Intelligence and financial crisis, historical edition

It is our contention that troubled times demand increased investment in intelligence activities by private firms, who cannot rely upon the agencies of government or the media to adequately address their interests. This is by no means a new phenomenon – rather, it is a rediscovery of much older principles that were in common practice prior to the 20th century.

The debate over intelligence failures in the current financial crisis thus continues to attract our attention. There are those serving, or having served, in a variety of institutions which claim that intelligence may have indeed staved off the worst of the impact to a specific firm or another. We shall see what to make of these claims once the business schools begin to compile their histories.

It is clear, however, that good intelligence served financial institutions well in earlier times. We find quite early reference to this in a text on the Theory and Practice of Joint-stock Banking, dated from 1836.

“The system of mutual espionage and rivalry which exists amongst joint-stock banks is another source of security to the public. That a system of espionage exists upon every joint-stock bank, at least in Scotland. by their sister banks, who exchange notes and checks with them, must be admitted, after what took place with regard to a joint-stock bank establishment in the west of Scotland. The agents of the joint-stock banks, both in London and Edinburgh, being in constant communication with each other, have early intimation of any departure, by any joint-stock bank, from the true and safe principles of banking. In fact, so long as a joint-stock bank can maintain its credit and good opinion with its sister banks, the public are tolerably safe; and so satisfied are the public in Scotland of this circumstance, that no run took place during the severest period of the panic, in 1825, on a single Scotch bank — the public being well assured that the other banks would give (by a refusal to accept the notes and obligations at the exchange) a clear and distinct notice, that danger was to be apprehended.”

This forthright discussion of commercial espionage would not doubt send many of the current practitioners of competitive intelligence into hysterics. One must note that no distinction was made at the time between the collection of information by overt means versus that of illicit provenance. The legal status of such information, and its use, was also far less clear than in today’s environment. (We must remind our more genteel readership that the first case in law on such a matter – at least that we are aware of - for the first time conclusively draws the line between legitimately obtained information from public or private sources, versus unspecified illegitimate methods, only in 1916.)

Regardless of the means by which it might have been obtained in accordance with the standards of the day, the precedent of relying upon intelligence to avert financial crisis has long been a maxim within the financial industry. Given the perspective of time, one may look back on the recent troubles as much as a failure of institutional memory as a failure of the profession itself.

The intelligence community and technological surprise in the Cold War

It has long been a maxim in the intelligence community that despite other types of intelligence failures – created by both collection shortfalls and analytic errors – the one remarkable area of success was the “fact” that no Soviet weapons system was deployed during the latter period Cold War without the US being aware of it in advance. In this version of the telling, the initial period of uncertainty regarding Soviet capabilities was ended by new technical collection methods, and the analysis to derive insight from those collection systems. From that point forward – usually dated to around the time of the introduction of the U-2 platform – the US intelligence community allegedly never again faced strategic technological surprise.

This story has been repeated so often that it is no longer even questioned, particularly given the fact that multiple DCI’s and their deputies have also supported the statement. Despite this, a recent conversation regarding certain the post-Cold War discoveries regarding certain historical intelligence controversies gave us reason to revisit this old success story. The public history regarding the IC’s true knowledge of the main enemy’s scientific and technical intelligence advancements has become more clear as declassification continues to bring these topics back into the realm of academic discussion. One can also now make far more useful comparisons the increasingly public statements of former Soviet scientists, defense planners, and other professionals that are now recording their own services’ histories.

And from these comparisons, we find the old maxim gravely wanting in the revised judgment of history. Perhaps the most serious area of strategic surprise were the revelations first made public by Ken Alibek, the defector who formerly headed the Soviet Biopreparat program, of an unsuspected strategic biological warfare capability. This capability included weaponized anthrax and smallpox warheads deployed on R36 / SS-9 SCARP and R-36M / SS-18 SATAN ICBMs. This surprising revelation was however preceded by an earlier intelligence failure regarding Soviet BW programs, which missed the development and first operational deployment of T2 mycotoxins - yellow rain - in Laos and Cambodia. That alone should have provided warning that all was not well with the IC’s supposed scientific and technical intelligence superiority, as also should have the Sverdlovsk anthrax release accident. However, the rapidly and intensely politicized public debate over these latter two cases in particular serves to illustrate well the long term damage that can be done to the community by the failure to remain objective, independent, and apart from the media-led scrum.

