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THE SITUATION ROOM

President Bush Heads to Germany to Address Mideast Tensions; Hezbollah Kidnaps Two Israeli Soldiers; New Details About Sources of CIA Leak and the Karl Rove Connection; Alexander Haig Interview; Ehud Olmert Authorizes Military Action in Southern Lebanon; Wasteful Spending in Response to 9/11 Attacks

Aired July 12, 2006 - 16:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


WOLF BLITZER, CNN ANCHOR: Thanks very much, Susan.
And to our viewers, you're in THE SITUATION ROOM, where new pictures and information are arriving all the time. Standing by, CNN reporters across the United States and around the world to bring you the today's top stories.

Happening now, President Bush heads overseas as Mideast tensions are exploding. It's 10:00 p.m. in Germany where the traveling White House is pointing an angry finger at Syria and Iran. We'll have live reports on this developing story.

Also this hour: Hillary Clinton's extreme makeover. As first lady, she riled up the healthcare industry with her radical plan for reform. Now as a senator, she's getting a much different reaction and it's paying off for her politically and financially.

And columnist Bob Novak names names. It's 4:00 p.m. here in Washington, where we now have new details about the sources of the CIA leak and the Karl Rove connection. I'm Wolf Blitzer. You're in THE SITUATION ROOM.

Right now President Bush is in Germany, closer to some of the world's most dangerous hot spots, including the Middle East, and two targets of the Bush administration's anger today. That would be Syria and Iran. The Mideast crisis clearly ratcheting up after the radical group Hezbollah today abducted two Israeli soldiers, killed three others.

Calling that an act of war, Israel sent troops into Lebanon, Hezbollah's base of attack, losing five more Israeli soldiers. The Bush administration is accusing Hezbollah of terrorism. And the White House says it's holding Syria and Iran responsible because they support Hezbollah. Our White House correspondent Ed Henry is traveling with the president. He's standing by live in Germany. Let's go to Jerusalem. Paula Hancocks has all the latest developing information -- Paula.

PAULA HANCOCKS, CNN CORRESPONDENT: Well, Wolf, the Israeli government has just had a special meeting to decide what to do next. Now, that meeting has finished but they are giving very little way. This was a meeting for operational details. The military operation that they are going to carry out against Lebanon, that we have been seeing the Israeli Air Forces, troops, tanks, gunships all in southern Lebanon.

This is the first time we've seen them there since they withdrew in May 2000. Now we've heard from one minister leaving that special cabinet meeting saying this is the start of a new era. We've also heard from Vanang Gisseng (ph), a spokesman for the government saying that they are going to take gradual steps, suggesting there is not going to be a huge military incursion, but just the troops that we see at the moment after eight Israeli troops were killed this Wednesday.

Now we know that they have been targeting Hezbollah buildings. We know that they have been targeting roads and bridges. They are hoping, the military says, to stop militants moving with the two Israeli soldiers that they have taken and they're trying to restrict their movements so they have a better idea of where they are.

But they are moving slightly deeper into Lebanon. As I say, the first time we've seen this for six years. A severe escalation in tensions here in the Middle East. Surprising it's escalated so fast, even though things do escalate very quickly in this region. Wolf?

BLITZER: First the tensions with Gaza and now the situation in the north with Lebanon. We're getting reports and I wonder if you've heard this, that the Israeli military has started to activate reserve units to bolster up its military presence in case it moves directly into Lebanon.

HANCOCKS: Yes, we heard that a little earlier this Wednesday. The military forces confirming to us that reserves are being called up. Now this is to backup the troops that they have already. We know that in the hours after this attack, it happened 9:00 a.m. local time in the morning, that's 2:00 a.m. Eastern time, instantly tanks and troops were moved up to that Israeli/southern Lebanon border.

We know also that things are ongoing in Gaza as well. We know almost 20 Palestinians have been killed just Wednesday alone. That's 80 Palestinians according to security forces that have been killed in Gaza since the start of this operation just over two weeks ago. So on two fronts now, Israel is carrying out very heavy military operations, Wolf.

BLITZER: Paula, stand by. You and your colleagues are going to have a very, very busy several hours. Thank you very much for that. I suspect it's going to be a tense situation throughout the region coming up tonight.

President Bush, meanwhile, landed in Germany only moments ago, his only stop before the G-8 summit in Russia. With so many global challenges before him, including these latest developments in the Middle East, this trip may be a critical test of the president's new emphasis on diplomacy.

Our White House correspondent Ed Henry is traveling with the president. He's on the scene in Germany. Ed, what has the White House reaction to the latest tensions involving Israel and Lebanon -- what's been the official White House reaction? ED HENRY, CNN WHITE HOUSE CORRESPONDENT: Wolf, even before the president arrived here in Germany, the White House released a blistering statement putting the blame squarely on Iran and Syria for the escalating violence in the Mideast. Add that to the list of foreign policies headaches awaiting for the president at the G-8 summit in St. Petersburg.

(BEGIN VIDEOTAPE)

HENRY (voice-over): Secretary of State Condoleezza Rice is on a separate diplomatic mission to Paris to deal with Iran, again refusing to answer the U.S. offer for talks in exchange for suspending its nuclear enrichment program. As Rice threatened tough U.N. sanctions against Iran, she had to deal by phone with yet another Middle East flare-up.

