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PAULA ZAHN NOW

America's Mortgage Crisis; New Jersey Shock Jocks Target Illegal Immigrants; Gender Bender: Fired Over Sex Change; Klan Offers Support for Texas College Students who Threw Racist Party

Aired March 23, 2007 - 20:00   ET

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


PAULA ZAHN, CNN ANCHOR: And good evening, everybody. Glad to have you with us tonight.
Out in the open: the quiet crisis, mortgage meltdowns that could cost you your house and affecting just about everyone else, potentially destroying the economy.

And here is a radio campaign you are not going to believe: public service or just plain racism? These guys want their listeners to turn in illegal immigrants, do what they say the government is supposed to be doing.

And happening now: A Florida city manager pleads for his job, after being fired because he plans to have a sex change, this after rave reviews and a huge, fat pay raise.

We're sticking with a story that has really caught our attention and I think matters to everyone out there. It is the quiet crisis in the mortgage business that is so serious, it is threatening America's entire economy. Yes, it is that serious. And this program is making a commitment to keep reporting on it.

As we speak, some two million American families can't make their mortgage payments and risk losing their homes. And you know what? That's just the beginning.

To bring this more out in the open now, we asked CNN's personal finance editor, Gerri Willis, to dig deeper into this mortgage meltdown crisis.

(BEGIN VIDEOTAPE)

GERRI WILLIS, CNN PERSONAL FINANCE EDITOR (voice-over): Here's a statistic that might mislead you: Existing home sales went up by 3.9 percent last month, the biggest rise in three years.

While that report today from the National Association of Realtors sounds good, industry insiders say it could be an aberration caused by good weather in December and January. In fact, experts at Economy.com expect housing prices nationally to fall by 3 percent to 5 percent this year.

They are blaming record foreclosures across the country, an estimated 2.2 million foreclosures in the next few years. Many of these involve people with less-than-ideal credit who get so-called subprime mortgages. Those are loans with higher interest rates, rates that keep going up after a relatively short term, so high, some can't afford the payment. With many more homes expected on the market, with many fewer buyers qualifying for mortgages, home prices generally are expected to drop.

Even the usually upbeat National Association of Realtors is hedging its bets.

DAVID LEREAH, SENIOR VICE PRESIDENT AND CHIEF ECONOMIST, NATIONAL ASSOCIATION OF REALTORS: Foreclosures are going to be a problem. They are -- they're at an all-time high. They will continue to increase. The -- some estimates are maybe a million foreclosures over the next several years. It's going to be hard for the local markets to absorb.

WILLIS: In some areas, officials are so concerned about the number of houses left vacant after foreclosures that they are mowing lawns and fixing broken windows to prop up the value of surrounding homes.

Economy.com predicts that local markets in Sarasota, Detroit, Sacramento will be the hardest hit, with price decreases of 9 percent or more. Banks are trying to stop the bleeding with tighter lending standards.

ROBERT SHILLER, ECONOMICS PROFESSOR, YALE UNIVERSITY: Price decline is a fundamental factor that inhibits mortgage lending, because mortgage lenders know that, when prices are falling, people are less likely to repay their loans. And, so, they're -- they are going to be pulling back on their -- on their credit.

WILLIS: But Shiller says the current crisis could spill over to the greater economy. And it could be a while before home buyers start sending the market up again.

SHILLER: If we look back at the last cycle, home prices declined for several years in the early 1990s. This is a bigger cycle. So, I think it's possible that homebuyers might take their time.

WILLIS: That means homeowners will be struggling to sell. And homebuyers may be staying put for some time to come.

(END VIDEOTAPE)

ZAHN: And personal finance editor Gerri Willis is here in person.

Thanks for keeping track of this story for us.

WILLIS: You're welcome, Paula.

ZAHN: It's a complicated one, and a very important one.

Obviously, the implications of this go far beyond subprime mortgage loans. Why should all of us be nervous about this, whether you have one of these loans or not? WILLIS: I got to tell you -- exactly. Even if you think you are safe, that you have a great 30-year fixed-rate mortgage and you are sitting pretty, guess what. If there's even one foreclosure in your neighborhood, it sends your house price down 1 percent. Now, that doesn't sound like a lot, but imagine you have a $300,000 house. Three foreclosures in your neighborhood, that's $9,000 off the top of your price. That hurts.

The other problem is that -- is this. Lenders are changing their lending standards. They are making it harder to borrow. So, let's say that you are sitting pretty. You thought you would tap your home equity to make sure that you could pay for your kids' college or to pay for some renovations to your house this spring.

Well, guess what? It's going to be harder to borrow. You will pay more in fees and interest rates.

ZAHN: You hear story after story about families getting wiped out. Do you have any advice for folks who are in trouble now, and what they can do to dig themselves out?

WILLIS: I can't emphasize this enough. Talk to your lender. Talk to your lender. Talk to your lender. Most people, they want to put their heads in the sand. You can't do that.

And I'm not talking about calling up the guy who served you the loan. You need to contact the loss-mitigation department. Those are the folks that can help you. And then ask for a repayment plan. Look, your bank doesn't want to own your house. They are not interested in that. They have to fix it up. They have to sell it. They would much rather that you fix the problem.

ZAHN: How flexible will they be?

WILLIS: They can be pretty flexible. And let me tell you, as this foreclosure crisis gets worse, they will be forced to be more and more flexible, because more people are going to have these problems. And they will face their own problems, if they don't decide to help people out just a little bit.

