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THE SITUATION ROOM

Will Sarah Palin Run?; President Obama Previews Jobs Plan

Aired September 5, 2011 - 18:00   ET

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


JACQUI JERAS, AMS METEOROLOGIST: There you can see that watch has been extended now through the western Carolinas, including places like Greenville, Spartanburg, and then we also have some storms down here along the Florida coast.

Of course, flooding continues to be a big concern with the remnants of this storm, too, and we're seeing a lot of that all across the Deep South and in the Appalachians.

WOLF BLITZER, CNN ANCHOR: Jacqui, thanks very much.

And you're in THE SITUATION ROOM.

Happening now: She's sounding and acting more and more like a possible presidential candidate, but she still won't say if she's running, so how long can Sarah Palin keep it up, and at what cost to her support and her credibility?

Also, President Obama offers his most revealing preview yet of his highly anticipated jobs plan, which he will unveil in only three days.

Plus, a missing iPhone and uproar over a search of this home. It's no ordinary phone. Now it has Apple at the center of a growing controversy.

We want to welcome our viewers in the United States and around the world. Breaking news, political headlines and Jeanne Moos all straight ahead. I'm Wolf Blitzer. You're in THE SITUATION ROOM.

The presidential campaign is kicking into high gear on this Labor Day for the Republican candidates who hope to replace President Obama, but it's Sarah Palin still not a candidate who is commanding attention, support that many of the declared candidates would probably almost certainly I should say envy.

CNN's Brian Todd is tracking Sarah Palin and what's going on in her so-called non-campaign.

So she was busy once again today, what, the third day in a row she's out there in Iowa and New Hampshire.

BRIAN TODD, CNN CORRESPONDENT: That's right, Wolf, a high- profile speech today in New Hampshire with plenty of read meat for the Tea Party crowd, this following a similar event in Iowa on Saturday. For someone who is not in the race, at least not yet, Sarah Palin is stealing lots of thunder from the GOP candidates and as always she's succeeding in getting us to pay attention to her.

(BEGIN VIDEOTAPE)

SARAH PALIN (R), FORMER ALASKA GOVERNOR: They can't stop us.

TODD (voice-over): She is hitting those crucial early decision stops in Iowa and New Hampshire, sounding out themes popular with the Tea Party.

PALIN: We believe that the government that governs least governs best.

TODD: Sarah Palin hasn't said if she will jump into the presidential race, but some in this crowd tried to push her along.

CROWD: Run, Sarah, run.

PALIN: I appreciate your encouragement.

TODD: In New Hampshire and Iowa in recent days, Palin has pounded on the ideas of reducing the role of government and cutting taxes, but she hasn't given specifics on what she would do to meet those goals.

We called and e-mailed Palin's representative to get specifics to find out if she's jumping into the GOP race or not. We didn't hear back. How long can Palin keep her supporters wondering?

DAVID GERGEN, CNN SENIOR POLITICAL ANALYST: She's been showing a lot of ankle, but you can only do that so long. People eventually sense they are being teased and they will fade back from that.

TODD: Palin is specific when she blames President Obama for more spending, more regulation, but was the president her only target when she repeatedly said this in Iowa and New Hampshire?

PALIN: Let's invite candidates who will refudiate the crony capitalism and the corporate welfare and the waste and the corrupt politics and the government bailouts for their buddies.

TODD: Some analysts believe the phrase crony capitalism is also a swipe from Palin at Texas Governor Rick Perry, who recently jumped into the race and straight into the lead among GOP candidates.

Political opponents have long accused Perry of rewarding his allies and campaign donors with government posts and contracts. Contacted by CNN, a spokesman for Perry said he and Palin are friends, that she once campaigned for him and that she must have been talking about Washington politicians, not about Perry's record of job creation and fiscal conservatism.

Palin has also taken subtle jabs at Mitt Romney recently, leading to speculation on whether she senses that she is losing some ground to the three candidates firmly in the GOP race who are topping the polls.

(on camera): Is she eclipsed already by Perry, Bachmann and Romney?

SUSAN PAGE, WASHINGTON BUREAU CHIEF, "USA TODAY": I think it's dangerous to assume that because she's the original Tea Party candidate. She's got clout that she could exercise even with these other candidates in the race.

(END VIDEOTAPE)

TODD: Susan Page and other analysts point out that if and when Palin jumps in, she may get the same kind of instant boost in the polls that Perry got, that she would likely command much more media attention than any candidate.

