The List

Spycrash

5 CIA operations that went south -- spectacularly.

The Associated Press yesterday revealed that Robert Levinson, a former FBI agent, was working for the CIA when he disappeared on Iran in March 2007. But perhaps more surprising than Levinson's ties to the CIA was the reckless way in which the operation was carried out: He was sent to Iran's Kish Island, a smuggling hub in the Persian Gulf, by a team of analysts who had no authority to run intelligence operations, and who would eventually be accused by CIA investigators of hiding the fact that they were running an off-the-books spy mission from top officials at the agency.

The fiasco caused a behind-the-scenes uproar in Congress and the CIA, which eventually forced three veteran analysts to leave the agency. Meanwhile, the White House, FBI, and State Department continued to publicly state that Levinson was a private citizen when he disappeared. The U.S. government urged the AP for years to avoid publishing news about Levinson's CIA ties, and paid a $2.5 million settlement to his family to avoid a lawsuit that could have revealed the truth.

The Levinson saga, however, is far from the first time that a CIA operation not only failed, but failed so badly that outsiders were left wondering how officers for America's premier spy agency could be so rotten at their jobs. Here are just a few of the most spectacularly botched operations in the Agency's history.

Hezbollah rolls up CIA's Pizza Hut spy ring

Lebanon has long been a playground for spies from across the Middle East. But in 2011, it appeared that U.S. intelligence services were getting badly outplayed by their rivals. More than a dozen informants recruited by the CIA were reportedly captured by Hezbollah and Iran, after the groups learned where the American spies were meeting their agents.

The CIA officers made Hezbollah's job easy by employing shockingly sloppy tradecraft. According to current and former U.S. officials, two Hezbollah agents posing as potential recruits learned the location where the CIA officers met their informants -- a Pizza Hut in Beirut. And the code word that the CIA allegedly used to set a meeting? "PIZZA."

From there, Hezbollah's internal security only had to observe the Pizza Hut to identify the informants, who were promptly disappeared. U.S. intelligence officers reportedly ignored multiple warnings about the risks of using the same location to meet multiple recruits -- and as a result, at least some CIA operations had to be suspended in Beirut during the summer of 2011. According to some, the damage was even more serious: "We were lazy and the CIA is now flying blind against Hezbollah," one former intelligence official told ABC News.

"The Italian Job"

In the days after the 9/11 attacks, the CIA expanded its use of "extraordinary rendition" -- the practice of snatching subjects from one country and transferring them to another country, where they were sometimes tortured. Perhaps no such effort went as badly as the abduction of Islamist cleric Hassan Mustafa Osama Nasr on the streets of Milan, Italy, in 2003.

Nasr had become a key figure in the city's radical Islamist community, drawing the attention of American and Italian officials by delivering fiery sermons from a local mosque. And the CIA operation, which received the blessing of the Italian intelligence service, initially appeared a success: Nasr was grabbed during the middle of the day and flown to Cairo, where he claimed to have been tortured.

The CIA officers who conducted the operation, however, were anything but subtle. They used commercial cell phones, which allowed Italian police to eventually track their mobile phone records; they racked up enormous bills at five-star hotels; many used their real names while operating in the country; and their getaway van had been filmed by traffic cameras as they prepared to grab Nasr. As questions grew about what happened to the cleric, it soon became obvious to all that this had been a CIA operation.

Italian prosecutors, who had been kept in the dark about the operation, were not about to let those leads go unexamined. The prosecutors tapped CIA operatives' phone lines and seized documents from their intelligence services archives to unravel the entire operation, in order to build a case that Nasr's abduction actually thwarted an ongoing police investigation and thereby harmed Italy's ability to monitor domestic radicals. In the case, 23 Americans who were part of the investigation were convicted in absentia of kidnapping -- including the former head of the CIA in Milan, Robert Lady, who was handed an eight-year jail sentence.

The attempted killing of "Lebanon's Khomeini"

In the worst days of the Lebanese civil war, the CIA not only found itself struggling against their stated enemies but also trying to rein in their supposed allies, whose brutality often went beyond what the American spies were willing to sanction.

