Washington Post Staff Writer
Sunday, November 25, 2007; Page A01

A White House assessment of the war in Afghanistan has concluded that wide-ranging strategic goals that the Bush administration set for 2007 have not been met, even as U.S. and NATO forces have scored significant combat successes against resurgent Taliban fighters, according to U.S. officials.

The evaluation this month by the National Security Council followed an in-depth review in late 2006 that laid out a series of projected improvements for this year, including progress in security, governance and the economy. But the latest assessment concluded that only "the kinetic piece" -- individual battles against Taliban fighters -- has shown substantial progress, while improvements in the other areas continue to lag, a senior administration official said.

This judgment reflects sharp differences between U.S. military and intelligence officials on where the Afghan war is headed. Intelligence analysts acknowledge the battlefield victories, but they highlight the Taliban's unchallenged expansion into new territory, an increase in opium poppy cultivation and the weakness of the government of President Hamid Karzai as signs that the war effort is deteriorating.

The contrasting views echo repeated internal disagreements over the Iraq war: While the military finds success in a virtually unbroken line of tactical achievements, intelligence officials worry about a looming strategic failure.

"There is a key debate going on now between the military -- especially commanders on the ground -- and the intelligence community and some in the State Department about how we are doing," said one Afghanistan expert who has consulted with the National Security Council as it continues to "comb through conflicting reports" about the conflict.

But one senior intelligence official, who like others interviewed was not authorized to discuss Afghanistan on the record, said such gains are fleeting. "One can point to a lot of indicators that are positive . . . where we go out there and achieve our objectives and kill bad guys," the official said. But the extremists, he added, seem to have little trouble finding replacements.

Although growing numbers of foreigners -- primarily Pakistanis -- are joining the Taliban ranks, several officials said the primary source of new recruits remains disaffected Afghans fearful of opposing the Taliban and increasingly disillusioned with their own government.

Overall, "there doesn't seem to be a lot of progress being made. . . . I would think that from [the Taliban] standpoint, things are looking decent," the intelligence official said.

Senior White House officials privately express pessimism about Afghanistan. There is anxiety over the current upheaval in neighboring Pakistan, where both the Taliban and al-Qaeda maintain headquarters, logistical support and training camps along the Afghan border. But "in all honesty, I think it is too early to tell right now" whether political turmoil will undermine what U.S. officials already consider lackluster counterinsurgency efforts by Pakistani forces, the senior administration official said.

At the moment, several officials said, their concern is focused far more on the domestic situation in Afghanistan, where increasing numbers are losing faith in Karzai's government in Kabul. According to a survey released last month by the Asia Foundation, 79 percent of Afghans felt that the government does not care what they think, while 69 percent felt that it is not acceptable to publicly criticize the government.

U.S. troops number more than 25,000 and make up the largest contingent of the 41,000-member NATO force in Afghanistan. NATO officers say they have eliminated Taliban leaders and fighters in higher numbers than in any previous year. But such claims of success reflect "a very tactical outlook in a game that is strategic," said a former U.S. senior commander in Afghanistan who shares many of the intelligence community's concerns. "I have a lot of respect for [Taliban] strategy," he said. "These guys are not cowardly by any stretch of the imagination."

There is widespread agreement among administration officials that the Taliban has suffered heavy losses this year. But the U.S. military has also suffered losses, with deaths already past the 100 mark, compared with 87 over all of last year -- making this the deadliest year for U.S. forces in Afghanistan since the war began. Afghan civilian deaths also reached an all-time high of 5,700 this year, according to an Associated Press tally.

The strategy is "clear, hold and build," said Seth Jones, an Afghanistan expert at the Rand Corp. "You clear the Taliban out, then you hold it for a period of time. You keep forces there, including Afghan forces, then you begin to build, then expand and go into neighboring districts. The problem has been that when you move troops into neighboring districts, you don't have enough to hold what you just cleared."

Although the competence of the Afghan army is improving by all accounts, U.S. military officials acknowledge that the goal of turning captured territory over to Afghan forces has been hampered by training delays and insufficient numbers.

Experts said the Taliban's control has extended beyond the group's traditional southern territory, with extremists making substantial inroads this year into the western provinces of Farah, Herat and others along the Iranian border even as they regularly challenge eastern-based U.S. forces.

"We're seeing definite expanded strongholds," said a U.S. official who declined to be identified by agency. "That's not going to stop in 2008. . . . If anything, it's gaining momentum."