Palin has previously indicated that she plans to make a decision about the presidential race possibly by the end of this month, Wolf. We may hear something soon after all these months.

BLITZER: Well, let's see. She doesn't have a whole lot of time left. It's interesting. She is getting some criticism from her colleague at FOX News. She's a contributor to FOX News. Karl Rove is a contributor at FOX News and he's suggesting that she's a little, what...

TODD: Thin-skinned.

BLITZER: Thin-skinned.

TODD: He says she has -- quote -- "enormous thin skin." He complains that she would get upset if we speculate about her, she would get upset if we didn't speculate about her. And this was after Palin's group slammed Rove for predicting that she was going to run for president. Between that and her swipes at some of the other GOP candidates, hard to know where she stands in the party at this point. Like always with Sarah Palin, it's all about reading tea leaves because her people don't really come out and engage with the media that much.

BLITZER: Even though she's toying with the idea of running, she's openly saying she hasn't made up her mind, she is still a contributor at FOX News. They haven't dumped her like they did Rick Santorum or Newt Gingrich or anything. She's still on the payroll.

TODD: That's right. All of this keeps us speculating about her, it keeps her name out there. That is good for the people who she's working with, good for the book sales and good for everything else. It kind of works for her in the media world right now.

BLITZER: I write about her on my blog at CNN.com/situationroom if you want to go check it out.

TODD: I will do it. All right.

BLITZER: Brian, thanks very much. Five of the declared Republican presidential candidates were in Columbia, South Carolina, today for a forum organized by Senator Jim DeMint, a leading Tea Party conservative. All of them cited the Declaration of Independence and its determination of God-given rights as the foundation of the American government and all of them talked about what they would do to change the country if they were president. Here's a sample.

(BEGIN VIDEO CLIP)

REP. MICHELE BACHMANN (R-MN), PRESIDENTIAL CANDIDATE: The federal government is spending far in excess of what it takes in.

Areas of government would include, for instance, I believe, the Department of Education, because the Constitution does not specifically enumerate, nor does it give to the federal government the role and duty to superintend over education. That historically has been held by the parents and by local communities and by state government.

HERMAN CAIN (R), PRESIDENTIAL CANDIDATE: I happen to believe that this administration is weakening America militarily. This is not what Americans want. The world is not safer. So we should not be a weaker nation.

NEWT GINGRICH (R), PRESIDENTIAL CANDIDATE: I also would look very carefully at Jefferson in 1802 passes the Judicial Reform Act of 1802, which eliminates 18 out of 35 federal judges. It doesn't impeach anybody. It just says this court does not meet, it will not be appropriated for, go home.

Now, the judges who were going to get those jobs promptly tried to file suit and the remaining 17 judges said to them, are you crazy? If we accept your lawsuit, Jefferson will eliminate our court.

(LAUGHTER)

GINGRICH: Now, I am not -- I want to be clear here. I am not as bold as Thomas Jefferson. I would do no more than eliminate Judge Berry in San Antonio and the Ninth circuit. That's the most I would go for.

(LAUGHTER)

(APPLAUSE)

GINGRICH: But let me say this because I think this has to be part of our national debate. That's not a rhetorical comment. I believe the legislative and executive branches have an obligation to defend the Constitution against judges who are tyrannical and who seek to impose un-American values on the people of the United States.

REP. RON PAUL (R-TX), PRESIDENTIAL CANDIDATE: We're living now with the third or fourth generation that have been taught that entitlements are right. And liberty and rights don't have anything to do with entitlements. Entitlements means that you can take somebody else's money, you know, and the government is there to redistribute it.

SEN. JIM DEMINT (R), SOUTH CAROLINA: What would you change about our foreign policy?

MITT ROMNEY (R), PRESIDENTIAL CANDIDATE: A lot. First, I would have one.

(LAUGHTER)

DEMINT: OK.

(APPLAUSE)

ROMNEY: I mean, the president has been reactive, and any time there's a reactive approach to foreign policy, sometimes, you get it right, sometimes, you get it wrong. I'm glad he got Osama bin Laden. He was opposed to the surge in Iraq, but fortunately he pursued a surge in Afghanistan. But the president has with regards to the Arab spring not had a policy.

(END VIDEO CLIP)

BLITZER: The front-runner in the race for the Republican presidential nomination, the Texas governor, Rick Perry, he bowed out of the forum at the last minute as he returned home to deal with wildfires that have destroyed some 300 homes in his state.

Before he left South Carolina, though, he did speak at a town hall and he took a direct swipe at his closest rival in the polls, the former Massachusetts Governor Mitt Romney.

