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The Reagan administration'：s most serious foreign policy problem surfaced near the end of the president's second term. In 1987 Americans learned that the administration had secretly sold arms to Iran in an attempt to win freedom for American hostages held in Lebanon by radical organizations controlled by Iran's Khomeini government. Investigation also revealed that funds from the arms sales had been diverted to the Nicaraguan contras during a period when Congress had prohibited such military aid.
The ensuing Iran-contra hearings before a joint House-Senate committee examined issues of possible illegality as well as the broader question of defining American foreign policy interests in the Middle East and Central America. In a larger sense, the Iran-contra hearings, like the celebrated Senate Watergate hearings 14 years earlier, addressed fundamental questions about the government's accountability to the public, and the proper balance between the executive and legislative branches of government.