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ERIN BURNETT OUTFRONT

America's Fiscal Hole; Mitt Romney and Bain Capital; U.S. Military Buildup

Aired July 12, 2012 - 19:00   ET

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


ERIN BURNETT, HOST: OUTFRONT next, the U.S. deficit on track today we find out to hit $1 trillion in just a few months. We are driving off a cliff at full speed. When will Congress do something about it?

And new questions about when Mitt Romney actually left his CEO job at Bain. We fact-check it. Does it add up? The Democrats are asking for more information about his career.

And we talk to Joe Paterno's son Jay about the Freeh report and his father's legacy. That's OUTFRONT tonight. Let's go.

Well food evening everyone. I'm Erin Burnett and OUTFRONT tonight a damsel in distress. America is the woman in "Hazzards of Helen" (ph), remember that, tied to the train track, helpless, her only hope is that she's rescued before she is flattened, destroyed, ripped to bits, shreds like a penny on the train track.

Makes me think of the AFLAC ad, today the Treasury reported the government added another $60 billion to the deficit in June. So the grand total on money that we've borrowed so far this fiscal year is $904 billion. The real headline, though, is that that number confirms that we are on solid track to hit a $1 trillion deficit for the fourth year in a row. Well, the sky high numbers start to blur in this country you know because you've got -- it's trillions here and trillions there and hundreds of trillions and it just -- it gets confusing.

But tonight actually there's a really frighteningly easy way to put that $1 trillion in perspective. So to give you just a sense of how much money we're burning through that we do not have, remember the $1.2 trillion in automatic cuts that are coming at the end of the year, the so-called sequester cuts that Democrats and Republicans alike say will kill us and eviscerate our defense among other things? Well that $1.2 trillion in pain is spread out over 10 years.

So yes, we are burning through that amount of money at this moment every single year. It is money that we do not have. It is deficit money. It is borrowed to make the point again and again and again and it has been going on for years under presidents from both parties. And over the time that you see here, there's been plenty of lip service about the deficit problem with everybody blaming somebody else.

(BEGIN VIDEO CLIP)

SEN. HARRY REID (D-NV), MAJORITY LEADER: No one needs to lecture me or us on deficits, because you invented them. Republicans invented deficits.

BARACK OBAMA (D-IL), PRESIDENT OF THE UNITED STATES: Another area where I hope we can find some agreement is on the issue of getting our deficits and debt under control.

REP. MIKE SIMPSON (R), IDAHO: That's the danger to this country is the $14 trillion deficit and the 1.6 trillion we add to it every damn year.

GOV. BOBBY JINDAL (R), LOUISIANA: (INAUDIBLE)

(END VIDEO CLIP)

BURNETT: A lot of talk, but no action, at least not on our spending problem. Now Congress is working hard, voting down the health care law for the 33rd time and voting to use the Capitol Visitors Center for an event to celebrate the one-time king of the Hawaiian Islands. Now I'm all for the importance of Hawaiian history and maybe even for Hawaiian independence but all the while the clock is ticking on the fiscal cliff.

So what is going to take for Washington to wake up? OUTFRONT tonight Peter Morici, economist and professor at the University of Maryland School of Business and Dan Gross, economics editor at Yahoo! Finance. All right, so Professor Morici, what is it going to take? I mean it was sort of stunning today when you look at the $1 trillion that we're burning through now four years in a row every single year, so you're already at four trillion there. The 1.2 trillion in devastating cuts is a 10-year number. I mean it's pretty frightening when you look at it that way.

PETER MORICI, ECONOMIST: Well, our deficits gone from about 161 billion before the recession to about 1.2, 1.3 trillion a year, so an enormous increase. Only half of that can be justified by inflation, more folks on Social Security, Medicaid, you know Medicare becoming more expensive. The rest of it has been bigger entitlements, hiring more people to work in the government. We simply are going to have to spend less money. But also we're going to have to accept more taxes because we're spending 50 percent more than we're taking in and we simply can't cut that much or anywhere near that much.

BURNETT: Dan it's interesting. When you look at this, it is a bipartisan problem. I mean President Bush with the prescription drug benefit --

UNIDENTIFIED MALE: Right.

BURNETT: That was an incredibly expensive entitlement. You may think it was worth it, but it was a lot of money spent and borrowed. President Obama, certain things. He says he supports the Simpson/Bowles deficit reduction plan, right, but that involves raising Social Security age, didn't want to do it. Mitt Romney wants to cut taxes by 20 percent, so neither one of them seem to be really embracing some of the politically painful things --

DANIEL GROSS, ECONOMICS EDITOR, YAHOO! FINANCE: Sure and there's a third big enabler here, which is the bond market. Investors around the world are letting us -- getting away with this and make it very cheap (ph). We sold in the U.S. 10-year bonds, borrowed money for 10 years, 1.46 percent. So even though we're running up these huge debts --

BURNETT: That makes a mortgage even look expensive.

GROSS: They're lending to this as if we have a pristine balance sheet. So on the one hand, people kind of fear that interest rates will get out of control --

BURNETT: Right.

GROSS: -- then we'll be in big trouble. On the other hand, the market is not enforcing a sense of urgency on our political system.