ZAHN: Very quickly, in closing, what kind of deals would be they willing to cut, just to extend the length of period of time that...

WILLIS: Extend the length of time that you can repay, put off your payments for a period of time. They are going to talk to you, work you through this. You can also contact people in your community who work with people who are in crisis with debt.

It's time to get some professional help. Even if you are only worried, if you're a month behind, two months behind. Pick up the phone. Make a phone call. It's time to do it now.

ZAHN: In the meantime, all the folks out there that are in trouble can just listen to you, some excellent advice. Thank you.

Right now, I want you to meet one of the two million families that are in over their heads and could lose everything. How did it get that way?

Well, we sent our Allan Chernoff to listen to their story, because it could also be yours.

(BEGIN VIDEOTAPE)

ALLAN CHERNOFF, CNN SENIOR CORRESPONDENT (voice-over): This is Ed Preteska's piece of the American dream, a workshop, a backyard, and a modest two-bedroom home. Now he's close to losing it all. His monthly mortgage payment is about to rise, an increase he and his wife, Marie (ph), cannot afford.

ED PRETESKA, HOMEOWNER: It's almost like dying. Somebody came to you and said to you, today's your last day on Earth. Tomorrow, you are dying.

CHERNOFF: You feel losing the house would be equivalent?

E. PRETESKA: Yes, about the same. I feel that, if I lost all this, might as well put me in the box.

CHERNOFF: Losing the house would be the culmination of a litany of hard luck. Ed and Marie's son, Shane (ph), nearly died two years ago in a motorcycle accident. Marie had to take months off to care for Shane.

At about the same time, Ed lost his job as a security officer. With unpaid bills piling up, the Preteskas got a call from a mortgage broker across the country in California.

And what did the mortgage broker actually say to you?

MARIE PRETESKA, HOMEOWNER: That: I can help you, Marie. I can definitely help you.

CHERNOFF: The broker consolidated their mortgage with other debts and wrote a new $234,000 adjustable-rate mortgage. The terms were tough. After two years at 7 5/8 percent, their interest rate could go up by as much as three percentage points, and potentially keep rising every six months. The only sure thing, it would never go below the original rate.

M. PRETESKA: I really, truly believed that, in two years, we could refinance, and the rate would go down, and it would be easier for us. It's not.

CHERNOFF: All too soon, Ed and Marie expect they will be charged an extra $160 a month. They say they can barely afford their $1,600 monthly payment now. Ed is 70 years old. Between his Social Security, a part-time job, and Marie's salary from a doctor's office, they bring home about $53,000 a year. Marie dealt with the mortgage, and admits she never read the fine print.

M. PRETESKA: I didn't pick up on that.

CHERNOFF (on camera): They are saying right here your rate will never decline below the original interest rate.

M. PRETESKA: And I didn't -- they never said that to me. And, of course, who is going to sit there and read all this? What person is going to sit there and even understand it?

CHERNOFF (voice-over): Bob Annette (ph), a mortgage consultant in town, says the Preteskas' broker, Twin Capital Mortgage in San Francisco, never should have put them into that kind of loan.

E. PRETESKA: Well, he's in California. He doesn't have to see these people, ever. What interest does he have in them? None.

CHERNOFF: Twin Capital declined to speak on camera, but, in a written statement, said: "Twin Capital Mortgage proudly stands behind the loan that we provided for the Preteska family. We strongly believe it was the best financing solution for them, given their circumstances and credit profile."

The Preteskas are among hundreds of thousands of borrowers with poor credit who were sold mortgages that are ticking financial time bombs, set to put them over their heads as soon as mortgage rates climb.

(on camera): Is there any way for Ed and Marie to get out of this?

UNIDENTIFIED MALE: In the immediate future, I don't see it.

CHERNOFF (voice-over): If the Preteskas tried to refinance, they would have to pay a steep penalty under terms of their loan.

If they sell, Bob Annette (ph) says, the price they would get wouldn't even pay off the mortgage. They would still owe the lender.

M. PRETESKA: Give me a kiss goodbye.

CHERNOFF: So, it appears inevitable that the Preteskas are going to lose their home and, in the process, fall even deeper into debt.

Allan Chernoff, CNN, Naugatuck, Connecticut.

(END VIDEOTAPE)

ZAHN: And we change our focus in a little bit.

Some radio shock jocks think they have a catchy name for their latest project. Listen to this.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: La Cuca -- what is it?

UNIDENTIFIED MALE: Gotcha.

UNIDENTIFIED MALE: Gotcha.

UNIDENTIFIED MALE: It doesn't happen that way.

(END VIDEO CLIP)

ZAHN: Are these guys suggesting that illegal immigrants are cockroaches? Just wait until you hear what they want your listeners to do.

Also, I want you to watch this remarkable story. You are not going to believe the lengths this young mother went to, to honor her husband's legacy. She had his baby two years after he died in the Iraq war.

(COMMERCIAL BREAK)

ZAHN: Well, as all of you know out there, talk radio can get pretty darn raunchy.

But, when a couple of shock jocks cooked up a project called La Cuca Gotcha, as in the old Mexican song "La Cucaracha," we just couldn't help but notice that the title of that song actually means "The Cockroach," and these guys want their listeners to turn in illegal immigrants.

We're bringing it out in the open tonight because it reflects the passions of people from coast to coast in the fight over illegal immigration.

That's why we asked Jim Acosta to tune in to the Jersey Guys.