(BEGIN VIDEO CLIP)

GOV. RICK PERRY (R-TX), PRESIDENTIAL CANDIDATE: There's not anybody that's going to be standing on the stage, whether it's in California this week or throughout the Republican primary -- and, listen, they are all very good men and woman. I greatly appreciate their throwing the hat in the ring and loving their country -- or if it's this -- or next fall with the president of the United States, the current president.

There is no one going to be sitting on that stage who has the record of job creation that I have. Now, there's going to be some that are going to get up and say, well, I have created jobs. And that's true. There is one in particular that's created jobs all over the world. But while he was the governor of Massachusetts, he didn't create very many jobs.

(END VIDEO CLIP)

BLITZER: Taking a direct swipe at Mitt Romney.

Let's get a little bit more with what's going on with our political reporter Peter Hamby. He's in Columbia, South Carolina, right now. How did Romney do at that forum, that forum that Senator DeMint sponsored today? Because he's not naturally a fit for so many of those Tea Party supporters.

PETER HAMBY, CNN POLITICAL PRODUCER: Exactly. These Tea Party events are not typically in Mitt Romney's wheelhouse. He has tried to step up his appeal to Tea Party activists in recent weeks after Rick Perry has kind of leapfrogged him in the polls, Wolf.

But Perry -- excuse me -- Romney actually did pretty well here. He hit a lot of Tea Party notes. He kind of veered a little bit on a moderate course at times. Tea Party activists are very critical of the regulatory climate, and Mitt Romney said -- urged caution a bit and said, you know, we do need some regulations in the federal marketplace.

But, you know, all of us down here were really waiting for Romney to address the topic of the health care law he passed in Massachusetts when he was governor.

And I have got to tell you, it was an amazing spectacle to see Senator Jim DeMint, who was a Romney supporter 2008, come down here and grill Romney on the health care law. I mean, that's pretty incredible. And the fact that Romney came down here to kiss the ring of a guy who backed him four years ago is really telling about the influence that Jim DeMint has in the Republican Party right now and how much things have changed for the GOP in the last four years, Wolf.

BLITZER: Yes. And I would just dispute one thing. He didn't exactly -- DeMint didn't exactly grill him. They asked him one question at the very end. Had 55 seconds left to answer it. They didn't go into any of the debates over mandates by states.

So it was basically a relatively easy question for Mitt Romney to handle because they just -- the clock was in his favor. They simply ran out of time.

Let's talk a little bit though about Sarah Palin. When she goes after candidates, in her words, crony capitalism-type candidates, is that a code word for the front-runner, Rick Perry?

HAMBY: It absolutely is. I mean, Sarah Palin does not talk to very many people in the media, but Palin allies have told me that that speech was crafted to directly go after Rick Perry, who, as Brian mentioned in his piece, has been attacked by critics in the past for rewarding his political donors and allies with government jobs and contracts and that sort of thing.

So, Palin, you know, who came to power in Alaska in 2006 as kind of this outsider populist maverick, was really trying to capture some that have political brand and carve out some space for herself in the Republican field if she does run. And you saw her today also kind of give a back-handed compliment to Mitt Romney, saying he's kind of late to the game when it comes to reaching out to the Tea Party movement.

So, you know, we still have to see whether she's going to enter the race. It's going to come down to her and Todd Palin making a decision. Only they know. Her staff don't know. So, Wolf, it's wait and see. But she's just trying to lay the groundwork and create some political space for herself in case she does run.

BLITZER: All right, good point. Peter, thanks very much.

Peter is out on the campaign trail covering all of this for us doing an excellent job.

The Republican candidates, by the way, they will face of one week from tonight in Tampa, Florida. I will be the moderator when CNN hosts the Republican presidential debate, along with the Tea Party Express, Monday night, September 12, 8:00 p.m. Eastern only here on CNN.

President Obama spent part of this Labor Day rallying union supporters in Detroit. He defended organized labor, vowed to fight for America's middle class and previewed his highly anticipated jobs initiative, which he will formally unveil in a speech before a joint session of Congress Thursday night. Listen to this.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: On Thursday, we are going to lay out a new way forward on jobs to grow the economy and put more Americans back to work right now. I don't want to give everything away right here, because I want you all to tune in on Thursday. But I will give you just a little bit.

(CHEERING AND APPLAUSE)

OBAMA: We have got roads and bridges across this country that need rebuilding. We have got private companies with the equipment and the manpower to do the building. We have got more than one million unemployed construction workers ready to get dirty right now. There is work to be done and there are workers ready to do it. Labor is on board. Business is on board. We just need Congress to get on board.

