NEW YORK - Even on a steaming hot day such as descended on New York last Monday, the Middle East looks very far away from the office of James D. Wolfensohn, 29 stories above Sixth Avenue in Manhattan. Construction staff in work boots, wearing hip- hugging tool belts, are still working industriously to complete the renovations - Wolfensohn is renting the entire floor. That will happen very soon, at which time Wolfensohn, 73, who was president of the World Bank for 10 years (1995-2005) and then spent 11 months as the Middle East envoy of the Quartet (the United States, Russia, the European Union and the United Nations), will launch his new adventure. His sons are now working to raise $500 million to develop alternative fuel sources, and he will head up the vast new fund.

Wolfensohn's period in the Middle East has left its mark on him. He may have left Israel and the Palestinian territories at the end of April 2006, but Israel and the territories have not yet left him. Which is understandable.

An Australian-born American Jew, Wolfensohn arrived in the region three months before the Israeli withdrawal from the Gaza Strip, brimming with good intentions. His decade as head of the World Bank, his relaxed temperament and his intimate acquaintance with the leaders of the Quartet made him an ideal candidate for the post of special envoy. His father, who served with the Jewish Battalions in World War I, planted emotional ties to Zionism and the region in his heart.

Wolfensohn landed in the Middle East in May 2005 in order to monitor the Israeli disengagement from Gaza and to help heal the badly ailing Palestinian economy. In the beginning he was full of hope: He was able to raise $9 billion ($3 billion a year for three years) to bolster the Palestinian economy, and in November 2005, three months after the disengagement, he served as the mediator between Israel and the Palestinian Authority in negotiations on transit routes and on access to and from the Gaza Strip. He also donated money of his own to help the Palestinians buy Israeli-owned greenhouses in Gaza.

However, the departure of Ariel Sharon from the political arena in January 2006, the fact that Wolfensohn's efforts were constantly undermined by none other than the U.S. administration, and the rise of Hamas to power combined to derail his mission. At the end of April 2006, fed up with both the Israelis and the Palestinians, and after understanding that he would not get backing from the Quartet, he decided to pack it in. He returned to the United States, where he divides his time between Manhattan and Jackson Hole, Wyoming, and tried to leave the failed mission behind him.

For more than a year, Wolfensohn kept his feelings about his year in the Middle East to himself. He watched, appalled, as the disengagement plan failed and as violence continued to rage in the region. It was only after the recent takeover of the Gaza Strip by Hamas and the appointment of former British prime minister Tony Blair to the post he held that Wolfensohn agreed to speak on the record. Indeed, the impression is that he considers it his duty to do so.

Lost dreams

Even before he is asked about his reaction to Blair's appointment as the Quartet's emissary, Wolfensohn opens the conversation with something of a self-justification: "I don't think that when negotiations are going on at various different levels - and I'm reasonably well informed about what's going on - that intervention by a third party really adds much."

The current situation in the Middle East leaves him in despair. "I think it was certainly easier in that glowing moment when there appeared to be an agreement that would give hope to the Palestinians and security to the Israelis - and you need to have both. You need to have a secure Israel, which is very clear, and you need to have a Palestinian community that feels it can have hope. The polls show that Israelis and Palestinians have such a balance - they'd like to come to a deal on borders, they'd like to reach a situation in which each can get on with their lives and live side by side for centuries. I think the average person, whether it be Hamas or Fatah, or religious or not religious, would love to settle down and live.

"I think that there was a framework for that in the agreement that Condi [Condoleezza] Rice announced in my presence and in the presence of the European representative Javier Solana," Wolfensohn continues. "But in the months following, every aspect of the agreement was abrogated. In fact, the sadness of it is that the last remaining aspect - the opening to Egypt [via the border crossing] - has seen the international observers reducing their representation because of non-usage [of the terminal]. So all the dreams that we had then have now gone, and beyond that you now have an elected Hamas government and a split with Fatah and [PA Chairman] Abu Mazen, with a new prime minister, and you've got Hamas in Gaza. So we have an added difficulty in that we don't have two parties now, we have three. And one with whom neither of the other two wishes to deal."

