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ANDERSON COOPER 360 DEGREES

Balance of Power in White House Begins to Shift; New Explosions Rock Gaza; Pilot on the Run Tries to Fake His Death; Prince Harry Apologizes for Racist Remarks

Aired January 12, 2009 - 23:00   ET

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


(COMMERCIAL BREAK)
ANDERSON COOPER, CNN ANCHOR: Tonight, President Bush says goodbye and thanks, his final news conference and his most remarkable one yet, giving advice to Barack Obama, mocking the critics, defending his decisions on the war, the economy and even hurricane Katrina. But also some rare admissions.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Clearly putting a mission accomplished on an aircraft carrier was a mistake.

(END VIDEO CLIP)

COOPER: Wait until you hear what he says, though, about Hurricane Katrina.

Also tonight, breaking news from Gaza: new explosions happening now; Israeli forces tightening their grip on Gaza City, Both sides claiming closer to victory. We'll get the latest live from the war zone.

And later, mayday mystery, a pilot calls for help. When his crashed plane is found, he's gone. Facing debts and trouble did he pull off the ultimate disappearing act? The police are now searching and want your help.

We begin though, with President-elect Obama and a day in which he truly began to take control, meeting with foreign leaders, requesting bail out money, making executive decisions, possibly including the closing of prison facilities at Guantanamo Bay and more.

In other words, acting like a president.

Candy Crowley is on the 360 transition team, covering a transition that almost seems over.

(BEGIN VIDEOTAPE)

CANDY CROWLEY, CNN SENIOR POLITICAL CORRESPONDENT: Of all the transition days, this one felt like the day the balance of power shifted.

Barack Obama held his maiden foreign policy meeting with Mexican President Felipe Calderon.

BARACK OBAMA, PRESIDENT-ELECT OF THE UNITED STATES: The friendship between the United States and Mexico has been strong. I believe it can be even stronger.

CROWLEY: And he got George Bush to ask Congress for the final chunk of money from the Bush bailout plan.

OBAMA: I felt that it would be irresponsible for me with the first $350 billion already spent to enter into the administration without any potential ammunition should there be some sort of emergency or weakening of the financial systems.

CROWLEY: It is a full-court press. The President-elect has been on the phone cajoling skeptical lawmakers stung by the lack of accountability for the first $350 billion it gave the Bush administration.

Obama plans an in-person appeal at the regular Tuesday Democratic Party lunch. In advance, top Obama economic adviser Larry Summers promised Congressional leaders this time the money will be better supervised, better spent and have more strings attached.

Top Obama aides are also working to grease the skids for quick passage of that enormous $800 billion stimulus plan. Working through Democratic objections that team Obama put in too many tax cuts trying to attract Republicans.

On the foreign policy front, Obama let aides leak the news that one of his first executive orders will be to shut down Guantanamo bay. A leak designed to calm liberal fears that Obama was backing off his promise.

Meanwhile, George Bush, seven and a half days and counting, held his last news conference, offering well wishes and warnings.

BUSH: Sometimes the biggest disappointments will come from your so-called friends. And there'll be disappointments. I promise you. He'll be disappointed.

On the other hand, the job is so exciting and so profound that the -- the disappointments are -- will be clearly, you know, a minor irritant.

OBAMA: Change has come to America.

CROWLEY: And for all the history Barack Obama is making and all the urgencies of the time, President Bush predicts after the swearing in, the parade and the balls there will be a time when the new President will be no different than the others who preceded him.

BUSH: When he'll walk into the Oval Office and there'll be a moment when the responsibilities of the President lands squarely on his shoulders.

CROWLEY: It is now the Obama administration in all but name. The balance of power shifts.

(END VIDEOTAPE)

COOPER: Candy, the President-elect has not been getting very warm welcome from fellow Democrats, senators criticizing the stimulus plan, his choice to head the CIA. Are his own party members pushing him around at this point?

CROWLEY: No, I don't think they're pushing him around. But I do think it's interesting that you have George Bush leaving the scene talking about partisan bitterness. And part of the problem with George Bush was that he came in and Republicans and Democrats alike felt that he just blew right over them.

That he rolled them and said, look, I'm the President and here's what I want. I think the Democrats' reaction right now has a lot to do with that. We've heard them say, hey, I don't work for Barack Obama. I work with him.

So I think this is a brushback along with some genuine concerns about how much money is spent where in the stimulus package. But I think when we get all down to the end of this you will find that Barack Obama gets a lot more than he loses in this stimulus package and other things probably for the first six months, maybe even up to a year.

COOPER: What did you make of the President today?

CROWLEY: Wow. I thought it was like all the George Bushes that came to that podium. You saw him sometimes humorous.

To me, the interesting thing about George Bush, and I interviewed him a couple weeks ago, and what I saw was something I hadn't seen before. And I think there is some melancholy there. Because, as much as American people are disappointed in the George Bush years, I think this is obviously not the administration that he thought he'd be running either. Not the way he thought he'd go out.

COOPER: Yes, some remarkable things said today. We're going to show it to our viewer. Now Candy, thanks.

We do want to show you more of this remarkable press conference that President Bush gave in the White House. According to the latest polling, as Candy referred to only about one in four Americans believe that George W. Bush has done a good job as President.