(BEGIN VIDEOTAPE)

CRAIG CARTON, RADIO TALK SHOW HOST: 3:36, Jersey Guys, at the center of the storm again.

JIM ACOSTA, CNN CORRESPONDENT (voice-over): When radio shock jocks Craig Carton and Ray Rossi, AKA the Jersey Guys, sound off on the issue of illegal immigration, they do it in their usual take-no- prisoners style.

CARTON: If you are here illegally, you are breaking the law.

RAY ROSSI, RADIO TALK SHOW HOST: Right.

CARTON: No better, no worse than a guy that robs the liquor store or the guy that waits to case your house out and rob you of your belongings. You are a criminal.

ACOSTA: And they don't stop at calling undocumented workers criminals. The Jersey Guys are urging their audience to report anyone who even looks illegal to immigration officials, using what they consider a catchy name to publicize their campaign.

UNIDENTIFIED FEMALE: La Cuca -- what is it?

CARTON: Gotcha.

ROSSI: Gotcha.

CARTON: La Cuca Gotcha.

ACOSTA: A not-so-veiled take on the old Mexican folk song "La Cucaracha," or "The Cockroach."

But not everybody is singing around.

UNIDENTIFIED FEMALE: You don't think the implication is there that you are talking about finding cockroaches?

CARTON: No, I do not.

ROSSI: No. The name itself is really from an 18th century Mexican song. The song is probably as...

ACOSTA (on camera): But "La Cucaracha" cockroach. That's what it means.

ROSSI: Yes, apparently, it does. But the goal wasn't to call Hispanics or illegals cockroaches.

ACOSTA (voice-over): State lawmakers and Hispanic groups in New Jersey accuse the Jersey Guys of whipping up xenophobic vigilantism, like Minutemen with microphones.

WILFREDO CARABALLO (D), NEW JERSEY ASSEMBLYMAN: The broad-brush characterization against Latinos by the Jersey Guys dehumanize a portion of our state's population, and it fosters hate.

ACOSTA: Franklin is an illegal immigrant who lives in New Jersey, but doesn't want his last name used. He is afraid the Jersey Guys are making him a target. He says he risked his life coming to America, stowing away on a train like this one.

FRANKLIN, ILLEGAL IMMIGRANT (through translator): In God's eyes, we are all the same. The only difference between us and the people on the show is that we are foreigners and they are from here.

ACOSTA (on camera): How can you call this La Cuca Gotcha, and it not be racist?

CARTON: Well, we didn't mean it with any offense. The name of it, to me, is irrelevant. It's what the program is. And the program is to get rid of illegal immigrants, because they are a danger to our country.

ACOSTA (voice-over): To defend themselves, the Jersey Guys held a press conference and aired it live.

The toughest questions...

UNIDENTIFIED FEMALE: People want to know if you are not desperate for ratings.

CARTON: Well, that's a good question. ACOSTA: ... came from the Spanish-speaking reporters.

UNIDENTIFIED MALE: The Latin community is looking for an apology.

CARTON: Yes.

UNIDENTIFIED MALE: Do you have something to say to them?

CARTON: I will not apologize to any community, because I don't believe that I have offended the Latin or Hispanic community.

UNIDENTIFIED PERSON: The Jersey Guys are not the problem. The problems are the illegal aliens.

ACOSTA: Boosted by their on-air supporters, the Jersey Guys vow to continue La Cuca Gotcha.

(on camera): Are you keeping the name?

CARTON: Yes.

ACOSTA: The name is not going anywhere?

CARTON: No.

ROSSI: No.

CARTON: And we don't apologize for any aspect of this project.

ACOSTA (voice-over): And that includes the end date for the project, May 5, also known as Cinco de Mayo.

Jim Acosta, CNN, Trenton, New Jersey.

(END VIDEOTAPE)

ZAHN: Now it's time to get this out in the open tonight.

And with me here, radio talk show host and NewsMax.com columnist Steve Malzberg. And Miguel Perez, he's a syndicated columnist and journalism professor at New York's Lehman College.

Great to have you both of you back with us.

STEVE MALZBERG, RADIO TALK SHOW HOST: Thank you.

ZAHN: You heard what the jockeys had to say, disc jockeys, that this is not meant to be racist, that the name is all by irrelevant. They just don't want illegal immigrants in this country.

MIGUEL PEREZ, SYNDICATED COLUMNIST: That's what all racists say. That's the problem here. The problem is that it's disguised racism, but it's still racism.

ZAHN: Against all Hispanics? PEREZ: This is vigilante radio.

Look, this is obviously not a complaint against illegal immigrants. This is -- by using that -- that word, cucaracha, which is very offensive, calling all Latinos -- they are basically calling all Latinos cockroaches -- and by using Latin music in their show when they're doing this campaign, by saying that the campaign will end on the Cinco de Mayo, they are offending a lot of people.

I'm -- Paula, I am used to getting letters, as a syndicated columnist, from bigots all over the country. And I usually don't get offended. These guys really offend me.

ZAHN: Yes, but you can't be proud of the fact there are some 350,000 illegal immigrants in New Jersey.

We're going to put those statistics up on the screen right now.

You certainly don't support the fact that this many people are breaking the law, do you?

PEREZ: I support the fact that they should be getting -- getting legalization. They are hardworking. They are what this country needs to survive.

If you put all those people on a plane tomorrow, this economy would go down the chute.

MALZBERG: Oh, boy.