Israeli troops stormed into Lebanon after Hezbollah abducted two Israeli soldiers and killed three more, which the Israeli prime minister dubbed an act of war and the White House called an unprovoked act of terrorism. Then there's the nuclear threat from North Korea, as well as Iran, which the White House seems to be reacting to from a defensive posture.

STEPHEN HADLEY, NATIONAL SECURITY ADVISER: We'll have to see. I think the diplomacy has set it up well. We'll have to see what these countries decide.

HENRY: This has inflamed some conservatives charging with Bill Kristol charging the approach to North Korea is Clintonian. But yet another hot spot, the ongoing war in Iraq has left the president with a weakened hand.

MIKE ALLEN, TIME MAGAZINE: The White House has said the president has always said that approaches will change as circumstances change. But one of the circumstances that has changed of course is the president's standing at home and in the world.

HENRY: In need of allies, the president is making the special stop in Germany to further bond with new chancellor Angela Merkel.

CHARLES KUPCHAN, COUNCIL ON FOREIGN RELATIONS: Bush has focused on Germany now that Chancellor Merkel is in office as the key link to Europe. And that's important because Tony Blair is very weak. That gives the United States a new foothold in Europe.

HENRY: But there may be cracks in the president's one-time alliance with Russian President Vladimir Putin on the eve of their own one-on-one talks before the G-8 summit. President Putin is reacting bitterly to a speech Vice President Cheney recently delivered in Lithuania, charging Russia may be backsliding on the way to full democracy.

VLADIMIR PUTIN, PRESIDENT, RUSSIA (through translator): I think your vice president's expression there is like his bad shot on his hunting trip.

(END VIDEOTAPE)

HENRY: An obvious reference to the vice president's recent hunting mishap back in the United States. The vice president's office today would not comment on that blast from Mr. Putin. It may only add to the pressure on President Bush to actually address some of this directly with his Russian counterpart.

But for now, senior aides are saying the president is likely to be frank and in private with Mr. Putin, meaning basically that he'll do most of the talking behind closed doors rather than embarrass Mr. Putin in public, Wolf.

BLITZER: Ed, are White House officials elaborating on why they're pinning the responsibility on Syria and Iran for this latest crisis in the Middle East?

HENRY: They're not elaborating in great detail, but it's pretty clear that given the fact that there's already this nuclear standoff with Iran, the White House sees and opportunity here to ratchet even more pressure on Iran, try to rally the international community against Iran to make sure that that Iranian enrichment program is for peaceful purposes, Wolf.

BLITZER: Ed Henry traveling with the president -- Ed, thank you very much. And to our viewers, this note. We're going to talk a lot more about the North Korea missile crisis coming up in our 7:00 p.m. Eastern hour right here in THE SITUATION ROOM. The special U.S. envoy Christopher Hill, he'll be joining us live from Beijing. That's coming up 7:00 p.m. Eastern tonight.

After many months of silence, the columnist Bob Novak is revealing more about his role in the leak of a CIA operative's identity. Let's get some more on this story that we reported on last night. Bob Novak's story, Brian Todd is standing by here in Washington -- Brian.

BRIAN TODD, CNN CORRESPONDENT: Wolf, in a new column breaking that silence, Novak seems to be trying to make one fundamental point, that he did not betray his sources.

(BEGIN VIDEOTAPE)

TODD (voice-over): Bob Novak says he confirmed all three of his sources on former CIA officer Valerie Plame's identity to investigators because, he writes in his latest column, special prosecutor Patrick Fitzgerald already quote, "knew the names of my sources."

SCOTT FREDERICKSEN, FORMER SPECIAL PROSECUTOR: It's interesting that Fitzgerald already had identified his sources when he finally came to interview Mr. Novak.

TODD: How did Fitzgerald know? The columnist says the prosecutor had gotten signed waivers from every official who might have leaked Plame's identity. Legal experts say by signing those waivers, government officials free journalists to talk about their conversations and use their names with investigators, but not to the public, unless the source agrees.

How was Fitzgerald able to pare down possibly hundreds of officials who might have known about Plame to Novak's three sources? A former special prosecutor says Fitzgerald most likely worked very fast, sending his team of investigators to interview all of them.

SCOTT FREDERICKSEN, FORMER SPECIAL PROSECUTOR: Those individuals know when an FBI agent comes calling, you either tell the truth or you're committing a crime. And I suspect most of them owned up very quickly to their conversations and that's how he knew.

TODD: Novak does not publicly reveal the name of his primary source. But he does say White House Deputy Chief of Staff Karl Rove and former CIA spokesman Bill Harlow were his secondary sources, confirming Plame's identity. Legal experts differ on whether those conversations add up to leaks. President Bush has often been pressed on what he'd do with a leaker on his staff.

UNIDENTIFIED MALE: Do you stand by your pledge to fire anyone found to have done so?

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Yes and that's up to the U.S. attorney to find the facts.

(END VIDEOTAPE)

TODD: Rove would not comment on Novak's latest column, but a Rove spokesman has said he never reached out to reporters about Plame and only responded casually when asked about her. Bill Harlow was not available for comment public but a former intelligence official, familiar with the issue, tells CNN Harlow tried to convince Novak not to run the story on Plame after Novak presented her name to him. Wolf.