A new report in the "Washington Post" concluding he's presided over the worst eight-year economic stretch since Harry Truman. And of course, there's Katrina and Iraq and 9/11 and torture. And a lot of things to answer for or talk about and today he tried.

The "Raw Politics" from Ed Henry.

(BEGIN VIDEOTAPE)

ED HENRY, CNN SENIOR WHITE HOUSE CORRESPONDENT: It was a George W. Bush we rarely see. The President who hates navel-gazing suddenly did just that.

BUSH: I believe the phrase "burdens of the office" is overstated. You know, it's, kind of, like, "Why me? Oh, the burdens, you know. Why did the financial collapse have to happen on my watch?"

It's just pathetic, isn't it, self-pity?

HENRY: But, amid the new candor, flashes of the old cowboy, as he defended his war on terror.

BUSH: And in terms of the decisions that I have made to protect the homeland, I wouldn't worry about popularity.

What I would worry about is the Constitution of the United States and putting plans in place that makes it easier to find out what the enemy is thinking, because all these debates will matter naught if there's another attack on the homeland.

HENRY: Pressed about his mistakes, he conceded some regrets.

BUSH: And, clearly, putting a "Mission Accomplished" on an aircraft carrier was a mistake. It sent the wrong message. We were trying to say something differently, but, nevertheless, it conveyed a different message.

Obviously, some of my rhetoric has been a mistake.

I thought long and hard about Katrina; you know, could I have done something differently?

HENRY: He blasted criticism that he was insensitive when he flew right over Louisiana after Hurricane Katrina, saying that landing Air Force One would have diverted critical resources.

BUSH: Law enforcement would have been pulled away from the mission.

HENRY: And he insisted, the federal government saved many lives.

BUSH: Don't tell me the federal response was slow when there was 30,000 people pulled off roofs right after the storm passed.

You know, I remember going to see those helicopter drivers, Coast Guard drivers, to thank them for their courageous efforts to rescue people off roofs -- 30,000 people were pulled off roofs right after the storm moved through. That's a pretty quick response.

HENRY: As he heads out the door, the president who has hated talking about his legacy is now all about defending it. He's even asking the TV networks for time on Thursday night to deliver a farewell address to the nation.

Starting next week Mr. Bush is vowing to stay out of the spotlight, agreeing with Barack Obama's mantra that there's only one president at a time.

Ed Henry, CNN, the White House.

(END VIDEOTAPE)

COOPER: Let us know what you think of President Bush and President-elect Obama's first moves. Join the live chat that's happening now at AC360.com. Also check out Erica Hill's live web cast during the break.

We're also going to show you more of the President's comments with our panel, David Gergen, Errol Louis and Ed Rollins. We'll talk about that.

Also tonight, we're live in the war zone on the border with Israel and Gaza with news breaking as we speak; new military operations apparently under way. Nic Robertson is there. We'll check in with him to find out what he is seeing and hearing.

And later, Britain's Prince Harry caught in a royal mess for what he said, racist language on a newly-surfaced videotape. See for yourself why the people of Pakistan and Britons of Muslim descent are not so wild about Prince Harry tonight.

And the great doggy debate is done. The two breeds the Obama's have narrowed it down to. And when will the Obama girls be getting their new playmate? All that and more tonight on 360.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

BUSH: When I get out of here, I'm getting off the stage. I believe there ought to be, you know, one person in the klieg lights at a time. I've had my time in the klieg lights.

(END VIDEO CLIP)

COOPER: In the klieg lights and the heat. We want to show you more of the President's news conference today.

Let's bring in our senior political analyst, David Gergen, Errol Louis of the "New York Daily News" and political contributor Ed Rollins.

David, I just want to play to you briefly a piece that we've already shown them just about Katrina that I just find stunning what the President said today. Let's watch.

(BEGIN VIDEO CLIP)

BUSH: People said the federal response was slow. Don't tell me the federal response was slow when there was 30,000 people pulled off roofs right after the storm passed.

(END VIDEO CLIP)

COOPER: I mean, it's amazing to me the President who said he's been thinking a lot about Katrina and up late at nights thinking about it over the years still believes that there wasn't a problem with the federal response.

There was bipartisan Congressional report in 2006 that said there were failures of leadership.

DAVID GERGEN, CNN SENIOR POLITICAL ANALYST: That is the most stunning thing, I think, that happened in the press conference, Anderson. It was sort of good job, Brownie. We're back to that.

You were there. You know how long people had to wait. And that -- his own agency didn't even know people were there for 48 hours, didn't know they were at that convention center in those terrible conditions.

And so I -- there was a lot about this press conference that was surprising. But that was the most surprising of all. I also think, Anderson, just more broadly, I said on the air the other night here on this program that I thought maybe that people had some sense of warmth about George Bush as he leaves office as we traditionally do about departing Presidents.

I think I was wrong. The responses on your Web site and elsewhere are very hostile. I must say now I'm revising my thinking about this. I don't think we've had a time since Richard Nixon left office, and Ed Rollins will remember that a quarter of a century ago, when people were so relieved to see the end of a presidency and to welcome in a new President.

COOPER: And Ed, you were saying before the break that this is a President who's been told now, for a while or kind of telling himself history will judge me differently.

