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Will the Bailout Work?; The Iraqi and the CIA
Aired October 10, 2008 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
(BEGIN VIDEOTAPE)
RICK SANCHEZ, CNN ANCHOR (voice-over): Coming at you now: the opening bell signals a frightening start, as the Dow races towards Scaryville. But, then, this. It starts heading the other way on news that banks may start lending again.
But then this: The president goes on TV to calm the nation. The market goes down 107 points.
UNIDENTIFIED MALE: Our houses became ATMs and we used them to fill our McMansions with McStuff.
SANCHEZ: How will this change America, change us all?
UNIDENTIFIED MALE: During our interview, Alwan (ph) seemed nervous, often smoking between questions.
SANCHEZ: A CNN exclusive interview with the man known as Curveball. Why should you care?
UNIDENTIFIED MALE: Never before have we gone to war on the basis of such an utter and complete fraud.
SANCHEZ: You will only see it right here, where your comments, unfiltered, on Twitter, MySpace, and more make this your newscast. It starts now.
(END VIDEOTAPE)
SANCHEZ: Hi, everybody. I'm Rick Sanchez.
Got an hour to go before now the Dow closes, so before we do anything else, let's check the numbers. We are going to be riding this ride all the way through the next hour. We are going to check the Big Board there on Wall Street. We are also going to be able to check the Chicago Board of Trade. That is the one that you see right there on the right.
Now, you see that other quadrant there? You see those markings there? We are going to do something very different during this next hour. We have invited a guest who actually will explain to all of us, like no one else can, exactly what is going on with this market, how we can possibly fix it, how we got into the fix that we are in to begin, and whether the fix that we have now will actually work.
His name is Sal Khan. You have seen him on the Internet. He is by far the most popular economist on YouTube. That is what he looks like, brilliant guy. We will save him and we will bring him up in just a little bit.
But, before we do that, let's start with the political side of this argument, and it has to do with this on this day. What is it that actually is happening that has triggered all of this? Most people will tell you it is the probably that foreclosure mess that we have been talking about, the housing bubble.
Well, John McCain today has come out with a statement saying that the only way that we are going to get out of this situation is to actually help those people, those people who are nearing foreclosure.
Here is what he said. Let's take it.
(BEGIN VIDEO CLIP)
SEN. JOHN MCCAIN (R-AZ), PRESIDENTIAL CANDIDATE: Under my orders, as president, the secretary of the treasury will carry out a homeownership resurgence plan.
The United States government will purchase mortgages directly and immediately from homeowners and mortgage services, and replace them, replace them, with manageable mortgages with rates that people can afford.
(APPLAUSE)
MCCAIN: A dream, the American dream of owning a home should not be crushed under the weight of a bad mortgage.
(END VIDEO CLIP)
SANCHEZ: All right.
So, according to McCain's plan, all of us would help those people with situational mortgages that they don't seem to be able to get out from under.
Now, he introduced that at the debate the other day. Barack Obama is now coming forth. And here is what he is arguing. How many people do we help? Do we help people who are in the market to buy a second or third home? Do we help people who are trying to invest? Do we help people who may have bought a home that was actually bigger than what their budget could afford?
That is the new question being raised. That's the new wrinkle. Let's take a look at Senator Obama's comment.
(BEGIN VIDEO CLIP)
SEN. BARACK OBAMA (D-IL), PRESIDENTIAL CANDIDATE: Right now, the law lets a bankruptcy judge write down your mortgage if you own six or seven homes. They can do it on the second and the third and the fourth and the fifth and the sixth and the seventh, but they can't do it on the only home you have got, if you have just got one. So, that might help Senator McCain sleep easier at night. But it won't do anything for folks like you.
(END VIDEO CLIP)
SANCHEZ: That sets the debate. We are going to be talking about that and the other wrinkles involved with this plan.
Before we do anything else, let's take you up to the Big Board, the market, Wall Street.
Susan Lisovicz is standing by, where things are pretty much where they were yesterday, when we talked, and the day before, when we talked. Susan, pick it up for us.
SUSAN LISOVICZ, CNN CORRESPONDENT: Yes. Well, Rick, Scaryville is right, because you and I are together in the final hour of trading, which is really when so much of the intense emotions kick in.
We have come off of an extraordinary session, the historic session, seven straight losing sessions for the Dow industrials. And despite that feverish bout of selling that we saw in yesterday's final hour of trading, there was more to go, a big burst at the open this morning, with the Dow tumbling nearly 700 points, only to rally back briefly, within 30 minutes, Rick, to get back into positive territory, a huge roar coming from the trading floor, but then to subside again.
What a lot of folks were hoping is something from the G-7 before the closing. So far, we haven't got it. We have heard the president talking. We have heard politicians talking. Investors, meanwhile, are walking -- or make that running -- to the exits.
(CROSSTALK)
SANCHEZ: Do they make anything of -- and I know you talk to these guys there on the trading floor -- do they make anything of the fact that, the other day when Henry Paulson spoke, the market actually did worse, and, today, when President Bush was speaking, he only spoke for nine minutes, but, in those minutes, the market went down 107 points. We counted. Coincidence? What do we make of that?