BLITZER: All right Brian, thanks very much. We'll have more on this story coming up in THE SITUATION ROOM as well. In the meantime let's check in with Jack Cafferty. He's in New York with the "Cafferty File." Hi Jack

JACK CAFFERTY, CNN ANCHOR: Wolf, you can tell that have Spring is near when the swallows return to Capistrano. You can tell the midterm elections are near when the army announces it's ending a multi-billion dollar contract with Halliburton.

The contract to provide logistical support to soldiers in Iraq will be rebid and potentially split among three different companies. Halliburton, which used to be run by Vice President Dick Cheney, has long been under fire from auditors, from the Justice Department, from congressional Democrats, for the price and the quality of its work.

Government audits found more than a billion dollars in questionable costs. Army officials defend Halliburton's performance. They acknowledge that relying on a single contractor leaves the government vulnerable, not to mention looking more stupid than usual, since the vice president is their former CEO. Halliburton will be eligible to bid on the new contracts. The company has denied allegations of any wrongdoing and they say it's neither unusual nor unexpected that the contract would be replaced with a competitive bid approach, particularly in light of the looming midterm elections. Here's the question what does it mean that the army is ending it's contract with Halliburton? E-mail your thoughts to CaffertyFile@CNN.com or go to CNN.com/CaffertyFile. Wolf.

BLITZER: Jack, thank you. And to our viewers, if you want a sneak preview of Jack's questions, plus an early read of the day's political news and what's ahead right here in THE SITUATION ROOM, sign up for our daily e-mail alert. Just go to CNN.com/SituationRoom.

Coming up, nearly five years after the 9/11 attacks, allegations of waste, fraud and abuse of Homeland Security Department dollars. We're going to tell you about the schemes being spotlighted by Congress and showing up online, including one involving a petting zoo.

Plus, has a former target of the health care industry become its new darling? We're checking into the healthy donations being given to Senator Hillary Clinton.

And up next former Secretary of State Alexander Haig on the escalating crisis in the Middle East and the Bush administration's attempt to hold Syria and Iran accountable. Stay with us, you're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: We're standing by to speak live with former Secretary of State Alexander Haig on the escalating crisis in the Middle East. We'll get to that shortly. First, though, Fredricka Whitfield is joining us from the CNN center with a closer look at some other important stories making news. Hi Fred.

FREDRICKA WHITFIELD, CNN ANCHOR: Hello to you Wolf. Authorities say a raging wildfire in southern California is zero percent contained and could scorch as much as 100,000 acres. Low humidity, high winds and temperatures in the high 90s are hampering efforts to contain the blaze. The blaze, which has charred some 26,000 acres so far, has destroyed 30 buildings and caused about 300 people to be evacuated.

A short time ago, China and Russia introduced a resolution to the U.N. Security Council responding to North Korean missile testing. The new resolution deplores last week's launches and urges Pyongyang to impose a moratorium on missile testing, but it tones down or removes much of the language included in an earlier Japanese draft that was deemed counter productive by the Chinese.

Defense Secretary Donald Rumsfeld says U.S. troops will have to continue providing support to Iraqi security forces for, quote, some period of time. He made the comments while visiting U.S. forces in Iraq today. Rumsfeld told the troops that the development of the Iraqi military and police has been, in his words, uneven.

And following talks with Iraqi officials in Baghdad, the secretary said political progress is key to establishing security in that country.

Meanwhile, another wave of violence in Iraq. Nine people were killed and more than 20 were wounded in a pair of bombings in Baghdad. And late today, 20 bodies were found in Diyala province northeast of Baghdad. Iraqi security officials say they are among two dozen people kidnapped earlier in the day, Wolf.

BLITZER: Thanks, Fred, very much. Fredricka Whitfield filling in for Zain Verjee, who is on assignment today. We'll have a lot more on Iraq coming up in the next hour, including my interview with Major General William Caldwell, the chief spokesman for the U.S. military in Iraq.

At the same time, new crises are being met with a new language coming in these days from the White House. But is it a sign of a new attitude, the end of what's being called cowboy diplomacy. Our senior analyst Jeff Greenfield takes a closer look, Jeff.

JEFF GREENFIELD, CNN SENIOR ANALYST: Wolf, President Bush is off to Germany and Russia at a time when diplomacy seems to be the watch word of the moment. Does this represent a change in tone and maybe even substance from the past? Among those who say, yes, there's a fascinating mixture of approval and concern.

(BEGIN VIDEOTAPE)

BUSH: This will be a monumental struggle.

GREENFIELD (voice-over): By most accounts the Bush administration's posture after the attacks of September 11th was that of a nation determined to act forcefully, with or without the world's approval.

BUSH: I will not wait on events while dangers gather.

GREENFIELD: Even before the invasion of Iraq, back in the fall of 2002, the administration's national security strategy made a case for preemptive action and set down a strong marker about universal values. America, it said, must stand firmly for the nonnegotiable demands of human dignity, free speech, freedom of worship, equal justice, respect for women, religious and ethnic tolerance, and respect for private property. When the invasion of Iraq was opposed by traditional allies, like Germany and France, Defense Secretary Donald Rumsfeld labeled them part of the old Europe.