ED ROLLINS, CNN POLITICAL CONTRIBUTOR: This is a President who thought he's going to be historic, he thought he was going to do better than his father. He wasn't going to make the mistakes of his father. He's going to be more like Reagan. And he has failed as miserably as any President in modern times, certainly.

And I think as David just said, I think there's no good feelings. Even Republicans, please leave the stage and go home. Let us try and rebuild our resources. The idea that you can stand in a press conference when the American public watched a major urban city collapse, crumble, people displaced and be ashamed of it and say we did everything we could, I didn't land the helicopter because it would have taken police away, it was just an absurd statement.

COOPER: Right, and I mean, Errol, it's sort of a red herring to talk about the fly over. That was a minor point, yes, a PR disaster and yes it would have taken away police officers from more important things.

But to focus on what the Coast Guard did which was valiant and courageous and brilliant...

ERROL LOUIS, CNN CONTRIBUTOR: Sure. COOPER: ... and totally forget about saying Brownie did a heck of a job, on Friday, days after the storm had passed and not even remembering people at the convention center...

LOUIS: Oh yes.

COOPER: ... it just boggles the mind.

LOUIS: Well, I mean, there's the run-up to it. The fact that the Army Corps of Engineers I mean they've been warned for decades that this Mississippi River Gulf outlet -- the Mr. Gulf would funnel in the event of a storm into the inner harbor...

COOPER: Right.

LOUIS: ... and top the levees and flood it. That's exactly what happened. And then there's the post response. I mean, put aside what happened with 30,000 people saved. OK, fine. Give them all medals. The city is still not rebuilt.

COOPER: Right. That's actually an inaccurate number for New Orleans, anyway, but which is a minor detail. But right. But the response since, I mean, New Orleans is still in some parts on --

LOUIS: You had Brownie in charge of FEMA. But then he put his top political operative, Karl Rove, who is equally unqualified to rebuild a major American city which he sort of approached halfheartedly before departing. And right now we still have thousands who are displaced and a city still unbuilt.

COOPER: David, Bush said today the greatest challenge Obama faces is an attack on our homeland. And it was interesting. Earlier Vice President Cheney advised Obama to look hard at the Bush counterterrorism policies before he implements what Cheney referred to as his campaign rhetoric and gets rid of those.

I just want to show how Obama responded to Cheney's advice.

(BEGIN VIDEO CLIP)

OBAMA: Well, I think that was pretty good advice. Which is I should know what's going on before we make judgments and that we shouldn't be making judgments on the basis of incomplete information or campaign rhetoric.

So I've got no quibble with that particular quote. I think if Vice President Cheney were here, he and I would have some significant disagreements on some things that we know happened.

(END VIDEO CLIP)

COOPER: David, you've been in the White House, is that a sensible way to look at it or did that surprise you at all? I mean, I think there are some people certainly on the left who will be surprised at Barack Obama saying that -- not to follow through on just the campaign rhetoric. GERGEN: Look, I think that both Barack Obama and George W. Bush went out of their way to be gracious toward each other and to say respectful things of each other. I don't read too much into it more than that. And I definitely don't think that anybody ought to assume that Barack Obama is going to take plays out of Dick Cheney's play book.

What I do think is sensible is for him now to have a chance to talk to the CIA and the FBI and the others and to the counterterrorism folks about just how -- he hasn't had access to some of this information. I do think he needs to take a hard look once he gets in there.

But let's not be -- let's not -- let's be very clear. Underneath this comedy, this sort of -- this period of good feelings between the two, there are going to be sharp departures under the Obama administration from what the Bush administration was doing.

Starting with, as Candy Crowley was reporting earlier, the shutting down of Guantanamo. They're not going to sit around for a second. They're going to do that next week by all accounts.

COOPER: Right. We learned today it may happen -- an executive order may be issued within the first week.

GERGEN: Right.

COOPER: How important Errol, do you think that is for Democrats, for the country?

LOUIS: There's an entire range of Barack Obama supporters for whom this is the main issue, to change the policy on torture, on warrant-less wiretaps, closing down Guantanamo, getting to the bottom of Abu Ghraib, sort of pushing forward on some of those investigations. He made those promises. People remember them.

I hear from them every day on my radio show. They want to know that this human rights agenda, if you want to call it that, was something that was real. It really does matter quite a lot to some people.

COOPER: How much do you think, Ed, this is just sort of feel good politics at this point? I mean, Bill Clinton talked about reversing "don't ask, don't tell" when he ran for Office.

Barack Obama has said the same thing. They essentially have said they are going to reverse "don't ask, don't tell." Is this real? Or are these things that then get kind of whittled away as politics?

ROLLINS: I don't think some of these fundamental things can get whittled away. These are matters of high principle. The Americans don't want torture. There may be CIA guys who feel they need to get to certain information. And I think in fairness to Barack Obama or any man who's President they're going to do everything to make sure we never have a 9/11 attack again. But that doesn't mean by adopting that strategy that you have to adopt the same tactics this administration had. Obviously he'll learn more in the next coming weeks. But he has a political base that he ran against a war. He was going to get these troops out of Iraq. He may not.

He's now talking about 30,000 more troops in Afghanistan, which may mean two or three years from now we still have troops there. And that's going to create a very significant --

COOPER: How tough do you think Republicans are going to be towards him especially early on?