LISOVICZ: Well, you know, I believe -- well, the president was basically telling us, for instance, Rick, a lot of what we know already.
And, while these may be extraordinary measures that Congress and the Treasury and the Fed are making, we really haven't seen any -- any significant progress in terms of freeing up the credit markets.
SANCHEZ: So, you are saying their words were empty, they didn't really do anything, they didn't send any message at all? Then, why did it go down?
LISOVICZ: I think because there is no faith right now. There is simply no faith that it is working yet.
SANCHEZ: Got it.
(CROSSTALK)
LISOVICZ: And, meanwhile, you are seeing signs of an economy that is decelerating, and emotion is kicking in.
SANCHEZ: No faith is not good, Susan Lisovicz. Thanks for that report. We will be talking to you, obviously, throughout the course of this newscast.
I want to bring in somebody now that I am really excited about having on this show. He is totally different from most of the people that we talk to. He has gained his fame on YouTube, of all places, where people go to see how he explains things that many of us frankly don't understand.
So, let's start with the basics. Sal Khan, thanks you for being with us, from the Khan Academy, by the way.
Basic question: Explain to our viewers, explain to the million people out there what is actually broken that we need to fix?
SAL KHAN, KHAN CAPITAL MANAGEMENT: Right.
And, right now, we have so many -- the stock market going down every day and people are having foreclosures, and, you know, banks are stopping lending and they're failing. So, it is really hard for people to keep track of, what is the problem? Are these just causes of the problem or are they the actual problem? So, I think we need to take a step back. And I have drawn a little diagram here.
SANCHEZ: Let's put it up.
KHAN: I have drawn a little diagram here. And I think there is a basic, fundamental question that we all have to ask. And what does the financial system do? They make a lot of money. Hopefully, they add some value to our economy.
And this diagram essentially explains what the financial system does. So, in a capitalist economy, you have a lot of people with capital. That could be land. That could be gold. That could be -- I don't know -- animals. That could be cash.
And what you need to do in order to make the economy grow is invest that capital into projects, build factories, plow seeds, hire people. And what the financial system does, the banks and the markets, they take that capital and hopefully they allocate it on projects that actually put people to work, hire people, grow our GDP.
The problem right now is, is, as opposed to the financial system actually putting more capital into the real world, it is for the most part more concerned with self-preservation at the moment. They are kind of in survival mode. And because they are in survival mode, you don't have this flow of capital going from whoever has it to the financial system and then to the projects. You pretty much have everything just going back into the financial system, because it is in essentially financial -- survival mode.
SANCHEZ: So, I see the financial system in the middle. Why is that piece broken? Explain. Draw that one up for us.
KHAN: Sure.
And, here, I am going to attempt to give everyone a five-minute MBA, but, essentially, what I have drawn here are balance sheets for some banks. And it might sound like a complicated term, be a balance sheet is, I think, something that most people are fairly familiar with when they talk about home equity.
So, if I were to draw a balance sheet for someone's house, it would look something like this. So, the asset would be your house, whatever it is worth, and then your liability, and I will call that A for asset, and then your liability would be your mortgage. Your liability would be the loan.
Now, if your house is worth $1 million, and your loan, let's say you owe $800,000 on your loan, whatever is leftover is your equity.
SANCHEZ: Right.
KHAN: That is a balance sheet. That is a balance sheet that I think most people are fairly familiar with.
For corporations, they have the same notion. And I think this is an important point to realize when people talk about the stock market and what does it mean for a company's stock to go to zero. When you buy a stock in a company, you are essentially -- you're not buying a share in all of its assets. You're buying a share in its equity.
So, if you look at -- so, I drew two banks here. And we will talk a little bit more about what is broken. But a bank has assets and a bank has liabilities. And if you take the sum of the assets and you subtract out the liabilities, what is left over is essentially the equity.
And when you buy stock in a bank or any company, you are essentially taking a share of that. So, what is broken here is, through the housing bubble, a lot of these banks, in order to facilitate this whole securitization -- and I can go more in detail into what that is -- they essentially accumulated these assets on their balance sheets.
And this has been the central focus of the entire bailout plan. And there has been a lot of talk about toxic CDOs and what are they worth. But I just want to show you what they do to a bank's balance sheet and why it is so important that we figure out what these things are worth, because you see here, I drew -- if you kind of view the height of this left-hand side as the assets, the height on the right- hand side is the liabilities. What is left over is the equity.
If these toxic CDOs are worth nothing, if this disappeared, then, all of a sudden, your assets are worth less than your liabilities. If your house is worth less than your mortgage, then you have no equity. In that situation, your stock would be worthless. And, in that situation, there's no one reason why anyone should be lending to you, because you are essentially throwing good money after bad.
SANCHEZ: So, the situation that the banks find themselves in is the same as the one that homeowners have found themselves in as a result of this.
KHAN: Pretty much.