Northern Afghanistan, ethnically separate from the Pashtun-dominated Taliban, is still considered relatively peaceful, although officials regard a Nov. 6 suicide bombing in northern Baghlan province that killed more than 8o people -- most of them children -- as an ominous sign. Though U.S. intelligence officials initially questioned the Taliban's denial of responsibility, they now believe the bomb was the work of Hezb-e-Islami, a Taliban ally, even as suspicion has grown in Afghanistan that most of the deaths were caused by Afghan police officers responding to the explosion.

The former senior U.S. commander said suicide attacks are a "hugely effective tactic" that has been imported from Iraq to Afghanistan, terrorizing the population and convincing Afghans that the coalition cannot protect them. "The idea that [suicide bombs] are a sign of desperation, that's ludicrous," he said.

In Washington, Afghanistan policy has often seemed to be on the back burner since the 2003 invasion of Iraq. Republican presidential candidates rarely discuss it, while Democrats generally bring it up to criticize the administration, saying officials are paying too much attention to Iraq at the expense of a "forgotten" war.

President Bush seldom mentions Afghanistan. In White House remarks last month asking Congress for an additional $200 billion for both wars, he noted that "our troops, NATO allies and Afghan forces are making gains against the Taliban," then offered an extensive recounting of progress in Iraq.

To the extent that the administration has publicly described problems in Afghanistan, it has focused on the reluctance of NATO members to send more troops and the restrictions placed by some on the missions they can undertake. "In Afghanistan, a handful of allies are paying the price and bearing the burdens" for the rest of the 26-nation group, Defense Secretary Robert M. Gates said at a NATO meeting last month. "The failure to meet commitments puts the Afghan mission -- and with it, the credibility of NATO -- at real risk."

Gates has acknowledged that U.S. Marine commanders have appealed to him to speed their departure from Iraq for deployment in Afghanistan to address more pressing challenges there. The Special Operations Command has also been lobbying for a more active role along the Afghanistan-Pakistan border.

Several experts believe that the United States can no longer afford to leave the Pakistani military to clean up its side of the border. "Unless we resolve the safe-haven issue, this is not going to succeed," said Henry A. Crumpton, a CIA veteran who led the agency's successful 2001 Afghanistan campaign against the Taliban and al-Qaeda. "It's getting worse."

But others said the problem is not Pakistan or a lack of military or financial resources in Afghanistan. It is the absence, they say, of a strategic plan that melds the U.S. military effort with a comprehensive blueprint for development and governance throughout the country.

"There are plenty of dollars and a hell of a lot more troops there, by a factor of two, from when I was there," the former commander said. The question, he said, is "who owns the overarching campaign for Afghanistan, and what is it?"

Washington Post Staff Writer
Sunday, November 25, 2007; Page A01

They are a study in contrasts, the boss and her subordinate, two tax office workers who have been charged with stealing more than $20 million from District coffers.

Harriette Walters, 51, alleged to be the mastermind of the city's largest fraud by government workers, was the unusually generous but tough, hard-working "go-to" manager of the office responsible for property tax refunds.

Her staff member, Diane Gustus, 54, was different: a quiet "follower." In her daily dealings, she carried herself as someone who did as she was directed and little more, current and former colleagues said.

As federal authorities unravel the alleged scheme, contradictory portraits of these two women are slowly emerging, though many questions remain unanswered.

What would have motivated Walters to lead a double life, spending years building a strong reputation in the city's finance office and then allegedly stealing millions? And was Gustus, who had built a career as a city worker, a co-conspirator or a hapless employee who looked the other way as she enjoyed Walters's generosity? Or was she something in between?

In the midst of an investigation that authorities believe could identify even greater losses and possibly ensnare other employees, current tax workers were reluctant to talk to reporters about Walters and Gustus. Those who did asked that their names be withheld. Family members were also reluctant to be interviewed, but this much about the two is known:

Walters, who worked 25 years for the District, has been described as flamboyant and outspoken. She drove a convertible Mercedes-Benz, wore diamonds and designer clothing and didn't mind sharing the wealth -- gifts that co-workers said she told them she financed with the help of a family inheritance and from those times when she hit it big at the blackjack table.

Gustus, married with two adult children, was also known as a hard worker, a woman who had put in 37 years with the city. She also worked part time at a Sears department store.

It was Walters, Traynham said, who had the dominant personality.

"If I needed her to do something, I could rely on her to do it," she said of Walters. "She knew what she was doing. That was probably her downfall. When you know the system, you can take advantage of the system."

"Diane was a follower," Traynham said. "I don't think Diane would have thought to do something like that."