DONALD RUMSFELD, DEFENSE SECRETARY: You're thinking of Europe as Germany and France. I don't. I think that's old Europe.

GREENFIELD: And Bush allies, like the "New York Post," graphically scorned the axis of weasel. But now with American forces stretched thin in Iraq and with trouble spots heating up from North Korea to Iran, the recent tone has been sharply different.

CONDOLEEZZA RICE, SECRETARY OF STATE: Welcome.

GREENFIELD: Secretary of State Rice has been mending fences and the president's language after the North Korean missile launch has been strikingly different from that of the past.

BUSH: Diplomacy takes a while.

GREENFIELD: And as for those non-negotiable demands for universal values?

BUSH: I looked the man in the eye, I found him to be very straightforward and trustworthy.

GREENFIELD: The president continues to embrace Russia's Putin. After a string of curbs on private property and individual freedoms. China is a partner even as it cracks down on dissidents. The policies of Saudi Arabia on women's rights and religious tolerance go all but unmentioned.

And while "Time" magazine approvingly notes what it calls "The End of Cowboy Diplomacy," there is some discontent being heard from the right. In the current "Weekly Standard," influential neo- conservative Bill Kristol writes of these diplomatic initiatives, quote, "Too bad the cost has been so high: a decline in the president's credibility around the world and sinking support for his foreign policy at home."

(END VIDEOTAPE)

GREENFIELD: For now, the administration rhetoric and policy seems to reflect something the president talked about much more as a candidate back in 2000 than as president during his first term, that U.S. foreign policy ought to be guided by a sense of humility -- Wolf.

BLITZER: Jeff Greenfield, thank you for that.

Still ahead on THE SITUATION ROOM, almost $14 billion in taxpayer money has been spent on federal assistance to 9/11 recovery efforts. But how much of that money actually went to those who really need it? We're going to take a closer look.

And, next, as President Bush prepares to meet with Russian President Putin, why is Vice President Cheney the focus of Putin's latest criticism? We'll discuss that and a lot more with Donna Brazile and Terry Jeffrey. They're standing by for our "Strategy Session."

(COMMERCIAL BREAK)

BLITZER: Welcome back to THE SITUATION ROOM. I'm Wolf Blitzer in Washington.

Let's get back to our top story, the escalating tensions and violence in the Middle East right now after the abduction of two more Israeli soldiers this time along the Israeli/Lebanese border, the radical group Hezbollah doing that. The U.S. laying direct blame though on Syria and Iran, urging Lebanon to work to solve the problem. Syria and Iran, the U.S. government says, supports Hezbollah.

Joining us now from West Palm Beach in Florida is the former Secretary of State Alexander Haig. Do you agree with the White House, Mr. Secretary, that Syria and Iran, which support Hezbollah, should really be responsible for what has happened today along the border with Israel?

ALEXANDER HAIG, FORMER SECRETARY OF STATE: Oh, there's no question about it. There never has been any question about it. I don't know why anyone would question the U.S. government. We have good intelligence on that situation, and this is a long-standing problem.

It's clear that Lebanon is not a sovereign state. It was relinquished some years ago when I was secretary of state and left the administration because of it. These are things that are very, very clear and have been for many, many months. And of course ...

BLITZER: Why would Syria and Iran right now want to start trouble with Israel?

HAIG: Well, they'd want to do it because Israel is now fully occupied with the territories they've just relinquished, and in hindsight I guess it would have been better if they had kept their forces in there until they saw whether or not the people that were going to govern in Palestine were going to be truly interested in peace rather than the destruction of Israel.

But that hasn't happened, and now we're confronting a situation where they're going to be inching missiles farther into Israeli territory and Israel just can't take it. It doesn't have the strategic depth and it's going to have to take action.

So this is a diversion to try to remind them, and this is, of course, Iran and Syria, which is largely controlled today by Iran, and Lebanon which has no sovereignty at all to speak of, because we've let that happen as well.

So all of these things are converging and now Israel has no more flexibility. They're going to have to take action unless this thing is resolved peacefully, and it doesn't look like there's a mood to do that quite yet.

BLITZER: Well, you referred to your experience when you were secretary of state during the Reagan administration in Lebanon. What should the current Bush administration be doing now assuming, as a lot of analysts do assume, that Israel is going to take its forces, ground forces, air power and move into southern Lebanon to look for those captured Israeli soldiers?

HAIG: Well, I think there's not much very much they can do unless they have an alternative for Israel to be able to live in peace with its neighbors. After all, this is all incited by the other side, not Israel. Why are we asking Israel to risk its own survival by turning the other cheek in a situation which is an act of war?

BLITZER: So the U.S. policy should be right now just down the line support for the government of Prime Minister Ehud Olmert? HAIG: Well, it's never down the line support. The Americans always have an obligation to speak as a friend to a friend. And they do and we will. And I'm very confident that the situation is not all as grim as it might look at the moment.

We also have the economic summit coming up where the Soviet Union, which is a -- former Soviet Union, has really been a prime mischief maker throughout the Middle East and continues to be that, has some very important other axes to grind.