In 1983 and 1984, the United States was targeted by three devastating suicide bombings that killed over 250 Americans, and were believed to be the work of Shia militants that would become a part of Hezbollah. The CIA judged that Shia cleric Muhammad Hussein Fadlallah was a key part of these attacks: In a 1985 report titled "Lebanon's Khomeini," the CIA assessed that "Fadlallah plays an important role in the Hizballah terrorist network...[and] coordinates radical Shia activities in Beirut."

On March 8, 1985, a car bomb packed with over 400 pounds of explosives detonated outside Fadlallah's house in the Beirut suburbs. The blast killed over 80 people and injured 200 more -- but it did not kill Fadlallah, who escaped uninjured. According to former CIA field officer Robert Baer, who denied any CIA involvement in the plot, the attack was carried out by Christian Lebanese army officers. Washington Post journalist Bob Woodward, however, would report that CIA Director William Casey had bypassed the agency's traditional channel to funnel money to the hit squad that planted the bomb.

The angry crowds beneath Fadlallah's house that day in March 1985, however, did not need Woodward's reporting to blame the United States for the bloody attack. Immediately following the attack, residents strung up a banner reading "Made in USA" over the building destroyed by the bomb.

A Failed Syrian Coup

The United States' current struggles in Syria aren't the first time that it has failed to bend the country's politics to its will. In the 1950s, the coup-ridden country found itself on the front lines of the struggle between the United States and the Soviet Union for predominance in the Middle East. By 1957, top CIA officials thought they saw an opportunity to spearhead a coup that would place Syria decisively in the Western camp.

According to Timothy Weiner's Legacy of Ashes, the joint U.S.-British plan was to make Syria appear to be a threat to regional security as a pretext for regime change. Syria would be "made to appear as the sponsor of plots, sabotage and violence directed against neighboring governments," according to a document found in 2003 among the private papers of British Defense Secretary Duncan Sandys. As the CIA and British intelligence agencies stoked discontent both inside the country and on its borders, CIA officer Kermit Roosevelt identified three top officials who would need to be assassinated to destabilize the government.

The plot quickly went wrong. The CIA station chief in Damascus, Rocky Stone, chose his allies poorly: The Syrian officers he recruited went on television to publicize the plot, denouncing it as the work of "corrupt and sinister Americans." Stone was ejected from the country in what even a former U.S. ambassador to Syria would denounce as a "particularly clumsy CIA plot." Meanwhile, Syria fell completely into the Soviet camp, where it would stay for the duration of the Cold War.

Soviets Shoot Down U-2 Spy Plane

As the Cold War heated up in the 1950s, President Dwight Eisenhower became obsessed with learning the true extent of Soviet military capabilities. Most importantly, he wanted to know how many intercontinental ballistic missiles the Soviets had pointed at the United States - and whether it was enough for them to emerge on top in a nuclear conflagration. In the middle of his term in office, the president was handed a new tool that could help him answer just that question -- the U-2 spy plane, which could fly at heights that Soviet airplanes and missiles could not reach.

CIA-operated U-2 spy planes started flying over Soviet territory in 1956, using its state-of-the-art camera to snap pictures of military installations below. Unbeknownst to the United States, the Soviets could detect the planes by radar.

In 1960, during the last months of his presidency, Eisenhower was preparing to attend a summit in Paris with Soviet premier Nikita Kruschev intended to lessen the tension between the global powers. The president halted the U-2 flights as he pursued the rapprochement, describing the flights as "provocative pin-pricking" that could convince the Soviets that the United States was planning to bomb Soviet installations. CIA officer Richard Bissell, who was in charge of the U-2 program, pressed the president to allow one more flight before the summit.

On May 1, 1960, the U-2 flight piloted by Francis Gary Powers took off from a U.S. base in Peshawar, Pakistan. It was detected soon after it entered Soviet airspace, and Soviet jets and anti-air missiles were ordered to bring it down. 1,200 miles into Soviet airspace, an anti-air missile hit Powers' plane, forcing him to eject as the plane hurtled toward the ground.

