On Oct. 10, Pakistani-American businessman Mansoor Ijaz dropped a bombshell: Pakistani President Asif Ali Zardari, he alleged, had offered to replace Pakistan's military and intelligence leadership and cut ties with militant groups in the wake of Osama bin Laden's killing in Abbottabad.

Ijaz also alleged in his op-ed in the Financial Times that Zardari communicated this offer by sending a top secret memo on May 10 through Ijaz himself, to be hand-delivered to Adm. Michael Mullen, then chairman of the Joint Chiefs of Staff and a key official managing the U.S.-Pakistan relationship. The details of the memo and the machinations Ijaz describes paint a picture of a Zardari government scrambling to save itself from an impending military coup following the raid on bin Laden's compound, and asking for U.S. support to prevent that coup before it started.

Mullen, now retired, denied this week having ever dealt with Ijaz in comments given to The Cable through his spokesman at the time, Capt. John Kirby.

"Adm. Mullen does not know Mr. Ijaz and has no recollection of receiving any correspondence from him," Kirby told The Cable. "I cannot say definitively that correspondence did not come from him -- the admiral received many missives as chairman from many people every day, some official, some not. But he does not recall one from this individual. And in any case, he did not take any action with respect to our relationship with Pakistan based on any such correspondence ... preferring to work at the relationship directly through [Pakistani Army Chief of Staff] Gen. [Ashfaq Parvez] Kayani and inside the interagency process."

Mullen's denial represents the first official U.S. comment on the Ijaz memo, which since Oct. 10 has mushroomed into a huge controversy in Pakistan. Several parts of Pakistan's civilian government denied that Ijaz's memorandum ever existed. On Oct. 30, Zardari spokesman Farhatullah Babar called Ijaz's op-ed a "fantasy article" and criticized the FT for running it in the first place.

"Mansoor Ijaz's allegation is nothing more than a desperate bid by an individual, whom recognition and credibility has eluded, to seek media attention through concocted stories," Babar said. "Why would the president of Pakistan choose a private person of questionable credentials to carry a letter to U.S. officials? Since when Mansoor has become a courier of messages of the president of Pakistan?"

On Oct. 31, Ijaz issued a long statement doubling down on his claims and threatened to reveal the "senior Pakistani official" that purportedly sent him on his mission. Ijaz quoted Gordon Gekko from the movie Wall Street: Money Never Sleeps, telling Zardari and his staff, "If you stop telling lies about me, I might just stop telling the truth about you."

The Pakistani press has given credence to Ijaz's story because it was published in the Financial Times. "The FT is not likely to publish something which it cannot substantiate if it was so required, so any number of denials and clarifications by our diplomats or the presidency will only be for domestic consumption and would mean nothing," wrote one prominent Pakistani commentator.

This is only the latest time that Ijaz has raised controversy concerning his alleged role as a secret international diplomat. In 1996, he was accused of trying to extort money from the Pakistani government in exchange for delivering votes in the U.S. House of Representatives on a Pakistan-related trade provision.

Ijaz, who runs the firm Crescent Investment Management LLC in New York, has been an interlocutor between U.S. officials and foreign government for years, amid constant accusations of financial conflicts of interest. He reportedly arranged meetings between U.S. officials and former Pakistani Prime Ministers Benazir Bhutto and Nawaz Sharif.

He also reportedly gave over $1 million to Democratic politicians in the 1990s and attended Christmas events at former President Bill Clinton's White House. Ijaz has ties to former CIA Director James Woolsey and his investment firm partner is Reagan administration official James Alan Abrahamson.

In the mid-1990s, Ijaz traveled to Sudan several times and claimed to be relaying messages from the Sudanese regime to the Clinton administration regarding intelligence on bin Laden, who was living there at the time. Ijaz has claimed that his work gave the United States a chance to kill the al Qaeda leader but that the Clinton administration dropped the ball. National Security Advisor Sandy Berger, who served under Clinton, has called Ijaz's allegations "ludicrous and irresponsible."

Then Assistant Secretary of State for African Affairs Susan Rice, now the U.S. ambassador to the United Nations, has previously acknowledged that Ijaz brought the Clinton administration offers of counterterrorism cooperation from Sudan but said that actual cooperation never materialized.

So why is Ijaz's story so popular in Pakistan, despite his long history of antagonizing the Pakistani government with such claims? According to Mehreen Zahra-Malik, who wrote about the Ijaz scandal on Oct. 29 in Pakistan's The News, it's all part of the culture of secrecy and conspiracy in Pakistani politics that the current civilian and military leadership in Islamabad has only continued to foster.

"When secrecy and conspiracy are part of the very system of government, a vicious cycle develops. Because truth is abhorrent, it must be concealed, and because it is concealed, it becomes ever more abhorrent. Having power then becomes about the very concealment of truth, and covering up the truth becomes the very imperative of power -- and the powerful," she wrote. "The end result: a population raised on a diet of conspiracy."

Attempts to reach Ijaz for comment were unsuccessful.

President Obama opined on Chinese currency legislation, Pakistani double dealing, and the European debt crisis during his Thursday morning press conference, which was supposed to focus on his jobs bill. Here are the foreign policy highlights of his remarks.

On Chinese currency manipulation:

Obviously we've been seeing a remarkable transformation of China over the last two decades, and it's helped to lift millions of people out of poverty in China. We have stabilized our relationship with China in a healthy way. But what is also true is that China has been very aggressive in gaming the trading system to its advantage and to the disadvantage of other countries, particularly the United States. And I have said that publicly but I've also said it privately to Chinese leaders.

And currency manipulation is one example of it, or at least intervening in the currency markets in ways that have led their currency to be valued lower than the market would normally dictate. And that makes their exports cheaper and that makes our exports to them more expensive. So we've seen some improvement, some slight appreciation over the last year, but it's not enough.

It's not just currency, though. We've also seen, for example, you know, intellectual property, technologies that were created by U.S. companies with a lot of investment, a lot of up-front capital, taken, not protected properly, by Chinese firms. And we've pushed China on that issue as well. Ultimately, I think that you can have a win-win trading relationship with China. I'm very pleased that we're going to be able to potentially get a trade deal with South Korea. But I believe what I think most Americans believe, which is trade is great as long as everybody is playing by the same rules.

On the legislation to penalize currently manipulation currently being considered by Congress:

My main concern -- and I've expressed this to Senator Schumer -- is whatever tools we put in place, let's make sure that these are tools that can actually work, that they're consistent with our international treaties and obligations. I don't want a situation where we're just passing laws that are symbolic, knowing that they're probably not going to be upheld by the World Trade Organization for example, and then suddenly U.S. companies are subject to a whole bunch of sanctions. We've got a -- I think we've got a strong case to make, but we've just got to make sure that we do it in a way that's going to be effective.