And we're going to have to see how it all turns out rather than rush into panic. But we've got to stick with our ally, our historic ally, and those whom we have an obligation to support. It's in our interest to do so.

BLITZER: Do you see a common thread running through this now escalating crisis between the Israelis and the Palestinians and Lebanon, if you will, as far as the regional situation with Iran, Syria, Iraq and elsewhere in this bigger picture is concerned?

HAIG: Well, it's always been that way, Wolf. This is a world that we have friends and we have those that don't share our values or interests. And it's interests, not values, that decide good foreign policy.

And until we return to a foreign policy where interests or sharing ideology is our goal, then we're going to have trouble. And I think that's beginning to happen, and I very much welcome it.

BLITZER: Finally, before I let you go, quick assessment. Will the U.S. be able to resolve the standoff with North Korea right now peacefully?

HAIG: Well, it's too early to say, but there's still much to be done there as well. After all, China doesn't want a conflict on its border. That's going to bring about the very outcome it fears the most, and that's a flood of refugees into the Chinese territories. They don't want that. They also want to be recognized as a peacemaker, not a troublemaker, in a region that there are very, very severe conflicting interests emerging.

BLITZER: Alexander Haig, the former secretary of state, thanks for coming into THE SITUATION ROOM.

HAIG: Thank you.

BLITZER: In our "Strategy Session": President Bush in Europe right now, getting ready for the G8 Summit, facing a new explosion of violence in the Middle East and a host of other international problems; and the columnist Robert Novak sharing some of his secrets in the CIA leak case -- two subjects for our "Strategy Session."

Joining us, our CNN political analyst, the Democratic strategist, Donna Brazile, Terry Jeffrey, the editor of "Human Events" online.

Guys, thanks very much for coming in. This Bush trip to Germany now -- then he's heading to Saint Petersburg in Russia for the G8 Summit -- it comes as tensions all over the world seem to be escalating, Donna. It poses, I guess, a great challenge for the president, but also, potentially, an opportunity.

DONNA BRAZILE, CNN POLITICAL ANALYST: Well, I think it's both a challenge and an opportunity, Wolf.

Look, last week, the president in Chicago, outlined, you know, what I believe is a new strategy to focus on diplomacy. He has a lot of work to do next week, in trying to convince the -- his partners or -- to focus on Iraq, to focus on Iran, to focus on North Korea.

Of course, energy security is a major issue for this G8 Summit. But, also, I think the president has to tell Mr. Putin that some of the anti-democratic initiatives that he's undertaken as president must be corrected. So, this is a big meeting for the president.

BLITZER: I don't know if you saw the interview that Matt Lauer did on "The Today Show" this morning, Terry, with Vladimir Putin, in which Putin didn't back down at all from any of the criticism, and he leveled right back at the vice president, Dick Cheney.

I think we have a clip from that. Let's listen.

(BEGIN VIDEO CLIP, "THE TODAY SHOW")

VLADIMIR PUTIN, RUSSIAN PRESIDENT (through translator): I think your vice president's expression there is like his bad shot on his hunting trip.

(END VIDEO CLIP)

BLITZER: The vice president had taken a shot at Putin earlier, complaining about some of the clamping-down on democratic reforms within Russia -- Putin not backing down at all.

TERRY JEFFREY, EDITOR, "HUMAN EVENTS": And he's also complaining about Russia using its oil as a weapon against some of the former states of the Soviet Union that are close in, like Ukraine or Georgia.

You know, the Cold War is over. And Russia is reasserting itself as an international power. They have interests. The U.S. has interests. As Secretary Haig was saying, sometimes, nations pursue their interests. We have a lot of shared interests with Russia. Particularly, they have an interest in integrating themselves into the Western economy, Wolf.

That's why it's fortuitous that the G8 Summit is taking place in Saint Petersburg. On the other hand, we have an interest in Russia and Vladimir Putin helping us with Iran, which is moving towards developing nuclear weapons, and helping us with North Korea. They seem to have come on board a little bit with Iran, but we have to see how that plays out. They haven't helped at all with North Korea. So, hopefully, the president will get progress on those two fronts... BLITZER: We will see what...

JEFFREY: ... this week.

BLITZER: We will see what he does on that.

Let's talk a little about Robert Novak, the syndicated columnist, our former colleague here at CNN. He wrote a column -- it appeared in "The Washington Post" and other newspapers today around the country -- in which he disclosed much more than he has disclosed before, but he is still not telling us who his original source was that told him, basically gave him the tip to go hunt for Joe Wilson's wife, Valerie Plame Wilson.

What have you learned from this column that you read in "The Post" this morning?

BRAZILE: Well, I learned that Bob may have broke his silence, but we still don't know who broke the law, who his primary source was in leaking the name of Valerie Plame.

While he could find the name in the who's-who, according to his column, he didn't know. Someone told him that she was a CIA agent.

BLITZER: Someone -- it sounds, Terry, like someone said to him: You know, Joe Wilson, he was on a boondoggle. He got this trip because his wife works at the CIA, and then -- but didn't mention the name of the wife. And then Bob Novak began to do what a journalist does, began to connect the dots.