ROLLINS: I think Republicans are going to try to become an opposition party which is a real task for them because they've been part of a governing process as long as David and I have.

And in order to do that they have to have a very controlled message. They're not ready to do that yet.

COOPER: We're going to have to leave it there, Errol Louis, Ed Rollins, David Gergen thank you very much.

ROLLINS: Thank you.

COOPER: Breaking news is next. We're going to go live to Nic Robertson for the latest on new fighting in Gaza.

And later, penthouse or big house? The Feds want to yank Bernie Madoff's bail. Drop him in the clink. See what a judge decided today and what Madoff's saying to his neighbors now about the scandal.

Also, new sex abuse hearings. Members of Warren Jeff's polygamist empire back in court. Plus our first look inside the Texas compound since dozens of FLDS children taken in that dramatic raid were returned to their parents. That's a "360 Exclusive" coming up.

(COMMERCIAL BREAK)

COOPER: Now to breaking news in the Middle East where Israeli forces have tightened their hold on Gaza. It's already Tuesday morning there. We're getting reports of more explosions and artillery fire.

And Nic Robertson is in the border. Nic, what are you seeing and hearing?

NIC ROBERTSON, CNN INTERNATIONAL CORRESPONDENT: Well Anderson, over this shoulder I can hear machine gunfire. Over this shoulder heavy thumps of artillery landing. We've had barrages of artillery fire that at moments have been sort of continuous, rolling barrages and the heavy crump and thump of artillery behind me at the north end of the Gaza Strip. Also, tanks moving into the Gaza City.

We understand that those tanks have been moving in on the sort of southeast and the northwest side of Gaza City. Also, accusations today that Israel has been using white phosphorous shells increasing the human suffering inside Gaza.

(BEGIN VIDEOTAPE)

ROBERTSON: In Gaza doctors show patients with what they describe as burns from phosphorous shells fired by Israeli forces.

This has spread on the bodies of the injured, creating burns of varying degrees, the doctor explains. Israeli officials don't specifically deny using white phosphorous, but insist.

MAJ. AVITAL LEIBOVICH, ISRAEL DEFENSE FORCE: The IDF is using its munitions with accordance to the international law.

ROBERTSON: Day by day, civilian suffering in Gaza worsens. Which despite leaflet drops and phone warnings, Israel seems incapable of stopping.

MARK REGEV, SPOKESMAN FOR ISRAEL'S PRIME MINISTER: People can move temporarily out of combat areas.

ROBERTSON: To where?

REGEV: (INAUDIBLE) of the Gaza Strip.

ROBERTSON: And you're providing them these safe locations?

REGEV: I think they know, I mean, the people of Gaza know better than most where Hamas keeps their military installation.

ROBERTSON: But if they did, then all these civilians wouldn't be killed.

REGEV: I think, also you've got to be careful with the numbers.

ROBERTSON: Without offering evidence, Israel says Hamas is killing political opponents and they account for 10 percent of the dead. According to Palestinian medical sources, more than 900 people have been killed so far; almost 300 of them children and close to 100 women.

ISMAIL HANIAH, HAMAS PRIME MINISTER (through translator): I say to our people that, by God, we're closer to victory than ever. This precious blood will not be wasted for nothing. By God, we will make victory with God's permission.

ROBERTSON: Israel's Prime Minister has said his country is nearing its goal of stopping Hamas attacks. But the conflict shows no signs of letting up. In Israel, more Hamas rocket attacks. Not as many as this time last week, here causing four casualties.

This rocket struck barely an hour into a cease-fire agreed for humanitarian relief. It reinforces the emerging reality that even once a permanent cease-fire is agreed, Hamas will almost certainly retain the ability to shoot rockets when it chooses.

Foreign Minister Tzipi Livni is hinting cease-fire talks in Cairo could conclude in days.

TZIPI LIVNI, ISRAELI FOREIGN MINISTER: This is something that depends not only on Israel.

ROBERTSON: Are you playing for the time to get a bigger military effect on the ground?

LIVNI: We are working simultaneously. And we need to have our decisions in the next few days.

ROBERTSON: She also indicated the deal may come before Israel has put Hamas's rockets completely beyond use.

And if they were to fire one rocket after the understanding?

LIVNI: Israel will change the equation. We are not going to stand even one rocket.

ROBERTSON: If Israel is preparing for a cease-fire, knowing Hamas can still shoot rockets, it will be stopping short of its stated goal when operations began which was to put an absolute end to Hamas rockets. Not a band-aid; a permanent cease-fire.

(END VIDEOTAPE)

COOPER: Nic joins us again live. Nic just on the white phosphorous charges, a military is allowed to use white phosphorous on the battlefield for illumination purposes, not against individuals. Is that correct? Am I wrong?

ROBERTSON: No. That's absolutely correct. And that's what Israeli officials are saying. They're saying we've got the same munitions in our weaponry that, for example, NATO forces, U.S. forces have.

We know for example in the Fallujah operation in Iraq in 2004 U.S. troops used white phosphorous for illumination. It's when it falls to the ground before it fully burns out that it causes these types of casualties -- Anderson.

COOPER: OK, now we know there's also three-hour cease-fires to bring in humanitarian aide. How is that working?