Sources knowledgeable about Walters's statements to investigators have said that she told FBI agents when they arrested her at her Northwest Washington home this month that Gustus was used in the scam.

"Harriette said she wanted people to do better than she did when she was coming up as a kid," he said. "From my understanding, her father passed away and left her money."

It was one of several explanations that Harriette Walters gave for her largess.

Walters's Early Life

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She was born in St. Thomas to a large family and had at least seven brothers and sisters. And it is true that her father worked for 43 years at Virgin Islands National Bank, now First Pennsylvania Bank, according to an obituary that appeared in the Virgin Island Daily News in 1989. Harriette is listed as an heir to the estate, but details could not be obtained. Her mother, Elaine, died in 1998, but her daughter is not listed as an heir. Both estates, however, are pending in probate court, according to a court clerk in the Virgin Islands.

Several family members declined to speak to The Washington Post for this story, including Richard Walters, 48, Harriette's younger brother, who is facing charges in the case. Richard's primary residence is in Bowie, where he owns a plumbing company. Last week, Richard Walters's home in St. Thomas, along with the St. Thomas home of another sibling, Cecilia Walters Smith, were raided by the FBI.

Classmates of several of Walters's siblings in the Virgin Islands said the family was known for its commitment to community service.

Walters's siblings. But few remembered much about Harriette Walters, whom several described simply as a "heavyset girl."

By the time Walters arrived in Washington, she had begun to transform. She started her government career as a clerk in the Department of Finance and Revenue in 1981 and worked her way up, becoming the manager of adjustments in 2004. Her salary rose by $8,000, to $78,564. She was making $81,000 when she was arrested.

Along the way, Walters became known as a woman who was uninhibited and capable.

Stanley Jackson, who was head of the Office of Tax and Revenue's Assessments Services Administration in the late 1990s, after the city was placed under the oversight of the D.C. financial control board, described Walters as a low-level worker who exuded confidence.

Another former colleague, who worked with Walters for two decades, said that she would boast of going on adventurous trips to Las Vegas. Walters was also a union steward for the American Federation of State County and Municipal Employees and ran unsuccessfully for vice president of Local 2776 in 1992.

"She was known as a character but very competent," said the former co-worker, who still works for the D.C. government. "Harriette would stand up in meetings and say, 'When are you going to fix this?' There might have been people who rolled their eyes, but I can't say they didn't like her."

Joan Williams Thomas met Walters in the late 1990s when Thomas had property tax problems. She waited for hours at the tax office before being told that no one would see her that day. She refused to go until Jackson, then Walters's boss, met with her. He introduced Thomas to his assistant, Harriette Walters. For the next eight hours, Jackson and Walters pored over computer files. During the next 18 months, Walters worked with Thomas to resolve her tax problems.

"I never had a cross word with her," Thomas said. "She could soothe the feathers off a duck."

Mastery of the System

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Walters and Gustus are accused of preparing property tax refund checks made out to sham companies. Others in the tax office have been implicated, but it is Walters's niece, Jayrece Turnbull, in jail in Maryland, who authorities describe as Walters's right hand. Turnbull, authorities said, deposited checks into the bank accounts of fake companies and then distributed the money to her aunt and others.

Walters knew her way around the system, including how to bypass a troublesome computer network that made it hard to process some refund checks. She found other ways to get taxpayers their money, including doing the paperwork manually. It was also the way she allegedly helped herself to the city's till.

Though she was known as a tough gatekeeper when it came to city funds, she didn't push her small staff to do the same. When Walters went to them with a voucher for a refund, they prepared it, according to court documents. Gustus, a tax specialist, signed off on at least 33 vouchers.

By the time Walters was arrested, she had deposited $8 million in her personal bank account and had three homes (two in New Jersey) valued at $2.3 million, according to court records. She purchased her primary home, a three-bedroom, three-bath rambler near Rock Creek Park, for $420,000 in 2000. It is assessed at $800,000.

Walters showered co-workers with gifts and money, sources said. At a D.C. Council hearing about the scandal, it was disclosed that authorities are even investigating whether Walters made loans to supervisors.

Sources said she appears to have lost a significant amount of money through gambling, including wagers at firehouse bingo parlors and charity-sponsored casino nights.

Walters also confided to friends that she was supporting a large extended family, sources said. "She was very generous and gave away so much money, in part because she wanted to be seen as a big person," one source said.

Cash Given to Gustus

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Walters gave Diane Gustus a lot of money, court records allege.

But according to those court papers, Gustus received far less than her superior throughout the scheme. For example, after a March 2005 check was cashed for $350,000, prosecutors allege, Walters collected at least $205,000, and Gustus received $10,000.