BURNETT: And Peter, I mean people talk about this because it's true. When money is cheap, you want to borrow it and over long periods of time, so that way you know you're locking in this low interest rate. So that makes a lot of sense for the country. But it does enable this spending and this addiction, as Dan indicates, and then one day those interest rates could go higher and I don't mean higher to two percent. I mean higher, some people would say five or 10 or 15. I mean remember the late 1970's.

MORICI: Well, they certainly could go to six or seven without much problem. You know Europe will eventually get over its problems. That's why all this money is coming here. And the Chinese are not going to be able to lend money to us the way they have been indefinitely. And when we have to pay higher interest rate on a debt that's more than $15 trillion, well then we're either going to have to raise taxes a lot or we're going to have to really cut spending much more, you know, much more draconian fashion than what's coming at the end of the year. You know right now we're being lulled into a sense of complacency that we simply should not have.

BURNETT: Dick Cheney and Paul Krugman, not two names usually said in the same sentence --

UNIDENTIFIED MALE: The odd couple, the odd couple.

BURNETT: The odd couple, but Paul Krugman is obviously a believer of borrow, borrow, borrow because you've got the economy growing to solve this and that's the right thing to do. Dick Cheney once told then Treasury Secretary Paul O'Neill Reagan proved deficits don't matter. Don't worry about it buddy.

GROSS: Right and this is -- you know that's not the only inversion we see as we're hurdling towards this fiscal cliff. Republicans are saying no, we can't cut government spending, i.e., defense, because that will mean you know millions of jobs lost, imply that if you cut government spending, you lose jobs. And the Democrats are the ones saying we can't let taxes go up on the middle class at a time like this, which leads me to believe you know that movie you showed of the train, I think you should have put up "The Titanic" because we know how that one ends. It hits the iceberg and it does have that kind of crash.

I think we are you know going into this election season, there's going to be no grand bargain now, hard to see one happening during a lame duck session. And I think we will begin to see some of those sequestered cuts kick in and some of those tax increases kick in, which will ironically make the budget deficit picture look a little better.

BURNETT: That's true and they may hurt. And maybe, Peter, that would make it worth it that we take those sequester cuts. You let the Bush tax cuts expire. You know it's painful, yes. But you do get more money. Is it the right thing to do?

MORICI: I don't know that it's the right thing to do. We need to fix what's broken in the economy so it grows more rapidly. So we can get along without these large deficits. Krugman's right that we need large deficits to keep the economy going at a time like this. But the trouble is we're becoming addicted to low interest rates and we're not spending money prudently. I don't know that government spending had an increase so much over the last five years on a permanent and structural basis to justify these deficits.

BURNETT: Maybe it's time to look at one of those. I mean certain terrible times you would need to overspend, but some of those ideas of saying, look, you can only have -- you can only spend this percent of your revenue.

(CROSSTALK)

BURNETT: This is what you bring in. This is what you're allowed to spend like a normal family.

GROSS: The irony is we all know what the contours of a grand bargain are --

BURNETT: Yes.

GROSS: Some loopholes will go away. Some tax rates will go away and there's going to be (INAUDIBLE). It's just a question of -- I think it's a question of when that happens.

BURNETT: All right. Well thanks very much to both of you. We appreciate it. Take to Twitter; let us know what you think.

And Democrats raising questions about Mitt Romney's career at Bain, the big one, when did he actually leave the firm? Some serious allegations, do they add up?

And new evidence released in the murder case against George Zimmerman including a picture of Trayvon Martin's hoodie. We're going to show it to you and explain why this is so important.

Plus the "Rolling Stones" today hit a major milestone. There are a number of reasons why these rockers are still after all these years together.

(COMMERCIAL BREAK)

BURNETT: Now our second story OUTFRONT, Senate Majority Leader Harry Reid says Mitt Romney is so secretive about his finances that he wouldn't make it through a Senate confirmation hearing.

(BEGIN VIDEO CLIP)

REID: He could not only be confirmed as a cabinet secretary, he couldn't be confirmed as a dog catcher because a dog catcher you at least would want to look at his income tax returns.

(END VIDEO CLIP)

BURNETT: OK, yes, so he you know got a little nasty there, but you get the point. Democrats are out in full force today. Flagging a "Boston Globe" article that questioned when Mitt Romney really left Bain Capital. Now the Romney campaign says the article is not accurate and from our look at it, the implication is basically that Mitt Romney was the sole stockholder in a specific Bain fund after he left as CEO, actually that does seem to be fair.

That does not indicate that he was still CEO or running the firm in any way, but it does seem to add to the drumbeat of questions about transparency in Mitt Romney's financial history. John Avlon, Reihan Salam and Jamal Simmons are all with us.

Let me start with you, Reihan. Basically, and it is complicated, you know, private equity firms, they'll have Bain Capital fund one, two, three, four, five, six. This was six. He left quickly, so he basically put his ownership of the firm in this thing and he had no control.

UNIDENTIFIED MALE: Yes.

BURNETT: Does this fly with you? I mean their explainers are very complicated.

REIHAN SALAM, CNN CONTRIBUTOR: Yes, I think the basic story is that he was not in day-to-day charge of what Bain Capital was doing after he abruptly left to take over the Salt Lake City Olympics in February of 1999. Now the problem is that it's a little tricky because there wasn't another person listed on those filing documents as CEO because, again, he left abruptly, so it takes a while to actually make this transition happen.