ROBERTSON: You know, U.N. officials are saying it's basically not working. 160 trucks of food got in today. But the U.N. says the lull is -- isn't long enough to get the food distributed. And there's quite a list of things the U.N. says are problematic in terms of food right now.

They say there's no chicken, they say, there's no fish, there's no frozen meat, there's no milk, there's no food for infants. There's a shortage of cash for people to buy whatever food is available. They say that only one quarter of the bakeries are working, that there's not enough fuel for people to cook whatever food they have on.

So a whole range of issues. They say a sewage plant was hit by Israeli artillery. There's contaminated water in the area. They've had to hand out sanitation kits there. So the situation here -- humanitarian situation that the U.N. paints is a desperate one. And they say it gets tougher by the day because normally they would provide maybe 500 trucks of food a day -- Anderson.

COOPER: All right, Nic Robertson live from the border. Nic, thanks.

Still ahead, a pilot's dramatic call for help just moments before his plane crashed. And as the plane was found, the pilot was nowhere to be found. New details about what police say was an elaborate plan to fake his own death.

Also ahead, Prince Harry's royal mess -- the spare, caught on tape making racist remarks to his fellow soldiers. Should he be punished or is it much ado about nothing? You can decide for yourself.

And later, the search for the first puppy narrowed down to two breeds. We'll tell you which dogs the Obama's are considering and what they're waiting for now, coming up.

(COMMERCIAL BREAK)

COOPER: Tonight, officials in several states are piecing together a bizarre story involving this crashed plane and a missing pilot. Authorities are searching for the pilot right now, convinced he tried to stage his own death.

And they suspect they now know why. More from David Mattingly.

(BEGIN VIDEOTAPE)

DAVID MATTINGLY, CNN CORRESPONDENT: Taking economic bailouts to new heights, this businessman and stunt pilot may have faked his own death and risked his life to do it.

The strange case of Marcus Schrenker began Sunday. Flying solo in his turbo prop, the 38-year-old seasoned pilot is traveling from Indiana to Dustin, Florida. But near Birmingham Schrenker declares an emergency, telling air traffic controllers his windshield is shattered and he's bleeding profusely. Moments later he turns on his auto pilot and all contact is lost. Two fighter jets scramble to intercept the plane, find it flying empty. The door was open and the cockpit dark.

The fighters watched the ghostly aircraft until it crashes. It crashes in this remote, swampy area in Milton, Florida. When search crews reached the impact site, a huge surprise awaits them.

SGT. SCOTT HAINES, SANTA ROSA, FLA., SHERIFF'S OFFICE: The pilot was not located. There was no signs of the pilot whatsoever.

MATTINGLY: No signs of the pilot. And authorities say no traces of any blood on the plane either. But this mystery wouldn't last long. Because guess who should pop up more than 200 miles away in Alabama? That's right; the missing pilot. Authorities believe he bailed out apparently hoping to fake his own death.

Turns out, Schrenker may have been on the run from a lawsuit and the law. Two financial companies he heads are under investigation for securities violations in Indiana. And his wife has reportedly filed for divorce.

The very much alive pilot was caught on a security camera checking into an Alabama hotel under a false name. He had earlier convinced a police officer to give him a ride there after showing up at a store with goggles and claiming his canoe had overturned.

It wasn't long until Schrenker disappeared again. Police later came looking for him. But he was gone. He was last seen running into the woods near his hotel wearing a black ski cap.

This case recalls the famous D.B. Cooper robbery. In 1971 the skyjacker made off with $200,000 after jumping out of a 727, never to be seen again. To this day his true identity remains a mystery.

The same, however, cannot be said for Marcus Schrenker. We know who he is. And finding him may just be a matter of time.

David Mattingly, CNN, Atlanta.

(END VIDEOTAPE)

COOPER: Just tonight a judge back in Indiana froze his assets. The court order also applies to his wife and his three companies and is aimed at protecting investors.

Next on 360, Prince Harry does it again: caught on tape making racial remarks. We'll show you the tape and the problems it is causing.

And later, jail or bail for Bernie Madoff? He's been living in luxury. Today a judge ruled on whether he can stay out or go directly to jail. The judgment ahead.

It looks like garbage but it is art; inflatable and incredible. See for yourself. It's our "Shot" today.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

PRINCE HARRY, ROYAL, UNITED KINGDOM: I was extremely grateful for having the opportunity. I did enjoy it a little bit more than I suppose I should. Not in a sick way. But, no. I enjoyed being out there.

(END VIDEO CLIP)

COOPER: That's Prince Harry last year fresh from his deployment to Afghanistan. Sounds gracious and he says he's grateful for the opportunity to serve his country. That's what he said then. It's not all, though. Tonight the 24-year-old royal is under fire for making racist remarks on videotape during his tour of duty. Harry says he's sorry and the prime minister is standing by him. But is it enough?

Randi Kaye reports. But first a warning; some of the words you'll hear are offensive.

(BEGIN VIDEOTAPE)

RANDI KAYE, CNN CORRESPONDENT: Time stamp 2006; Prince Harry behind the camera. He pans, then zooms in to a fellow soldier of Pakistani decent. Listen to what the Prince whispers.

PRINCE HARRY: Our little Paki friend.

KAYE: A racial slur from the prince third in line for the British throne. This tape has been buried for years until it was leaked to the "News of the World" tabloid in Britain. The posting on its Web site reads, "Harry's racist video shame."

