The Pentagon on Tuesday abandoned a plan to establish a futures market that would have allowed traders to profit by correctly predicting assassinations and terrorist strikes in the Middle East.
Facing outraged Democratic senators, Deputy Defense Secretary Paul Wolfowitz (search) said he learned of the program in the newspaper while heading to a Senate Foreign Relations hearing on Iraq..
"I share your shock at this kind of program," he said. "We'll find out about it, but it is being terminated."
Armed Services Committee Chairman John Warner, R-Va., said in an interview that he received assurance from the head of the Pentagon agency overseeing the program that it would "stop all engines on this matter today."
Warner spoke by telephone with Tony Tether, head of the Pentagon's Defense Research Projects Agency (search), after consulting with Intelligence Committee Chairman Pat Roberts, R-Kan., and Appropriations Chairman Ted Stevens, R-Alaska. The three agreed "that this should be immediately disestablished," Warner said.
Warner said that DARPA "didn't think through the full ramifications of the program."
The little-publicized Pentagon plan envisioned a potential futures trading market in which speculators would wager with one another on the Internet on the likelihood of various economic or political events in the Middle East, including terrorist attacks or assassinations. A Web site promoting the plan already is available and registration of traders was to begin Friday.
When the plan was disclosed Monday by Democratic Sens. Ron Wyden of Oregon and Byron Dorgan of North Dakota, the Pentagon defended it as a way to gain intelligence about potential terrorists' plans.
Wyden called it "a federal betting parlor on atrocities and terrorism." Dorgan described it as "unbelievably stupid."
Criticism mounted Tuesday. On the Senate floor, Democratic Leader Thomas Daschle of South Dakota denounced the program as "an incentive actually to commit acts of terrorism."
"This is just wrong," declared Daschle, D-S.D. At an Armed Services Committee hearing, Sen. Hillary Rodham Clinton called it "a futures market in death."
At the Foreign Relations hearing, Wolfowitz defended DARPA, saying "it is brilliantly imaginative in places where we want them to be imaginative. It sounds like maybe they got too imaginative," he said, smiling.
Sen. Barbara Boxer, D-Calif., told Wolfowitz "I don't think we can laugh off that program,"
"There is something very sick about it," she said. "And if it's going to end, I think you ought to end the careers of whoever it was thought that up. Because terrorists knowing they were planning an attack could have bet on the attack and collected a lot of money. It's a sick idea."
DARPA has been criticized by Congress for its Terrorism Information Awareness program, a computerized surveillance program that has raised privacy concerns. Wyden said the Policy Analysis Market (search) is under the supervision of retired Adm. John Poindexter, the head of the Terrorism Information Awareness program and, in the 1980s, national security adviser to President Reagan.
Warner said Poindexter and Tether had personally reviewed the program.
The program is called the Policy Analysis Market. DARPA said it was part of a research effort "to investigate the broadest possible set of new ways to prevent terrorist attacks."
Traders would have bought and sold futures contracts -- just like energy traders do now in betting on the future price of oil. But the contracts in this case would have been based on what might happen in the Middle East in terms of economics, civil and military affairs or specific events, such as terrorist attacks.
Holders of a futures contract that came true would have collected the proceeds of traders who put money into the market but predicted wrong.
A graphic on the market's Web page Monday showed hypothetical futures contracts in which investors could trade on the likelihood that Palestinian leader Yasser Arafat would be assassinated or Jordanian King Abdullah II would be overthrown. Although the Web site described the Policy Analysis Market as Middle East market, the graphic also included the possibility of a North Korea missile attack. The graphic was later removed from the Web site.
In a statement Monday, DARPA said markets could reveal "dispersed and even hidden information. Futures markets have proven themselves to be good at predicting such things as elections results; they are often better than expert opinions."
According to its Web site, the Policy Analysis Market would be a joint program of DARPA and two private companies, Net Exchange, a market technologies company, and the Economist Intelligence Unit, the business information arm of the publisher of The Economist magazine.
Trading was to begin Oct. 1. The market would have been open to at least 10,000 investors by Jan. 1.
The Web site says government agencies will not be allowed to participate and will not have access to the identities or funds of traders.
The market is a project of a DARPA division called FutureMAP (search), or "Futures Markets Applied to Prediction."
"The rapid reaction of markets to knowledge held by only a few participants may provide an early warning system to avoid surprise," the FutureMap Web site said.
Wyden said $600,000 has been spent on the program so far and the Pentagon plans to spend an additional $149,000 this year. The Pentagon has requested $3 million for the program for next year and $5 million for the following year.
Wyden said the Senate version of next year's defense spending bill would cut off money for the program, but the House version would fund it. The two versions will have to be reconciled.