But then "Fortune" on "CNN MONEY" recently had a story about Dan Climac (ph) which says that wait a second, we've actually seen documents, internal documents that say that he was not one of the managing partners and this was a document from 2000. So I think that the story is correct.

BURNETT: Right.

SALAM: The problem is that this is really tough to explain and if someone wants to exploit that fact, they can.

BURNETT: Right. Right. And let's just, John Avlon, put up the quote in the 2001 Bain Capital SEC filing and this is what I think has created some confusion. "Mr. W. Mitt Romney is the sole shareholder, sole director, chief executive officer and president of Bain Investors VI" and everybody, that's what's really important, that is not Bain Capital. That is Bain Investors VI, which could be --

UNIDENTIFIED MALE: Sounds like a super hero team.

BURNETT: Right or it sounds like something that is deeply confusing or designed to obfuscate, which of course it wasn't at the time, but it may seem that way now.

JOHN AVLON, CNN CONTRIBUTOR: But here's the basic problem. Politics is perception. And this SEC filing seems to contradict the previous statements they've been making over and over that Mitt Romney didn't have anything to do with Bain after 1999. And there are specific reasons for that cutoff date. Not only has Reihan said that's when he start -- took over the Olympic bid and so he stopped, clearly, day-to-day functioning and oversight over Bain at that point, which is a practical matter.

But it's between 1999 and 2001 that a lot of the things that have been alleged in ads and things occurred at Bain. For example, the outsourcing claim, a company named CSI, which did call centers. It was between 1999 and 2001 that that call center company merged really started moving overseas, and then was divested by Bain. Likewise the GST Steel Company, the Kansas City steel company that was the subject of that Obama attack ad.

BURNETT: Right.

AVLON: Really it's between 1999 and 2001 where things changed. Initially, the Bain infusion helped the company thrive in a pretty tough environment, but starting in 1999, they start losing around $50 billion and ultimately the company goes bankrupt, so it occurs in that window and that's why these dates matter so much.

BURNETT: And honestly, Jamal, the thing is if you want to look at it that way, so he had no control, but he was getting money from the firm during that window. I mean at this point, Mitt Romney is still receiving money from investments that were made at Bain that is part of his retirement deal with the company. I mean he's still getting money.

JAMAL SIMMONS, DEMOCRATIC STRATEGIST: Yes, Erin, you know what this sounds like to most people in the country? (INAUDIBLE) outsourcing, (INAUDIBLE), Swiss bank account, (INAUDIBLE) sweetheart deal, you know for most people in the country, they have no idea what all these things add up to, but is raising questions about Mitt Romney's business career, which he started out being a positive. Somewhere in America, there are a bunch of Democrats sitting in a room doing the dark arts of campaigns and they're sending off little informational time bombs on Mitt Romney every week. At some point, his campaign has got to get a hold of itself and find a way to create a narrative about Mitt Romney's business career that most people in America will accept or else he will not be elected president of the United States. People will not trust this man to lead this country.

AVLON: But here's the stunning thing about this. Just from a political level. They've had -- Mitt Romney's political career has gone on for basically 18 years. First runs for the Senate in 1994, 18 years to get this story straight, to have a strong clear answer that voters can understand about what is objectively a hugely impressive private sector record, this guy was a leader in business and very successful and that's something that Americans generally root for. The flat footedness about clearly explaining this stuff, that's where the real question mark comes in, how come they can't communicate --

BURNETT: Right and Reihan what about that? Because John and Jamal are making a very fair point. This guy has known about his ambition to be in public office and president for a very long time.

(CROSSTALK)

BURNETT: You know it's not since '94, but at least the past eight years. Why are they getting hit, seemingly punched in the face every week by this stuff?

SALAM: We have a very eerie convergence here, which is a consensus among the three of us. The fundamental problem is that Mitt Romney has a story to tell about dynamism, OK, so being in private equity means essentially what you're doing is you're a guy who is taking on corporate insiders. You're taking failing companies, infusing them with cash, so that they could then take on fat and lazy incumbents.

Let's put it that way. And that's ultimately a very good thing for consumers because it tends to lower prices. It drives productivity gains, but here's the thing. That's a very big and complicated idea to explain and from the Mitt -- the Romney campaign's perspective, they think that they don't actually have the room, they don't have the media echo chamber in order to get that story across. Rather, they have to fight 30-second sound bite to 30-second sound bite --

BURNETT: He also --

SALAM: -- and that's why they don't feel as though they can actually tell that story about why dynamism is good.

BURNETT: He also -- he's not sitting down and doing long in- depth interviews on these issues --

UNIDENTIFIED MALE: Because he's afraid --

BURNETT: You think they're too complicated and they're going to --

(CROSSTALK)

BURNETT: -- needs to sit down and do one --

(CROSSTALK)

BURNETT: -- right, but the only way to represent is to sit down and do one and take the tough questions and then come out --

(CROSSTALK)

SALAM: It requires a level of trust on the part of your inter market (ph) --

(CROSSTALK)

SALAM: And I think that the Romney and a lot of Republicans believe that they're not going to get a fair shake and that's why they engage in this kind of what I think John is calling it fairly a nickel and dime kind of tactic where you're talking about '99, 2001, you could actually say that wait a second, outsourcing, trade, these are things that make America stronger. But that's really tough to say if you feel as though you're not going to get a fair shake.