Let's put America back to work.

(CHEERING AND APPLAUSE)

OBAMA: Last year -- last year, we worked together, Republicans and Democrats, to pass a payroll tax cut. And because of that, this year, the average family has an extra $1,000 in their pocket because of it.

But that's going to expire in a few months if we don't come together to extend it. And I think putting money back in the pockets of working families is the best way to get demand rising, because that then means business is hiring, and that means the government -- that means that the economy is growing.

So I am going to propose ways to put America back to work that both parties can agree to, because I still believe both parties can work together to solve our problems. And given the urgency of this moment, given the hardship that many people are facing, folks have got to get together. But we're not going to wait for them.

(CHEERING AND APPLAUSE)

OBAMA: We're going to see if we have got some straight shooters in Congress. We're going to see if congressional Republicans will put country before party.

We will give them a plan and then we will say, if you want to create jobs, then put our construction workers back to work rebuilding America. Do you want to help our companies succeed? Open up new markets for them to sell their products.

You want -- you say you are the party of tax cuts? Well, then prove you will fight just as hard for tax cuts for middle-class families as you do for oil companies and the most affluent Americans. Show us what you got.

(END VIDEO CLIP)

BLITZER: The president speaking today in Detroit. When the president, by the way, lays out his new jobs plan before a joint session of Congress Thursday night, CNN, of course, will carry it live. Don't miss our special coverage. It will all begin right here in THE SITUATION ROOM 6:00 p.m. Eastern Thursday night.

Severe weather news just coming into THE SITUATION ROOM, damaging tornadoes happening near Atlanta. We're working the story. Stay with us.

Also, ties between the CIA and Libya's Gadhafi revealed in shocking documents discovered in Tripoli. We will update you.

Plus, the search of this home sparks major controversy with Apple and its new iPhone 5 right at the center of the uproar. Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Rick Perry, the governor of Texas, is speaking about the wildfires there near the capital of Austin. I want to listen in briefly.

(JOINED IN PROGRESS)

PERRY: ... lives, pets, livestock, and frankly legacies of generations to come can be put in jeopardy, and we can lose those.

So in that same vein, I want to ask anyone who is in harm's way to listen to the evacuation orders. Obviously in Texas we allow for local control. It's going to be the county judge who makes the final call, but I join him in saying that those who have lost electrical power, obviously, that there is a reason for that happening and for people to really pay attention to -- I know the sheriff's office is going to be going door to door, and clearly sharing with people the jeopardy that they put themselves in. I understand that losing your home, losing lifetime possessions is an incredibly difficult thing, but do not put your life in jeopardy for that. To our firefighters again, I want to remind them of the just great gratitude that the people of this state have for you. People from California, from all across this country are here helping us.

I mean, this is the classic example of neighbor helping neighbor. And our prayers are with them and for their well-being and certainly for their success in this -- in this mission.

And to those that have been displaced by this fire, those that have already lost homes, know that we're going to do everything we can. The next 72 hours are very important to those individuals. I think it's going to be Wednesday before FEMA gets here. And so, you know, just find out what you can do to help your neighbor.

There's a lot of things that you can do, whether it's putting them up, whether it's just taking care of them and loving on them, and there's a lot that Texans will do to take care of Texans over the course of the next 72 hours. And I really appreciate you for doing that.

We will pick up the pieces. We always do. Whether it's a hurricane of monster size or whether it's floods or whether it's wildfires, we will pick up the pieces. We will rebuild.

And with that, Nim Kidd is in here I know standing here close. And I'm going to let him come up and just share with you the most current state of affairs with not just with this fire, but across the state.

So, Nim, if you could, let me take the -- Nim Kidd, our chief emergency manager.

NIM KIDD, TEXAS EMERGENCY MANAGEMENT CHIEF: Thank you, Governor.

Good afternoon.

BLITZER: All right, SO there you heard the governor of Texas, Rick Perry, speaking emotionally about what's going on, a heartbreaking situation in Texas right now. We're staying on top of the wildfires in that state, and we will update you later this hour.

(NEWS BREAK)

BLITZER: The fall of Moammar Gadhafi exposed some secrets the CIA probably preferred to keep quiet. There are new documents that have just been found in Tripoli that reveal a cozy and very troubling relationship between America's spies and Libya's own intelligence network.