(LAUGHTER)

ZAHN: What about that? A lot of people say that they are doing the kinds of jobs that most Americans don't want to do.

(CROSSTALK)

MALZBERG: Right. Right.

ZAHN: And you send 12 million of them home, your economy...

MALZBERG: And imagine if it was conservatives making that argument: We need the Mexicans and the illegals here to clean the toilets.

They would say racist, bigots. But people are now being labeled as -- by your guest here, as racist and homophobes and bigots, which is what the left always does to people who have a point to make that goes against the mainstream media, you know, grain, because they don't want lawbreakers.

Ask your guest if he would call them lawbreakers, if he would call them illegal immigrants. Probably, he would be against calling them that.

(CROSSTALK) PEREZ: They are lawbreakers. They are not criminals. And they should not being treated like...

(CROSSTALK)

MALZBERG: They are criminals. You break the law, you are a criminal, sir.

(CROSSTALK)

PEREZ: The law says these people are not criminals.

MALZBERG: Oh, really?

PEREZ: So, you should catch up on the law.

MALZBERG: They're lawbreakers, but they're not criminals?

(CROSSTALK)

PEREZ: Yes, they break the law. It's...

(CROSSTALK)

MALZBERG: That's a good trick.

PEREZ: It's a statutory break, but it's not a criminal.

MALZBERG: That's a good trick.

PEREZ: They tried -- you people, you and your people tried to make them illegal.

MALZBERG: "You people"?

PEREZ: Yes, you and your people.

MALZBERG: Ah, that's nice from a liberal. Very nice.

PEREZ: The extreme -- extremist right wing, extremists like yourself...

MALZBERG: Let me explain something.

ZAHN: OK. One at a time.

PEREZ: ... you tried to make them illegal last year, and you failed. You tried to turn them into criminals last year in Congress, and you failed.

MALZBERG: Well...

PEREZ: So, the American public should know that you have not gotten away with it yet.

MALZBERG: Well, I -- I -- to me, a lawbreaker is a criminal. But, that aside, what the Jersey Boys are doing, I can't vouch for the name. And I know Ray Rossi. I have known him for years. He's one of the Jersey Boys. He's no -- no bigot. The fact of the matter...

ZAHN: Wait. You say you can't vouch for the name.

MALZBERG: No.

(CROSSTALK)

ZAHN: You are not going to sit here with a straight face tonight and say that it's a wonderful thing that illegal aliens, and perhaps all Hispanics, are being called cockroaches.

MALZBERG: No. All Hispanics -- well, again, I can't get inside their head, and I don't work for the station.

But how are all Hispanics being called cockroaches? They want people to do what the State Department -- what the Homeland Security Department wants us all to do: be vigilant. You see an illegal, you think he's illegal, not go after him, not commit vigilantism. Call up or e-mail us. That's all they're saying.

PEREZ: The first people...

ZAHN: But you think this will create vigilantism?

PEREZ: Listen, of course. It will incite violence. It will create, you know, racial profiling.

ZAHN: Why? How is it any different than people turning in illegals in the past, to pick up a telephone?

PEREZ: Because the hidden bigots in this country see these guys on the radio, and they say, oh, it's OK now. It's OK for us to go pound some people.

(CROSSTALK)

ZAHN: Well, they are not saying that. They are saying pick up the phone, call it in, report it, if you know someone is here illegally.

(CROSSTALK)

PEREZ: The last people who want help from these guys is Homeland Security.

Homeland Security goes after criminals...

MALZBERG: Gangs...

PEREZ: ... not after -- you call in your neighbor and you suspect him?

(CROSSTALK)

PEREZ: And, for that reason, they should investigate him?

MALZBERG: Increase in crime.

PEREZ: Homeland Security doesn't want that.

What they want is responsible investigative stuff that they can check out.

(CROSSTALK)

PEREZ: If it's a criminal, somebody who violated a court order to leave the country, then maybe.

(CROSSTALK)

ZAHN: You get the last word, and a brief one at that.

(CROSSTALK)

MALZBERG: Illegals ruin neighborhoods. They bring increase in crime, overcrowded schools. Hospitals close down. Why should we tolerate it?

PEREZ: Hogwash.

ZAHN: We are going to end it on that note.

MALZBERG: OK.

(LAUGHTER)

ZAHN: Hogwash.

He got the last word, after all.

MALZBERG: Yes. That's OK. That's OK.

ZAHN: I don't want any of you to move. We have got a lot more to talk about.

Out in the open next: a development happening now in a story we have been following very closely for weeks. You might remember that the city manager in Largo, Florida, got fired because he wants to get a sex change -- this after getting a big pay raise, being told he was doing just a swell job.

Right now, Steven Stanton is inside Largo City Hall in a standing-room-only meeting. It is his last chance to convince city commissioners to give him his job back.

Carol Costello is outside Largo City Hall now. She joins me now.

What else is going on inside? CAROL COSTELLO, CNN CORRESPONDENT: Well, Paula, Steve Stanton just gave an impassioned speech, telling the citizens of Largo that the city manager job is his passion, and it's difficult to leave one's passion.

But the bottle line here, he has to convince enough commissioners to, in essence, rescind his firing, so that he can remain on the job.

(JOINED IN PROGRESS)

STEVE STANTON, FORMER LARGO, FLORIDA, CITY MANAGER: ... in the newspaper. It's been real difficult.

ZAHN: All right, we continue to listen to a little bit of what Steve Stanton had to say.