Last point is, my administration has actually been more aggressive than any in recent years in going after some of these practices. We've brought very aggressive enforcement actions against China for violations in the tire case for example, where it's been upheld by the World Trade Organization that they were engaging in unfair trading practices, and that's given companies here in the United States a lot of relief.

So, you know, my overall goal is, I believe U.S. companies, U.S. workers, we can compete with anybody in the world. I think we -- we can make the best products. And a huge part of us winning the future, a huge part of rebuilding this economy on a firm basis -- that's not just reliant on, you know, maxed-out credit cards and a housing bubble and financial speculation, but is -- is dependent on us making things and selling things -- I am absolutely confident that we can win that competition. But in order to do it, we've got to make sure that we're aggressive in looking out for the interests of American workers and American businesses, and that everybody's playing by the same rules, and that we're not getting -- getting cheated in the process.

On Pakistan's hedging strategy:

With respect to Pakistan, I have said that my number-one goal is to make sure that al-Qaida cannot attack the U.S. homeland and cannot affect U.S. interests around the world. And we have done an outstanding job, I think, in going after directly al-Qaida in this border region between Pakistan and Afghanistan. We could not have been as successful as we have been without the cooperation of the Pakistan government. And so on a whole range of issues, they have been an effective partner with us.

What is also true is that our goal of being able to transition out of Afghanistan and leave a stable government behind -- one that is independent, one that is respectful of human rights, one that is democratic -- that Pakistan I think has been more ambivalent about some of our goals there. And you know, I think that they have hedged their bets in terms of what Afghanistan would look like, and part of hedging their bets is having interactions with some of the unsavory characters who they think might end up regaining power in Afghanistan after coalition forces have left.

What we've tried to persuade Pakistan of is that it is in their interest to have a stable Afghanistan; that they should not be feeling threatened by a stable, independent Afghanistan. We've tried to get the conversations between Afghans and Pakistans (sic) going more effectively than they have been in the past. But we've still got more work to do. And there is no doubt that there's some connections that the Pakistani military and intelligence services have with certain individuals that we find trouble (sic). And I've said that publicly and I've said it privately to Pakistani officials as well.

On the Pakistan-India relationship:

[The Pakistanis] see their security interests threatened by an independent Afghanistan, in part because they think it will ally itself to India, and Pakistan still considers India their mortal enemy. Part of what we want to do is actually get Pakistan to realize that a peaceful approach towards India would be in everybody's interests and would help Pakistan actually develop -- because one of the biggest problems we have in Pakistan right now is poverty, illiteracy, a lack of development, you know, civil institutions that aren't strong enough to deliver for the Pakistani people. And in that environment you've seen extremism grow. You've seen militancy grow that doesn't just threaten our efforts in Afghanistan but also threatens the Pakistani government and the Pakistani people as well.

So trying to get that reorientation is something that we're continuing to work on. It's -- it's not easy.

On cutting off aid to Pakistan:

You know, we will constantly evaluate our relationship with Pakistan, based on, is overall this helping to protect Americans and our interests?  We have a great desire to help the Pakistani people strengthen their own society and their own government. And so, you know, I'd be hesitant to punish, you know, aid for flood victims in Pakistan because of poor decisions by their intelligence services. But there's no doubt that, you know, we're not going to feel comfortable with a long-term strategic relationship with Pakistan if we don't think that they're mindful of our interests as well.

On the European debt crisis:

The biggest headwind the American economy is facing right now is uncertainty about Europe, because it is affecting global markets. The slow-down that we're seeing is not just happening here in the United States: It's happening everywhere. Even in some of the emerging markets like China you're seeing greater caution, less investment, deep concern.

I speak frequently with Chancellor Merkel and President Sarkozy. They are mindful of these challenges. I think they want to act to prevent a sovereign debt crisis from spinning out of control, or seeing the potential breakup of the euro. I think they're very committed to the European project. But their politics is tough because, essentially, they've got to get agreement with not only their own parliaments, they've got to get agreement with 20 parliaments, or 24 parliaments, or 27 parliaments. And engineering that kind of coordinated action is very difficult.

You know, but what I've been seeing over the last month is a recognition by European leaders of the urgency of the situation. And nobody's, obviously, going to be affected more than they will be if the situation there spins out of control. So I'm confident that they want to get this done. I think there are some technical issues that they're working on in terms of how they get a big enough -- how do they get enough fire power to let the markets know that they're going to be standing behind euro members whose -- you know, who may be in a weaker position. But they've got to act fast.

And we've got a G-20 meeting coming up in November. My strong hope is that by the time of that G-20 meeting, that they have a very clear, concrete plan of action that is sufficient to the task.

The NSC is getting a new Pakistan director following the departure of Shamila Chaudhary, who left this last week after over a decade in government to join the private sector. She will be replaced by career Foreign Service officer Dawn Schrepel, who most recently worked for former Deputy Secretary Jim Steinberg as his special assistant on South and Central Asia issues.

Chaudhary gave up one job to take two new ones, starting today as an analyst for the Eurasia Group as well as senior South Asia Fellow at the New America Foundation. She worked for years as a self-described backbencher at the State Department, before catching Secretary of State Hillary Clinton's attention after the two debated the wisdom of engaging non-governmental centers of power in Pakistan. Soon afterwards,  Clinton promoted her to State Department's policy planning staff. She had joined the NSC in April 2010.  

"We are thrilled that Shamila is joining our South Asia team at New America," New America President Steve Coll said in a release. "She has worked all of the hard issues on the inside of government and yet retains a fresh, creative, energized and inter-disciplinary perspective. "

"I am delighted to welcome Shamila to the firm," said Eurasia Group Head of Research David Gordon in another release. "Her analytical strength and depth of regional expertise will be a true asset to our Asia coverage."

By choosing Schrepel as Chaudhary's replacement, the NSC can maintain its links to the State Department on Pakistan issues, especially with the office of Special Representative for Afghanistan and Pakistan Marc Grossman. Chaudhary was a key interlocutor between the NSC and SRAP.

Grossman will be in Pakistan Tuesday for a meeting with his Pakistani and Afghan counterparts.

Schrepel has a solid reputation and, although she is not seen as a Pakistan expert per se, she was posted in Karachi for a year. She reports to Jeff Eggers, the active duty Navy SEAL who was recently was named senior director for Afghanistan and Pakistan following the retirement of Bush administration holdover John Tien.

Eggers now leads a team of six directors at the NSC -- three on Pakistan, three on Afghanistan. On Pakistan, there's Schrepel, Phil Reiner from OSD Policy, and Tamanna Salikuddin. The Afghanistan directors are Abigail Friedman, Stan Byers, and Jeff Hayes.