AVLON: It's also --

(CROSSTALK)

AVLON: -- say if your SEC filing --

SIMMONS: Erin, Erin --

AVLON: If your SEC filing says well look this is all perfectly explainable if you're running a private equity fund. That's tough for people to understand --

BURNETT: Final word quickly, Jamal.

SIMMONS: Erin, yes, the facts have an uncanny way of getting -- of coming out. Ask George Bush about his drunk diving record during the 2000 campaign. They've got to find a way to just let it all out, get it out on their terms, tell their story and get moving.

BURNETT: Right. All right --

(CROSSTALK)

SALAM: -- outsourcing by the way didn't work then.

BURNETT: All right.

SALAM: We'll see if it works now.

BURNETT: We're going to -- there is a way -- people will listen. He's got to give people credit for being smart and being able to understand this stuff, right, otherwise, actually insult people. All right thanks to all of you. Still OUTFRONT the big news today, the fresh report -- the Freeh report and its damning criticism of Joe Paterno. His son Jay is OUTFRONT tonight to answer to that.

And next something about the "Rolling Stones" you probably won't believe.

(COMMERCIAL BREAK)

BURNETT: Our third story OUTFRONT tonight sea drones. The U.S. military has been bulking up in the Persian Gulf in case of a conflict with Iran or a war. And today we find out that the United States has deployed submersible sea drones to clear Iranian mines. And we're going to explain exactly what those are in a moment, but add them to the two aircraft carriers already in the region, mine sweeping ships and a ship that the U.S. could use as a forward staging base and you start to see some of the very significant build-up that the U.S. military is putting into the Persian Gulf and the Straits of Hormuz in response to the Iranians threatening to close the Strait because they're upset about sanctions on their country.

The United States in fact announced more of those sanctions today expanding them against Iranian companies that they say are involved in the country's nuclear program. CNN national security contributor Fran Townsend is a member of the CIA External Advisory Board and she's with me tonight. So first of all sea drones, can you explain what those are? I mean I certainly, you know we all have a concept of what drones are in the air and what they do, but what are sea drones?

FRANCES FRAGOS TOWNSEND, CNN NATIONAL SECURITY CONTRIBUTOR: Right. So this is a commercially available product that obviously is going to supplement. You talked about the mine sweeping ships. Well a sea drone what you don't want to have happen is have a mine sweeper miss a mine and go over it and have it detonate. And so these sea drones are used. They can go to very deep depths, hundreds of feet, more than 900 in most cases. They go in front of the ship and around it and so they -- they're sort of the canary in the mine, if you will. They go under water, very deep. They look for these mines. If they find it, they detonate it and they destroy themselves and it protects the ship.

BURNETT: Sort of hovering in the water with sensors --

(CROSSTALK)

BURNETT: Hence the word "drone". All right, so what about this military buildup? How significant is it? We've been hearing a lot about it. The U.S. military sort of seems a little schizophrenic to me, to be honest. They brag about it and then they don't want to talk about it depending on the day, but how serious and significant is it --

TOWNSEND: And as you list the assets, they're hard to hide, right --

(CROSSTALK) TOWNSEND: -- aircraft carriers, mine sweepers --

(CROSSTALK)

TOWNSEND: -- forward operating bases.

BURNETT: Right.

TOWNSEND: So it's pretty clear. We shouldn't be surprised frankly. When you look at the negotiations between Iran and the West fell apart. July 1st, the oil sanctions, which were long noticed, but they actually went into effect then.

BURNETT: Right.

TOWNSEND: Today they came out, they announced companies that are subject to sanctions because they believe they're front companies for the potential movement of oil around those sanctions.

BURNETT: Right.

TOWNSEND: And so as this progresses, given the critical nature of the Straits of Hormuz in the movement of oil throughout the world, not to be surprised that we would move military assets in there.

BURNETT: Right. Final thing, "Daily Telegraph" front page tomorrow morning. Everyone you'll see this, British intelligence saying that they had -- MI6 agents have foiled Iran's attempts to build a nuclear bomb in 2008, but they say they're two years away from getting one. You take that seriously?

TOWNSEND: I do. MI6 their external service works very closely with U.S. and western intelligence. Take disruptive actions all the time and so not surprising, and two years is consistent with what we've heard from General Petraeus at CIA and Leon Panetta before him.

BURNETT: Right.

TOWNSEND: That's the lower, the sooner end of that scale, but not different really from what we're hearing from western intelligence.

BURNETT: A little longer than Israel's thinking, which might be a good thing. All right well Fran Townsend, thanks as always, appreciate your taking the time to be with us.

And next, what is it about Washington, D.C. mayors? The latest one, Vincent Gray, caught up in a corruption scandal. Should Washington have seen it coming?

And there's new evidence released in the Trayvon Martin case, hundreds of pages of FBI interviews, plus Joe Paterno's son, Jay Paterno, will be with us tonight.

(COMMERCIAL BREAK) BURNETT: Welcome back to the second half of OUTFRONT. We start with stories we care about where we're focusing on our reporting from the front lines and first tonight, Egyptian President Mohammed Morsi returned from his first international trip. It was to Saudi Arabia. It's a crucial trip because Egypt desperately needs money and Saudi has a lot of it. Egypt's economy is in terrible straits and it needs to have a good relationship with Saudi, its largest trading partner.

Now, there's a big problem here because Morsi, of course, is a Muslim Brotherhood candidate. It is a banned party in Saudi Arabia. So, he really wants to strengthen his ties with the country. Back home, Morsi has to start putting together a government.