Homeowners, you have an asset that is worth less than your liabilities, what do you do? Do you try to get someone to bail you out and buy your asset for more than it's worth, or do you just declare bankruptcy?
SANCHEZ: Let's hold off right there. We're going to come back in just a little bit and we're going to continue that conversation.
And we're also going to be bringing you something today that is an exclusive to this particular hour on CNN, the story of Curveball. Who is Curveball? He may just be the only person that the Bush administration used as their source for going to war in Iraq, or certainly as much as anyone else. Was he right? No. Who he is? No one has known -- up to now, an exclusive interview with Curveball.
Stay with us. We will be right back.
(COMMERCIAL BREAK)
SANCHEZ: Twitter.com/ricksanchezCNN.
So many of you, 23,000, I believe, when we last checked, are talking to us, watching this newscast, as well as on MySpace and Facebook.
In fact, there's somebody on MySpace right now. She's watching our show and she just wanted us to know this.
She says: "My son is 17 years old and excited about college. I am worried that we won't be able to get a loan to send him now. My husband's hours have been cut back from work, as well. This absolutely affects all of America."
And that is why we are doing what we're trying to do for you.
Let's go back now and bring in Sal, if we can, Sal Khan. He explained to us moments ago what it is that is actually the problem, what it is that is broken.
Now let's take the next step. Let's try and understand, because everyone seems to be wondering: I don't understand this bailout/rescue plan that the government has been in. What is it? What is the government actually doing? Explain that to us, so we can understand it like a fifth-grader.
KHAN: Right. So, the main problem, just to take the big picture, was that no one is lending to each other. So, what the government at least says that they wanted to do is try to get the lending started again. So, their bailout plan was essentially, let's buy out these toxic CDOs, because if I'm -- let's say I am a good bank that didn't get involved in this.
And if bank A is holding these toxic CDOs, I'm not sure if bank A should be bankrupt, if the toxic CDOs are worth nothing, or maybe they are good for the money. So, there is a lot of uncertainty on what these are worth.
The government, at least what they said they would do, is, if they went in and essentially did these reverse actions and bought these assets, then that, all of the sudden, would give confidence in these banks. There wouldn't be uncertainty as to whether you can loan them money and maybe that will free up the credit -- the whole system again.
SANCHEZ: Will it work?
KHAN: Probably not.
If you think about what is going to happen, psychologically, so, Bank A, if you were to -- let's say that -- you know, if you were to just switch this toxic CDOs and if you were to just turn that back into cash, because the government just bought it for exactly what Bank A says it is worth.
So, if you just turned this into cash, the question is, is Bank A all of the sudden going to start lending? And there's a couple of things to think about, because, besides that toxic CDO, there were other things on its balance sheet. And, frankly, a lot of these things are starting to get a little bit toxic. No one is really talking about them right now, because, you know, if you have a dead skunk in the house, you are not going to notice that the milk has gone bad.
So, essentially, you have a lot of assets on your balance sheet right here that, if you are a prudent bank manager, you are going to see. You're going to say, boy, I should just keep that cash, because, if these turn toxic, because the economy might be turning south or for whatever reason, I should just hold onto that cash, so that I don't go bankrupt.
So, everyone is in complete survival mode, even the good banks. If somehow you were to give them capital -- and Paulson's new version of the plan is that essentially they will inject equity, so buy stocks. So, if you buy stocks, you will essentially make this pie bigger and put some cash here.
But even this guy, the good bank, it is not so clear to me that he will actually start lending. Everyone is in survival mode. This is not a time to make new loans and take on new risks.
SANCHEZ: So, it seems that the government went in and they have decide, you know what we are going to do? We're going to go in there and help these guys out. And as soon as we help them out, everybody will realize that now they have the government's backing, so other people will be interested in helping them. More people will give them their money.
That hasn't worked. That -- the people and other investors have not bought into that.
When we come back, I want to hear your idea of what perhaps the government should have done or could still do to rescue this. It is unique. It's different. And you and I had talked about it earlier, but I want you to be able to share it with our viewers.
Also, Curveball, the story that we have been telling you about. This is going to be a CNN exclusive to this hour about one particular individual who no one has ever talked to before. He only speaks German and Arab. You will hear his conversation here in the next 10 minutes.
Stay with us. We will be right back.
(COMMERCIAL BREAK)
SANCHEZ: All right.
So, we understand now what actually is broken. We have got a sense of what the government tried to do to fix it, but it doesn't seem to be working, because enough people/investors and regular folk don't seem to be buying into it.
Let's bring in Sal Khan once again from the Khan Academy and talk about what may be done, either, A, would have been the original plan that would have worked better or something we can do now. And that is?
KHAN: So, the big picture -- just going back to the big picture, is that the financial system, no one is lending through, right?
SANCHEZ: Right.
KHAN: And every bailout plan so far, the government, it just keeps injecting money in, either through loans, either through buying assets for maybe more than they are worth, or now buying stock.