All of them still report up to Gen. Doug Lute, the deputy national security advisor for Iraq and Afghanistan, who is still in place despite months of reports that he was on the way out. The Washington Post's Al Kamen reported last week that Lute told his staff he is staying "indefinitely." We're told that the White House has had trouble finding a suitable replacement for Lute, who still represents a valuable link to the military. Meanwhile, Lute seems content to keep up with the daily grind of Af-Pak policy despite the fact that he has never been a core member of the Obama clique.

Meanwhile, there's still no permanent replacement for departed India Senior Director Anish Goel. His job is being done for the time being by Acting Senior Director Michael Newbill, who accompanied Clinton on her recent trip to India. Newbill reports to Special Advisor Dennis Ross, and India remains on an entirely different bureaucratic branch from Af-Pak in the NSC, as it does at the State Department.

The House Foreign Affairs Committee is set to mark up a fiscal 2012 State Department and foreign assistance authorization bill July 20, which proposes sweeping changes to the security assistance provided to several governments that have rocky relationships with the United States.

The draft version of the bill, obtained by The Cable, would prevent the allocation of any funds that fall under the State Department's jurisdiction to the government of Pakistan until the administration can reassure Congress that Pakistan is assisting with the investigation into who helped hide Osama bin Laden, a step that will include making bin Laden's relatives available to the U.S. government. Islamabad must also demonstrate that it is not holding up visas for U.S. personnel who are set to go to Pakistan and not diverting U.S.-provided weapons for purposes other than fighting terrorists along the Afghanistan-Pakistan border.

That would effectively defund the Kerry-Lugar aid program, which allocated $1.5 billion in fiscal 2012 and another $400 million in foreign military financing. $800 million in U.S. aid was also suspended earlier this month -- but those funds came from the Pentagon's coffers, not the State Department.

The bill would also prohibit the use of any State Department funding to assist the government of Lebanon until the White House certifies to Congress that no member of Hezbollah or any other terrorist group serves in a policy position in the Lebanese government -- a step that would currently be impossible, because Hezbollah is a major coalition partner in the current government. The Obama administration would also need to certify that Lebanon's security services are free from Hezbollah members, that all Lebanese government ministries are financially transparent, and that the Lebanese government is dismantling all foreign terrorist organizations, which includes Hezbollah

In other words, no foreign military financing or international military education and training (IMET) funding for Lebanon would be permitted if this bill, authored by HFAC Chairwoman Ileana Ros-Lehtinen (R-FL), were to become law.

Similar restrictions on funding for the Palestinian Authority (PA) make it equally unlikely that any State Department assistance to the Palestinian Authority would be allowed. The bill would condition the aid on the president certifying that the PA is doing several things, including that they have "halted all anti-Israel incitement in Palestinian Authority-controlled electronic and print media and in schools, mosques, and other institutions it controls, and is replacing these materials, including textbooks, with materials that promote tolerance, peace, and coexistence with Israel."

Funding for Yemen would also face a series of difficult restrictions, including the stipulation that the president must certify that the Yemeni government "is not complicit in human rights abuses." Hundreds of protesters have been killed since the 5-month old uprising against President Ali Abdullah Saleh, who is still recovering in Saudi Arabia.

Ros-Lehtinen's bill doesn't stop at restricting foreign assistance to countries that have fraught relations with the United States. The bill would also set into law that it "shall be the policy of the United States to uphold and act in accordance with all of the reassurances provided by the President in an April 14, 2004, letter to the Prime Minister of Israel."

That's a direct swipe at Obama's May 19 declaration that Israeli-Palestinian peace negotiations should be based on 1967 borders with agreed swaps. The bill would also require the State Department to relocate the U.S. embassy in Israel to Jerusalem.

On China, Ros-Lehtinen's bill would call for a U.S. consulate in Tibet and a Tibet interest section in the U.S. embassy in Beijing. It would also eliminate the East-West Center in Hawaii, a think tank studying U.S.-China relations, and prohibit funding for the U.S.-China Center of Excellence on Nuclear Security that the two countries agreed to establish in January.

The bill also includes language on reinstating the "Mexico City Gag Rule," which would prevent funding for any non-governmental organization that discusses abortion. Republican members of HFAC are also expected to introduce amendments on everything from the United Nations to Libya.

Of course, the bill could change before Wednesday's markup. In fact, this is only the latest of several drafts that have been provided to The Cable over the last couple of weeks. We're told that this draft is close to what the final version that will be presented to the committee.

But that doesn't mean the bill will become law any time soon. Assuming the House leadership gives the bill floor time, it would still have to be reconciled with a version being drafted by the Senate. And the Senate Foreign Relations Committee, led by John Kerry (D-MA), isn't about to put forward a bill that contains such dramatic limits on the Obama administration's foreign policy.

HFAC staffers insist that they want to devise a strategy for their bill to become law by working with the Senate.

The last time a State Department authorization bill actually became law was 2005, although the House did pass one in 2009. Regardless, insiders see the bill as guidance for House appropriators, who plan to mark up the State Department and foreign assistance appropriations bill July 27. That bill could actually become law if Congress ever resolves the current budget crisis and tackles government funding levels for next year.

For those readers out there who aren't budget geeks, the authorization bill simply sets out policy and is not binding when it comes to dollar amounts. The appropriations bill sets funding, and as such actually places money in the State Department's coffers.

And for those out there who are budget geeks, give this a closer look. If you find any other noteworthy provisions, e-mail your humble Cable guy (and budget geek) at josh.rogin@foreignpolicy.com.

One of the most prominent, remaining Obama administration justifications for continuing the war in Afghanistan is the need to squash the threat of attacks on the U.S. But top administration officials don't believe there has been a terrorist threat coming from Afghanistan since at least 2004.

"The goal that we seek is achievable, and can be expressed simply: no safe-haven from which al Qaeda or its affiliates can launch attacks against our homeland, or our allies," President Obama said in his Wednesday evening speech to the nation, where he promised to withdraw 10,000 troops this year and all 33,000 surge troops by next summer.

In a conference call with reporters earlier Wednesday, a "senior administration official" said no terrorist threat from Afghanistan has been present for 7 or 8 years, well before the Obama administration surged troops there in 2009.

"On the threat side, we haven't seen a terrorist threat emanating from Afghanistan for the past seven or eight years. There has been clearly fighting and threats inside of Afghanistan, but the assessment of anywhere between 50, 75 or so al Qaeda types that are embedded in Haqqani units, basically, tactical fighting units inside of Afghanistan, they are focused inside Afghanistan with no indication at all that there is any effort within Afghanistan to use Afghanistan as a launching pad to carry out attacks outside of Afghan borders," the official said. "The threat has come from Pakistan over the past half-dozen years or so, and longer."

Later in the same conference call, the "senior administration official" repeated the administration's view that there's no terrorist threat coming from Afghanistan and used that assumption to argue there will be no danger in removing the surge troops.