Interesting, Hani Sabra of the Eurasia Group says he says Morsi will pick a weak prime minister to try to keep decision-making within the Muslim Brotherhood. Of course, the military recently have already changed a lot of the constitution so that Morsi himself will not have very much power at all.

Well, 450,000 Yahoo! passwords have been exposed. A group of seven hackers stole the passwords according to a note posted on their Web site, saying they wanted to do it as a wake-up call and not a threat. Yahoo! confirmed the hack of Yahoo! voices, which is part of its new services.

According to security expert, Nelson Anders (ph), the most frequently used passwords were, OK, everybody this is a wake-up call. If your password is "password," "welcome" or 123456, you probably should change it.

OK, Wells Fargo is paying $175 million to settle allegations it discriminated against black and Hispanic borrowers. The Department of Justice accused Wells Fargo, which is the largest mortgage lender in this country a steering minority buyers into more costly loans and charging them higher fees. The center for responsible lending says the news is welcome. But they say, and I quote, "The impact of discriminatory pricing on African-American and Latino communities has been severe and will take generations to remedy."

Well, tonight, Senate Democrats have written to Attorney General Eric Holder, calling on him and regulators to investigate the ongoing rate fixing scandal on LIBOR, that crucial rate to which American mortgages, or at least many of them, are fixed. They want him to pursue civil and criminal probes into banks that could have manipulated that rate. Senate aides tell OUTFRONT that Senator Jack Reed of Rhode Island, Carl Levin of Michigan are leading the charge.

Well, it's been 343 days since this country lost its top credit rating. What are doing to get it back tonight?

Well, 30-year mortgage rates have hit another record low. Every week I say, this might be the last week I get to say that, 3.56 percent. Rates have either matched or hit a new low for 11 of the past 12 weeks. Obviously, in order to have an economic recovery, we need housing to recover, those low rates hope. We've had a little recovery over the past few months. We'll see if it will stick. And now our fourth story OUTFRONT: worst mayor in America may happen to live in the nation's capital. We're talking about Vincent Gray. So, let's tell you about this guy, because it's still pretty amazing story. You know, he was running in 2010 against a young rising star in the Democratic Party, this guy Adrian Fenty, who was loved by a lot of people.

You may remember him. He was telling the unions to go -- jump off a cliff in Washington, D.C. Vincent Gray said, "I'm going to come in. I've got character, integrity and leadership." That's a quote.

But since taking office, his administration has been plagued by scandal.

Just this week, a friend of Grays pleaded guilty to helping funnel $650,000 in campaign funds through a contractor to support Gray's election. That is on top of the three campaign aides who have pleaded guilty to felony charges.

And others in the D.C. government are not looking as good either. Many of the city's top government officials are now under investigation by other city or federal officials. And now, three council members are calling on Gray to resign.

John Avlon, this is just an amazing story, because this is a guy who came in as a knight in shining armor for the teachers unions, to fight back and say, I'm going to help you out and I'm going to stand up for the common man and here he is, involved in multiple, seemingly, corruption scandals.

JOHN AVLON, CNN CONTRIBUTOR: That's right. This was the establishment striking back. This is the Democratic machine, teachers unions putting over $1 million in his campaign, to push back against Adrian Fenty's controversial education reforms, along with Michelle Rhee.

Well, sometimes, careful what you wish for, because the clubhouse in many big cities is often corrupt and the allegations of corruption are unbelievable. I mean, it really is in epidemic proportions right now. Three members of the city council are calling on Mayor Gray to resign.

The question is, when you've got this many distractions, and we now know he knew about the $650,000 shadow campaign infusion back in January, how long can you continue to govern in the city's best interest? That's one of the many questions being asked of Vincent Gray tonight.

BURNETT: And let's talk about this. I mean, what does this mean for the unions? I mean, we talk about unions across America right now, and this battle. People like Chris Christie are taking them on. Wisconsin obviously.

This guy goes, that could be a real blow to one place where the unions were seeming to gain power. AVLON: Look, we need to be careful to say that the unions so far are not directly implicated in these particular corruption scandals. But the broader point absolutely stands. When Adrian Fenty lost that closed Democratic partisan primary to Vincent Gray, it was seen as a brush back pitch by the unions.

BURNETT: Right.

AVLON: Saying that, look, if you live in a one-party town, we have the money and ability to take you out if you end up reforming too aggressively. That's one of the reasons this isn't a national story. Not just that it's our nation's capital.

BURNETT: No.

AVLON: There's also a cautionary tale for all campaigns. Sometimes when you want to win in the worst way, you win in the worst way and it stops your from being able to govern.

BURNETT: Quickly, before we go. Vincent Gray in the Marion Barry ballpark yet? Everyone may remember the guy who went to jail, was doing crack or cocaine in a hotel room. He was getting visits from ladies in jail, which were not something we'll talk about on a family program.

AVLON: Yes. You know, the Marion Barry ballpark is really specific. We have an illustrious history of sort of incompetent scumbags of big city mayors. I don't think he's yet hit Marion Barry levels. But watch out. There's still room to fall.

The point is, though with this many levels of accusations of corruption and self-inflicted scandal, it really does distract from the people's business.

BURNETT: All right. Thank you very much.

AVLON: Thank you.