The diplomatic fallout was immediate. For four days, the United States continued to claim that the incident involved a weather plane that had drifted off course. On May 7, Kruschev revealed that Powers had been captured alive, along with wreckage from the plane, forcing the United States to admit to the espionage effort. The Paris summit soon broke up in recriminations, and the confrontation between the two superpowers only became more tense in the years ahead.

The next flashpoint was in Cuba, where the 1961 Bay of Pigs invasion - a botched, CIA-directed attempt to overthrow Fidel Castro's regime - would be a major factor in Castro's decision to agree to a plan to position Soviet missiles on the island. The ensuing Cuban  Missile Crisis was the closest the world has come to a nuclear war - and a case study in how one bad decision can lead to many more down the road. 

DAVID FURST/AFP/Getty Images

The List

Untangling the Chinese Bond Knot

Five ways that Beijing could get rid of its dependence on U.S. debt.

U.S. Vice President Joe Biden's trip to Beijing this week was overshadowed by tensions arising from China's announcement of its air defense identification zone, a wide swath of the East China Sea, which includes territory administered by Japan. But increased Sino-American tension also has profound economic dimensions -- perhaps the most important being China's ownership of U.S. bonds, an arrangement that fundamentally links the two major economies yet could soon be the root of future discord.

In June 2006, before the global financial crisis, China owned only $699 billion in U.S. securities. Back then, they were still a decent investment -- returns on U.S. bonds were above 5 percent. Now, however, the returns are essentially zero and the risk is higher, yet China keeps buying more. As of the end of September, China's foreign exchange reserves stood at $3.66 trillion, with approximately $800 billion more at state banks. Why does China park so much of that money -- more than $2 trillion -- in U.S. bonds? A lack of alternatives.

But this can't last forever. So the more important question is when Beijing will seek to climb out of the box it jumped into when its holdings of U.S. bonds began to soar. An even more critical question is just how China will go about divesting. The Communist Party has five options to ease dependence on U.S. bonds. Each is unpleasant.

1. Sell U.S. bonds.

Several times a year, an advisor to the Chinese government espouses selling U.S. bonds and buying alternative investments such as assets denominated in other currencies or gold, among others. In an Oct. 15 Financial Times op-ed, for example, Chinese economist Li Daokui suggested Beijing could purchase as much as 5 percent of the shares of multinational companies operating in China and listed on stock exchanges worldwide, as well as up to 5 percent of the shares of public utility companies in mature market economies, and could increase its holdings "of all non-US sovereign bonds rated higher than double A plus."

This plan has at least two glaring problems. What country wants to sell China hundreds of billions of dollars in bonds, pressuring its currency higher? In 2010, Japan called out China for doing so with far smaller purchases. Chinese outward investment in 2012 hit a record $87.8 billion, but even at that level included multiple large-scale setbacks. Will dozens more major companies step forward to offer China large stakes in their business? The scope for a quick expansion is sharply limited.

Meanwhile, the problem is growing. In the third quarter of 2013 alone, China added $166 billion to official reserves. To reduce the percentage of U.S. bonds in the reserves, the State Administration of Foreign Exchange (SAFE) would have to find a different investment for an additional $100 billion on average every new quarter.

But even before SAFE, the agency that manages China's foreign exchange reserves, invests this money, it needs to find a buyer for its existing U.S. bond holdings. This will be difficult because Washington is already selling hundreds of billions of dollars in bonds annually to the same buyers China will seek. To make the sales, SAFE will have to offer steep discounts. And it will likely receive mostly U.S. dollars in return -- because that is what buyers will want to offload if they are purchasing more U.S. bonds.

2. Open the capital account.

A common misconception concerning Chinese reserves is that the Communist Party can and should spend the money at home. It should -- but it cannot. Controls on the movement of capital flowing in and out of the country separate the financial books of all actors, from the central government to households, into domestic and foreign ledgers. This limits domestic Chinese entities' ability to use dollars, which cannot be used on bills or wages, or be freely sent overseas. Because they have little use, the overwhelming majority of dollars distributed in China would be exchanged for renminbi (RMB), China's currency, at the only place authorized to conduct foreign exchange -- the state banking system. And official reserves would go right back up.