And the logic here is, is maybe that will start up the lending. But most probably, any new money that you put into the system to a large degree is just going to go into survival mode or it's going to go to essentially make up mistakes that have already been made.
So, one idea -- and this actually came from a friend of mine, Todd Plutzkey (ph) -- I actually think it sounded crazy when he first said it, but it actually sounds like a really good idea, take that $700 billion -- and remember, the problem isn't -- you are not trying to save the financial system. You're trying to save the pipe that goes from the capital to the project.
So, why not take the $700 billion and capitalize a brand-new financial system? And one thing that Todd had pointed out, $700 billion, it is an astronomical amount of money. That is more than the book value of the equity -- book equity is this piece right here on the balance sheet -- than J.P. Morgan, Morgan Stanley, Goldman Sachs, Washington Mutual, Wachovia, and Bank of America combined.
So, the government could overnight create banks bigger than those banks, although I don't think they should concentrate it all in five or six banks.
(CROSSTALK)
SANCHEZ: So, in other words, you are saying, why try and put money into something that is so absolutely messed up? If they are half-dead, let them die. Create a new system altogether.
But wouldn't that be a problem, too, because then wouldn't those banks would be owned by the government? Do we want that?
KHAN: No. And this is the solution.
And, first of all, just to make a point clear, Paulson's current solution involves government ownership. This plan, what you could do is, the government could capitalize the banks, maybe 20 or 30 banks around the country, with the $700 billion. And then each of those banks could have 300 million shares, and they give one share to every American.
SANCHEZ: New banks, new, totally new banks, interesting.
Sal Khan, thanks so much. We will keep you on. We're going to be talking about this throughout the hour, obviously.
We are trying to get people who can explain some of these things for us.
And what is the market doing right now? Let's make that as big as we possibly can, down 71, a lot better than we were looking at an hour ago.
Maybe you have helped, Sal, in some ways, hopefully.
(LAUGHTER)
SANCHEZ: All right. We are going to come back to that in just a little bit.
But, obviously, one of the key stories that we have been saving for you today, the story of Curveball, the man who seemed to have been the source or the influence in the invasion of Iraq. Was he really what he was supposed to be? He wasn't. And you will hear from him, himself.
We will be right back.
(COMMERCIAL BREAK)
SANCHEZ: As we expected, Sal Khan is a bit of a hit. He does things kind of differently, doesn't he?
And a lot of people have a lot of comments and a lot of questions for him, but -- including this one.
Let's go ahead and take the Twitter board, if we possibly can. This one comes in from Sanchfan. Yes, he watches this show a lot, like every day. He says: "Keep Khan talking. Look, the market is going up."
Apparently, it had been. I had not even noticed that, I was so engaged in the conversation. Let's do this real quick.
I want to just step away from this for a moment. I want to talk about Republicans, but not the kind of Republicans that most people think about, at least not that visual script that that we all seem to have in our head of what Republicans, as Marshall McLuhan once wrote. No, these are guys who are really cutting against the grain when it comes to being Republicans.
Their story in tonight's "League of First Time Voters."
(BEGIN VIDEOTAPE)
RUFUS MONTGOMERY, REPUBLICAN VOTER: It's about leadership and who is best prepared to lead our country.
SANCHEZ: And you think that John McCain is better prepared to lead our country than Barack Obama?
MONTGOMERY: I know he's better prepared to lead.
MICHAEL MCNEELY, REPUBLICAN VOTER: Principles matter. Lower taxes, strong national defense, traditional marriage, free market solutions, those types of things, that we believe in the Republican Party.
SANCHEZ: Austin, you agree?
AUSTIN KING, REPUBLICAN VOTER: Barack is a good candidate, but I feel like he talks a lot. And I don't think he can get everything that he talks necessarily done.
I feel that he is just -- just like a motivational speaker at some times, but I really think that being a Republican is the way to go.
SANCHEZ: Does that mean you support the policies of George Bush?
MONTGOMERY: I don't want to vote for someone who is only going to side with the people that are presumably in power. John McCain has a proven record of working across the aisle, to the extent that it has caused him angst amongst Republicans.
SANCHEZ: But given the economic situation, the dire economic situation -- you hear Henry Paulson and others describe it that way -- wouldn't you tend to want to lean with the guy who does not represent or is most distant from the party at hand right now, which is the George W. Bush/Dick Cheney party?
MCNEELY: Change, for us, is not looking to the government to be our savior. We are individuals. This nation is great because of individuals, the individuals who have risen up and taken on the challenges of the country.
SANCHEZ: Is there a chance that, come that Tuesday, you might actually pull the ballot for Barack Obama? Or are you pretty much set on John McCain?
KING: There is a chance. Especially me, as a young voter -- I'm hearing most of the debates. I really never voted before, just like class elections in school. So, I am just really getting -- trying to hear everybody out, trying to get everybody's opinion.
MCNEELY: Although we are seeing some times of trouble in our economy, we know that we can see it through, and the Republican Party has the best answers.