BURNETT: Incompetent scumbags, not often said. I wish you say that more often.

OK. We have new evidence tonight in the second degree murder case against Florida neighborhood watchman George Zimmerman. And what we want to show you now is a never before seen picture. This is a picture of the hoodie and the t-shirt that were actually worn by Trayvon Martin the night he was killed.

The state also released hundreds of panel pages of FBI interviews in which Zimmerman is described as, quote, "overzealous," with a, quote, "little hero complex" but not motivated by racial tendencies.

Benjamin Crump is an attorney for Trayvon Martin's family. Paul Callan is a criminal defense attorney. Both are OUTFRONT tonight. Good to see you.

Mr. Crump, let me start with you. The lead investigators from the Sanford Police Department told the FBI, and I just want to quote here exactly what they said, quote, "Zimmerman followed Martin not because of his skin color, but because of his attire which was similar to hoodies worn by local gang members."

What's your initial response to that?

BENJAMIN CRUMP, ATTORNEY FOR TRAYVON MARTIN'S FAMILY: Well, Erin, as Trayvon parents and I have said all along, we don't know George Zimmerman. We do know George Zimmerman. We don't know if he's a racist or not. But we do know he pursued, confronted and shot Trayvon Martin in the heart for some reason.

And we know there's a witness, number nine, who called the police on her own volition to say that George Zimmerman was a racist. She's a contested witness because they don't want to let what she says out. The special prosecutor said in court, Erin, that she would be used as a rebuttal witness, much like in the Sandusky trial.

BURNETT: Right, and I want to -- let me follow up on that, because -- do you raise the case of this particular witness, but, obviously, in the FBI information that has been released, we now have seen dozens of friends and co-workers who have said Zimmerman was not a racist.

So, does that make it more difficult for you or concern you -- maybe there's more than one -- but you talk about one person versus many people saying something different?

CRUMP: No, not at all. Friends, people give varying degrees of how they feel about somebody for whatever reason. None of that matters to why this armed watchman with a 9 millimeter gun got out of his car and chased an unarmed teenager and shot him in the heart.

We can't get off the ball. All this other stuff is just distractions.

BURNETT: And, Paul, what about the law of self-defense? I want to go back to this picture that we have here, to show you tonight, which is the exact hoodie that Trayvon Martin was wearing the night he was killed.

Paul, does the law of defense allow a defendant to claim that the way somebody was dressed is relevant? You know, I'm referring to the fact they're saying he was dressed the way local gang members were dressed and that would somehow, according to this theoretically, potentially justify what Zimmerman did.

PAUL CALLAN, CNN LEGAL CONTRIBUTOR: Well, the answer to that is yes and no. I mean, obviously, if you wear a ski mask into a bank, that would suggest you're a robber. And the way you're dressed would certainly be relevant to how people react.

Now, with the hoodie and the so-called gangsta style of dress, it's a little bit different thing. I mean, my son, in a relatively prosperous suburb, he dresses -- he wears hoodies all the time and loose-fitting fans, the gangsta kind of look.

But I will say, a lot of people feel threatened by it. Ultimately when the judge charges the jury, he'll say to the jury, there's a subjective component. Was Zimmerman actually fearful? And would a reasonable person in his shoes have been fearful?

Would somebody at night seeing somebody wearing a dark hoodie be fearful? And that's what the jury ultimately will judge. There's no absolute rule on it.

BURNETT: And, Mr. Crump, final question, FBI also interviewed Zimmerman's ex-fiancee who said she had a troubled relationship with him. She had a restraining order. She said he hit her in the mouth because she was chewing gum. Obviously, that seems very bad for Mr. Zimmerman.

But then she also said she never heard him express any kind of bias or prejudice.

All in, what kind of witness do you think she'll be? Someone that you're looking forward to hearing from or not?

CRUMP: Absolutely. She -- the key to this is knowing what was inside Zimmerman's head. She also said he has some suicidal tendencies. So, all that has to be vetted out.

And, Erin, for the last time, the fact that I wear a hoodie doesn't justify you killing me. If we started letting people's choice of clothes dictate who we can shoot, commit crime against, that's like a woman wearing a skirt and you say that justifies rape. That's not allowed in America.

(CROSSTALK)

CALLAN: You know, I got to agree with you on that. That's absolutely true. When you judge self-defense, the jury is -- they look at the whole picture as to what the person was confronted with. That's, you know, that's what the law is and --

CRUMP: Paul --

CALLAN: -- whether you're under threat or not. So --

CRUMP: -- Mark Zuckerberg wears a hoodie.

CALLAN: Nobody's saying you go out and shoot somebody who's wearing a hoodie.

(CROSSTALK)

CRUMP: -- young black man wore a hoodie.

CALLAN: Nobody is saying you can do that.

(CROSSTALK) CRUMP: -- young black man -- so how -- when we start allowing it, it opens up a floodgate to say if minority people wear hoodies, it's OK because they look like criminals. But when the white guys wear hoodies, nobody says they're suspicious, that's not allowed.

CALLAN: Well, that has nothing to do with hoodies. That has to do with racism. And that's --

CRUMP: Exactly.

BURNETT: That's the question.

All right. Thank you to both of you. But obviously, that is the crucial question here about what happened that night. Was it racism?

Well, a scathing report says Penn State leaders including Coach Joe Paterno concealed Jerry Sandusky's child abuse allegations for years. Jay Paterno comes OUTFRONT next.