And this was once an anonymous compound in a dusty Pakistani town until America's most infamous enemy was found behind its walls. Some in Pakistan want to see it sink, sink into obscurity again. Our correspondent is just back. (COMMERCIAL BREAK)

BLITZER: In Libya, the fall of the capital has revealed horrible abuses by the Gadhafi regime. Now we have discovered documents that show the CIA was sending terror suspects to Libya for interrogation.

Our senior international correspondent, Ben Wedeman, is joining us now live from Tripoli.

Ben, what are you finding out?

BEN WEDEMAN, CNN SENIOR INTERNATIONAL CORRESPONDENT: What we're finding out, Wolf, is that in the messy aftermath of Moammar Gadhafi's escape from Tripoli, that there are some documents coming to the surface that certain people would like to remain in the dark.

(BEGIN VIDEOTAPE)

WEDEMAN (voice-over): They didn't have much time to shred many documents in the headquarters of Libya's main spy agency. In fact, most of the contents of the building are intact.

It all amounts to a treasure trove of information about the shadowy world of cooperation between the world's spies.

(on camera): We're in the basement of the Libyan external intelligence agency. It's like being in the basement of the CIA.

And here we have got access to all sorts of documents, letters, faxes and other communications between the CIA and its Libyan counterparts, top-secret documents, secret documents with names and dates and all sort of details that some people probably don't want to be made public.

And that relationship was, it appears, cozy. Peter Bukhart (ph) of Human Rights Watch photographed hundreds of documents from external intelligence, run for years by Moussa Koussa, who fled Libya last spring.

UNIDENTIFIED MALE: Moussa Koussa was on a first-name basis with the CIA & MI-6. There's Christmas greetings in here. There's documents saying, "Thanks for the oranges you sent."

WEDEMAN: The U.S. and Libya were at odds for years, but relations warmed dramatically after Libya renounced its program for weapons of mass destruction in late 2003, when Koussa starting corresponding with then-CIA director Porter Goss.

Libya eagerly signed up for the U.S. global war on terror, but just how eager is made clear by the documents uncovered in Tripoli.

UNIDENTIFIED MALE: They established conclusively what we've been saying for a long time, that the CIA was capturing and rendering people to Libya so they could be interrogated by Libyan security, and we even have the CIA questions they sent to be asked to these suspects that they rendered to Libya. WEDEMAN: One of those sent by U.S. officials to Libya was alleged Libyan Islamic militant Abdullah Hakim Belhaj, also known by his nom de guerre Abdullah al-Sadiq. According to documents provided by Human Rights Watch, in 2004, the U.S. detained Belhaj, then handed him over to Libya.

Belhaj now heads the rebel military council in Tripoli. Rights groups and the U.S. State Department regularly accused the Libyan security services of the systematic use of torture.

Bashir Sharif was not part of the extraordinary rendition program, but he experienced the torture firsthand. He showed us how he was beaten to his knees in Tripoli's infamous Abu Salim prison, where he was held from 1984 to 2001.

A CIA spokeswoman declined to comment on the specifics of the documents in Tripoli but did add that, quote, "It can't come as a surprise that the Central Intelligence Agency works with foreign governments to help protect our country from terrorism and other deadly threats."

Among spies there's no such thing, it seems, as a strange bedfellow.

(END VIDEOTAPE)

WEDEMAN: And, Wolf, more documents are coming to the surface. This, in fact, is a trip report by a Libyan army officer who went to Beijing in July to cut an arms deal with the Chinese, despite the U.N. embargo. So lots of stuff coming to the surface here in Tripoli, and I'm sure there's more on the way.

BLITZER: Just the beginning, Ben, of this treasure trove. But based on what you and the other experts have seen so far, this collaboration between the CIA and Gadhafi's spies, was it more prevalent during the Bush administration or during -- did it continue, basically, more or less the same during the Obama administration?

WEDEMAN: Well, it's not clear, because apparently, the mode of communications between the CIA and the Libyan external security agency changed from faxes to e-mails, and it's very difficult now because -- because of all the attention on this subject, it's not possible to get into that external intelligence agency anymore.

However, some of the people who first got in there actually got into the computers and were able to browse around, and they did say that there was communications much more recent, some of it, in fact, not -- just a few months old, whereby Libyan officials were pleading with the Americans to stop the bombing raids. But it's hard to tell how much of it changed under the Obama administration.

BLITZER: Ben Wedeman on the scene for us in Tripoli. Fascinating material. Thank you.