"And so, in taking a look at the drawdown of U.S. troops, the 10,000 this year and then the 33,000 by next summer, it is certainly the view of the people who have been prosecuting this effort from the administration that this is not going to increase the threat," the official said. "Again, we don't see a transnational threat coming out of Afghanistan in terms of the terrorist threat and it's not going to affect at all the threat in Pakistan either."

Of course, if the Taliban regain control of Afghanistan, that could all change. Obama's GOP critics were quick to criticize the president for talking extensively about wrapping up the war and apparently going against the advice of ISAF Commander Gen. David Petraeus.

"When America goes to war, America needs to win. We need to close out the war successfully, and what that means now is not nation-building. What it means is to follow General Petraeus's advice and to get those security forces built up where they can pick up the slack as we draw down," said GOP presidential candidate Tim Pawlenty.

"I think we have undercut a strategy that was working." Sen. Lindsey Graham said on CNN. "I think the 10,000 troops leaving this year is going to make this fighting season more difficult. Having all of the surge forces leave by next summer is going to compromise next summer's fighting season."

For those on both the left and right who wanted Obama to withdraw from Afghanistan even more quickly, the acknowledgement that no terrorist threat exists there only reinforces their argument for a speedy exit.

"Our troops have done everything we've asked them to. They've routed the Taliban, dismantled Al Qaeda, and facilitated democratic elections," said GOP candidate Jon Huntsman. "Now it is time we move to a focused counter-terror effort which requires significantly fewer boots on the ground than the President discussed tonight."

"It has been the hope of many in Congress and across the country that the full drawdown of U.S. forces would happen sooner than the President laid out - and we will continue to press for a better outcome," said House Speaker Nancy Pelosi (D-CA).

Meanwhile, former officials and experts complained that Obama's speech seemed to acknowledge that the U.S. will never be able to prevent the Taliban from playing a role in Afghanistan's future, but failed to spell out a diplomatic solution that addresses how to incorporate the Taliban into the Afghan government.

"I would have liked to have heard much more from him about a diplomatic strategy," Vali Nasr, a former top advisor to the late Richard Holbrooke, said on MSNBC immediately following the speech. "If you cannot end the war militarily, the only other way the war is going to go away is through some kind of deal in which the protagonists agree to a peace settlement. And we haven't done much of that. It hasn't been part of the debate about sending the troops in and it hasn't been a part of the debate of pulling troops out."

"Ultimately wars are fought on battlefields, but they have to finish around the table, and the administration hasn't really outlined how it is going to get there," Nasr said.

SINGAPORE - Political reconciliation talks with the Taliban could begin as early as this winter, but only if the U.S. keeps up the military pressure and convinces the Taliban they are losing the war, Defense Secretary Robert Gates said Saturday

"There is a generally accepted view that nearly all conflicts of this kind eventually come to a close with some kind of a political settlement, but the reality is, in my view, that the prospect of a political settlement does not become real until the Taliban and the others... begin to conclude that they cannot win militarily," Gates said following his remarks here at the 10^th annual IISS Shangri-La Security Dialogue.

After 15 months of ejecting the Taliban from their home territories in the regions of Helmand and Kandahar, the momentum is on the side of the Afghan government and the NATO coalition, but if there's a military pullback, the prospects for negotiations decrease, he said.

"If we can sustain those successes, if we can further expand the security bubble, we have enough evidence that the Taliban are under pressure and that their capabilities are being degraded, that perhaps this winter the possibility of some kind of political talks or reconciliation might be substantive enough to offer some hope of progress," said Gates.

The Obama administration is devising a strategy for the way forward in Afghanistan referred to internally as "Plan 2014" that may call for U.S. troop reductions beginning this year. But Gates, who leaves office July 1, is warning against such a pullback.

"My own view is that the political opportunities will flow from military pressure. And only as long as the military pressure is kept on and there are further gains, will the prospects for a political solution improve," he said.

Gates reiterated the U.S. position that any reconciliation with the Taliban must include their agreement to sever ties with al Qaeda, agree to adhere to the Afghan constitution, and lay down their arms. But he acknowledged that the Taliban are here to stay.

"The Taliban are probably a part of the political fabric of afg at this point and can... potentially have a political role in the future of that country," said Gates.

Sen. John McCain (R-AZ), the ranking Republican on the Senate Armed Services Committee, told The Cable in a Saturday interview that he totally agreed with Gates's assessment and would continue to press for heavy military pressure to continue.

"It's very simple. What motivation would the Taliban have to talk if they think they're winning. It clearly is a situation where if they think that they losing... then they will be willing to have serious talks," McCain said.

But McCain admitted that whatever progress has been made militarily in Afghanistan, problems remain with the effort in Pakistan, the relationship with Afghan President Hamid Karzai, and corruption in the Afghan government

"If they had good government, they probably wouldn't have the insurgency in the first place," McCain said.

Senate Foreign Relations Committee chairman John Kerry (D-MA) returned on Tuesday from a trip to Pakistan where he had two somewhat conflicting missions: deliver Congress's tough love message to Islamabad and chart a path forward for mending government-to-government relations.

Kerry gave a long readout of his trip to all Democratic senators on Tuesday at their weekly caucus lunch meeting, after which multiple Democratic senators reported they were more determined than ever to use foreign aid as leverage to pressure Islamabad to go after America's enemies living in their midst.

"Kerry notified [the Pakistani government] that there are some serious problems with their continuing to harbor terrorists like the Haqqani network," Senate Armed Services Committee chairman Carl Levin (D-MI) said upon emerging from the lunch meeting. "He brought forcefully to the attention of Pakistan that their continuing support and harboring of the Haqqanis is creating a big problem for continuing any kind of financial support."

Levin has long called for Pakistan to take stronger action against the Islamic extremist groups in South Waziristan, which include the Quetta Shura, led by Mullah Omar. But now he is ready to put America's money where his mouth is by threatening to link such action to U.S. aid and he thinks he has his caucus' support behind him.

"I believe there is strong feeling inside the Democratic group of senators that the continued harboring of the Haqqani network and the Quetta Shura by the Pakistanis represents a real problem in terms of continuing financial support to Pakistan," Levin said.

Earlier this month, Levin told The Cable that he wants to continue certain types of military aid that are in direct support of the U.S. mission in Afghanistan but wants to more heavily condition economic aid -- such as the $1.5 billion in annual funds provided under the Kerry-Lugar-Berman legislation signed into law last year.

Levin's committee has some sway, but the rubber meets the road at the Appropriations Committee, where Sen. Patrick Leahy (D-VT) chairs the subcommittee that dispenses foreign aid. Leahy has long been a critic of U.S. economic aid to Pakistan.

"There are three areas of the world I'm reviewing for the appropriations bill where we may have some significant changes. That's one of the three areas," Leahy told The Cable on Tuesday.