And why the city of San Diego is crazy for comic books.

(COMMERCIAL BREAK)

BURENTT: It's an important day in rock music history. Fifty years ago today, the Rolling Stones played their very first gig.

On July 12th, 1962, they played at Marquee Club in England. And their first hit, a cover of Chuck Berry's "Come On," came a year later.

And since then, they have toured. And they have toured. And they have toured.

And they may not be done yet. Because when they reunited at the Marquee Club yesterday, Keith Richards hinted at a new tour. Telling "The Hollywood Reporter," I'm quoting him, "There's things in the works. I think it's definitely happening."

Now, this is pretty stunning, everybody, because the average age of the band is 68 -- 68. You think what more can they hope to accomplish? Why keep touring?

Now, that brings us to tonight's number: $558 million. That's how much their last tour in 2007 brought in. During the two-year Bigger Bang Tour, they played to 2.5 million people in 32 countries. At the time, it was the highest grossing tour of all-time.

So, it's probably no surprise they want to get back out there. But I have to say, isn't it awesome we have people who are 68 years old as amazing rock stars? I think it's great.

Well, we're back with our "Outer Circle".

And we want to go tonight to London, with the Olympics just two weeks away. The British government has announced that it's going to be using an additional 3,500 troops as security for the games, because the security contractor that was hired by the Olympic said it's not even going to have enough people ready in time. It's pretty shocking that they just discovered this.

Jim Boulden is in London. And I asked him how the change will affect security at the Olympics.

(BEGIN VIDEO CLIP)

JIM BOULDEN, CNN CORRESPONDENT: Erin, the private company hired to supply 13,000 security guards known as G4S say 9,000 being trained aren't ready yet. So, the government has designed to deploy an extra 3,500 troops, on top of the more than 13,000 already being deployed to secure the country during the Olympic Games.

You could say at least the soldiers have two weeks to get ready, even though some were expected to be on a well-earned leave. Or you could say, with only two weeks to go before the opening ceremony, how could the publicly traded firm used for everything from Wimbledon to red carpet events, to concerts, not have planned their training regime better?

But ironically, extra troops and the security guards, once trained, will mean London has even more security than originally planned -- Erin.

(END VIDEO CLIP)

And our thanks to Jim.

And now, our fifth story OUTFRONT -- a damning report out today that said that top Penn State officials, including head football coach Joe Paterno, covered up sex abuse allegations against Jerry Sandusky for over a decade. It's a 267-page report by former FBI Director Louis Freeh that says in order to avoid, quote, "bad publicity," officials, quote, "repeatedly concealed critical facts".

OUTFRONT tonight: Jay Paterno, the son of the late Joe Paterno.

And, Jay, thanks very much for taking the time to be with us. I know this has to be hard to read all of this. I know you've got a lot of emotions about your father who just recently died.

Let me just start by asking you this, though, the thing that stands out to everybody who's talking about this today. The report says four of the most powerful people at Penn State, including your dad, "failed to protect against a child sexual predator." That's the words in the report. And, quote, "exhibited a striking lack of empathy for Sandusky's victims by failing to inquire about their safety and well-being."

What's your reaction to that?

JAY PATERNO, SON OF JOE PATERNO: Well, I think that -- you know, people have to realize this report is not a legal document. This report is a -- it's a report where the burden of proof is much lower than it would be if this was a legal case or a legal document. So they've drawn some conclusions here. There are really no new facts in this situation. They've just drawn different conclusions that people have.

But I think as this case continues to go on, which it will because there's still some cases pending and there's sworn testimony that people can look at. I think they'll have a different -- a different view of what the real conclusions are.

BURNETT: Did you ever have a heart-to-heart with your father before he died and ask him the question of, "You know, dad, why did you not -- when you went and you told someone else about what happened in the shower, when you found out about it from Mike McQueary, why didn't you push it even further?" Did you ever have that heart-to- heart?

PATERNO: No. I mean, we had a conversation about it. And he said, look, he said, "All I knew to do was to tell -- report it to my superiors." This is not a subject that he was comfortable talking about, this type of thing.

But he said, "Look, I knew I had to give it to my superiors because I knew they could handle it better than I could." He said, "I felt like that they would handle things."

And he said in hindsight, "I wish I'd done more. I wish I'd followed up a little more aggressively."

And our statement that the family put out today says just that.

BURNETT: Right, right.

Well, let me ask you about this -- I know this has frustrated your family. But this is something that, you know, I'm trying to understand.

According to the report that was put out by Mr. Freeh, Tim Curley, the former athletic director and the former president Graham Spanier had decided to report Sandusky to the Department of Public Welfare. But before they reported, Curley wrote in an e-mail, and I'm quoting his email, "After giving it more thought and talking it over with Joe yesterday, I'm uncomfortable with what we agreed were the next steps." And, obviously, then, at that time, they decided to not go that far.

Obviously, the e-mail makes it sound like your father agreed with not reporting Sandusky.

Do you think your dad felt some sort of level of protection that before going forward with something like this, he'd want to have seen it himself? I mean, is there some psychological reason that could explain that seeming reticence?

PATERNO: No, I think what the reticence -- I don't think there's any reticence at all about reporting it. I think what Joe is simply stating is, look, we have a -- somebody has reported something to us that is alleged to have happened. We ought to at least talk to the person who's been accused. And that seems to be the tone of the e- mail when you read the entire e-mail.