MONTGOMERY: I actually get to vote twice this year. I am a presidential elector. And I will cast a vote for John McCain in November. And I will also do the same in December, when we certify him as our next president of the United States.
(END VIDEOTAPE)
SANCHEZ: And I guess it is worth noting, on most days, we wouldn't, with the Dow being up 50 points, but guess what? Suddenly, up 50 points is like a party on Wall Street.
Look at that, plus 57 right now. The magic, I guess, of I don't know what. We will stay on top of that.
But, before we do that, there is something I need to talk about, because this has a lot to do with the current trend our country is in right now. And it has to do with the war in Iraq and these statements that I want you to listen to now which were part of the run-up to the war, in fact as important as any two.
Take a listen.
(BEGIN VIDEO CLIP)
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: We know that Iraq, in the late 1990s, had several mobile biological weapons labs. These are designed to produce germ warfare agents and can be moved from place to a place to evade inspectors.
COLIN POWELL, U.S. SECRETARY OF STATE: The source was an eyewitness, an Iraqi chemical engineer who supervised one of these facilities.
(END VIDEO CLIP)
SANCHEZ: "The source was an eyewitness, an Iraqi chemical engineer." We now know, from several books and lots research, the guy he is talking about is Curveball.
Do we have a picture of him? Let's put up that picture of Curveball.
When we come back, the very first exclusive interview with Curveball -- who he was, what he really knew and what he really said that led to the run-up of the war. You'll only see it here on CNN, as well as those two guests who will join us. Both have written books on this.
We'll be right back.
(COMMERCIAL BREAK)
SANCHEZ: Once again, for those of you just now joining us, Welcome back. I'm Rick Sanchez here in the World Headquarters of CNN.
Who was "Curveball?" He became a very prominent figure because of the words that were used by President Bush and Colin Powell.
In fact, let's listen to those one more time.
(BEGIN VIDEO CLIP)
BUSH: We know that Iraq, in the late 1990s, had several mobile biological weapons labs. These are designed to produce germ warfare agents and can be moved from place to place to evade inspectors.
(END VIDEO CLIP)
(BEGIN VIDEO CLIP)
POWELL: The source was an eyewitness -- an Iraqi chemical engineer who supervised one of these facilities.
(END VIDEO CLIP)
SANCHEZ: When you hear those ominous words, how can you fault the American people for not wanting to back this administration, until you look a little deeper into who the source of that information that they shared with the American people actually was.
This is a CNN exclusive. The reporter is Frederik Pleitgen.
(BEGIN VIDEOTAPE)
FREDERICK PLEITGEN, CNN CORRESPONDENT (voice-over): In February 2003, Colin Powell made America's case for going to war before the U.N. Security Council. Saddam Hussein, Powell said, was producing biological weapons and using mobile labs in road trailer units and rail cars.
(BEGIN VIDEO CLIP)
POWELL: The source was an eyewitness -- an Iraqi chemical engineer who supervised one of these facilities.
(END VIDEO CLIP)
PLEITGEN: The weapons were never found. Multiple intelligent sources confirm what this man says -- that he is the person Powell cited for the information that helped lead America to war -- the Iraqi defector known to intelligent services as "Curveball." And he says his real name is Rafid Alwan.
(on camera): Did you ever say that Saddam Hussein was producing weapons of mass destruction?
RAFID ALWAN, "CURVEBALL": Never. Never.
PLEITGEN: No one ever?
ALWAN: No one.
PLEITGEN (voice-over): During our interview, Alwan seemed nervous, often smoking between questions. And he had a friend with him, identified only as Mr. Ali, who seemed to be coaching him.
Alwan says he wants to set the record straight.
ALWAN (THROUGH TRANSLATOR): There are many wrong statements made about me and I want to declare it one by one. I have documents proving that everything said about me is false.
PLEITGEN (on camera): This is your graduate certificate for the Technical University of Baghdad?
ALWAN: Yes.
PLEITGEN: OK.
(voice-over): But all he does provides are certificates saying he has a degree in chemical engineering and a student I.D. from a German college. As long as he is living in Germany, Alwan says, he cannot comment on what he actually did tell the German intelligence service about Saddam Hussein's weapons of mass destruction program.
UNIDENTIFIED MALE: Is Rafid Alwan Al-Janami (ph) the only person who gave info about Iraq?
ALWAN (THROUGH TRANSLATOR): I won't mention names because I don't want to put their lives in danger. I'm right now thinking of protecting my children because they have been through very hard times because of me.
PLEITGEN: Alwan came to Germany from Iraq in 1999, he says, seeking asylum. He was picked up by the German intelligence service, the BND. According to intelligence sources, Alwan told the BND Saddam Hussein had a secret bioweapons program at this seed purification plant in Djerf al Nadaf and that Iraq's dictator was using the mobile labs to cover everything up. Former BND Officer Norbert Juretzko says the German service wanted so badly to believe Alwan, they disregarded inconsistencies in his story.
NORBERT JURETZKO, FORMER GERMAN INTELLIGENCE OFFICER (THROUGH TRANSLATOR): He was put under pressure by the BND -- tell us something. They were desperate for something. They gave him money, privileges, a visa and the like. And so this man used his imagination to get all of these things.