The soldier he calls "Paki" is Ahmed Raza Khan (ph). The word "Paki" has long been associated with racism and hate. Khan's father reportedly told British media, that word he used is a hate word and should never be used against any Pakistani.

Prince Harry apologized through a spokesman. "Prince Harry fully understands how offensive this term can be and he's extremely sorry for any offense his words might cause. Prince Harry used the term without any malice."

On tape, the insults keep coming. Here the camera focuses on a soldier wearing camouflage on his head.

PRINCE HARRY: (EXPLETIVE DELETED) raghead. Look at me. Look at me. Look away.

KAYE: The royal family did not apologize for the word raghead, but instead tried to explain it away. Prince Harry used the term raghead to mean Taliban or Iraqi insurgent.

There are some lighter moments, too. At one point, Prince Harry is smoking a cigarette and pretending to be talking to the Queen of England, his grandmother, on his cell phone. He tells her sarcastically, send my love to the corgis and Grandpa, and God save you, before quickly hanging up.

Prince Harry made the video just a year after this picture of him was published. He showed up at a fancy party wearing a Nazi uniform. He apologized for that, too. Telling the British press, "It was a very stupid thing to do and I've learned my lesson." Apparently, he didn't.

(END VIDEOTAPE)

KAYE: The question now is will Prince Harry be disciplined? While his case will reportedly be handled in line with normal army procedures, British Prime Minister Gordon Brown said today he believed the prince's apology was genuine and that the public would give him the benefit of the doubt. The prime minister said it is up to the army if it wants to discipline him, Anderson.

COOPER: It comes at a particularly bad time because the British army is trying to actually reach out to people of Muslim descent --

KAYE: Right. And they're wondering what type -- and they're concerned that this could have an impact on those relations, certainly hoping it doesn't.

COOPER: All right. Randi Kaye, thanks.

Just ahead, new developments in the government's case against a polygamist group in west Texas as a trial date is set. We've got an exclusive look inside the compound where the alleged abuse took place.

But first, Erica Hill joins us with a "360 News and Business Bulletin" -- Erica.

ERICA HILL, CNN CORRESPONDENT: Anderson, a judge today refused to revoke former money manager Bernard Madoff's bail saying prosecutors had not proved that he's a flight or security risk. The ruling means Madoff will remain under house arrest at his $7 million Manhattan apartment pending his $50 billion fraud trial.

The senate's two top Democrats today clearing Roland Burris to fill Barack Obama's vacant seat in the senate. It is a major about- face here. They had initially vowed to block his appointment by embattled Illinois governor Rod Blagojevich. Barring Republican objections, Burris could be actually sworn in and seated later this week.

Here's what he had to say about it today.

(BEGIN VIDEO CLIP)

ROLAND BURRIS (D), SENATE APPOINTEE: If you are among the many in Illinois who are disheartened by the cloud that hangs overhead and darkens our state's image, I ask that you join me in remembering the old saying, it's always the darkest before the dawn.

(END VIDEO CLIP)

HILL: You may have heard Samuel Wurzelbacher, otherwise known as Joe the plumber, is now reporting from Israel for a conservative blog. Well, today the Ohio resident called on President-elect Obama to help Israel in its campaign against Hamas. During a break from being a war correspondent, he told reporters interviewing him he doesn't believe journalists should be allowed to report from war zones -- Anderson.

COOPER: There you go. Yes.

HILL: It's getting better.

COOPER: It does. It just -- yes. But I guess he's not leaving?

HILL: Not right away. I don't think his job is done.

COOPER: No one else should report but him.

HILL: Yes.

COOPER: He should report. All right.

HILL: And he feels the Israeli people really like having him there and that he's helping to bring their side out.

COOPER: All right. We'll see. Erica, thanks.

Now our "Beat 360" winners, our daily challenge to viewers, a chance to come up with a caption better than the one that we can come up with for a photo that was put on our blog.

Tonight's picture: President-elect Obama speaking to reporters after lunch at Ben's Chili Bowl in Washington. Our staff winner tonight is Gabe, whose caption: "I'm making history, but I still can't get a cab."

Our viewer winner is Pamela from Alabama. Her caption: "I heard that. You had Ben's Mega Bowl, didn't you?"

I don't get it.

HILL: I'm not explaining it to you on TV.

COOPER: I know. Never mind. Pamela, your "Beat 360" T-shirt is on the way. Sorry I'm so slow, Pamela.

Still ahead, the case against a polygamist sect in Texas moves forward. A rare, exclusive look inside the compound state officials raided last year. Authorities removed more than 400 kids. Most of them have returned. What's life like for them now?

Plus, Sasha and Malia Obama said to be closer than ever to getting the dog of their dreams. The Obamas have apparently narrowed the field down to two breeds. Which should be top dog? We'll take the vote.

(COMMERCIAL BREAK)

COOPER: Saturday night surprise for President-elect Obama and the next first family, a stop at the Lincoln Memorial. Obama, his wife Michelle and their daughters, Sasha and Malia, spent about 20 minutes by the towering statue honoring the 16th president; a hero to what will soon be the 44th president.