The records also allege that Gustus, whose city salary was $55,212, bought a 2006 GMC Envoy for $40,456 and paid off the loan a year later using several cashier's checks she received from Walters.

"A lot of employees were misled by" Walters, said Gustus's attorney, A. Scott Bolden, who contends that his client was simply doing her job. "They may not have asked questions because of friendships and the gifts that they received. But once they had a justification of family wealth and gambling proceeds, what else are you going to ask?"

Gustus grew up in Southeast Washington, the daughter of a truck driver and beautician. She graduated from Eastern Senior High School in 1971.

Her daughter and two other relatives work for the tax office. The daughter, Temika Gustus, a tax technician, declined to comment for the article.

Harriette Walters had also begun to talk about retiring, to the Virgin Islands, a co-worker said.

Bloomberg News
Saturday, November 24, 2007; Page D01

Freddie Mac, the second-largest U.S. mortgage-finance company, may report wider losses than it forecast as the slump in credit markets worsens, Moody's Investors Service said.

Freddie Mac, which reported a record loss of $2.03 billion in the third quarter this week, may have underestimated when it projected that 0.11 percent of the debt it guarantees will go bad in the next two years, Moody's analysts Brian Harris and Craig Emrick in New York said in a report Wednesday.

"Continued deterioration in the mortgage market, resulting in further decline in these books, may lead to credit losses in excess of their 11 basis point loss forecast," Harris and Emrick wrote.

Freddie Mac, based in McLean, said it expected credit losses to continue to increase into next year. The company and its larger sibling, Fannie Mae of the District, guarantee 40 percent of the $11.5 trillion U.S. home-loan market. The government-chartered companies have lost $57 billion in market value because of write-downs caused by record U.S. mortgage foreclosures.

In another report Wednesday, Credit Suisse analysts Moshe Orenbuch and Kerry Hueston wrote that Freddie Mac would take an "other than temporary" write-down of $1 billion to $5 billion on subprime mortgages in 2008, based on losses of up to 10 percent on the assets.

"We gave our estimates on Tuesday with our earnings, and we stand by those," said Sharon McHale, a Freddie Mac spokeswoman.

Freddie Mac shares, down more than 41 percent since Nov. 13 as concern about potential losses escalated, rose for the first time in seven days, climbing 47 cents, or 1.8 percent, to $26.47. Fannie Mae climbed $2.97, or 10 percent, to $32.20.

Freddie Mac reported $1.2 billion in provisions for credit losses and reduced the value of its assets by $3.6 billion. The company's $713.1 billion portfolio as of September included $105 billion of securities backed by subprime mortgages, the company said this week.

Fannie Mae on Nov. 9 reported a third-quarter loss of $1.39 billion, caused by a $2.24 billion decline in the value of derivatives and $1.2 billion in credit losses among the $2.7 trillion of mortgage assets Fannie Mae owns or guarantees.

Congress authorized the creation of Fannie Mae and Freddie Mac to increase mortgage financing by buying loans from lenders. They profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They record losses when defaults rise.

Washington Post Staff Writer
Saturday, November 24, 2007; Page A03

"Surround Yourself With Great People" was the title of a chapter in "Leadership," Rudolph W. Giuliani's best-selling celebration of his management style, but to critics of his performance in two terms as mayor of New York, it was an admonition he too often ignored.

"As he became more confident in his ability, he didn't need anything from others other than to be loyal to him," said Marilyn Gelber, who was ousted as Giuliani's environment commissioner in 1996. "The management style grew harder as time went on and as he grew more comfortable with the level of control he wanted."

Giuliani's close association with Kerik, especially his lobbying of the Bush administration three years ago to make his former associate the secretary of homeland security, threatens to undermine one of the central arguments of his candidacy for the Republican presidential nomination: that he is a superior leader who would bring to the White House high standards and a level of managerial acumen that many, including Republicans, say is missing under President Bush.

Giuliani's critics say that while he is justifiably praised for his leadership in the days after the Sept. 11, 2001, attacks, his advancement of Kerik, his former chauffeur, was part of a pattern of rewarding loyalty over competence in personnel decisions. "It's pretty clear that his judgment on political appointments was weighted more heavily to cronies and friends than to quality," said Harold Schaitberger, president of the International Association of Fire Fighters, which has endorsed Sen. Christopher J. Dodd (D-Conn.) for president and has turned sharply against Giuliani after supporting him early in his mayoralty. "Are we going to have a chairman of the Joint Chiefs of Staff who's a private first class but who happens to be a friend? Are we going to have a law clerk who becomes attorney general?"