ALWAN (THROUGH TRANSLATOR): I've never been an agent or a spy for any intelligence agencies in the world and I never got paid by anyone.
PLEITGEN: Alwan also says he did not lie and that he did work in Saddam Hussein's WMD development program. He says he does not feel responsible for the Iraq War, but he believes that it was justified.
ALWAN (THROUGH TRANSLATOR): I feel that America offered to Iraq what no other country can offer to Iraq. America sacrificed its people and its money and its position to free a dictatorial country.
PLEITGEN: But why did both the CIA and the German intelligence believe this man when the stakes were so high? The CIA never even spoke to Alwan in person before using his information.
BOB DROGIN, AUTHOR, "CURVEBALL," NATIONAL SECURITY CORRESPONDENT, "L.A. TIMES": I think it's, arguably, the biggest intelligence failure in history. Never been have we gone to war on the basis of such an utter and complete fraud. You know, after 9/11 what we heard from the authorities is that they had failed to connect the dots that led to that scandal. In this case, they made up the dots.
PLEITGEN: Today, to many in the U.S. intelligence community, the name "Curveball" is synonymous for a total meltdown in the run-up to the Iraq War.
Tyler Drumheller was the CIA station chief in Europe at the time.
TYLER DRUMHELLER, FORMER CIA AGENT, AUTHOR, "ON THE BRINK": He was driven by his own self-preservation. And then he got caught up in the story he was telling. And then he just had to keep going.
PLEITGEN: For his part, Rafia Alwan says his biggest wish is to return to Iraq and work for his people and his country -- a country he says now is a better place.
Fred Pleitgen, CNN, Berlin.
(END VIDEOTAPE)
SANCHEZ: That's a good piece of journalism. And we're going to look into this a little further because there's a question that's obvious here. I'm sure you're asking yourself, did he buffalo us or did we want to be buffaloed?
Did our government want to buy that information without actual verification?
Two men coming up in just a little bit. One actually wrote the book -- the book is "Curveball." And the one on the right from him is actually a case agent who studied this. You saw them in the story and we're going to be joining them in just a little bit. They're going to take us through the story and answer the questions that you want answered.
Stay with us.
We'll be right back.
(COMMERCIAL BREAK)
SANCHEZ: This isn't real hard to figure out. And thousands of you watching us right now have kind of figured it out.
Here's Pattifriday. She's watching our newscast right now and she sends this comment into us: "Curveball," he's lying, but Bush just needed one tidbit of info to go ahead and "Curveball" gave it to him."
Is she right? -- Is she right?
Let's ask Bob Drogin. He's the author of the book, "Curveball." And Tyler Drumheller. He is also the author of the book called "In the Brink." And he's been a CIA agent who worked on this particular case involving "Curveball."
Todd, let's start with you. Answer Patti Friday's question.
Is she right?
DRUMHELLER: She's right. And everything -- looking at the whole -- the whole problem, it was the system of intel that failed. The individual parts actually did their jobs. But in the beginning, the tragedy is that "Curveball" had this -- had enough information to build a story that fit this apocryphal story that was already out there, which is what people wanted to believe on the policy level.
SANCHEZ: And...
DRUMHELLER: And by the time it was -- people looked at it to try and verify if he was good or not, it was too late. He was already -- he had already become part of the...
SANCHEZ: But it was in the state of the union, man. It was in...
DRUMHELLER: That's right.
SANCHEZ: It was in Colin Powell sitting before the United Nations, talking to the whole world, saying this is why we're doing this.
How did it get that far without somebody -- you or somebody saying you can't do this, this isn't true (INAUDIBLE)? DRUMHELLER: Well, we did raise this. It was raised in -- throughout the fall of 2002. You have to remember, this was a Defense Intelligence Agency case first. We weren't brought into it until the fall of 2002.
From the beginning, we began to raise questions about the validity of the information. Now, we're not engineers or scientists, so we really didn't know the details of it. But as professional intelligence officer, you can tell that there -- that, at the very least, this is information that should not be part of an NIE, that should not be part of the planning for the war.
But by that time, by the time you get to sort of December of 2002, the army is already on the way to the desert and this has become part of the policy. And when we did raise it -- I mean this -- I raised it a week before the Powell speech with the -- saying that we needed to not use this information. But there was such a strong -- this was the last tangible thing that they had left. All the other stories had been discredited...
SANCHEZ: And...
DRUMHELLER: And this was all that was left.
SANCHEZ: Bob Drogin. Let's bring you into this conversation, because I think the thing that really hit me when I was watching that wonderful report by Frederik Pleitgen was when he said U.S. officials never went over and actually sat down and interviewed him. We just took at face value what the Germans had.
Does that tell you something? And, if so, what?
DROGIN: Well, in this case, the CIA and the DIA tried to get interviews with him and the German authorities refused to let them do it. And the problem is that the story was ultimately too good to check. He was telling them what they wanted to hear.