Kerry is now in the uncomfortable position of defending ties with Pakistan. He made a robust case for continued strong relations in Tuesday morning's SFRC hearing on Pakistan with former National Security Advisor Jim Jones.

"As much as some people have reached a level of impatience or serious evaluation about where we are and where we're going, it's very clear to me that we need to be really careful and thoughtful so as to get the policy right, so as to not lose the progress that has been made," Kerry said.

Kerry said at the hearing that he conveyed the angst in Washington regarding Pakistan's behavior to top Pakistani officials and emphasized that "this relationship will not be measured by words or by communiques after meetings like the ones that I engaged in; it will only be measured by actions," he said.

To that end, Pakistan agreed to return the tail of the downed "secret" helicopter from the Navy SEALs raid on Osama bin Laden's compound, Kerry said, and expressed hope of more progress. Special Representative Marc Grossman is due to visit Pakistan later this week and Secretary of State Hillary Clinton is scheduled to go there soon, but that planning is in flux.

SFRC ranking Republican Richard Lugar (R-IN) sounded a note at the hearing similar to Levin's.

"The Obama administration should make clear to Pakistan's military that going after some terrorists while coddling others will not be tolerated," he said. "It should also communicate that the Pakistani military's deliberate fomenting of anti-American demonstrations to oppose U.S. initiatives and Pakistan's own civilian leadership is not acceptable."

Several senators at the hearing complained about providing aid to Pakistan while the country's citizens continue to vilify the United States.

"I'll be interested to hear what Senator Kerry has to say about these items that are -- that are non-aid items, because frankly, I'm getting tired of it, and I think Americans are getting tired of it as far as shoveling money in there to people who just flat don't like us," said Sen. James Risch (R-ID).

"The one thing I'd say to you, Senator, is that right now we have about 100,000 reasons for worrying about our relationship with Pakistan, and they're called our young men and women, and they're in uniform in Afghanistan," Kerry responded.

As Congress contemplates cutting U.S. aid to Pakistan in light of the discovery that Osama bin Laden had been hiding there for years, the funds most at risk from disgruntled lawmakers are those currently allocated to the civilian government that is more sympathetic to Washington, rather than the money going to the Pakistani military, which is more wary of ties to the United States.

This irony is not lost on senior U.S. lawmakers who are thinking about scaling back promises of economic assistance. Most vulnerable are the funds promised under the Kerry-Lugar-Berman aid package, which total $7.5 billion over five years.

Top senators admit that the civilian government led by President Asif Ali Zardari has staked a lot of its credibility on its decision to stand by Washington. But many in Congress say that the United States needs the Pakistani military to help it fight the war against the Taliban and al Qaeda, so they're more reluctant to cut this funding.

"The part that I'm most skeptical of is the economic part, the 5 year Kerry-Lugar plan," Senate Armed Services Committee chairman Carl Levin (D-MI) told The Cable in a Tuesday interview.

Levin's committee has control of the Pakistani Counterinsurgency Capability Fund, which goes directly to the Pakistani military, but he won't cut that funding in his authorization bill.

"It's not a matter of which part of the government to support, it's the mission or activities that are in our interest. And the military pieces that we're supporting, which is reimbursement of their costs for supporting our effort in Afghanistan plus training their military on the border, that's clearly in our interest," Levin said.

He said it's also in the U.S. interest for Pakistan to develop into a stable democracy that can provide for itself -- but that's not the most pressing issue at the moment.

"Sure, that's also in our interest but not as clearly," said Levin. "Plus, the money is much more easily transferable on the economic side than on the military side."

Several top senators, including Senate Appropriations Subcommittee on State and Foreign Ops chairman Patrick Leahy (D-VT), also want to scale back the Kerry-Lugar-Berman funding because they don't feel it's being wisely spent or that the oversight is in place.

Two lawmakers who have called for a review of the Kerry-Lugar-Berman funding in the wake of the bin Laden killing are Sen. Richard Lugar (R-IN) and Rep. Howard Berman (D-CA), two of the three authors of the legislation. As leaders on the Senate Foreign Relations Committee and House Foreign Affairs Committee, they play a role in authorizing the funds each year.

"Very little of the money has been spent -- only $179 million has been allocated from the $1.5 billion this year -- largely because we never worked out the accountability of the money, who in Pakistan would spend, how we would audit what they were doing, nor have we agreed on the projects," Lugar told The Cable in a Tuesday interview.

"We've made very little headway," Lugar said, although he added that he is among those who want to keep up ties with both Pakistan's military and civilian officials.

"We have to stay engaged and we've been through this before," he said. "We need to find ways to have a better rapport with Pakistan."

Berman has criticized the administration's decision to certify that Pakistan "demonstrated a sustained commitment towards combating terrorism," a requirement under the Kerry-Lugar-Berman aid bill passed last year. He wants the administration to use the money as leverage to pressure the Pakistanis to more aggressively go after militant groups.

Sen. Robert Menendez (D-NJ) told The Cable on Tuesday that he would soon send a letter to President Barack Obama demanding that funds to Pakistan be cut off if the administration can't stand by that certification.

According to the most recent chart compiled by the Congressional Research Service (PDF), the U.S. government has given Pakistan $20.7 billion in aid since fiscal 2002, and is requesting another $2.9 billion for Pakistan in next year's budget.

From that total, $14.2 billion has gone to the Pakistani military, primarily for coalition support funding, reimbursement for counterterrorism operations, and foreign military. Of the $6.5 billion in aid to Pakistan that has gone to the civilian side, $4.8 billion was provided to "economic support funds," and the rest was spread out between programs such as food aid and international disaster assistance.

UPDATE: Berman's spokesperson Gabby Adler writes in to clarify Berman's position on the aid:

Ranking Member Berman is primarily concerned about security assistance for Pakistan. The section 203 certification made by the Secretary of State applies to security assistance, not civilian assistance, and Mr. Berman maintains that strengthening Pakistan's civilian government and democratic institutions remains one of the few ways to ensure a long-term, healthy relationship with that country.

U.S. officials had been frustrated by Pakistan's refusal to cooperate in the mission to apprehend Osama bin Laden for over 10 years, according to government documents released Thursday by the National Security Archive.

"As the discovery of Osama bin Laden in Abbottabad, Pakistan, raises fresh questions about U.S.-Pakistan relations, newly released documents show that as early as 1998 U.S. officials concluded the Government of Pakistan ‘is not disposed to be especially helpful on the matter of terrorist Usama bin Ladin,'" stated the release on the website of the National Security Archives, which is housed at the George Washington University.

"According to previously secret U.S. documents, Pakistani officials repeatedly refused to act on the Bin Laden problem, despite mounting pressure from American authorities. Instead, in the words of a U.S. Embassy cable, Pakistani sources ‘all took the line that the issue of bin Ladin is a problem the U.S. has with the Taliban, not with Pakistan.'"