However, in Wolfensohn's view, none of the sides can allow itself to observe from afar the new reality that has emerged in the region and to wait for it to change. "The reality is that you have 1.4 million Palestinians living in Gaza and you can't wish them away, you can't leave Gaza as a place where the rich and the intellectuals and the powerful can get out, and leave just the people who can't make a living - or can make a living if they could, but have no leadership. And military use or subjugation doesn't solve the problem, it seems to me."

It is Wolfensohn's view that "in the interest of Israel, in the interest of the Palestinians, there is a need to get things back to a situation where there is representation of all the Palestinian people in an entity that can deal with Israel to bring about, if Israel wishes, a two-state solution, which appears to be a thing Secretary [of State] Rice is now committed to." The situation, he says, cannot simply "be allowed to lie there, because just pretending that 1.4 million people can live in a sort of prison is not a solution at all. So I think it's going to require, on the part of Tony Blair or someone, some real negotiations to try and get this started."

Asked about another possible way out of the deadlock - with Israel taking the initiative and exerting pressure on the Palestinian population to rid itself of the Hamas leadership, or assassinating the organization's leaders in order to pave the way for Fatah to take control again - Wolfensohn shrugs his shoulders. "I'm not at all sure that Israel can determine what happens in Palestine, the Palestinian territories. There's been no evidence up to now that a decision taken by the Israelis will determine what the Palestinians do. I don't think personally that a military solution is a solution," he says dryly.

Corruption at

the crossings

Wolfensohn sounds hurt and disappointed as he describes the slide into violence after the disengagement from Gaza. "Part of the reason it happened, in my view, is that the conditions in Gaza deteriorated so terribly," he explains. "If you recall, in the time of the withdrawal there was a day or two of people looting, but within 48 hours it was under control. Things were peaceful in Gaza, and this was not because of a military presence of the Israelis. It was because the Palestinians recognized that if they want to have any hope, they need to be in a more peaceful mode."

He toured the Gaza Strip with Palestinian Authority Chairman Mahmoud Abbas (Abu Mazen) immediately after the PA asserted its authority there, and recalls a euphoric atmosphere that dissipated very quickly.

"I remember seeing the greenhouses with the chairman and looking at the fruits and everything, and there was a joyous atmosphere: 'Boy, we're about to get this going and we're going to have hotels by the beaches and we're going to have tourism and it's going to be fantastic, and the Palestinians really know how to be hosts.' But in the months afterward, first of all Arik [Sharon] became ill and the current prime minister came in, and there was a clear change of view."

At that time, Wolfensohn recalls, powerful forces in the U.S. administration worked behind his back: They did not believe in the border terminals agreement and wanted to undermine his status as the Quartet's emissary. The official behind this development, he says, was Elliot Abrams, the neoconservative who was appointed deputy national security adviser in charge of disseminating democracy in the Middle East - "and every aspect of that agreement was abrogated."

The non-implementation of the agreement naturally had serious economic consequences. According to Wolfensohn, the shattering of the great hope of normality, which the Palestinians experienced so deeply when the Israel Defense Forces and the settlers left the Gaza Strip, brought about the rise of Hamas. "Instead of hope, the Palestinians saw that they were put back in prison. And with 50 percent unemployment, you would have conflict. This is not just a Palestinian issue. If you have 50 percent of your people with no work, chances are they will become annoyed. So it's not, in my opinion, that Palestinians are so terrible; it is that they were in a situation where a modulation of views between one and the other became impossible.

"And you can blame the Palestinians because there were those among them who were firing rockets or you can blame the Israelis for overreacting," he continues. "But either way - whichever side you take - the situation that emerged was that you had 50 percent of the population frustrated, no resources, and a border which was corrupt on both sides. I saw it with my own eyes: Israelis and Palestinians, arm in arm, walking off together and clearly pricing how you could get your truck to the top of the line or get it through at all. It was an absolutely transparently corrupt system at the border - you had to buy your truck's way across. I thought it was a disgrace."