There has been a lot of talk about why it is that the city has turned on him so swiftly. Does it account for much that, in fact, he had gotten such positive job reviews, and the fact that he had been given a pay raise, which most people assume that he was being rewarded for a job well done?

COSTELLO: Well, Paula, I think it came as a surprise to the people of Largo. They suddenly found out that their city manager was going to become a woman, and they just couldn't adjust fast enough.

These city commissioners are sitting there, listening to this vitriol coming from their constituents, and they were moved to vote to fire him. Now it's up to Steve Stanton to try to convince them that they were wrong.

I'm going to have much more coming up a little later -- Paula.

ZAHN: Real quick answer: Where is his wife, where is she on this, and his son?

COSTELLO: Ah. His wife did appear tonight, but she was not walking beside him, and she did not sit beside him. But she did appear. And, as you know, she's been in hiding ever since this secret came out.

ZAHN: I guess no one should be too surprised about that.

Carol Costello, thanks. We're going to be coming back to you in a little bit, as this story continues to unfold tonight.

Meanwhile, the fear of losing a loved one in Iraq has some soldiers' families going to desperate lengths. Out in the open, I want you to pay attention to this story, because it really is extraordinary -- the amazing story of a war widow who never gave up and finally gave birth to her fallen husband's son two years after he died?

(COMMERCIAL BREAK)

ZAHN: The Iraq war entered its fifth year this week. And, as of today, at least 3,233 members of the U.S. military have died in Iraq.

Tonight, we are bringing out in the open the extreme, even desperate lengths some Iraq war widows have gone to, to create families and keep alive the memory of their husbands.

Wait until you see this story from Keith Oppenheim on one soldier's son born years after his father died in Iraq.

(BEGIN VIDEOTAPE)

KEITH OPPENHEIM, CNN CORRESPONDENT (voice-over): Eight-month-old Benton Smith is like hundreds of children around the country. He lost a parent, his dad, to the war in Iraq. But, unlike other children, Benton was born long after his father died.

KATHLEEN "K.C." CARROLL-SMITH, IRAQ WAR WIDOW: I wish his father could have been here and seen his son. And, pretty much everyday, I wonder what Brian would have thought of his wonderful little baby.

OPPENHEIM: Brian is Brian Smith, the father Benton will never meet. That's because Benton was born two years after his father's death. His mom, Kathleen -- her friends call her K.C. -- explained how, due to modern science and the casualties of war, Brian was gone before his son was even conceived.

CARROLL-SMITH: He was my best friend in the world and -- and the love of my life.

OPPENHEIM: The love story began in 1992, when Brian and K.C. met in Austin, Texas. They married. Brian became a lawyer. But, at the age of 2829, he grew restless. In 2002, he joined the Army and became a tank commander in Iraq.

On July 2, 2004, Lieutenant Brian Smith stepped out of his tank at a checkpoint and was killed by a sniper.

CARROLL-SMITH: When he died, it was really devastating. I thought my world had ended when he died.

OPPENHEIM: Before Brian left for Iraq, K.C. and Brian had been trying to have children. Brian donated his sperm so K.C. could keep trying to get pregnant while he was away. They never even considered he might not come back home. Brian did sign a document that stated, in the event of his death, K.C. could decide how to use his sperm sample.

And K.C. decided to have Brian's baby.

(on camera): So, he never said to you that it would be OK for you to get pregnant with his sperm if he passed away?

CARROLL-SMITH: No. But it wasn't -- he didn't say I couldn't or could. It was just never discussed.

OPPENHEIM: It's -- it's -- this question strikes you as strange?

CARROLL-SMITH: Yes.

(LAUGHTER)

OPPENHEIM: Explain. Why?

CARROLL-SMITH: Well, because we wanted children. And this is the child -- one of the child -- potential children we would have had. So, what is wrong with having the baby I would have had, even though he's not here?

OPPENHEIM (voice-over): At first, Brian's mother, Linda, was opposed.

(on camera): But did she feel that his permission was missing in some way?

CARROLL-SMITH: I believe so. I think that she felt maybe I was taking liberties.

OPPENHEIM: What did you say to your mother-in-law when she objected?

CARROLL-SMITH: "Linda, you know, this is my life, and I really want to have Brian's child."

OPPENHEIM (voice over): K.C. convinced her in-laws that this was the right thing to do. On the third try for in vitro fertilization, she got pregnant, 15 months after her husband died. With all the joy, it has been a challenge for K.C. to watch her loving child grow in the absence of his father.

(on camera): Do you feel the loss of Brian when you feel the warmth of Benton?

SMITH: Yes, but his dad won't see this. Won't see the miracle that he helped produce.

OPPENHEIM (voice over): But no doubt, this little miracle is a happy boy.

SMITH (SINGING): A-B-C-D-E-F-G...

OPPENHEIM: And K.C. says Brian is present every day in the stories that Benton hears about the man who gave him life only after he lost his own.

SMITH (SINGING: ... next time won't you sing with me?

OPPENHEIM: Keith Oppenheim, CNN, Austin, Texas.

(END VIDEOTAPE)

ZAHN: What a story.

One more thing. The Veterans Administration says there are at least two other children like Benton Smith. Not just born, but conceived with sperm samples after their fathers died.

A little bit earlier we brought "Out in the Open" the story of a city manager who got fired for wanting a sex change. Will his town relent and take him back? We're going to take you live to tonight's big meeting and fireworks. Lots of them so far, and it's not over yet.