And there is no way -- I think there were some conclusions drawn by the Freeh commission as to what that wording meant.

And I think as -- again, as we go forward and Tim Curley and Gary Schultz have their trials that come up some time early next year, what it looks like, they'll be sworn testimony, more information about this.

The thing I think it's important for everybody to understand is this report is by no means the end of all things that are going to come out. So, we'll have more people on the record. There's voices that were not heard by the Freeh commission that will be in the court of law.

And I think that will help clarify some of these things that are -- that are -- you know, even Louis Freeh himself admits they had to draw some, quote/unquote, "reasonable conclusions".

And I think the important thing is that, you know, Joe didn't want -- Joe wanted us to pursue the truth wherever it took us. And I don't think we would have stopped with reasonable conclusions. We want to continue to pursue the truth.

BURNETT: Right, right. I guess the thing that seems so challenging to understand is that, you know, if someone comes in and tells you that they saw someone raping a child in the shower. And, obviously, your father was very distressed about that and he talked about it with the head of the university the next day. But then nothing happened.

I mean, don't you think you'd say something must happen, that you would keep pushing it?

PATERNO: Well, let me clarify that very quickly for you. Mike McQueary has testified that he did not come in and say he saw a young man being raped in the shower. So, that's probably an inaccurate characterization of what Mike told him.

Mike told him he saw something that wasn't right, something that crossed the line. And Joe reported it to his superiors.

BURNETT: Right. I'll put the quote up here.

(CROSSTALK)

PATERNO: So I think that wording has been --

BURNETT: Yes, let me just, Jay, put the quote up. He said, "I told him," Paterno, "what I had seen. I made sure he knew that it was sexual and that it was wrong."

PATERNO: Correct. But that it was, you know, something that crossed the line, but not a rape, as has been characterized. It could -- not that any of that is excusable, not that any of that is right.

But Joe reported it to his superiors -- which is exactly what he's required to do by the Clery Act. He really could not have stepped outside of that legally.

But, that being said, he has since said that he wishes he'd followed up and pursued it more. And that's what he has said about it. And that's -- he'd been very clear on that and never wavered.

BURNETT: Are you disappointed a little bit though, part of you? I know it's got to be hard. I mean, your dad was a hero and you love him and he's your dad. But is part of you a little disappointed?

PATERNO: Disappointed in him?

BURNETT: Yes.

PATERNO: You know, I think what we have to understand is this. We have a lot more information in 2012 than we did in 2001. We have to understand, when you judge people's actions 11 years ago, you have a lot better context and a lot better -- a lot more information they had there. And you can't necessarily judge people and their actions 11 years ago based on what you know now.

At the time this was reported to Joe, Jerry had never been charged with a crime. A very -- obviously somebody who was upset about something he had seen came to him. And Joe went and reported to his superiors.

So, I don't know that I want to condemn somebody or say I'm disappointed because I can't tell you -- I wasn't in his shoes. And a lot of people would like to say they would have done differently. But that's just -- you know, it's easy to say that now.

BURNETT: Quick question to you, just as you're talking, did you always call your dad "Joe" or did you call him "Dad"?

PATERNO: Well, I worked for him in 17 years. And in a professional situation, I referred to him as "Joe" because --

BURNETT: OK.

PATERNO: -- it made it a lot easier for everyone else around in the office, rather than in a meeting, and calling him dad. That would put people, you know? So, it's a hard habit to break after 17 years.

BURNETT: So, as you were just saying it, I noticed it, you know -- I mean -- OK.

And one final quick question. There's obviously been a call to remove your dad's statue from the campus. There's been Twitter action on that. But there's been other people who have said it should go away.

I know, emotionally, I'm sure you don't agree. If it would help the campus heal, is that something you would support? PATERNO: I don't know that it would help the campus heal. I think there's a lot of people right now -- it's a very emotional issue right now. But I think everybody has to understand there's a long view to this.

I think as this case continues, there's going to be more information. And I think you want to wait until all the information is -- and all the facts are in, and all the truth is in.

I think everybody in this situation, whether it's Penn State, whether it's my family, and certainly most of all the victims, deserve to have the truth come out and not necessarily make decisions based on what Louis Freeh himself has called reasonable conclusions.

BURNETT: All right. Well, Jay, thanks very much.

PATERNO: Thank you. Appreciate it, Erin.

BURNETT: All right. Jay Paterno, as we said, the son of Joe Paterno, the Penn State football coach.

We'll be right back.

(COMMERCIAL BREAK)

BURNETT: We have a great comic story. We're going to bring that to you tomorrow. We wanted to give the extra time to Jay Paterno, Joe Paterno's son, who as you saw, is defending his father and saying that the damning report that came out by the former FBI Director Louis Freeh was not a legal document and wasn't accurate. In fact, saying hindsight is 20/20 and it's easy to look in the mirror in the distance and see what happened and it's not really fair to judge his father.

Tomorrow, a lawyer of one of the victims of Jerry Sandusky will respond to him and to the Freeh report.

And as I promised, we will have our great comic story, which we think will be a lot of fun, tomorrow.

In the meantime, have a wonderful Thursday night. Enjoy yourself. We'll see you back here. Same time, same place tomorrow. Have a great night.

"A.C. 360" starts now.