US technical intelligence regarding Soviet chemical weapons programs also allegedly suffered from similar surprise, failing to initially detect the development of the entirely new class of Novichok nerve agents – again learning about the capability only from post-Cold War defector reporting. What might have been in this matter is far less clear, but as an exception it certainly disproves the rule.

It is important that when holding up a standard for new intelligence professionals to emulate that we choose one that has actually been met before. Absolutely avoiding all forms of strategic surprise in the scientific and technical area is a laudable goal. But that is not the bar that was set by the Cold War era – despite what others may claim - and measuring today’s efforts through that prism does a great disservice to those who are responsible for chasing an impossible mission under what are arguably the far harder circumstances of the contemporary operating environment.

This does not in any way detract from the excellent service given by those responsible for the assessment of Soviet weapons programs, and for the countless successes which initially gave rise to the myth. While the IC does not need aggrandizement, it does have ample legends that have more than earned bragging rights never exercised in a quiet profession. History owes those that never sought recognition in their own time an accurate accounting of the deeds of their day.

The black swan and the siren song

Via Shloky comes the link to this most fascinating interview by the author of Freakonomics with Nassim Nicholas Taleb, the thinker behind the concept of the Black Swan. Rarely are we so fortunate as to have two interesting thinkers conversing. Now if we could only get a similar conversation transcript and podcast between Taleb and some of the luminaries of the intel side of the house…

In an intelligence community that has become in many ways almost obsessed with the prospect of surprise (and the attending problem of warning failure), Taleb has achieved a nearly cult status. (We ourselves have done our humble bit in spreading his work more widely within the community.) It is thus quite refreshing to read about his attempts to spoof the traditional categorization in place in the major publishing houses, his other practical jokes in the financial world, and to otherwise defy commoditization of his ideas. This gives us great hope that he will continue to provide great contributions to the community.

Some key points from the interview, which intelligence professionals would do well to remember:

"We prefer any theory, even wrong, to no theory. Theorizing is the default activity for our brain; suspension of belief is an active one. Because of the narrative fallacy, our minds default to theory making. It takes more conscious effort – and energy - to suspend beliefs. It also takes more training – we train children to find “explanations” instead of just teaching them to have the guts to say, “I don’t know” in certain circumstances."

In many ways, our own concept of Smoking Mirror is an attempt to overcome the epistemic arrogance (confident but incomplete knowledge) of the false prophet.

It is too easy – especially as the ranks of true experts thin in the great demographic change sweeping the community – for many intelligence practitioners to assume to mantle of expertise without its substance. In the complex and chaotic world in which we live, that mantle is more of a burden than a benefit. It is for this reason we have such hope for the new young faces in the community, and for the generation after next. They join us without the same pre-conceptions and mental rigidity that too often mark their older but less suitable counterparts – and hopefully, these new professionals will be supported by the best possible education and training to help them preserve that flexibility of mind, and respect for the limitations of their own expertise without the burden of ego.

Where have you gone, Mrs. Wohlstetter?

In the light of recent events, we are reminded of the continuing challenges of getting predictive intelligence right. We are not given the power to see the future, but we are given the ability to reason - and most importantly, to imagine.

There has been a recent trend towards the examination of intelligence surprise (particularly at the strategic level), intelligence failure, and the analytical tradecraft by which these are avoided. We are grateful for these efforts, and their contribution to the literature of intelligence.

To this end, we recommend our readers to the excellent doctoral thesis “Surprise, Intelligence Failure, and Mass Casualty Terrorism” by Thomas Copeland - one of the few scholars of the intelligence field that emerged in the 1990’s. We were pleased to make his acquaintance at several academic functions in the past, and we greatly respect his intellect and insight.

Closely related, the classic Anticipating Surprise by Cynthia Grabo has recently been updated and released as an occasional paper by the Joint Military Intelligence College. The original declassified version has also been released through the Kent school.

Other contributions by authors at the Fletcher school and at the Military Intelligence Corps Professional Association have also been noted.

While we still feel the recent loss of Roberta Wohlstetter - the first and best of the scholars in the subject - her legacy continues to live on in the community.