Just months ago the house where bin Laden was killed was certainly in the world spotlight, but now that the ten-year anniversary of 9/11 is approaching, it's once again cloaked in secrecy. CNN's Nick Paton Walsh just returned to Abbottabad, Pakistan.

(BEGIN VIDEOTAPE)

NICK PATON WALSH, CNN CORRESPONDENT (voice-over): The town of Abbottabad has had its secrets. This is where the man behind September the 11th lived for years, his house raided by U.S. Navy SEALs, the world asking how did bin Laden live here so long?

Abbottabad, where these army cadets train in a climate of fierce nationalism, wants its secrets again, it seems. The army now surrounds bin Laden's house, we're told, as we approach down the same back street we freely roamed months earlier.

(on camera) If you go down this road, it's the only physical reminder of the life of 9/11's mastermind. The Pakistani army's is keen to keep it out of sight, perhaps out of embarrassment or maybe by now a little paranoia.

It's eerily quiet, though.

(voice-over) We catch a glimpse of the house. Bushes growing thick around, it's almost like they're trying to swallow the secret again, but out of nowhere we're stopped by a soldier.

(on camera) We have been very quickly stopped by the police here, asked for our passports, and told to leave. In fact, we've been asked to stay with them for a little while, all quite surprisingly, given only a few months ago this place was teeming with journalists, quite open. Things have obviously, definitely changed.

(voice-over) Nobody feels the army's anger and this loss of face more than bin Laden's former neighbors, some accused of being spies who helped the CIA. This neighbor wasn't but still wanted to stay unanimous.

UNIDENTIFIED FEMALE (through translator): The people who live right next door were picked up, because they shared electricity and gas connections to the house. No one knows who arrested them.

WALSH: This is the alleged vaccine the CIA spread across the town to try and get a sample of bin Laden's DNA. One of the two women who gave the injections told CNN she was hired by a doctor in Peshawar. This local was happy, though, to be sampled

UNIDENTIFIED FEMALE (through translator): I think they probably needed our DNA to hunt for Osama so that's OK.

WALSH: The most high-tech manhunt in history wounding the Pakistani army's pride and leaving a bitter taste in ordinary lives here.

(END VIDEOTAPE)

BLITZER: Nick Paton Walsh is joining us now live from Islamabad. Nick, I understand there's new information just coming in on the Pakistani government's arrest of a top al Qaeda leader.

WALSH: Absolutely. They announced today they arrested Younis al-Mauretani, considered to be an external commander for al Qaeda's efforts to attack the west, arrested in the suburbs of the southern city of Quetta.

A senior Pakistani intelligence official saying to us that there were no American boots on the ground during this operation, but the Americans did provide what they referred to as technical help, helping them locate this man.

He's considered the man behind plots to attack Europe and more recently perhaps plots to attack United States energy infrastructure, oil pipelines, that sort of thing.

He's currently in Pakistani custody, and the same intelligence source says he may be sent back to Mauritania where he's from. Remarkable, really, what this has done. There's a list of statements from Pakistani military talking about their intimate warm relationships with the Americans. And it's been reciprocated by the White House, who's congratulated the Pakistanis on their efforts. Frankly, these two intelligence agencies who were so much at each other's throats after the bin Laden raid today seemingly good friends again -- Wolf.

BLITZER: Nick Paton Walsh on the scene for us in Islamabad. Thanks for that good report.

A crisis at the U.S. Postal Service. Drastic cuts are being considered that could impact communities all across the United States.

(COMMERCIAL BREAK)

BLITZER: Those are amazingly tough times for the United States Postal Service. Business way down. Costs rising and a budget crunch that has left officials considering some truly drastic measures. Lisa Sylvester is once again here. She's joining us with more on this crisis that's going on right here in the United States. What's it all about?

LISA SYLVESTER, CNN CORRESPONDENT: Yes, that's right, Wolf. There is, in fact, a congressional hearing tomorrow on how to save the U.S. Postal Service.

The agency, which does not rely on taxpayer funding, is in dire straits. It's on the verge of defaulting on a $5 billion payment it's supposed to make to its retiree health fund. The postmaster general says he knows how to close the budget gap but needs Congress' approval.

(BEGIN VIDEOTAPE)

SYLVESTER (voice-over): The U.S. Postal Service is projecting a $9 billion deficit for this fiscal year. The agency is asking Congress to take immediate action, beginning with lifting a mandate that requires the postal service to make billions in surplus payments to retiree health funds. Without the legislative change, the Postal Service will go into default.

We sat down with Postmaster General Patrick Donahue, who explained what this will mean.