SANCHEZ: Too good to check?
DROGIN: Too good to check, yes. I mean it was...
SANCHEZ: But what do you mean by that?
DROGIN: ...because it utterly fit into the preconceptions that they had of how Saddam was building and hiding these weapons. And the wonderful bit about putting them on trucks is if you -- you know, if you go to a place and it's not there, you say well, he drove it away.
So it fit all the -- it justified all of their preconceptions.
SANCHEZ: What are Americans to make with this, guys?
You know, Bob, I'll begin with you, because I guarantee you there's people who are watching this newscast right now who are kind of disgusted listening to this. DROGIN: Well, it's a pretty awful case. I think it's uniquely -- unique in the annals of intelligence. Here you have a who comes out and he spins a story and the German authorities do nothing to check it. We now know what we didn't know a few years ago, that while they were doing this -- and he was an informant for them.
SANCHEZ: Hold that thought.
DROGIN: And he was on their payroll.
SANCHEZ: Hold that thought, Bob. I know you're going to get to something that I think is very important.
We're going to carry you over. We're going to bring you back on the other side of this and continue talking about this important case, the real -- who is the real source for the information that led up to the run-up to war -- "Curveball" and two men who know him very well.
We'll be right back. Stay with us.
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SANCHEZ: Let's get some quick Twitters that we're getting now as we -- some Tweets that are coming in on the Twitter board.
Let's go ahead and go to the Twitter board. A lot of people are commenting on this conversation.
This is Twinsfan, who says: "Look, if we're not there for WMDs anymore, then why are we still there? This makes me even more skeptical of our current government."
Let's go to the next one. It says: "The administration was looking for ways to sell Iraq War to the U.S. Administration didn't have to believe intel, didn't care about truth."
Let's do one more. Partyfree says: "The Bush administration did not need "Curveball." They would have invaded Iraq with or without him."
I'm interested in what our guests have to say about that, whether they would have gone ahead and done something even if they didn't have that.
But go ahead, Bob, and finish your point.
DROGIN: Simply that, you know, Mr. Alwan is a conman. He's a fraud. You know, in the interview you did, he says he wasn't paid by the intelligence service. That's not true. He says he didn't talk about WMD. That's not true.
We interviewed him four and five months ago, had him on the front page of the "Los Angeles Times." He told us a series of lies, as well.
And yet they believed him. They took this information, they made no effort whatsoever to confirm it, to check it. And they delivered it to the president of the United States, who used it as pretext to go to war. And it's just a dreadful situation.
SANCHEZ: Is our system -- you know, I kind of -- I want to go back, you know, if we can to what you were saying, Agent Tyler, about you knowing that there was something going on and not being able to stop them from following this thing that you were thinking isn't probably true.
I'm just wondering, do -- should we have checks and balances that allow you to do that?
Because if this continues in the future, this could happen again.
DRUMHELLER: We do have checks and balances, but they were totally overridden in this. This is a -- an intelligence...
SANCHEZ: By who, Rumsfeld?
DRUMHELLER: By the -- it was a policy failure -- yes, in the White House, I think from vice president's office to different people that wanted to go to war. And because this fit exactly what they wanted to hear.
So the bar, as one senior officer said, the bar to say the words WMD was very low. The bar to refute it was extremely high -- almost too high to get over the top.
SANCHEZ: Wow!
DRUMHELLER: But we do have the system. And, in fact, the tragedy of this is that the system worked. The individual officers in the agencies that looked at this, as early as October and September, were saying there's something wrong with it. Even before that...
SANCHEZ: But...
DRUMHELLER: ...before we got into it...
SANCHEZ: But...
DRUMHELLER: ...the analysts were raising questions about it.
SANCHEZ: But it didn't work, though, to the point where it could actually stop the American people from something that didn't seem to be true. And we're going to have to leave it at that.
This was an interesting, phenomenal conversation.
Thanks to both of you for being with us...
DRUMHELLER: Thank you.
DROGIN: Thank you.
SANCHEZ: ...and for writing those books. It's good stuff that Americans deserve.
When we come back, we're going back to Sal Khan.
And as you've been watching there, the market has been teetering all over the place. But all things considered, certainly not the kind of drop that we were looking at yesterday in the 600 range. So it's kind of flat. He will tell us what we need to know now as individuals, from the micro perspective on this -- what this will do for you and me, from Sal Khan.
Stay with us.
We'll be right back.
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SANCHEZ: Check in time. Wolf Blitzer is standing by in "THE SITUATION ROOM" -- Wolf, what you got?
WOLF BLITZER, CNN ANCHOR: Thanks very much, Rick.
As you know, an unbelievable up and down ride on Wall Street today. The former Treasury secretary, Robert Rubin, he's standing by live here in "THE SITUATION ROOM." He's the man who helped President Bill Clinton during much better economic times. I'll ask him what he thinks the country should be doing to get out of this crisis and where the bottom might be. Robert Rubin standing by.