JEFFREY: Well, there's no question Bob Novak is an excellent journalist. He's proved that in a long, long career, Wolf.

He said in his column, first of all, that the senior administration source who first told him about Wilson's wife had done it inadvertently. Secondly, he has said for a long time that he actually looked up her name in who's-who.

Something Donna said, I think, is incorrect. She said, we don't know who committed the crime yet. The fact of the matter is, as Novak's column gives us more evidence, Patrick Fitzgerald conducted a very aggressive investigation. He knew exactly who Novak's sources were, including the original source. He did not charge that person with a crime, because that person did not commit a crime.

Meanwhile, Scooter Libby's crime that he's been charged with, that he's alleged to have committed is perjury and obstruction of justice in a grand jury, not leaking Valerie Plame's name.

BLITZER: And lying to FBI agents, which is a serious charge as well.

(CROSSTALK)

BRAZILE: It's a serious crime. And it's also a crime to identify and leak a name of a -- of a CIA covert agent. So, that -- that is a crime. And someone -- and the president and the White House at first distanced themselves from this investigation, and said no one was involved in the White House. Now we learn that Karl Rove was a secondary source of this information.

JEFFREY: And Bob Novak called up Rove to try and confirm this.

But the fact of the matter is, Victoria Toensing, who was a counsel at the Intelligence Committee in the Senate when the Agents Identity Protection Act was written has said -- and I believe she's absolutely right -- that this law did not apply to Valerie Plame or leaking her name to a reporter. That's why Patrick Fitzgerald didn't charge anyone with that crime. It simply was not a crime.

BLITZER: Here's what the president said on September 30, 2003, shortly after all the of this erupted. Listen to what he said.

(BEGIN VIDEO CLIP)

BUSH: If there's a leak out of my administration, I want to know who it is. And I -- if the person has violated law, that person will be taken care of.

(END VIDEO CLIP)

BLITZER: Did -- how did you interpret what the president said and his actions subsequent to that?

BRAZILE: Well, the president clearly has flip-flopped. I mean, in that interview, the president made it clear that once he uncovered if anyone leaked in his administration, he would fire them. And we now know that Karl Rove still has his job and he still has his security clearance.

BLITZER: He didn't say, if someone committed a crime, he would fire them. If someone who -- leaked, they would fired.

JEFFREY: Well, you know, it's -- if -- I believe that Novak is telling the truth about how he got this information. It was inadvertently given to him in the course of a long interview with a senior administration official.

In other words, this person didn't have an animus against Valerie Plame and Joe Wilson. They weren't bringing in Novak and saying, here, Bob, take this and put it in the newspaper. It was inadvertent. I don't think that was a leak.

BRAZILE: But Mr. Harlow said...

JEFFREY: It was a mistake.

BRAZILE: Mr. Harlow, the...

(CROSSTALK)

BRAZILE: ... other... BLITZER: The former CIA spokesman.

JEFFREY: Right.

BRAZILE: He stated that he told Bob Novak not to put her name in that article. And it's clear that Bob went ahead and put the -- put her name in that article.

JEFFREY: Well, Novak says he remembers that differently. And, so, they have a conflicting story there.

BLITZER: Well, we will see what else comes out in the next few days. Appreciate both of you coming in...

BRAZILE: Thank you.

BLITZER: ... to THE SITUATION ROOM. Thank you very much.

And up next: news coming into CNN right now. We are going to go back to Israel, where we're hearing the Israeli cabinet has now authorized what's being described as a severe response to the abduction of those two Israeli soldiers by Hezbollah along the border with Lebanon. We're going to go back and have details.

Also coming up: Has the health care industry had a change of heart when it comes to Senator Hillary Clinton? We will examine the senator's lucrative new relationship with doctors, hospitals, and drugmakers.

And could there possibly be a connection between homeland security and a center for kangaroos? We're looking at the new questions about security spending -- your tax dollars at work.

Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: We're getting more on the really escalating tensions rocking the Middle East right now.

Let's go back to Jerusalem.

CNN's Paula Hancocks standing by with the latest developments.

Paula, what has just happened?

HANCOCKS: Well, Wolf, a special cabinet meeting has just ended, and Israeli Prime Minister Ehud Olmert has authorized military action in southern Lebanon.

We have been seeing that for the past day. He has said he will carry out a severe response against these Hezbollah attacks, which left eight Israeli soldiers dead and two Israeli soldiers kidnapped. Now, we have also heard from Dan Halutz, the chief of staff, earlier on, telling Israeli media that he's willing to take Lebanon back 20 years, if they continue with these attacks. We're also hearing from this cabinet meeting that they're going to carry out attacks to prevent future attacks against the Israeli people -- so, not giving any details about what exactly these attacks will entail, but certainly saying there will be a severe response -- Olmert once again saying he holds the Lebanese government responsible for the attacks early this Wednesday morning -- Wolf.

BLITZER: Earlier, the Bush administration said they hold Iran and Syria responsible as well.

Paula, stand by. We are going to have a lot more on this story. We're watching it minute by minute -- much more coming up at the top of the hour right here in THE SITUATION ROOM.

Another story we're watching involving severe weather.

Our Jacqui Jeras is watching that story for us.

What's the latest development on that front, Jacqui?