As for the move to the White House, the Obamas have apparently reached a decision about a pet almost. They've narrowed down the search to two breeds of dogs, which -- the question is which one will actually get the run for the Oval Office.

Erica Hill looks up close.

(BEGIN VIDEOTAPE)

HILL: And then there were two. Two breeds, that is. The president-elect offering up a bit of first dog news in an exclusive interview with ABC News this week with George Stephanopoulos.

OBAMA: They seem to have narrowed it down to a labradoodle or Portuguese Water Hound.

HILL: Actually it's a Portuguese water dog, an animal of, quote, "spirited disposition, self-willed, grave and very resistant to fatigue. A dog of exceptional intelligence and a loyal companion."

That's the word from the American Kennel Club, which is pulling for the breed. One reason? It's the only AKC-recognized breed in the race.

The labradoodle is actually a hybrid developed in the '80s on the quest to create an allergy-free guide dog. And, while there's no such thing as a hypoallergenic dog, both dogs are generally considered good options for allergy sufferers like 10-year-old Malia Obama. Both are smart and busy.

GAIL BUCHWALD, ASPCA: They're both going to have a pretty active adolescence. Until they're about 2 years old, those dogs are going to -- they're going to need to run every day.

HILL: Dog people tend to be pretty particular about their best friend. So we thought we'd ask a few to weigh in. The first woman we met was walking a labradoodle.

What's the best thing about having a labradoodle?

UNIDENTIFIED FEMALE: They're active; they're fun. They're gentle, despite what he's doing to my hand right now.

UNIDENTIFIED FEMALE: I don't know Portuguese Water Dogs that well, but poodles are great. I love them.

HILL: What do you think? Who should the Obamas get for a dog? What do you think? One of you? Yes?

UNIDENTIFIED MALE: I think it'll be a winner with each -- either one.

HILL: The deciding factor may be chance. The Obamas hope to find their dog at a shelter, but both breeds are in high demand.

Gail Buchwald at the ASPCA says the key to finding the right dog is patience.

BUCHWALD: I think the Obamas are going to need a very social dog that can deal well with people coming and going. It's going to need to be a dog that's very flexible and adaptable to different schedules. There may be a bit of hectic quality to the lifestyle there in the White House.

HILL: And one last tidbit, from a veteran dog walker here in New York City.

UNIDENTIFIED MALE: There's one other thing that you can tell President-elect or President Obama, to get a dog to do anything you want. One word. Bacon.

(END VIDEOTAPE)

HILL: There you go. He said bacon, and that dog will do whatever you would like.

Now, this is really funny. There was a blog on "The Baltimore Sun's" Web site called "Mutts" that a features reporter there wrote it. He took it offline in August. But at one point last year he had decided what each candidate's dog would be, equivalent dog.

COOPER: Right.

HILL: Hillary Clinton, a labradoodle.

COOPER: Really?

HILL: Barack Obama he thought would be a Great Dane. John McCain a pug.

COOPER: Now, I thought there were hypoallergenic dogs. There are not?

HILL: It's a common misconception. So don't feel bad. You're not alone. There are -- there are -- what it is, is that there are dogs that are better suited to people's allergies, because they may not shed as much. They may not have as much dander. But there's no dog that's absolutely allergy-free. Because I learned today you can even be allergic to dog saliva.

COOPER: Really?

HILL: Yes.

COOPER: Interesting. Erica, thanks.

Up next, inside the FLDS compound -- polygamist compound, with new developments in court.

And later, really cool video. Trash transformed with a little help from a New York City subway. Take a look at this. It's all made out of trash bags, and it's all the air from the subway.

HILL: There's a good dog for the Obamas.

COOPER: I know. It's our "Shot of the Day," next.

(COMMERCIAL BREAK) COOPER: This video from last April shows some of the first images of kids being removed from that polygamist sect in west Texas which is led by Warren Jeffs.

Now, the raid was part of a crackdown on the FLDS sect. It was also a PR nightmare. Most of the kids were ultimately returned to the families, but there were also arrests.

Today a judge set an October trial date for one of 12 men indicted after the raid. Raymond Merrill Jessop is charged with one count of sexual assault of a child and one count of bigamy.

As Jessop's case moves forward, Gary Tuchman takes an exclusive tour inside the Texas compound where the kids we just saw in that video are now back at home.

(BEGIN VIDEOTAPE)

GARY TUCHMAN, CNN CORRESPONDENT: This is the ranch where 462 children were taken away by authorities this past spring. The allegations: that they were abused, neglected and in imminent risk of harm.

But now most of them are back on the Texas ranch owned by the fundamentalist group that broke away from the Mormon Church, the FLDS.

Did you miss it?

UNIDENTIFIED FEMALE: Yes.

TUCHMAN: Did you understand what would happen when they came here and they raided the ranch?

UNIDENTIFIED FEMALE: I did.

TUCHMAN: Did you understand it?

UNIDENTIFIED FEMALE: Yes.

TUCHMAN: What did they -- what did they tell you the reason was, your parents?

UNIDENTIFIED FEMALE: We were bad.

TUCHMAN: Who told you, you were bad?

UNIDENTIFIED FEMALE: CPS.

TUCHMAN: CPS, or Child Protective Services, found foster homes for all the children. And, as you might imagine, denies ever saying that to them.