"Out in the Open" a little bit later on, a college party that offended almost everyone except the Ku Klux Klan.

We'll explain when we come back.

(COMMERCIAL BREAK)

ZAHN: Miss USA, Britney Spears, Lindsay Lohan. all have been in and out of rehab lately. Now another young star's checked in.

Who is it? Stay tuned.

Then coming up at the top of the hour, Robert Shapiro and Jamie Lee Curtis are among the guests who will talk about overcoming addiction on a very special "LARRY KING LIVE".

But right now we go back to that story that's happening in Largo, Florida, at this hour. It's something we brought "Out in the Open" earlier this month. We've been following it very closely. It's fascinating to watch. And just tonight, it's reaching a turning point.

Three weeks ago, Largo commissioners fired veteran city manager Steve Stanton because he's going to have a sex change operation. Right now, inside a heated, packed meeting, pleading to get his job back -- you are looking at live pictures, the community taking him on. And as we watch this play out, we are going to check in with Carol Costello, who is outside and is very tuned in to all of the fireworks tonight.

Carol, what is the most explosive thing we've heard so far?

CAROL COSTELLO, CNN CORRESPONDENT: Oh, my goodness. We've heard a lot of explosive things.

This hearing has been going on for more than two hours now, Paula. And, you know, Steve Stanton has tried everything he could to prepare for this night. He's done numerous media interviews. In fact, just this morning he shot an interview with "The Daily Show" with Jon Stewart.

And, of course, he talked to us. He talked to other media outlets. He even convinced his wife to come with him to the hearing today.

But still, it's going to be a really tough sell, Paula.

(BEGIN VIDEOTAPE) COSTELLO (voice over): Steve Stanton is ready, surrounded by his wife and his attorneys, ready to fight, not just for his job, but for the compassion of his community.

STEVEN STANTON, FIRED LARGO, FLORIDA, CITY MANAGER: Largo has not been a job to me. Largo's been a passion. Largo's been my passion. And one does not just replace one's passion.

COSTELLO: Hundreds of residents of Largo City, Florida, a town of just 75,000, lined up for hours to hear Stanton explain why he should be allowed to keep his job as their city's manager.

NADINE SMITH, EQUALITY FLORIDA: Tonight was the last chance really to stand up for equality and fairness, and to tell the commission that this is job discrimination. It doesn't even matter how they try and pretty it up. What they are doing right now is firing someone because this person announced that they are transgender.

COSTELLO: Many came to tell their board of commissioners they want him gone before he gets a chance to fulfill his plans to become a she.

UNIDENTIFIED FEMALE: God doesn't accept everyone.

ROBERT Jackson, FORMER LARGO MAYOR: It will break the city. It would be a disaster. This community is not ready for that.

COSTELLO: Stanton argues that for 14 years he's been a beloved public servant, one who has increased the town's revenues, improved its services. He performed so well, he even got a raise. But it all fell apart when the media forced him to reveal his secret -- this 48- year-old man was planning to become a woman.

Public reaction was fierce.

UNIDENTIFIED MALE: ... terminate Mr. Stanton.

UNIDENTIFIED MALE: The ethics bothers me a lot.

UNIDENTIFIED MALE: And everybody in this city of Largo is just supposed to roll over and accept that?

COSTELLO: Although several commissioners had promised their support, they voted to fire him. Tonight is his chance to appeal that decision. He only needs one vote. He only needs to convince just one more commissioner that he suffers from a disorder called Gender Dysphoria and needs their support.

KAREN DOERNING, NATIONAL CENTER FOR LESBIAN RIGHTS: Being transsexual is actually a medical condition. There's a condition called Gender Dysphoria, or Gender Identity Disorder, and it's where basically your brain tells you are one gender, but you are born with the anatomy of the other gender.

COSTELLO: It's a disorder, Stanton says, his wife and child have come to understand. And that in part has made his fight worthwhile.

STANTON: Two years from now I see myself as a very happy, well- adjusted person that is going to look back upon all of this and knowing that it was all worth it.

(END VIDEOTAPE)

ZAHN: So, Carol, you say the next step is just to get one commissioner to change their vote. What are the chances of that happening?

COSTELLO: You know, I talked to some local reporters, Paula, because, you know, they live in this community and they know it much better than I do. They really don't believe Steve Stanton has much of a chance to get his job back.

He remains optimistic though. He's optimistic through this whole thing. And, you know, if he doesn't get his job back, he's in for quite a fall.

ZAHN: Well, it certainly didn't sound like he had much support from the folks we just listened to in your piece.

Carol, keep us posted.

COSTELLO: Sure will.

ZAHN: If anything major happens, we'll come back to you live.

Back first though to tonight's "Out in the Open" panel -- Steve Malzberg and Miguel Perez.

OK, gentlemen. We didn't get a chance to hear much of what Mr. Stanton had to say to defend himself tonight. Let's listen to a small part of his impassioned plea.

(BEGIN VIDEO CLIP)

STANTON: There's a tremendous amount of misinformation regarding what a transsexual is. Is it responsible for someone to be one or not? Is it an offense like any other employee misconduct would be?

If somebody truly loved their family, would they simply not do it? Would they simply not do it?

So those questions, those were questions.

(END VIDEO CLIP)

ZAHN: All right, Steve. Put yourself in the commissioners' place. Would you fire a guy simply because a reporter outs him and says he's going to have a sex change operation?