JACQUI JERAS, CNN METEOROLOGIST: Well, Wolf, we had a possible tornado touchdown in Upstate New York. And it sounds like it caused some damage to some buildings.

The town is called Hawthorne. And it's just north of White Plains. There, you can see the possible tornado as it pulls on through. The National Weather Service is reporting that a building was damaged and people are trapped.

CNN has spoken with local authorities. They say they're not sure whether or not anybody is trapped in that building, but they are confirming that there has been some damage with this storm. There was a tornado warning in effect around the top of the hour at the time that this happened.

The storm is now weakening and heading across southern parts of Connecticut. But a tornado watch remains in effect across the area throughout the rest of the afternoon -- Wolf.

BLITZER: All right. We will continue to watch this story with you as well, Jacqui. Thank you.

Coming up here in THE SITUATION ROOM: Does U.S. envoy Chris Hill have progress to report in his efforts to deal with the North Korea missile standoff? He's going to be our guest live here in THE SITUATION ROOM, 7:00 p.m. Eastern. He will be joining us from Beijing.

Also: When Hillary Clinton lived in the White House, she made some enemies in the health care industry. A lot of us remember that. Is she making new friends now that she's mulling a presidential campaign of her own?

Stay with us.

(COMMERCIAL BREAK) BLITZER: Welcome back.

On Capitol Hill today, lawmakers are putting a spotlight on allegations of very wasteful spending, or worse, in response to the 9/11 attacks nearly five years ago.

Let's bring in our congressional correspondent, Andrea Koppel -- Andrea.

ANDREA KOPPEL, CNN CONGRESSIONAL CORRESPONDENT: Wolf, this is the first of three hearings that will be held here on the Hill this week, all focused on a similar theme, focusing on the response, the recovery, and the rebuilding of Lower Manhattan.

(BEGIN VIDEOTAPE)

KOPPEL (voice-over): Almost five years after terrorists attacked the World Trade towers, the federal government has spent $14 billion to help New York respond and recover.

There have been plenty of allegations of waste, fraud and abuse, but Homeland Security Chairman Congressman Peter King says, it wasn't until he saw how FEMA mishandled Hurricane Katrina, that he decided Congress need to investigate FEMA's role in post-9/11.

REP. PETER KING (R-NY), HOMELAND SECURITY COMMITTEE CHAIRMAN: I felt it was important, as a New Yorker and as chairman of the committee, to look into exactly what happened in the aftermath of September 11, what went wrong, what went right, and also apply that to other tragedies, such as Katrina.

KOPPEL: In the six months since King and his colleagues launched their review, they say they have received over 1,100 complaints, resulting in approximately 250 investigations, the majority related to fraudulent applications for help with paying mortgages, rents and unemployment assistance.

One scheme involved two people, each of whom claimed $10,000 worth of damage to their personal property from smoke and debris they said filled their apartments, about 35 blocks away from the World Trade Center site.

Today's hearing, the first of three scheduled this week, was focused on the immediate response to 9/11. One government witness pledged not to repeat the mistakes of the past.

GREGORY KUTZ, DIRECTOR OF FINANCIAL MANAGEMENT AND ASSURANCE, GOVERNMENT ACCOUNTABILITY OFFICE: The government must learn from these costly lessons and make fraud prevention a high priority for future disasters.

(END VIDEOTAPE)

KOPPEL: But, even before then, these lessons learned can still prove useful in the post-9/11 recovery and rebuilding, Wolf. In fact, the federal government has -- is yet to spend another $6 billion the Congress approved back in 2001 -- Wolf.

BLITZER: Andrea Koppel, on the Hill, thank you.

And we're also picking up new details on how the Homeland Security Department doles out anti-terrorism dollars. It's -- it's based in part on the National Asset Database, a system that breaks down, state by state, possible terrorist targets.

So, how did petting zoos and high-stakes bingo make the list?

Our Internet reporter, Abbi Tatton, is standing by with details -- Abbi.

ABBI TATTON, CNN INTERNET REPORTER: Wolf, the Kangaroo Conservation Center, that's one of about 1,500 sites in Georgia that appear on this Homeland Security list.

And the Department of Homeland Security's own inspector general has examined the list and is questioning what it's calling noncritical assets, not just the kangaroos, a petting zoo, an apple and pork festival in Illinois, a Tennessee Mule Day Parade.

This report criticizes these inclusions, saying the database does not accurately represent key sites nationwide that could be terror targets. And, also, it's making the allocation of resources difficult. It's also questioning the number of assets that different states submitted.

Look at Indiana there, with over 8,000. That's 50 percent more than New York, where lawmakers have recently criticized terror funding cuts.

The Department of Homeland Security, in a response, defended the database, saying it's supposed to be an inventory, not a prioritized list. They are, however, improving guidelines given to states on what is critical -- Wolf.

BLITZER: Abbi, thank you.

And still to come: Jack Cafferty wondering what it means that the U.S. Army is now ending its contracts with Halliburton. He's standing by with "The Cafferty File."

Plus: Senator Hillary Clinton and the health care industry -- our political analyst, Bill Schneider, will show us what's bringing this odd couple together.

Stay with us.

(COMMERCIAL BREAK)

BLITZER: There's a developing story we're following in Houston, Texas.