PATRICK DONAHUE, POSTMASTER GENERAL: On September 30, if we do not have relief from that fund, we'll not be able to make a payment of $5.5 billion to the federal government. We will pay our employees, and we will play our suppliers, because we're going to continue to deliver mail.

SYLVESTER: But for how long? The reality is e-mail and electronic bill payments have taken a heavy toll on the Postal Service. To close its budget gap, the postmaster general also is seeking congressional permission to end Saturday delivery, to close 3,700 postal locations, to let go of 120,000 employees, and restructure workers health benefits.

There is strong pushback from the postal workers' union, whose contract includes a no-layoff clause and ensures generous health-care benefits. The American Postal Workers Union calls the cost-cutting proposals "a reckless assault on the Postal Service and postal employees."

Senator Tom Carper, chairman of the subcommittee overseeing the postal service, says something has to be done.

SEN. TOM CARPER (D), DELAWARE: If we do nothing, the Postal Service could literally close. Bouncing up against this $15 billion line of credit limit, and if we do nothing, then they will, I think, run out of money.

SYLVESTER: If Congress changed the 2006 law that requires the postal service to fully pre-fund the retirees' health fund, that would take off some of the immediate financial pressure. The postmaster general says his agency is the only government entity required to fund retiree health benefits 75 years out.

(END VIDEOTAPE)

SYLVESTER: And getting Democrats and Republicans and Congress to agree, especially with a looming deadline of September 30, is not very easy. The postmaster general and the head of the postal workers' union, they are going to be among those testifying at tomorrow's hearing.

BLITZER: They have to do something. There's no doubt about that. Lisa, thanks very much.

A missing top key secret iPhone and a controversial search carried out at this home. It all puts Apple in the middle of an uproar. Stay with us. We'll explain right here in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: What happened inside a San Francisco home is at the center of a high-tech mystery involving Apple's yet-to-be released iPhone 5. Our Silicon Valley correspondent, Dan Simon, is in San Francisco. He's got some details.

What are you learning, Dan?

DAN SIMON, CNN CORRESPONDENT: Well, Wolf, if you look at the way product cycles go, Apple is poised to release the next generation of its treasured iPhone, the fifth generation, and now there are questions about whether an employee lost a prototype at this bar behind me, and the company's handling of the alleged incident.

(BEGIN VIDEOTAPE)

SIMON (voice-over): A new not-yet-for-sale iPhone would be considered priceless if it ever got into the hands of Apple competitors, who would love to take it apart and find out what's inside. So if reports that an Apple employee lost an iPhone 5 prototype are true, then whoever found it probably had no idea what he or she had stumbled upon.

UNIDENTIFIED MALE: There was an ad that appeared on Craigslist offering the phone for $200 from a Bruno Heights residence, and we think that's where it ended up.

SIMON: The technology Web site CNET reported that an Apple employee lost the iPhone at Kava 22, a bar in San Francisco.

UNIDENTIFIED MALE: Appears to be you have a few too many drinks, perhaps, and you leave it behind.

SIMON: Apple wouldn't confirm the story, but the San Francisco Police Department put out a press release Friday evening that says, "Apple requested assistance in tracking down a lost item." Police said four SFPD officers accompanied two Apple employees to a San Francisco home, and those employees went into the house to look for the lost item. None was recovered.

But then the publication "SF Weekly" reported that it had interviewed a man who consented to having his home being searched for a phone last month after being confronted by people he presumed were police officers. No one in the group identified themselves as Apple employees.

Again, no comment from Apple.

This whole story may seem a bit familiar.

STEVE JOBS, OUTGOING CEO, APPLE: IPhone 4.

SIMON: When Steve Jobs introduced the iPhone 4 last year, he joked about whether anyone had seen it in advance.

JOBS: Stop me if you've already seen this.

SIMON: That's because many had.

JASON CHEN, FOUND IPHONE 4 PROTOTYPE: Hey, I'm Jason Chen. This is the new iPhone.

SIMON: An iPhone 4 prototype was lost in a bar and wound up in the hands of the tech blog Gizmodo, which paid $5,000 for the device.

(END VIDEOTAPE)

SIMON: Well, after that first incident there was all kinds of speculation about whether this was some kind of publicity stunt, but you had two people arrested and charged with criminal misdemeanors. And there's also some speculation that there may be some publicity at play in this one, Wolf, but you have the police involved so it may not be the case.

Back to you.

BLITZER: All right, Dan. Stay on top of it for it. Thank you very much.