If Beijing lifted capital controls, foreign exchange reserves would have far greater uses domestically. In the Chinese court of public opinion, this is the most palatable option, as it would allow Beijing to more easily spend the money domestically. Talk in 2011 of a Chinese bailout of the European Union foundered quickly, for example, over the reaction at home.

But Beijing is unwilling to allow domestic capital free exit from the country. It appears to fear a nightmarish scenario: Formerly captive deposits pour out, forcing the People's Bank of China, the central bank, to frantically redeploy reserves to patch state financials. This would undermine, at least temporarily, state control of the financial system. Yes, it seems impossible that enough money could leave to override the benefits of perhaps $2 trillion spent domestically. Nonetheless, this fear has paralyzed the Communist Party since it began seriously considering liberalization after China joined the World Trade Organization in 2001. November's important Third Plenum meeting offered the same vague promises on capital account opening, but still no timetable. The safe bet is that controls remain.

3. Reverse course on the renminbi.

The huge quarterly increases to China's foreign reserves are due in part to Beijing's purchases of foreign currency, especially dollars, on the open market in order to cap the RMB's value. If the People's Bank were to let the RMB move unimpeded, China's accumulation of reserves would slow, perhaps dramatically. While this would make it easier to avoid buying additional U.S. bonds, it would not affect the bonds already held. That would require a full reversal, with the People's Bank selling foreign currency and buying RMB, drawing down its excess reserves in the process.

In principle, this is entirely reasonable. A more valuable RMB would have massive benefits: It would hedge against rising global energy prices, for example, and provide a major boost to the transition to the consumption-led growth that the Communist Party claims to want. No longer a small country seeking to export its way to growth, China has aspirations to global leadership -- and sustained economic leadership requires a strong currency.

But in practice, this is very unlikely. Because the RMB is still pegged to the dollar, movement of the RMB against other currencies is still explained almost entirely by the movement of the dollar. It would be far easier for Beijing to de-peg the RMB and stop accumulating reserves than to try to reallocate current U.S. bond holdings. Yet Beijing has steadfastly refused to do so because it does not want to directly subject the RMB to market forces.

4. Reverse course domestically.

Besides the unpalatable task of strengthening the RMB, Beijing has plenty of other tools for internal restructuring. Cutting subsidies for domestic production, for example, would help, as would reforms aimed at rebalancing consumption and investment.

At the November plenum, Beijing announced steps in this direction; if implemented, they would gradually limit the accumulation of reserves. Unfortunately, the problem is immediate, not long term. As with the exchange rate, stopping further increases in China's foreign exchange reserves would require transformative reform. And it would still leave current reserves unaffected.

For domestic restructuring to ease dependence on U.S. bonds, it would have to be at the level of the reforms of 1978, when Beijing granted farmers property rights, or 1993, when many state-owned enterprises lost their protected status. In contrast to these previous rounds, led by Chinese leader Deng Xiaoping, President Xi Jinping and his colleagues have not shown the will or the capacity to move so quickly and decisively.

5. Hope for a massive new country to enter the global economy.

Drawing on government holdings of foreign currency, state institutions like China Development Bank have funded development projects around the globe, from dams in Laos to refineries in Latin America. This has barely made a dent in reserves, but it serves as a model.

Few international opportunities are big enough to make it worthwhile for SAFE to sharply reorient its portfolio despite the costs of selling U.S. bonds. Another financial crisis could be an opportunity, depending on how much the afflicted countries would pay for Chinese help. An internationally rehabilitated Iran would have a good deal to offer in return for large-scale Chinese investment.

Size-wise, the preeminent possibility is North Korea. Even peaceful Korean reunification would require hundreds of billions of dollars for imports, fiscal support, and development. South Korea would want help, and China would not want heavy involvement from the United States or Japan. The timing of Korean reunification is unclear, of course, but it would suffice to draw Beijing out of the U.S. bond trap.

Yes, waiting for the unification of North Korea is not an ideal investing strategy, but neither is waiting for U.S.-China tensions to dissipate. Mutually assured economic destruction cannot last forever in a dynamic global marketplace. And Beijing needs to pursue one of these options, soon.

Photo: ChinaFotoPress/Getty Images