The archives posted six new documents obtained through a Freedom of Information Act request, as part of its Osama bin Laden File. The documents date from 1998 to 2000 and therefore do not represent the policies of the current Pakistani government led by President Asif ali Zardari, nor Pakistan's policies following the 9/11 attacks. But they do show a history of deep distrust between the United States and Pakistan in the early years of the war against the Taliban and al Qaeda, despite efforts by former President Bill Clinton's administration to convince Pakistan to help bring bin Laden to justice.

According to an Aug. 21, 1998 internal memo written by then Assistant Secretary of State for South Asia Affairs Karl F. Inderfurth, the Pakistani government tried to distance itself from U.S. strikes on an al Qaeda target in Afghanistan that year, which were a response to the U.S. embassy bombings in Kenya and Tanzania.  "The most sincere reaction of the government of Pakistan to the Bin Laden strikes is exasperation at the unneeded difficulties this event has created for them in dealing with their domestic political situation, and in particular, in keeping the religious parties happy and relatively off the street," he wrote.

According to internal State Department talking points from November 1998, continued efforts to exert pressure on the Taliban to expel bin Laden, including efforts to convince Pakistan to put pressure the Taliban, were unsuccessful. "Time for a diplomatic solution may be running out," the memo stated.

After Clinton met with then Pakistani President Nawaz Sharif in Washington on Dec. 2, 1998, the U.S. embassy in Islamabad sent a diplomatic cable Dec. 18 that communicated their impression that the Pakistani government "is not disposed to be especially helpful on the matter of terrorist Usama bin Ladin." The cable also quoted a news article it claimed was sourced to the Pakistani government, which warned of a U.S. military or clandestine strike to get bin Laden. The article said that the Pakistani government does "not want to have anything to do with Washington's anti Osama crusade."

U.S. officials continued to press Pakistan on bin Laden throughout 1999, but got little positive response. A May 1999 diplomatic cable sent from the U.S. embassy in Islamabad expressed continued frustration with Pakistan's handling of the bin Laden issue. Top Pakistani officials told their U.S. interlocutors that they were taking the bin Laden issue seriously, but they did not know where he was and did not believe he was planning to attack the United States. One Pakistani official was quoted as admitting that Pakistan was preoccupied with "the recent increase in Indo-Pakistani tensions over Kashmir."

By November 2000, following the attack on the USS Cole and less than a year before the 9/11 attacks, the level of frustration had increased such that Under Secretary of State Thomas Pickering opened a meeting with Pakistani officials "by expressing disappointment that Pakistan, whom he called a good friend of the U.S., was not taking steps to help with Usama bin Ladin," according to a diplomatic cable.

Foreshadowing the unilateral raid on May 1 inside Pakistan that ended with bin Laden's death, Pickering warned the Pakistanis that the United States "would always act to protect U.S. interests at a time and place of its own choice."

Only days after the killing of Osama bin Laden, the Senate will begin a series of hearings to assess the progress in Afghanistan and Pakistan and the way forward in the war on al Qaeda.

Senate Foreign Relations Committee (SFRC) chairman John Kerry (D-MA) announced the hearings Monday, framing them as a forum "to debate the end-state in Afghanistan, assess the strategic relationship between the United States and Pakistan, and examine regional implications." The hearings have been planned for some time, but the killing of bin Laden gives them new focus and increased importance, he said.

"The killing of Osama bin Laden closes an important chapter in our war against extremists who kill innocent people around the world," Kerry said in a statement. "A single death does not end the threat from al Qaeda and its affiliated groups and highlights the need to thoroughly evaluate our strategy in Afghanistan and Pakistan. We need to make certain we are asking tough questions about the direction and effectiveness of our policy."

Kerry has been an integral part of the administration's Afghanistan and Pakistan diplomacy. He was personally dispatched to mend ties with Afghan President Hamid Karzai in October 2009, and traveled to Lahore, Pakistan, in February to defuse tensions over the killing of two Pakistanis by CIA contractor Raymond Davis. Kerry was also there to negotiate the terms of Davis's release.

The committee's ranking Republican, Sen. Richard Lugar (R-IN), echoed Kerry's concerns about the lingering danger of al Qaeda in a statement on Sunday night, in which he said "the death of Osama bin Laden is welcome news, but it in no way eliminates the threat from the terrorism he espoused."

On Tuesday, the SFRC will hear testimony on Afghanistan from Council on Foreign Relations President Richard Haass, former State Department Policy Planning Director Anne-Marie Slaughter, and Ronald Neumann, president of the American Academy of Diplomacy.

On May 5, the committee will shift its focus to Pakistan and will hear from Samina Ahmed, South Asia project director at the International Crisis Group, Moeed Yusuf, South Asia adviser at U.S. Institute of Peace's Center for Conflict Analysis and Prevention, and Michael Krepon, co-founder and senior associate for South Asia at the Stimson Center. More hearings will be announced soon, a committee spokesman said.

Secretary of State Hillary Clinton also struck a cautious note in her Monday remarks on bin Laden's death.

"Continued cooperation will be just as important in the days ahead, because even as we mark this milestone, we should not forget that the battle to stop al Qaeda and its syndicate of terror will not end with the death of bin Laden," she said. "Indeed, we must take this opportunity to renew our resolve and redouble our efforts."

The State Department is giving the Pakistan Counterinsurgency Capability Fund (PCCF) back to the Pentagon for the rest of the year, as part of the budget deal struck between Congress and the administration to avert a government shutdown.

The budget deal took $8.5 billion away from the State Department and foreign operations for the remainder of fiscal 2011. The administration had requested $1.2 billion in the State Department's budget for PCCF this year, but the new budget deal cuts that request by $400 million and transfers the remaining $800 to the Defense Department, under what DOD calls the Pakistani Counterinsurgency Fund (PCF).

The Pentagon was in fact the original owner of that fund. But transferring the money as well as the program's management to Foggy Bottom was a key part of Secretary of State Hillary Clinton's plan to assert more State Department control of foreign military assistance programs.

The State Department may have agreed to give up the fund out of convenience. By moving the remaining $800 million of PCCF funding back to DOD, State managed to remove about 10 percent of the total $8.5 billion in budget cuts, thereby saving several other programs.

For next year's budget, State has requested $1.0 billion for PCCF, but nobody knows whether or not that money will be given to State or DOD. State perhaps has a better chance of keeping the PCCF money in fiscal 2012, as opposed to fiscal 2011, because next year the money is being requested as emergency war funding and therefore does not have to fit under the regular budget limits.