But a Texas appellate court and the Texas supreme court ruled the state had no right to take these children, despite the FLDS's history of polygamy and underage marriage. So except for one 14-year-old girl who was allegedly married to the jailed leader of the church, Warren Jeffs, they have been reunited with their families.

There's a famous painting called "American Gothic." Have you seen that before? That's what you look like right now with the pitch fork.

UNIDENTIFIED FEMALE: Yes, well, actually it needs to be like this.

TUCHMAN: Gloria is part of a polygamist household. She has nine of her own children. Like all of the FLDS members on this ranch, she is observant, praying at the gigantic White Temple the members constructed themselves.

UNIDENTIFIED FEMALE: The Holy Father wouldn't let those children be gone for that long and not return them.

TUCHMAN: Just this morning ten FLDS members went before a judge in Texas to answer the to sexual abuse and bigamy charges. Last week, an FLDS leader, Winston Blackmore, was arrested in Canada on charges of plural marriage.

All these men say they've been charged because of their religious beliefs.

Another leader in the church says many members of this large polygamist group in North America are frightened there could be more raids.

You think this is a conspiracy against your religion? Do you think this is taking away your freedom of religion?

WILLIE JESSOP, FLDS CHURCH LEADER: Is there any doubt?

TUCHMAN: Willie Jessop says computers and photo albums were taken as evidence from every family here and not returned. The FLDS members who live on this ranch produce their own food and say their alfalfa, potato and sugar cane crops failed when people were forced out this past spring. But they're back at work now, adults and children picking carrots here.

Are you mad that they took you from this ranch?

UNIDENTIFIED FEMALE: No.

TUCHMAN: Why?

UNIDENTIFIED FEMALE: Because you don't like people who have the spirit of God.

TUCHMAN: So do you think you still -- do you think you still have the spirit of God?

UNIDENTIFIED FEMALE: Sure.

TUCHMAN: What did you Mom and Dad tell you was the reason they took you off the ranch?

UNIDENTIFIED FEMALE: Because they think we're abused.

TUCHMAN: And what do you have to say about that?

UNIDENTIFIED FEMALE: That's just a bunch of baloney.

TUCHMAN: Some of the children look scared as we drive around the 1,500-acre ranch. We're told they think we're police. Most of the time, it looks like nothing dramatic ever happens here.

Now, what did you learn from it?

UNIDENTIFIED FEMALE: Love each other more.

(END VIDEOTAPE)

COOPER: It's interesting, Gary. Why is the FLDS giving you access to this ranch after -- I mean, for years you have not gotten a good reception in these communities?

TUCHMAN: That's right. For two and a half years, we've been covering the FLDS. And as you know, Anderson, I've lost count of the car doors that have been slammed on me, the people who have sworn at me, the people who have run away from me, the people who have yelled at me. And now we're interviewing their children, and we're standing next to their huge limestone temple without any chaperons that we see.

Basically, the consensus among many people, many of the leaders in the FLDS, is the paranoia of the news media, staying away from the news media may have hurt their case. They're hoping that, by talking to people like us, they create more understanding.

COOPER: But they -- very clearly when all those arrests took place, they very clearly said, "Look, there aren't underage marriages. Nothing is being done here illegally." Clearly, the state still is saying that's not the case, and these court cases are moving forward.

TUCHMAN: What they're basically saying in a nutshell, they say they don't do underage marriages anymore. But they say polygamy is part of their culture, part of their religion, something that goes on throughout this country and in other parts of the world, too. And they say it's a violation of the spirit of the religion to tell them they can't marry more than one person.

COOPER: All right. Gary Tuchman. Appreciate it. Thanks, Gary.

There's a fascinating thing that's going to be our "Shot" tonight. It's just something to kind of make you smile before you go to bed. On the streets of New York, you might walk by something like this. Don't worry. It's harmless. We'll explain exactly what you're seeing, coming up.

(COMMERCIAL BREAK)

COOPER: All right. Time for -- hey, Erica. What are you doing?

HILL: I had to get rid of my chair. COOPER: No. Show's not over yet.

HILL: I'm lazy. Taking a break there.

COOPER: Time for "The Shot." Street sculptures from trash. This is really cool stuff. Look at that. This is made out of, like, basically a garbage bag. We saw this on Andrew Sullivan's Web site. It's from YouTube.

It's Joshua Allen Harris is the artist behind these inflatable garbage displays.

HILL: This is wild.

COOPER: Yes. He basically makes them out of garbage bags and then tapes them to subway gratings in New York. And then uses the air from the exhaust of the subways, as the subways pass by that bring the sculptures to life.

HILL: That is so cool.

COOPER: That's the Loch Ness Monster.

HILL: I was just going to say, it's Nessie.

COOPER: Exactly.

HILL: We're on a first-name basis.

COOPER: This one is, like, two creatures battling each other. It's like a centaur.

HILL: And another dude.

COOPER: Yes. And they only -- what's cool is they only live for a few seconds. And then people basically think they're garbage when they walk by them. And then they sort of pop to life. I would be freaked out if this thing popped up.

HILL: Oh, cool. I would, too, but at least now I'll be expecting it.

COOPER: Yes. I think it's very cool.

You can see all the most recent "Shots" at our Web site, AC360.com.

That does it for 360. Thanks for watching.

"LARRY KING" starts right now.

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