Was American CIA agent Raymond Davis secretly working with the Taliban and al-Qaeda to destabilize Pakistan and lay the groundwork for a U.S. seizure of that country’s nuclear weapons? Was he photographing sensitive military installations and marking them with a global positioning device? Did he gun down two men in cold blood to prevent them from revealing what he was up to? These are just a few of the rumors ricocheting around Islamabad, Lahore and Peshawar in the aftermath of Davis’s arrest Jan. 27, and sorting through them is a little like stepping through Alice’s looking glass.

But one thing is certain: the U.S. has hundreds of intelligence agents working in Pakistan, most of them private contractors, and many of them so deep in the shadows that Pakistan’s intelligence agency, the Directorate for Inter-Services Intelligence (ISI), doesn’t know who they are or what they are up to. “How many more Raymond Davises are out there?” one ISI official asked Associated Press.

Lots, it would appear. Five months ago, the Pakistani government directed its embassies in the U.S. to issue visas without letting the ISI or Pakistan’s Interior Ministry vet them. According to the Associated Press, this opened a “floodgate” that saw 3,555 visas for diplomats, military officials and employees issued in 2010.

Many of those visas were for non-governmental organizations and the staff for the huge, $1 billion fortress embassy Washington is building in Islamabad, but thousands of others covered consular agents and workers in Lahore (where Davis was arrested), Karachi and other cities. Some of those with visas work for Xe Services (formerly Blackwater), others for low-profile agencies like Blackbird Technologies, Glevum Associates, and K2 Solutions. Many of the “employees” of these groups are former U.S. military personnel—Davis was in the Special Forces for 10 years—and former CIA agents. And the fact that these are private companies allows them to fly under the radar of congressional oversight, as frail a reed as that may be.

How one views the incident that touched off the current diplomatic crisis is an example of how deep the differences between Pakistan and the U.S. have become.

The Americans claim Davis was carrying out surveillance on radical insurgent groups, and was simply defending himself from two armed robbers. But Davis’s story has problems. It does appear that the two men on the motorbike were armed, but neither fired their weapon and, according to the police report, one did not even have a shell in his pistol’s firing chamber. Davis apparently fired through the window of his armored SUV, then stepped out of the car and shot the two men in the back, one while attempting to flee. He then calmly took photos, called for backup, climbed into his car, and drove off. He was arrested shortly afterwards at an intersection.

The Pakistanis have a different view of the incident. According to Pakistani press reports, the two men were working for the ISI and were trailing Davis because the intelligence agency suspected that the CIA agent was in contact with the Tehrik-e-Taliban, a Pakistani group based in North Waziristan that is currently warring with Islamabad. As an illustration of how bizarre things are these days in Pakistan, one widespread rumor is that the U.S. is behind the Tehtik-e-Taliban bombings as part of a strategy to destabilize Pakistan and lay the groundwork for an American seizure of Islamabad’s nuclear arsenal.

The ISI maintains close ties with the Afghan Taliban based in Pakistan’s Baluchistan Province, as well as its allies, the Hizb-e-Islami and the Haqqani Group. All three groups are careful to keep a distance from Pakistan’s Taliban.

Yet another rumor claims that Davis was spying on Lashkar-e-Taiba, a group with close ties to the ISI that is accused of organizing the 2008 massacre in Mumbai, India. The Americans claim the organization is working with al-Qaeda, a charge the Pakistanis reject.

When Davis’s car was searched, police turned up not only the Glock semi-automatic he used to shoot the men, but four loaded clips, a GPS device, and a camera. The latter, according to the police report, had photos of “sensitive” border sites. “This is not the work of a diplomat,” Punjab Law Minister Rana Sanaullah told the Guardian (UK), “he was doing espionage and surveillance activities.”

The shooting also had the feel of an execution. One of the men was shot twice in the back and his body was more than 30 feet from the motorbike, an indication he was attempting to flee. “It went way beyond what we define as self-defense, “ a senior police official told the Guardian (UK). “It was not commensurate with the threat.” The Lahore Chief of Police called it a “cold-blooded murder.”