The Giuliani campaign dismisses such criticisms, saying that Giuliani's judgment as a manager was vindicated by his administration's overall success in reducing crime and welfare and improving the city's quality of life and economy.

Hiring political allies for top jobs has a long history in city government, and Giuliani was hardly the first mayor of New York to bring along loyalists to be his advisers inside City Hall. What set him apart, observers say, was the extent to which he also emphasized loyalty in looking for people beyond those City Hall aides to run city agencies. And, given that he was taking over after years of Democratic rule, he was faced with a smaller pool of candidates who were both experienced and politically sympathetic. This became apparent as time wore on, said Dick Dadey, director of Citizens Union, a city watchdog group.

"When you start a new administration, you generally draw from a pool of extremely interested and well-qualified people who are eager to bring change," Dadey said. "As the first wave starts to move on, those who have been with you from the beginning and remain loyal to you start to move up, but they do not necessarily move up because they're the most qualified."

The police department exemplifies the shift. Giuliani hired as his first commissioner William J. Bratton, who made his reputation leading the Boston police and New York transit police but was also known for his self-promotion. After forcing Bratton out in 1996, when they clashed over claiming credit for the drop in crime, Giuliani passed over several department veterans and instead turned to his more strait-laced fire commissioner, Howard Safir, whom he knew from their days pursuing drug traffickers in the early 1980s. Safir was then with the U.S. Marshals Service, and Giuliani was with the Justice Department. "Howard and I go back 20 years," Giuliani said in announcing the move.

Safir presided over a continuation of the drop in crime. But he came under intense criticism after the fatal police shooting of an unarmed black man, for failing to provide adequate oversight of the police unit involved in the shootings and for his detached response. He also came under scrutiny for, among other things, taking a corporate jet to the Academy Awards shortly after the shootings, for assigning eight detectives to his daughter's wedding, and for sending officers to investigate a woman who rear-ended his wife's car.

To replace Safir as fire commissioner in 1996, Giuliani chose Thomas Von Essen, a rank-and-file firefighter who was far down the department's chain of command but headed the firefighters union local that backed Giuliani in 1993. Also in 1996, Giuliani selected a nationally known bioterrorism expert, Jerome Hauer, to head his new office of emergency management. But Hauer left in 2000, partly out of frustration with Giuliani's inability to get the police and fire departments to cooperate more.

Hauer said the limits of Giuliani's leadership team became clear to him after he returned at City Hall's request to help out after the Sept. 11 attacks and was startled to discover that neither Kerik nor Von Essen nor Sheirer had ever obtained federal security clearance, which made it hard for Hauer to discuss information he was receiving from Washington. Shortly afterward, Giuliani banished Hauer from Ground Zero after Hauer endorsed a Democrat to succeed the mayor.

Giuliani "had a blind spot when it came to people he knew well" and "very little respect for the vetting process," Hauer said. "The competent people in the administration all tended to leave because they got tired of the borderline-incompetent people who got in. He ran off the professionals because they were difficult to work with. If they didn't do things the way he wanted or overshadowed him, he got furious."

Fran Reiter, a deputy mayor under Giuliani, said most initial Cabinet hires came via a "very extensive search process," but the mayor was more likely to emphasize personal ties when it came to public safety jobs. Giuliani wanted ownership over that realm because of his law enforcement background, she said. And he worried that department veterans who he did not have ties with would have more allegiance to the departments than to him.

"These were areas where he just really wanted people whom he trusted and who were not going to do anything other than what he wanted them to do," she said.

Gelber, for one, argues that the latter definition applied to the Giuliani administration. She freely admits she got her job for political reasons -- she was chief of staff to the Brooklyn borough president, and to curry favor with him, a Democrat, Giuliani hired her as his first environment commissioner. At first, she was impressed with Giuliani's zeal to "look for new ideas and new ways of doing things," which included organizing thoughtful seminars on governance for Cabinet members.

But she grew disillusioned when she started getting pressure from City Hall to hire political supporters and fire those from the previous administration, including a secretary, as well as criticism for receiving too much praise in the newspapers for her work. Things came to a head, she said, when City Hall told her to hire an applicant for a key deputy post overseeing air quality who presented as his qualification some materials on his work for the Giuliani campaign, including a thank-you letter from the mayor.

Gelber eventually gave in but blew up at the deputy in 1996 after two asbestos incidents in which she says he failed to take charge. Giuliani fired her shortly afterward.