience?

JOHN TAYLOR: Just a little bit. Of course, one of the reasons for the new bills you are seeing, with the colors and the complicated designs, is to make counterfeiting more difficult. That's why that is happening. So it is definitely a problem.

In terms of the idea of making the dollar less attractive, there is evidence that hundred-dollar bills are sold at a discount in certain countries. So if you have five twenty-dollar bills you can get more than for one one-hundred dollar bill, because people recognize there is a possibility of it being counterfeit.

There was a wonderful piece in The Wall Street Journal about that maybe six weeks ago by Michael Phillips, which actually documented in different countries what the price differences were. So it is definitely a reason for us to make sure that the currency is sound. Having a currency that is used internationally is a huge benefit for the United States, so we want to continue with that.

QUESTION: I don't know if this is the Treasury's problem, but right after we went into Iraq, a lot of money, millions, was set aside for reconstruction, and today they don't have drinking water or electricity or nothing much has happened. What happened to all that money?

JOHN TAYLOR: Well, a lot of it wasn't spent at all. A lot of it is just sitting around. Some of it was spent. Some of it wasn't spent wisely. Some of it was spent on things which were then destroyed right away. But I think to me the main thing is it wasn't really spent. Like all the money that was raised internationally was not spent. The money was spent also on security types of things, so you don't really see the benefit from that. You know, you fix a hospital and you have to fix it again. So that's the reason.

Now, I do think, by the way, that it could be done better. I don't think there's any question. Here's what I think about this more generally. We talk a lot about fund raising. I talk about fund raising in this book, $5 billion for Afghanistan. It is hard to raise money, but it is much easier to raise money than it is to spend money.

I think we need internationally what I would call action raising, as distinct from fund raising. I have seen it everyplace.

One of the other reasons I went to Afghanistan a lot was because I could see the money wasn't being spent. If it wasn't spent, there was a real risk that Karzai would have trouble. We wanted to have money spent, so we set up timelines: "You've got to build this road by this date." The international agencies would say, "Oh, we can't build it that fast. We've never built a road in less than three years." I said, "Three years? We've got to get this done in a year or this guy is going to have a lot of trouble." So you need that kind of an attitude.

I'm sounding a little aggressive here, but, quite frankly, you do need some people to say, "This is a war on terror. We have a huge problem here. This is not business as usual. This is not something that you can fritter away and let the bureaucracy debate how to do it, have a million studies. You've got to do it."

So I think a lot of it, quite frankly, is just hardnosed, businesslike demands, with timelines to get it done. And it will work. I guarantee you, if you do it that way, it will get done. But that's hard.

QUESTION: Let me thank you for showing how collaboration and cooperation can work in international finance. We usually hear about all the problems.

Now, to continue the last line of questioning, part of the President's strategy on Iraq is to encourage the rebuilding of private enterprise. This is certainly the American approach. It is a way to prevent terrorism, because if people are employed and engaged in meaningful enterprises, they are less likely to become terrorists. How is this going to be managed financially? How do you bring back an economy that has been smashed?

JOHN TAYLOR: Well, first of all, the private part of this—the buying and selling, the small construction, the importing of a satellite dish or a refrigerator or some kids' toys and then selling them—that actually is working remarkably well. Newsweek, just two weeks ago, had a piece about the economy, and they titled it "The Mother of All Surprises." The reason is no one knows about it, but the private economy, given the security problems, is working remarkably well. It is growing. You have growth numbers around 10 percent.

First of all, that's important, but there is still a lot more to do. Obviously, if you had a better security situation, you'd have more private-sector activity. But when we get that, I guarantee you that country is going to thrive. There are entrepreneurs. There are people who will come back. There is a lot of money. So that's the first thing. The private sector is essential and it can do well. It is already doing surprisingly well: "the mother of all surprises."

The second thing is there is money that can be used now. So the $10 billion the President referred to is money that is available for them to spend now. It's a matter of spending it, not a matter of getting the money. That is, as I say, difficult to do, surprisingly, to execute the spending. That should be a high priority, and maybe the new economic coordinator can focus on that in Iraq. It would make a tremendous difference.

JOEL ROSENTHAL: Thank you.