The issue of the greenhouses is especially painful to Wolfensohn because of his personal contribution to them. "Everything was rotting because you couldn't get the fruit. And if you went to the border, as I did many times, and saw tomatoes and fruit just being dumped on the side of the road, you would have to say that if you were a Palestinian farmer you'd be pretty upset. So my view is to try and not demonize the Palestinians. I'm not denying that there are Palestinians who fire rockets and do terrible things; I know that that happens. But to get a fundamental solution, you have to have hope on both sides."

Wolfensohn is not naive. He knows that the Hamas election victory in January 2006 did not derive only from the collapse of the border-crossings agreement after the disengagement, but also from the years-long corruption of the Fatah leadership. He says he cautioned Fatah representatives with whom he was in contact about this danger, but they ignored him.

"Fatah wasn't that popular at the time. A lot of people thought that the Fatah leadership was overpaid. The Palestinians, at least, did. They thought they had a dishonest leadership - not, I think, at the level of Abu Mazen, but at a ministerial level. They felt that there was an elite class that was taking advantage of the situation, and that the only way they could get some improvement was by electing a group that, at least at the time, was perceived as straightforward. My own opinion is that the decision to move to Hamas was partly ideological, but partly because of the failure of the Fatah leadership. I know that to be the case and so does everybody who was there." Wolfensohn had discussions with the Fatah leadership, he says, "but at the time they were pretty self-confident. If you look at [Mohammed] Dahlan, the people who were there, the informal leaders - there wasn't a lot of talk about Hamas ousting them."

Didn't they think it was a problem for them to drive their shiny Mercedes through refugee camps?

Wolfensohn: "I thought it was and said so many times. It's not only that, it's also the building of the big houses, the private armies. They said their polls showed that they'd win. What can you do? I'm an outsider. For any outsider there's a level to which you cannot penetrate."

Even though Wolfensohn identified the danger already then - in contrast to many observers and commentators, who see America's insistence on holding democratic elections in the PA as the factor that enabled Hamas to become so strong - he does not view this as a mistake. "I think that's a very hard question to answer, because although it's pretty clear that the tide had turned in terms of support for Hamas, there had been a promise of elections. I think probably that I, too, would have taken the position to press on, in the hope that the outcome might have been different."

Surprised by Bush

James Wolfensohn was born in Sydney, Australia in 1933. He is a graduate of the faculty of law of the University of Sydney, was the captain of the Australian fencing team at the 1956 Olympic Games in Melbourne, and served as an officer in the Royal Australian Air Force. After the Olympics he entered Harvard Business School, emerging with an MBA. He was then employed briefly by the Swiss-based cement company Holderbank (now Holcim), before returning to Australia and working in a number of banking firms, specializing in investments.

His principal employer in this period was the investment bank J. Henry Schroders. He served as a senior executive in the institution's London headquarters before becoming the managing director of its New York branch, a post he held from 1970 until 1976. Afterward Wolfensohn held a senior position with Salomon Brothers, the Wall Street investment bank.

In the 1970s, he became friends with the cellist Jacqueline du Pre and began to study the instrument with her when he was 41. He continues to take this hobby seriously and performs on various occasions. Wolfensohn says that if peace is ever attained between Israel and the Palestinians, he has an agreement in principle with Ehud Barak ("I like Ehud Barak, but that's largely because he's a pianist") and with a Palestinian violinist to give a joint concert.

Wolfensohn became an American citizen in 1980 and was already then considered a candidate to head the World Bank, after the tenure of Robert McNamara. When this did not happen, he established an investment firm bearing his name, and devoted much of his time to philanthropic activity. Among other public service activities, he was chairman of Carnegie Hall in New York and of the John F. Kennedy Center for the Performing Arts in Washington.