Overall, the PCCF funding is one piece of a larger puzzle in which State is competing with DOD for authorities and programs that both have a role in. If the PCCF funding is any indication, these decisions are now largely being made to fit budget realities, and are less a result of considerations over which agency is best suited to manage which issue.

"It looks like the transfer of responsibility for Pakistan counterinsurgency programs from DOD to State, which the Congress wanted to do, has been delayed," said Gordon Adams, former Office of Management and Budget director for national security spending, now a professor at American University. "Could be it was easier to fund the program this way, which sets a bad precedent for the future."

President Barack Obama held his monthly White House meeting on Afghanistan and Pakistan on Wednesday morning with a new roster of officials in attendance.

Past White House Af-Pak meetings have included a wide range of national security officials, but with both U.S.-Afghanistan and U.S.-Pakistan relations at a low point, today's group was expanded to include top officials from the Justice Department, the Treasury Department, and several new members of the administration.

Attorney General Eric Holder and attended the meeting for the first time. Other officials who are new additions to the roster include new White House Chief of Staff Bill Daley, the new special representative for Afghanistan and Pakistan, Marc Grossman, the new deputy secretary of State, Thomas Nides, head of the Office of the Defense Representative in Islamabad (via video conference), Vice Adm. Michael LeFever, and Deputy Ambassador to Afghanistan Tony Wayne (via video conference).

Returning officials in the room included Secretary of State Hillary Clinton, Defense Secretary Robert Gates, U.N. Ambassador Susan Rice, National Security Advisor Tom Donilon, Director of National Intelligence James Clapper, counterterrorism advisor John Brennan, Deputy NSA Denis McDonough, Under Secretary of Defense for Policy Michele Flournoy, CIA Director Leon Panetta, USAID Administrator Rajiv Shah, Joint Chiefs Chairman Adm. Michael Mullen, Joint Chiefs Vice Chairman James Cartwright, Afghanistan Ambassador Karl Eikenberry, Pakistan Ambassador Cameron Munter (via video conference), Deputy NSA Tony Blinken, CENTCOM Commander Gen. James Mattis, Commander, ISAF Commander Gen. David Petraeus, (via video conference), and NSC Coordinator for Af-Pak Doug Lute, and Deputy Treasury Secretary Neal Wolin.

Munter and LeFever have been intensely involved in the diplomatic crisis caused by the arrest in Lahore of CIA contractor Raymond Davis, which has stalled U.S.-Pakistani strategic cooperation. The Pakistani courts rejected Davis' claim on immunity Wednesday. Petraeus, Wayne, and many others have been dealing with the fallout of the accidental killing of 9 Afghan boys in Afghanistan's Pech Valley by U.S. forces Tuesday.

"We are deeply sorry for this tragedy and apologize to the members of the Afghan government, the people of Afghanistan and, most importantly, the surviving family members of those killed by our actions. These deaths should have never happened," Petraeus said on Wednesday.

A host of top U.S. military officials held a secret day-long meeting with Pakistan's top military officers on Tuesday in Oman to plot a course out of the diplomatic crisis that threatens the U.S.-Pakistan relationship.

The United States was represented by Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, Gen. David Petraeus, commander of International Security Assistance Force (ISAF), Adm. Eric Olson, commander of U.S. Special Operations Command, and Marine Corps Gen. James Mattis, commander of U.S. Central Command, Stars and Stripes reported. The Pakistani delegation included Gen. Ashfaq Parvez Kayani, Pakistan's chief of army staff, and Maj. Gen. Javed Iqbal, director general of military operations.

The meeting was planned long ago and covered various aspects of the U.S.-Pakistani relationship, but a large portion was dedicated to the diplomatic crisis surrounding Raymond Davis, the CIA contractor who was arrested in Lahore, Pakistan, last month after fatally shooting two armed Pakistani men.

"Where do you go to think seriously and bring sanity to a maddening situation? Far from the madding crowd to a peaceful Omani luxury resort of course. So that's what the military leadership of the US and Pakistan did," wrote Gen. Jehangir Karamat in a read out of the meeting obtained by The Cable and confirmed by a senior Pakistani official. Karamat is a former chief of Pakistan's army, and also served as Pakistan's ambassador to the United States from 2002 to 2004.

"The US had to point out that once beyond a tipping point the situation would be taken over by political forces that could not be controlled," Karamat wrote about the meeting, referring to the reported split between the CIA and the Pakistani Inter-services Intelligence (ISI) that erupted following the Davis shooting.

In Oman U.S. officials implored the Pakistani military to step up its involvement in the Davis case, following the Pakistani government's decision to pass the buck to the judicial system on adjudicating Davis' claim of diplomatic immunity. However, their concerns also went beyond this most recent diplomatic spat.

"[T]he US did not want the US-Pakistan relationship to go into a free fall under media and domestic pressures," Karamat wrote. "These considerations drove it to ask the [Pakistani] Generals to step in and do what the governments were failing to do-especially because the US military was at a critical stage in Afghanistan and Pakistan was the key to control and resolution."

"The militaries will now brief and guide their civilian masters and hopefully bring about a qualitative change in the US-Pakistan Relationship by arresting the downhill descent and moving it in the right direction."

A senior Pakistani official confirmed the accuracy of Karamat's analysis to The Cable. The official said that the Davis incident would hopefully now be put on a path toward resolution following a feeding frenzy in the Pakistani media, which has reported on rumors of an extensive network of CIA contract spies operating outside of the Pakistani government's or the ISI's knowledge.

"The idea is to find a solution whereby the Davis incident does not hijack the U.S.-Pakistan relationship," the official said. The most probable outcome, the official explained, is that Davis would be turned over to the United States, following a promise from the U.S. government to investigate the incident.

The United States would also compensate the families of the two Pakistani men killed by Davis, and a third man who died after two other U.S. embassy personnel ran him over while racing to the scene of the shooting. Negotiations between U.S. officials and the family members are already underway, the official said.

Shuja Nawaz, director of the South Asia Center at the Atlantic Council, said that it was the responsibility of the Pakistani Foreign Ministry, led until recently by Shah Mahmood Qureshi, to resolve the Davis case. Qureshi was removed as Foreign Minister after reportedly refusing to go along with the government's plan to grant Davis immunity.

"It's really the Foreign Ministry's responsibility," said Nawaz, "But in the absence of action by the civilian government, if the military can help persuade them to resolve this matter and find the way, that's all for the better."

But once the Davis case is resolved, there's still much work to be done in repairing the relationship between the CIA and the ISI. The ISI is widely suspected of airing its anger with the CIA in both the Pakistani and U.S. media. The latest example was Wednesday's Associated Press story that featured a never-before released ISI "statement" that said the Davis case was putting the entire ISI-CIA relationship in jeopardy.

The CIA and the ISI are talking, the Pakistani official said, but the path toward reconciliation will be a long one.