MALZBERG: Well, it goes beyond that. First of all, obviously...

ZAHN: Why? MALZBERG: Because that's what the people obviously want. In 2003, that town voted down a so-called equal rights protection for homosexuals and transsexuals and transgenders and all that. So the people have spoken on this.

They've obviously spoken. The commissioners who are elected by the people know where the public is coming from in their town. That's why they all voted to fire him in the first place. So that's what the people of the town want.

How would you like your town to be engrossed from now, from today, right on through this entire transition to a woman, focusing every day on this guy, on how he's progressing? It will become a farce. The whole town will become a laughing stock.

I wouldn't want my town to be known for that. This guy should have the courage -- first of all, look what he's doing to his 13-year- old child, putting himself in the spotlight like this. He should step aside, have his transsexual change, and then go -- try to get his old job back as a woman.

ZAHN: Do you think it's anybody in the community's business what...

PEREZ: No.

ZAHN: ... the root of his sexuality?

PEREZ: No.

ZAHN: If he has some sexual dysfunction problem or...

PEREZ: As long as it doesn't affect his job. Look, Paula, if you came in here tomorrow and you said, "My name is Pablo Zahn," and you did your job just the way you are doing it now, why would -- why would anybody object?

ZAHN: Because he said it would be a major distraction, and that would be all anybody was focused on.

PEREZ: Well, you know, it's a major distraction because unfortunately a lot of people in this country have major homophobic hang-ups. That's why. It's all about homophobia here.

MALZBERG: I was waiting for it. You see, on the immigration issue you are xenophobic and racist. Now you're homophobic. Anybody who disagrees with what the liberal point of view has a label put on them.

ZAHN: All right. OK. But you can't ignore the fact -- and we're going to put up on the screen what a bunch of Fortune 200 and 500 companies have done.

And they have actually put policies in place that protect transgender employees. Look at this, 122 of the Fortune 500 companies. MALZBERG: Right. So let him go work for one of them.

ZAHN: So you don't agree that there ever should ever be any kind of ban on discriminating against anybody on the basis of their sexuality?

MALZBERG: If you owned a little shop, for instance, a candy store, and your main greeter was going to do this, you'd have a right to fire that person because this is who you present to the public. This is the face of your company. I think it depends on a case-by- case basis.

This man is the city manager. This city will be known as the transsexual city, and it's going to be a laughing stock, right or wrong, for the next entire amount of time.

PEREZ: I don't find that funny. I don't know why it would be a laughing stock.

I think the city would get a lot of publicity, maybe. I agree with that.

MALZBERG: And they don't want it.

PEREZ: But what is the problem with that? I mean, the guy has a right to do with his life as he pleases. And we should not intervene.

MALZBERG: And they have a right to fire him.

PEREZ: If the guy -- if the guy -- yes, they have a right to fire. And I have the right to say they are a bunch of idiots.

MALZBERG: Yes, sure.

PEREZ: If the city -- if the city was dealing with the case of a teacher with young children that could be influenced, maybe I would go along with what they are saying. Only then. If they are high school students, no. You know, they are old enough.

ZAHN: Gentlemen, I've got to leave it there. Steve Malzberg, Miguel Perez, thank you.

MALZBERG: You're welcome.

ZAHN: Pablo Zahn?

PEREZ: Pablo Zahn, yes. Or Paul. I would even go along with Paul.

ZAHN: OK.

Some white college students got themselves in a lot of trouble for having a party that was intentionally planned to make fun of black people. But now they are getting some sympathy.

Who is on their side? It's "Out in the Open" next. You are not going to believe it.

And a little bit later on, there is Miss USA, Britney Spears, Lindsay Lohan, and who is in rehab now?

Stay tuned. The list grows and grows and grows.

(COMMERCIAL BREAK)

ZAHN: We have a new disturbing development for you tonight in a story we've been watching all year long. We were all stunned when Allan Chernoff uncovered racist parties thrown by college students all over the country, parties where white students dress up and portray vile stereo types.

Now Allan's learned of a Ku Klux Klan rally to show support for some Texas college students who threw a racist party.

(BEGIN VIDEOTAPE)

ALLAN CHERNOFF, CNN SR. CORRESPONDENT (voice over): What kind of behavior could be so outrageous that it would prompt the Ku Klux Klan to demonstrate in favor of it? CNN reported on these Martin Luther King party pictures back in January, pictures portraying African- Americans in a demeaning way -- a white student dressed as Aunt Jemima. One wore a shirt saying, "I love chicken," and others chugging bottles of malt liquor.

The off-campus party at Tarleton State University sparked outrage at the Texas school.

DONALD ELDER, STUDENT, TARLETON STATE UNIV.: I was hurt because I thought there was only a few people like that that stereotyped.

CHERNOFF: This past week, the controversy attracted the Ku Klux Klan. The racist organization rallied on the courthouse steps in Stephenville, Texas, home to Tarleton, to show support for students at the party and to protest illegal immigration.

About 25 members of the traditional Christian Knights of the Ku Klux Klan, a faction of the white supremacist group that favors black outfits, were protected by fences and more than 100 police officers.

UNIDENTIFIED MALE: Back up! Back up! Back up!

CHERNOFF: There was one violent incident when the police detained a Klan supporter who got into a scuffle with a group of people there to protest the Klan. Ironically, most Tarleton State students saw none of this. They were off for spring break.