In 1995, he was nominated by then-U.S. president Bill Clinton to be president of the World Bank, and won the unreserved support of the bank's board. His term was unanimously extended for another five years in 2005, making him the third person to hold the presidency for two consecutive terms (after Eugene Black and McNamara). During his term of office, Wolfensohn placed the emphasis on changing the institution's organizational culture, focusing attention not only on making loans, but also on creating economic growth in the Third World and reducing the rate of poverty throughout the world. He was surprised, he says, that President George Bush let him continue as president of the World Bank, instead of appointing one of his people to the post.

"No Democratic appointee kept his job, and he wanted to put in [Paul] Wolfowitz, so it was clear to me that I couldn't stay a day longer at the World Bank," he reveals. "It was very clear that it wasn't personal. It was practice. But they then asked me if I'd take on this other term, which was hugely unusual and I have no I idea why it happened. I was very surprised, and delighted."

'Small print'

According to James Wolfensohn, the major blame for the failure of his Middle East mission lies with him. "I feel that if anything, I was stupid for not reading the small print," he admits. "I was never given the mandate to negotiate the peace." The mandate he received, he says - which is identical to the one Tony Blair has now been given - was solely to try to improve the economic situation in the territories and to improve the Palestinians' situation in general, whereas he naively thought that this included intervention to advance peace.

"To be quite honest with you, I was so anxious to try to help. I was getting out of the World Bank, and I thought, you know, this is a good place to start. I was full of ideas and good intent, and everybody would see me and they would all discuss the peace process with me. I was given enough rope so that I could go to the G7 [meetings of finance ministers from seven industrialized nations] and see any leader that I wanted, and when I got out of the bank I just continued, not because of the need to see them, but because I thought this job was pretty good, because I was really helping to do something that I was keenly interested in."

In 2005, Wolfensohn's access to the G7 leaders may have made it easier for him to extract from them a commitment for a $9-billion package to ameliorate the situation of the Palestinian economy. However, he says, afterward Condoleezza Rice and Elliot Abrams made it very clear to him that intervention in peace negotiations was not within his purview. "I had to fight my way into the November [2005] meeting when Secretary Rice announced the six-point plan. I was there with Javier Solana when it was announced, and what I didn't realize was that that was the death penalty, because after that the Israelis and the Americans took apart that agreement one by one, and I knew less and less what was happening. And my team of 18 people was fired. So I was left with no office and no people, and even though they asked me to stay on, it was pretty clear to me that the only thing to do was to get out."

Asked whether the disengagement plan was not one big mistake, because of its unilateral character and because Israel has been attacked relentlessly from the Gaza Strip since its implementation, Wolfensohn waxes nostalgic for Ariel Sharon. "I don't think it was a mistake, if it had been followed by the second part of the disengagement - to create a self-sustaining entity that could be the first step to Palestinian statehood that could allow the Palestinians to live their lives and develop a sense of national integrity. That was an opportunity that was missed, and at the heart of it was Arik [Sharon]. He was an unlikely negotiator of peace because of his record, but I have to say that personally I found him very pragmatic. I can't say that he was fond of Palestinians, but he knew that for the future, you couldn't have an Israel full of Palestinians. That demographic imperative made it essential that there would be some kind of two-state solution."

Sharon, Wolfensohn continues, "was hugely suspicious of me, as he was of the Quartet, but in the end he accepted me and I think I knew what was in his mind. I think he saw the Gaza withdrawal as a very positive thing. When Condi [Rice] came over for those meetings in November [2005], he and I at that stage were becoming pretty good friends. He got up from the table where he was sitting with Condi - and that's something he never did - came across to my table and gave me a hug. He was prime minister, so it was for me to [rise to] greet him, but he did it in a very obvious way. I think personally that he had the strength and the standing, and in my opinion the determination to move through with the two-state solution.

"I don't blame [Prime Minister Ehud] Olmert. He doesn't have the strength or the leadership that Arik had. Arik, as you remember, confronted the nation and said, 'If you want to attack someone, attack me.' Ehud [Olmert] has not had the standing and his popularity is quite low," Wolfensohn adds, smiling.

