Recent Cloak and Dagger Happenings

Bruce Schneier attempts to untangle the news that the NSA has been reading Iranian codes, and that Ahmed Chalabi informed the Iranians. In doing so, he runs across the massive difficulties of attempting to analyze an intelligence happening. Indeed, what follows is practically useless, unless you enjoy this cat and mouse stuff like I do...
As ordinary citizens without serious security clearances, we don't know which machines' codes the NSA compromised, nor do we know how. It's possible that the U.S. broke the mathematical encryption algorithms that the Iranians used, as the British and Poles did with the German codes during World War II. It's also possible that the NSA installed a "back door" into the Iranian machines. This is basically a deliberately placed flaw in the encryption that allows someone who knows about it to read the messages.

There are other possibilities: the NSA might have had someone inside Iranian intelligence who gave them the encryption settings required to read the messages. John Walker sold the Soviets this kind of information about U.S. naval codes for years during the 1980s. Or the Iranians could have had sloppy procedures that allowed the NSA to break the encryption. ...

Whatever the methodology, this would be an enormous intelligence coup for the NSA. It was also a secret in itself. If the Iranians ever learned that the NSA was reading their messages, they would stop using the broken encryption machines, and the NSA's source of Iranian secrets would dry up. The secret that the NSA could read the Iranian secrets was more important than any specific Iranian secrets that the NSA could read.

The result was that the U.S. would often learn secrets they couldn't act upon, as action would give away their secret. During World War II, the Allies would go to great lengths to make sure the Germans never realized that their codes were broken. The Allies would learn about U-boat positions, but wouldn't bomb the U-boats until they spotted the U-boat by some other means...otherwise the Nazis might get suspicious.

There's a story about Winston Churchill and the bombing of Coventry: supposedly he knew the city would be bombed but could not warn its citizens. The story is apocryphal, but is a good indication of the extreme measures countries take to protect the secret that they can read an enemy's secrets.

And there are many stories of slip-ups. In 1986, after the bombing of a Berlin disco, then-President Reagan said that he had irrefutable evidence that Qadaffi was behind the attack. Libyan intelligence realized that their diplomatic codes were broken, and changed them. The result was an enormous setback for U.S. intelligence, all for just a slip of the tongue.
There are also cases when compromised codes are used... The Japanese attack on Midway was extraordinarily complex, and it relied on completely surprising the Americans. US cryptanalysts had partially broken the Japanese code, and were able to deduce most of the Japanese attack plan, but they were missing two key pieces of information - the time and place of the attack. They were able to establish that the target of the attack was represented by the letters AF, and they suspected that Midway was a plausible target. To confirm that Midway was the target, the US military sent an uncoded message indicating that the island's desalination plant had broken down. Shortly thereafter, a Japanese message was intercepted indicating that AF would be running low on water. However, such clarity in intelligence coups like this is quite rare, and the Iranian news is near impossible to decipher. You get stuck in a recursive and byzantine "what if" structure - what if they know we know they know?
Iranian intelligence supposedly tried to test Chalabi's claim by sending a message about an Iranian weapons cache. If the U.S. acted on this information, then the Iranians would know that its codes were broken. The U.S. didn't, which showed they're very smart about this. Maybe they knew the Iranians suspected, or maybe they were waiting to manufacture a plausible fictitious reason for knowing about the weapons cache.
So Iran's Midway-style attempt to confirm Chalabi's claim did not bear fruit. If, that is, Chalabi even told them anything. Who knows? Everything is open to speculation when it comes to this.
If the Iranians knew that the U.S. knew, why didn't they pretend not to know and feed the U.S. false information? Or maybe they've been doing that for years, and the U.S. finally figured out that the Iranians knew. Maybe the U.S. knew that the Iranians knew, and are using the fact to discredit Chalabi.
I'd like to know more about this story, but it seems woefully underreported in the media and it is way too cloak and dagger to accurately analyze with the information currently available. The sad thing is that I suspect we'll never be able to figure it out.