EFFRAM BRYANT, STUDENT, TARLETON STATE UNIV.: I was just kind of happy that I was going to be at home over spring break so I wouldn't have to be here to be involved with that.

CHERNOFF: Tarleton students and faculty say the Klan has no impact on campus.

KATIE WRIGHT, STUDENT, TARLETON STATE UNIV.: Anything like that is just a shock.

WANDA MERCER, TARLETON STATE UNIV.: There was a lot of resentment on the campus that they would say KKK in the same sentence with Tarleton State University, that they felt like Tarleton might be attracted to their rhetoric because of what they saw earlier.

CHERNOFF: Indeed, after the party controversy, one of the hosts who posted pictures on his Web page apologized, saying partygoers did not realize how their costumes could be interpreted.

JEREMY PELZ, STUDENT, TARLETON STATE UNIV.: We didn't mean -- you know, we weren't trying to discriminate against anybody.

CHERNOFF: But for the Klan, the controversy was an opportunity to display its emblematic brand of prejudice, protected by the First Amendment, right to freedom of speech.

Allan Chernoff, CNN, New York.

(END VIDEOTAPE)

ZAHN: And right now, we've got to turn our focus to a "BizBreak".

(BUSINESS REPORT)

ZAHN: Well, the list of rehab all-stars keeps growing, growing, growing. There has been Miss USA, Britney Spears, Lindsay Lohan.

Who is next? Stick around and find out. We'll be right back.

(COMMERCIAL BREAK)

ZAHN: Surprise. Look who's in rehab now. Actor Jesse Metcalfe, the gardener on "Desperate Housewives," checked into a clinic this week to tackle a drinking problem. I'm mentioning that tonight because it's been some kind of week for celebs their addictions.

Britney Spears got out of rehab, and Miss USA, Tara Conner, who spent some time there herself over the last year, just a couple hours away from passing her crown to the winner of this year's pageant.

So, we wondered whether these role models for many young people are sending the wrong message and glamorizing the rehab process.

We asked Entertainment Correspondent Brooke Anderson to bring it all "Out in the Open".

(BEGIN VIDEOTAPE)

BROOKE ANDERSON, CNN ENTERTAINMENT CORRESPONDENT (voice over): A pop princess, a movie queen...

UNIDENTIFIED MALE: Kentucky!

ANDERSON: ... and the reigning Miss USA. Britney Spears, Lindsey Lohan and Tara Conner are American royalty whose loyal fans watch their every move. But for each of these three high-profile role models, the latest move has been rehab. And some say that may be a good thing.

DR. DREW PINSKY, ADDICTION SPECIALIST: The question of whether celebrities have de-stigmatized treatment is really an interesting one in that, yes, they have.

ANDERSON: Addiction specialist Dr. Drew Pinsky believes these young stars in rehab set a worthwhile example.

PINSKY: They help young people in the culture at large understand that when you meet criteria for an addictive disease there's treatment and it works.

ANDERSON: But some people worry that may make drugs and alcohol more appealing.

LIZ PERLE, COMMON SENSE MEDIA: Kids are being given the message that it's sort of a whatever situation and it's consequence-free. And what we're really dealing with here in rehab are life-threatening diseases.

ANDERSON: Liz Perle is editor-in-chief of Common Sense Media, a nonprofit organization dedicated to improving the effects of media and entertainment on kids.

PERLE: They're treating it like a spa almost. Kids are listening to this and doing monkey see, monkey do. They're just going to think, well, if it happens to me, I'll just pop into rehab. It should be fun.

ANDERSON: In fact, that's exactly how Miss USA Tara Conner described her recent experience in drug and alcohol rehab.

TARA CONNER, MISS USA: It was amazing. It was absolutely amazing. A lot of fun.

PERLE: What kids have to realize is, when Tara Conner says something like that, she's full of the number one symptom of alcoholism, which is denial.

ANDERSON (on camera): Adding to the confusion for money are images like these pulled from the Web site of Promises, where Spears received her treatment in Malibu. Expensive, luxurious, resort-like facilities that have become synonymous with the celebrity rehab experience.

PERLE: They're shown going in and out of very fancy real estate with very lovely pools instead of really addressing the serious nature of this compulsion that has them in their -- in its claws.

ANDERSON: But Dr. Drew Pinsky argues that high-end amenities make very serious and necessary treatment more attractive.

PINSKY: Addicts and alcoholics don't want to get treatment. They don't like to do it. So anything that would entice them into those environments, I can't -- I can't quarrel with that.

And it's intense. It's intense. Make no mistake about it. It's not a -- it's not a -- it's not a country club, though it may look like it.

ANDERSON: Fresh out of treatment, Spears now joins Lohan and Conner on the outside, where the world will see whether these women in fact ultimately can become positive rehab role models.

Brooke Anderson, CNN, Hollywood.

(END VIDEOTAPE)

ZAHN: Well, I hope so.

And overcoming addiction happens to be the focus of tonight's "LARRY KING LIVE". Actress Jamie Lee Curtis is among the guests who will talk about it with Maria Shriver.

All that coming up at the top of the hour.

We'll be right back.

(COMMERCIAL BREAK)

ZAHN: Before we go, some breaking news tonight.

According to The Associated Press, senior defense officials say a Pentagon investigation will recommend that nine officers, including up to four generals, be held accountable for missteps in the aftermath of Pat Tillman's death, who ended up dying from friendly fire.

That wraps it up for all us here tonight.

Thanks for joining us.

Good night.

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