"It's a spy game being played out in the media and the CIA has told the ISI to cut it out," the official said. "The relationship remains testy. But after the meeting between Mullen and Kayani the likelihood of some resolution has increased."

Inside the Pakistani government, the Davis case has exacerbated internal tensions between the civilian government, led by President Asif Ali Zardari, and the ISI. Pakistani news agencies have been reporting that the Pakistani embassy in Washington has approved hundreds of visas for American officials without proper vetting, increasing the ease with which covert CIA operatives could enter the country.

Pakistan's Ambassador to Washington Husain Haqqani has denied that any visas had been issued from his embassy without proper authorization. An analysis of Pakistani visas granted to U.S. government employees, conducted by the Pakistani government, shows there has been no significant increase in the number of visas issued since 2007.

Regardless, the gentlemen's agreement between the ISI and the CIA that the two organizations would keep each other informed on each other's actions in Pakistan has now broken down.

"It's a vicious circle. Davis was in Pakistan because Pakistan can't be trusted. But Davis getting caught has increased the mistrust," the Pakistani official said. "Their interests are no longer congruent. Eventually the ISI and the CIA will have to work out new rules of engagement."

Senate Foreign Relations Committee Chairman John Kerry (D-MA) is in Pakistan, but not only to negotiate the release of an American diplomat imprisoned there. Kerry's trip was designed to reset U.S.-Pakistan relations, which have been strained by recent events.

"We have many mutual interests. And that's what brings me here," Kerry said at a press conference upon arriving in Lahore on Tuesday, the city where U.S. diplomat Raymond Davis was arrested on Jan. 27 after fatally shooting two Pakistani men. The U.S. government has been demanding Davis be released from prison because, as an employee of the embassy there, he has diplomatic immunity. Kerry said that rescuing Davis, however, wasn't the focus of his visit.

"I'm here, because in the middle of events that seem to be focusing people narrowly, we need to remember and think about the things that we care about and that we're both fighting for the bigger, the bigger strategic interests," Kerry said. "And we cannot allow one thing or another that might divide us in a small way to take away from the things that unite us in a big way."

Behind the scenes, a high-level government source familiar with the discussions said that Kerry crafted the trip and his message on his own. President Obama asked Kerry to travel to Pakistan to deal with the Davis crisis, which has put elements of U.S.-Pakistani cooperation on hold. But after conferring with senior foreign policy aides and Pakistani Ambassador Husain Haqqani over the weekend, Kerry decided to travel to Pakistan for a "relationship saving" mission, not a "rescue" mission, the source explained.

For example, Kerry decided to travel first to Lahore, rather than Islamabad where the Pakistani government resides. Although he will meet with Pakistani government officials at the highest levels, including President Asif Ali Zardari, he wanted first to deliver a message to the Pakistani people directly in the town where the incident took place and tell them directly that the United States wasn't only interested in Davis's release.

"Senate Foreign Relations Committee Chairman John Kerry left last night for Pakistan where he will meet with senior Pakistani government officials to reaffirm U.S. support for the strategic relationship between the two countries," committee spokesman Frederick Jones told The Cable.

Kerry told the White House before he left that he was not going solely to secure the release of Davis specifically, but to establish a path out of the crisis and ensure other areas of critical cooperation remained on track, the high-level government source said.

The reaction in Pakistan to Kerry's opening press conference among officials supportive of the relationship was overwhelmingly positive.

"He said all the right things on Pakistan," a senior Pakistani official told The Cable. "John Kerry is recognized by most Pakistanis as a friend of Pakistan. By sending him, President Obama has really helped what could have become a bigger diplomatic problem down the road."

The trip comes after a severe downturn in U.S.-Pakistan relations following Davis's arrest. Davis, a former Special Forces operative who speaks fluent Urdu, was being tailed by two suspected agents of Pakistan's Inter-Services Intelligence organization on motorcycles when he shot and killed them through the windshield of his car. Davis claimed they brandished guns. A third Pakistani man was run over and killed by a U.S. embassy vehicle accidentally as it rushed to the scene.

The State Department has always maintained that Davis has diplomatic immunity but has been unclear on what his actually job was in Pakistan. The State Department said on Monday that Davis was a member of the "technical and administrative staff" at the U.S. Embassy in Islamabad and that he had been temporarily assigned to the consulate in Lahore.

The shooting has become a national scandal in Pakistan and an international crisis due to a combination of circumstances and political gamesmanship by opponents of the Zardari government inside Pakistan. When Davis was arrested, the Punjabi police did not write on his arrest forms that he claimed diplomatic immunity, a Pakistani government source said.

This source told The Cable that the region around Lahore is run by the brother of Nawaz Sharif, the top political opponent to Pakistani President Asif Ali Zardari, and the authorities there might have sought to take political advantage of the situation. By claiming that Davis had committed murder and pushing the story out to Pakistani media, Zardari was placed in the unenviable position of having to choose whether to defend an American murderer or risk the wrath of his countrymen.

Foreign Minister Shah Mahmood Qureshi happened to be out of the country at the time. A Foreign Ministry official named Salman Bashir was left to make the decide whether to grant Davis immunity right away but decided it would be politically prudent to make no decision at all and let Davis remain in jail, the Pakistani government source said. Unclear messages from the U.S. side exacerbated the confusion.

"The political tragedy was that it was almost three days before the U.S. government claimed immunity, by which time the tensions had already been inflamed," the source explained.

It should be clear to the Zardari government that because Davis was on the U.S. embassy diplomatic list, he has immunity as a matter of international law under the Vienna Convention and should be released. But they are likely trying to avoid absorbing the political fallout of releasing him by passing the buck to the Pakistani courts, who will hear arguments about the Davis case on Feb. 17.

Meanwhile, the Davis debacle has stalled some U.S.-Pakistan cooperation. Secretary of State Hillary Clinton canceled her scheduled meeting with Qureshi at the recent Munich Security Conference and the U.S. postponed a planned trilateral meeting between top officials from the U.S., Pakistan, and Afghanistan.

National Security Advisor Tom Donilon is personally involved in trying to secure Davis's release. Haqqani has denied reports that Donilon threatened to kick him out of the country if Davis wasn't release,, but the White House has told the Pakistani government the issue must be resolved before full cooperation can resume.

The most probable outcome will be a face-saving deal whereby the Pakistani courts agree to release Davis, the U.S. government promises to investigate the incident as a criminal matter, and the U.S. pays some compensation to the families of the Pakistani victims.

In the end, the incident illustrates that the U.S. and Pakistani governments still have a ways to go in terms of working together to build stability into the relationship.

Either way, our Pakistani source said that there is plenty of blame to go around.

"[Davis] was wrong in carrying the gun. He was wrong in shooting the people. There definitely was some craziness in what he was doing," the source said. "But it's a clear and gross violation of international law to hold a diplomat."