Let's go back to CNN's Fredricka Whitfield at the CNN Center.

What's the latest, Fred?

WHITFIELD: Well, our affiliate KHOU in Houston is reporting that, in Harris County, on Winfield (ph), somehow, a drum, a 55-gallon drum containing hydrobromic acid has been punctured at a warehouse there. About 200 people have been exposed.

This chemical is known to be one of the strongest mineral assets known. And because of the exposure to these 200 or so people now, a number of metro buses are being brought in to help provide some sort of air-conditioning triage. We don't know exactly what and how this drum was punctured, just that it has been, and that many people have been exposed, and these are the measures that are being taken right now.

BLITZER: We will continue to watch it.

Thanks very much, Fred. We will get more information and bring it to our viewers.

Back when she was first lady, Hillary Clinton made a bad first impression on the health care industry. But the times have changed, now that she's a U.S. senator and a possible presidential hopeful.

Let's bring in our senior political analyst, Bill Schneider -- Bill.

WILLIAM SCHNEIDER, CNN SENIOR POLITICAL ANALYST: Wolf, they say politics makes strange bedfellows. They don't come much stranger than Senator Hillary Clinton and the health care industry.

(BEGIN VIDEOTAPE)

SCHNEIDER (voice-over): Remember the Harry and Louise ads from 1994?

(BEGIN VIDEO CLIP, COALITION FOR HEALTH INSURANCE CHOICES AD)

UNIDENTIFIED MALE: Congress isn't passing the health care reform America wants.

(END VIDEO CLIP)

SCHNEIDER: The health insurance industry used those ads to help defeat first lady Hillary Clinton's health care plan.

Now "The New York Times" reports that Senator Hillary Clinton ranks second among candidates in contributions from the health care industry, more than $850,000.

Senator Clinton has proposed legislation to increase Medicare payments to health care providers and to lower the cost of malpractice insurance. She's even worked with Newt Gingrich to improve health care information technology.

SEN. HILLARY CLINTON (D), NEW YORK: I know it's a bit of an odd- fellow or odd-woman mix, but Speaker Gingrich and I have been talking about health care and national security, actually, now for several years.

SCHNEIDER: So, why is Senator Clinton raising so much money from the health care industry? We asked a prominent Washington lawyer.

FREDERICK GRAEFE, ATTORNEY: There's no quid pro quo. You're not buying access. Your -- you want your friends elected or reelected.

SCHNEIDER: Does the health care industry consider Hillary Clinton a friend?

GRAEFE: Yes, I would say she's a friend of the health care industry, in the sense that she understands it, OK? She's had a lot of experience in it.

SCHNEIDER: She probably knows the health care system, what's good and bad about it, better than any other senator. Oh, and one more thing: power.

GRAEFE: All industries, I think, including health care, are reaching out to her, because they expect her to be the nominee in 2008.

SCHNEIDER: The health care industry knows she's likely to be a major player.

CLINTON: I have done a little bit of work on health care myself, and still have the scars to show for it.

(END VIDEOTAPE)

SCHNEIDER: To paraphrase something British statesman Lord Palmerston once said, in politics, there are no permanent friends and no permanent enemies. There are only permanent interests -- Wolf.

BLITZER: Bill Schneider, thanks for that -- Bill Schneider, part of the best political team on television -- CNN, America's campaign headquarters.

Still to come: raging flames, dry land and hot winds challenging firefighters in Southern California -- we will have a live report on the fight against a threatening wildfire.

And what does it mean that the U.S. Army is ending its contract with Halliburton? Jack Cafferty will be back with your e-mail.

Stay with us.

(COMMERCIAL BREAK)

BLITZER: Let's check back with Jack. He's got "The Cafferty File" -- Jack.

CAFFERTY: The question this hour is: What does it mean that the Army is ending its contract with Halliburton?

James, sergeant 1st class, U.S. Army infantry, in Denton, Texas: "As a soldier who recently completed a 13-month tour in Iraq, I applaud the decision to make the field wide open. With competition, the price for the taxpayer will go down, the quality for the military personnel in theater will go up -- a win-win situation for all of us."

Larry in Astoria, New York, writes: "It means nothing now. It's too late. It's normal for a bloodsucking leech to fall off once it's so bloated, it can't possibly take another drop. Why do you think we went to war in the first place?"

Jean in Dallas writes: "Jack, do you really think the Army makes a decision without a direction from the top of the Pentagon? It means Rumsfeld doesn't want Halliburton to be an issue for this year's election."

Steven in Springfield, Virginia, writes: "It means the company with the lowest bid will get the contract. If Halliburton gets it, then they get it. Jack, why do you always have to have some sort of conspiracy. This is just good business."

Uh, yes.

Tim in Beverly, Massachusetts: "It means the Republicans are afraid of losing control of at least one house of Congress, and they're trying to muddy the waters before the inevitable and long- overdue congressional oversight hearings finally begin."

And Janet in Tacoma, Washington, writes: "With the mess the budget is in, the Army was forced to stop shopping at Neiman Marcus, and now must visit Kmart in order to get a decent deal, just like the rest of us" -- Wolf.

BLITZER: Jack, thanks very much.

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