"I have no doubts that I may have made tactical, strategic mistakes, but the basic problem was that I didn't have the authority. The Quartet had the authority, and within the Quartet it was the Americans who had the authority. It was not a Quartet decision to close the office," he explains, in a very unsubtle hint. "There was never a desire on the part of the Americans to give up control of the negotiations, and I would doubt that in the eyes of Elliot Abrams and the State Department team, I was ever anything but a nuisance."

Not such a big deal

Wolfensohn is convinced that he was also perceived as a nuisance by Olmert and by Dov Weissglas, Sharon's close adviser, who stayed on in the initial period after Sharon was incapacitated by a stroke. Wolfensohn feels that he may have been able to wield influence in matters of little importance, but that he did not have access to the real decision makers after Sharon's departure. "I was mature enough to understand that at the main gate, I had no position," he says.

"My worry for Tony Blair is that if you read the mandate he has - it's exactly the same as mine. It talks about helping both sides, helping the Palestinians, but there's nothing there about negotiating peace. I would only hope that there's a greater mandate given to him, because even with the superior standing that he has over the standing I had, if he doesn't have a mandate ... If halfway through the negotiations your office is closed and someone takes over the negotiations, you have to say you failed," Wolfensohn says, breaking into loud, bitter laughter.

Did you speak with Blair after his appointment?

"I have no comment on that."

How do you assess his chances?

"Better than mine were. He is closer to George Bush. He was prime minister. I do not believe there's much time. I think it is difficult. But we're fortunate to have somebody with experience."

Precisely because he views himself as an analyst who observes the global arena from a bird's-eye view, Wolfensohn is convinced that the Palestinians - and even more, the Israelis - cannot allow themselves to waste time. He also disputes the prevailing concept in the region, which holds that the Israeli-Palestinian conflict is central to the future of the world.

"In the end, both sides have to recognize that they are 11 million people in a sea of 350 million Arabs," Wolfensohn says, and goes on to illustrate the proportions numerically: "Over the last four years, the war in Israel and Palestine has cost the international community - including military expenditure - somewhere between $10 and $20 billion. The Iraq war has cost $600 billion. The Afghanistan war has cost between $50 billion and $100 billion. You have a nuclear threat in Iran, you have the issue of Syria and which way it goes, and you have a doubling of the Arab population in something like between 10 and 15 years. So instead of 350 million, there will be 700 million. Israel may grow from six million to eight million, if they're lucky, or nine million.

"There has to be a moment when Israelis and Palestinians understand that they are a sideshow," Wolfensohn continues. "The real global politics is the politics of war and the politics of nuclear weaponry and the weight of the population. In the Western press the Israeli-Palestinian conflict gets a lot of coverage, but you should see the press in the developing countries, as I did when I visited more than 140 countries: It's not such a big deal there. I don't see any way to argue that Israel's position is improving."

Wolfensohn carefully avoids giving a reply to the question of whether the continuation of the conflict and the worsening of Israel's situation are liable to produce a regime with apartheid characteristics. At the same time, he notes that Israel has for some time been suffering from a brain drain, and adds that when the country reaches junctures of major decisions, the strength of the security establishment always overcomes that of the civil forces in society.

"The expenses on military and intelligence in Israel are probably greater than in any democracy I know of, and I can understand that, given the situation, but as a continuing characteristic of the country, I don't think it's hopeful. To me it is so bloody sad that all the creativity you have in Israeli youth has to go through this experience in the army, risking their lives," Wolfensohn says, casting his gaze far beyond Central Park. "Israeli youth finish high school and spend two-three years in the army, and then go to Thailand and other places and smoke pot to get over it, then come back and start their lives when they're 24. I don't think that's an ideal way for the next generation of Israel to live their lives."

Did your mission in Israel change the way you perceive Zionism and Israel?

"No. I still believe in that. But Israelis and Palestinians really should get over thinking that they're a show on Broadway. They are a show in the Village, off-off-off-off Broadway. I hope I don't get into too much trouble for saying this, but what the hell, that's what I believe, and I'm 73." W