They're among the most popular cars in the world. Now Honda is recalling almost 1 million of them. Stand by. We'll explain.

Explain. And a happy ending for Happy Feet.

(COMMERCIAL BREAK)

BLITZER: Lisa Sylvester is back with some of the other top stories in THE SITUATION ROOM right now -- Lisa.

SYLVESTER: Hi, there, Wolf.

Well, lawyers in Perugia, Italy, argued today over DNA evidence which led to the conviction of American student Amanda Knox. Prosecutors defended the evidence, but defense lawyers insist the samples can't conclusively prove Knox's guilt. In 2009, Knox was convicted of killing her roommate and sentenced to 26 years.

Honda is recalling nearly 1 million cars worldwide. One problem involves power windows which could potentially catch fire. The other concern is a software glitch with the transmission in stick-shift cars. Honda CRVs and the hybrid CRZ are impacted by the recall. So is the Fit, a popular fuel-efficient model. This is Honda's second major recall in recent weeks.

And Happy Feet is paddling home after an extraordinary adventure. The wayward penguin was released into his native waters on Sunday. You may remember Happy Feet was found back in June, exhausted and hungry on a New Zealand beach. He had traveled more than 1,800 miles from his native Antarctica. Happy ending there for Happy Feet.

BLITZER: We're happy for Happy Feet. Thanks very much, Lisa. Thanks for that.

Strange news on the hard courts. Jeanne Moos is next with some of the odd moments at the U.S. Open.

(COMMERCIAL BREAK) BLITZER: If the rest of the U.S. Open is half as entertaining as this weekend, tennis fans will be thrilled. Jeanne Moos looks at how one player felt like dancing after a win, while another player was literally floored.

(BEGIN VIDEOTAPE)

JEANNE MOOS, CNN CORRESPONDENT (voice-over): When tennis star Rafael Nadal sank lower, then lower and lower in the middle of a press conference, it was unlike anything we'd seen before. Unlike the time Marie Osmond just fainted on "Dancing with the Stars." People are always fainting in public, from a spelling bee finalist to a guest on Glenn Beck's old show, to audience members lulled into unconsciousness by politicians.

BILL CLINTON, FORMER PRESIDENT OF THE UNITED STATES: Everybody agrees are there.

MOOS: But Nadal didn't pass out. He cramped up, grimacing, covering his face with his arm, and repeatedly sighing.

UNIDENTIFIED FEMALE: Can I do anything?

RAFAEL NADAL, TENNIS STAR: No.

MOOS: He did ask someone to call the trainers.

(on camera) Forget tennis elbow. Nadal has set a new standard of pain for the leg cramp. You know that thing most of us have at night in bed?

UNIDENTIFIED FEMALE: This knot and twist and you get up. Oh, my God, OK. Let me walk this off, let me walk this off. And you're like...

MOOS: Except Nadal couldn't even walk. He slid to the floor with his right hand slamming his thigh, cramping.

UNIDENTIFIED FEMALE: OK, I think we'll put -- draw and end to the press conference. If you would all mind leaving...

MOOS: After almost ten minutes of massage, ice packs and Gatorade, Nadal was fine. He told CBS Sports that the humidity during the match he'd just won was probably to blame. And he said he gets cramps often.

NADAL: Yes, a lot of times: yes, nothing new. But you know, not during the press conference.

MOOS: There was more spastic muscle cramping at the U.S. Open. Oh, wait, that's dancing. The spectator in the stands was imitated on the court by Novak Djokovic. The two later danced together.

Of course, Rafael Nadal's tennis cramp could have happened at an even worse time. What if his leg stiffened during one of his Armani underwear ad shoots? Tennis fans posted remedies: "Yellow mustard helps. One spoonful every night has stopped cramps for me." The people's pharmacy noted "some people keep mustard packets at their bedside to eat, not rub."

UNIDENTIFIED MALE: Is it cramped up?

MOOS: Maybe Rafael Nadal could improve his serve by serving mustard. Jeanne Moos, CNN, New York.

(END VIDEOTAPE)

BLITZER: We have an important interview lined up for tomorrow. The former vice president, Dick Cheney, will join me. We'll talk about a lot, including his recollections of what led to the invasion of Iraq. Dick Cheney, tomorrow here in THE SITUATION ROOM, 5 p.m. Eastern.

That's it for me. Thanks very much for watching. I'm Wolf Blitzer for our international viewers. "WORLD REPORT" is next in North America. "JOHN KING USA" starts right now.