EMBARRASSED Pentagon officials were yesterday forced to scrap a scheme that invited speculators to make money out of terrorist attacks, coups and assassinations.

Paul Wolfowitz, the Deputy Defence Secretary, said that the online initiative was being cancelled a few days before its launch on Friday. He also promised an investigation into how $500,000 (£308,000) of public money had been spent and why the projected $8 million scheme had been allowed to come so close to fruition. “We will find out exactly how this happened,” he said.

News of the Policy Analysis Market had sparked disbelief, derision and disgust. Investors would have been encouraged to bet anonymously on the likelihood of unrest around the world. Areas that the Pentagon wanted internet gamblers to focus on included the possible assassination of Yassir Arafat, the deposing of King Abudullah II of Jordan and a bioterrorist attack on Israel.

Senators said that the idea was so outlandish and in such poor taste that most people would assume that it was a hoax. Mr Wolfowitz confirmed otherwise. He said that Pentagon officials were supposed to be imaginative, but “it sounds like maybe they got too imaginative”.

Before the U-turn, US officials had defended the initiative vigorously, saying that it could help Washington to predict pivotal events, particularly in the Middle East. The theory was that analysts should follow the money if they wanted the best forecast of events.

“Research indicates that markets are extremely efficient, effective and timely aggregators of dispersed and even hidden information,” a Pentagon statement, issued after initial criticism, said. “Futures markets have proven themselves to be good at predicting such things as elections results. They are often better than expert opinion.”

Such thinking depended on market forces being driven by expert opinion. Employees of US government agencies, including the CIA and the Pentagon’s Defence Intelligence Agency, would have been barred from taking part, but it is debatable how highly senior officials regard their analysis anyway, given their desire to set up the initiative.

The scheme was dreamt up by the Pentagon’s Defence Advanced Research Projects Agency, whose Information Awareness Office is led by John Poindexter, Ronald Reagan’s National Security Adviser in the 1980s, when the Administration sold arms to Iran in exchange for the release of US hostages in Lebanon.

With Oliver North, Mr Poindexter oversaw the illegal diversion of those funds to the Contra guerrillas fighting Nicaragua’s elected communist Government. His conviction of lying to Congress was later overturned.

Senator Byron Dorgan, a North Dakota Democrat, said: “Can you imagine if another country set up a betting parlour sponsored by the government so that people could go in and bet on the assassination of an American political figure?” Spending taxpayers’ money to create terrorism betting rings was “as wasteful as it is repugnant”.

Critics also questioned the logic of the scheme. While it could allow terrorists to make money from their outrages, it also offered them the chance to mislead US intelligence. And, if it really worked, allowing authorities to prevent attacks or coups, would punters continue to put money into it?

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