The U.S. claims that Davis is protected by diplomatic immunity, but the matter might not be as open and shut as the U.S. is making it. According to the Pakistani Express Tribune, Davis’s name was not on a list of diplomats submitted to Pakistan’s Foreign Ministry on Jan. 25. The day after the shooting the embassy submitted a revised list that listed Davis as a diplomat.

Washington clearly considered Davis to be important. When he asked for backup on the day of the shooting, another SUV was dispatched to support him, apparently manned by agents living at the same safe house as Davis. The rescue mission went wrong when it ran over a motorcyclist while going the wrong direction down a one-way street. When the Pakistani authorities wanted to question the agents, they found that both had been whisked out of the country.

Almost immediately the Obama administration sent Sen. John Kerry, chair of the Senate Foreign Relations Committee, to Islamabad to apologize and pressure Pakistan to release Davis. But the incident has stirred up a hornet’s nest in Pakistan, where the CIA’s drone war has deeply alienated most Pakistanis. Opposition parties are demanding that the CIA agent be tried for murder. A hearing on the issue of whether Davis has diplomatic immunity is scheduled for Mar. 14.

In the meantime, Davis is being held under rather extraordinary security because of rumors that the Americans will try to spring him, or even poison him. Davis is being shielded from any direct contact with U.S. officials, and a box of chocolates sent to Davis by the Embassy was confiscated.

The backdrop for the crisis is a growing estrangement between the two countries over their respective strategies in Afghanistan.

The U.S. has stepped up its attacks on the Afghan insurgents, launched a drone war in Pakistan, and is demanding that Islamabad take a much more aggressive stance toward the Taliban’s allies based in the Afghan border region. While Washington still talks about a “diplomatic resolution” to the Afghan war, it is busy blowing up the very people it will eventually need to negotiate with.

This approach makes no sense to Pakistan. From Islamabad’s point of view, increasing attacks on the Taliban and their allies will only further destabilize Pakistan, and substitutes military victory for a diplomatic settlement. Since virtually every single independent observer think the former is impossible, the current U.S. strategy is, as terror expert Anatol Lieven puts it, “lunatic reasoning.”

Pakistan wants to insure that any Afghan government that emerges from the war is not a close ally of India, a country with which it has already fought three wars. A pro-Indian government in Kabul would essentially surround Pakistan with hostile forces. Yet the Americans have pointedly refused to address the issue of Indian-Pakistan tension over Kashmir, in large part because Washington very much wants an alliance with India.

In short, the U.S. and Pakistan don’t see eye to eye on Afghanistan, and Islamabad is suspicious that Americans like Davis are undermining Pakistan’s interests in what Islamabad views as an area central to its national security. “They [the U.S.] needs to come clean and tell us who they [agents] are, what they are doing,” one ISI official told the Guardian (UK). “They need to stop doing things behind our back.”

There are a lot of unanswered questions about the matter. Was the ISI onto Davis, and was he really in contact with groups the Pakistani army didn’t want him talking to? What did Washington know about Davis’ mission, and when did it know it? Did Davis think he was being held up, or was it a cold-blooded execution of two troublesome tails?

Rumor has it that the CIA and the ISI are in direct negotiations to find an acceptable solution, but there are constraints on all sides. The Pakistani public is enraged with the U.S. and resents that it has been pulled into the Afghan quagmire. On the other hand, there are many in Washington—particularly in Congress—who are openly talking about cutting off the $1.5 billion of yearly U.S. aid to Pakistan.

What the incident has served to illuminate is the fact that U.S. intelligence operations are increasingly being contracted out to private companies with little apparent oversight from Congress. At last count, the U.S. Defense Department had almost 225,000 private contractors working for them.

The privatization of intelligence adds yet another layer of opacity to an endeavor that is already well hidden by a blanket of “national security,” and funded by black budgets most Americans never see. The result of all this is a major diplomatic crisis in what is unarguably the most dangerous piece of ground on the planet.

More of Conn Hallinan’s work can be found at Dispatches From the Edge.