Also, both presidential candidates unveiling new plans aimed at trying to boost the economy. You'll hear about both of their plans. That's coming up.
And the U.S. military now relaxing the rules. And why the economic crisis is actually helping the military get more people to sign up for duty.
All that and a lot more coming up right here in "THE SITUATION ROOM" -- Rick.
SANCHEZ: Wolf Blitzer, thanks so much. Sal Khan standing by.
Sal, tell us, if you could -- I guess bring us back to basics. How are we being affected by what we're seeing in the news every day, the credit crunch and the situation with the markets?
KHAN: Sure.
If we don't unclog the credit system, we know that everyone is going to unlever their debt. So we're going to have deleverage. That's essentially everyone unwinding their loans. Deleverage -- and this is, I think, a critical point, because I think there has been a lot of misinformation out there.
That actually contracts the money supply. So a lot of people out there are worried about inflation, these deficits that lead to inflation. But when you have deleverage -- and this is what happened in Japan, this is what happened in the '30s, the money supply contracts. That's our printing press. Leverage is our printing press in the fractional reserve system. And that's going to lead to deflation.
So I think a lot of people are worried about are we going to see inflation, are we going to see deflation. And if we don't fix the problem, we're going to see what Japan saw and we're going to see deflation. And so (INAUDIBLE)...
SANCHEZ: And deflation means what, concretely, to me and you?
KHAN: Things get cheaper. The opposite of inflation. So -- unfortunately, maybe salaries will go down. But on the plus side, a lot of assets -- you know, people buying a house, they'll get cheaper even.
SANCHEZ: Got it.
KHAN: I know that probably won't be a good thing in the short- term.
SANCHEZ: Yes. Exactly. Not with what the situation is right now.
Thanks so much. Sal Khan, you've been a great guest. And what an original way of being able to explain things.
We're going to be right back with the closing bell, which looks to be somewhere in the middle of Nothingville.
We'll be -- stay with -- there it is, just kind of staying in the middle. We'll be right back.
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SANCHEZ: On Fridays, we always like to catch you up on all the stuff that we didn't bring you during the week. Why? Because we've been so mixed up with the market and the politics that some stories we wish we could have brought you. Well, here they are.
(BEGIN VIDEOTAPE)
SANCHEZ (voice-over): Another no show by Kim Jung Il. As North Korea marked the founding of its Communist Party, the country's dictatorial ruler remained under wraps. He's said to have suffered a stroke. So who has their finger on the North's nuclear program? Just yesterday, the country barred inspectors from a nuclear site its pledged to dismantle.
Jerome Corsi apprehended in Kenya -- you ask, who is Jerome Corsi?
Corsi is a reporter for a conservative leaning news site who wrote a best-selling book critical of Barack Obama -- Obama, whose father was Kenyan. Corsi was quickly deported for an alleged visa violation.
A story this week out of Gloucester, Massachusetts -- a unanimous vote. The school board will let the local high school dispense contraceptives with parental consent. Gloucester High School, you'll recall, recently had several teen pregnancy.
UNIDENTIFIED MALE: Let's leave Barack Hussein Obama wondering what happened.
SANCHEZ: Also this week, the perils of political indications. We all got to know the Florida sheriff who spoke at a McCain-Palin rally. The McCain campaign condemned that kind of rhetoric, by the way.
But did you notice this guy -- this Republican who's backing the Democrats? Maybe that's why he seemed confused when he tried to introduce Joe Biden.
UNIDENTIFIED MALE: The next vice president of the United States, John McCain.
(END VIDEOTAPE)
SANCHEZ: They're saying whose John McCain? Did they invite John McCain? I guess he meant Joe Biden.
Let's put the Twitter board up again. Some of the darndest things. I guess it could happen to anybody.
All right, Randi is watching us and she says: "Yes, the Bush administration knew that it was B.S. It seems they waved off the catcher and threw the U.S. public the curve ball." Cute, huh?
And then Sanchez saying: "Can you and Khan just end the show singing Kumbaya? It might help the market. Think of my 401(k), Rick."
Let's bring in Susan Lisovicz. Apparently, while we had Khan on, the market started to do real well. I don't know. I mean it's as good of an explanation as for the reason it goes up and down, right?
LISOVICZ: You know, Rick, in the final 30 minutes of trading, the lead -- the direction of market changed five times. It's been an incredibly intense and volatile day. And the fact that we're ending with a sell-off, but such a benign one, is actually a victory for the bulls. Remember, the Dow at its lows was down nearly 700 points. Veteran traders saying the market tested the lows after losing 20 percent of value.
SANCHEZ: Are they...
LISOVICZ: This is a victory going into the weekend.
SANCHEZ: Are they cheering in the background there?
LISOVICZ: They're exhausted. They were cheering when the Dow went positive.
SANCHEZ: All right. Susan Lisovicz, thanks so much for bringing us up on this. And, obviously, what a week. What a wild ride. It's not over, by the way.
Here now, Wolf Blitzer, from "THE SITUATION ROOM." BLITZER: Thanks very much, Rick.
