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Southern California Wildfires; Bank Stress Test Results; President Obama's Budget Cuts; Wesleyan Gunman Manhunt: Shooter Targeted College, Jewish Community; Santa Barbara Burning; Afghanistan Tensions Remain in Light of Continuing Attacks

Aired May 07, 2009 - 10:59   ET

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

TONY HARRIS, CNN ANCHOR: And good morning, everyone. It is Thursday, May 7, 2009, odd day. Think about it, 5/07/09, one of only six days this century with three consecutive odd numbers.

And here are the top stories of the CNN NEWSROOM.

Wildfires hopscotch the canyons of southern California. Twenty homes go up in flames, thousands of people out of their homes this morning.

Did your bank crack under pressure? The government reveals results of its stress tests today.

In Afghanistan, protesters chant "Death to America" and blame U.S. bombing runs for civilian deaths.

Good morning, everyone. I'm Tony Harris. And you are in the CNN NEWSROOM.

President Obama just moments ago presenting his budget details. His proposal calls for 121 federal programs to be cut or consolidated. Those cuts would total $17 billion or about one half of one percent of the budget Congress has approved for next year.

A live report on the president's request from our White House Correspondent Suzanne Malveaux in about 10 minutes. Plus, Josh Levs will look at those programs the president wants to cut.

What do you think of President Obama's proposed budget and his cuts? And more than that, what would you cut?

We'd like to hear from you. Log on to CNN.com/newsroom. Click on my big head there once you get there, and it will get you to our show page, and then have at it. We will get some of your responses into the program this hour and next with Josh.

Conditions are ripe for another bad day on the fire lines in Santa Barbara, California. A wildfire that erupted Tuesday has raced across 500 acres. More than 13,000 people have fled their homes. Winds expected to hit 25 to 45 miles an hour with gusts up to 60.

Several mansions and the coastal foothills have burned. At least eight firefighters have been injured. The fire comes about six months after 200 homes were destroyed by another wildfire there. Our Kara Finnstrom is in the fire zone, standing by one of the 20 or so homes destroyed by the flames.

Kara, good morning to you.

Any more evacuations this morning? Or has everyone pretty much gotten out of the path of this fire?

KARA FINNSTROM, CNN CORRESPONDENT: Well, Tony, we're about to get an update on that within the next hour, actually. What we can tell you is at this point, 18,000 people have been evacuated. So a huge number.

If you take a look behind me at what's left of this home tucked down into this canyon, you can get a feel for the intensity of this fire. This home burning all the way to the ground.

What we don't know at this point is exactly how many other homes saw this type of devastation. As you mentioned, some firefighters have mentioned that they saw at least 20 homes destroyed, but firefighters, emergency crews have been out today trying to get a better feel for that. They say this fire became menacing when winds picked up late yesterday.

(BEGIN VIDEOTAPE)

FINNSTROM (voice-over): It was the fear of firefighters on the front lines in Santa Barbara -- high winds gusting to 65 miles per hour, suddenly blasting fire through hot, dry canyons. The fire exploded. The black smoke so thick, no one could get an accurate count of how many homes were burning.

UNIDENTIFIED MALE: When everything was going down, we couldn't even tell that this house was burning. We couldn't see this far.

FINNSTROM: Another firefighter said he personally saw at least 20 homes burning.

UNIDENTIFIED MALE: This is the Santa Barbara Police Department issuing a mandatory evacuation for all residents in this area. Gather your personal belongings and leave your homes immediately.

FINNSTROM: By late afternoon, sheriff officials had to double the number of mandatory evacuations, with 2,000 families ordered to leave their homes.

UNIDENTIFIED FEMALE: So we have bottled water, pillows. We've got dog food and, of course, all of the photo albums.

FINNSTROM: Amy Ford (ph) has lived in Santa Barbara for 35 years. She's ignoring the evacuation orders for now, but she's packed and ready to go.

UNIDENTIFIED FEMALE: This is as close as it's come down to the main part of Santa Barbara, since I've been here, at least.

(END VIDEOTAPE)

FINNSTROM: And the governor is in Santa Barbara. He'll be at that press conference taking place, again, about an hour from now.

He has already, Tony, declared a state of emergency, which will free up more resources to come in. And also more resources for people who lost homes like this one.

HARRIS: Hey, Kara, very quickly, we'll talk to Rob Marciano about the conditions in a second, but it looks like, at least for a moment, the winds are down.

FINNSTROM: You know, it feels great out here right now. But we spoke with some firefighters about that, and they said, hey, this is what it felt like before the winds kicked up yesterday.

So we're going to take advantage of this, we're going to get those helicopters up. They have 16 aircraft that are going up today. We're going to do as much as we can right now, but we're not taking anything for granted.

HARRIS: OK. Kara Finnstrom for us.

Kara, appreciate it. Thank you.

And Governor Schwarzenegger will have more to say about the fires and evacuations at a news conference about 50 minutes from now. And of course, we will bring that to you live.

Take a test. The most obvious question, what's my grade? Well, today is the day we get stress test results on the nation's top 19 banks. The Obama money team has leaked figures for, what, two weeks now? So we know no one failed.

CNN Radio's Steve Kastenbaum is in New York.

And Steve, let's take a different approach to this. You went down to the floor of the stock exchange yesterday to sort of take the pulse of traders anticipating the stress test results. What did you hear?

STEVE KASTENBAUM, CNN RADIO CORRESPONDENT: You know, nobody on the floor is surprised by the information that was leaked out today and is included in several published reports. Let's take a look at what's going on with the banks, first of all, and what their information is in this stress test.

We know a lot of big banks are going to need additional capital to weather the storm. First off, Bank of America, Tony, $34 billion; Wells Fargo, the government says it needs up to $15 billion; GMAC, $11.5 billion; $5 billion for Citigroup; $1.5 billion for Morgan Stanley.

But there are a number of banks that are doing well, and this is not a surprise to those traders on the floor of the stock exchange. Those that don't need more capital: JPMorgan Chase doing very well; Goldman Sachs, MetLife, American Express; Bank of New York Mellon; Capital One. You know, there are a lot of banks that have been profitable in the last couple of months and, as a result, we're not seeing any sort of panic amongst investors.

I was talking to traders yesterday, and they seemed a lot more positive yesterday than they did several weeks ago when I visited with them as the market first started to show signs of turning around a little bit.

HARRIS: Well, wait a minute, Steve. Yes. Well, is all of the drastic talk of bank nationalization essentially gone from the floor, at least?

KASTENBAUM: I don't know if it's all gone. I got a sense that the traders feel the banks are starting to enter the realm of financial well being.

I mean, some of them obviously still have a long way to go before they get a clean bill of health from the Treasury Department, but they're starting to see that, you know, they can work their way out of this now. They can show on their sheets, you know, where the toxic assets are now and what they need to do in order to get back in the black.

And as a result, they can see which banks are a sure bet now. Well, not a sure bet, but a better investment.

HARRIS: Yes.

KASTENBAUM: And the traders are telling me they're hearing that from the investors, they want to put their money in those banks now. So they're feeling a little bit better.

A couple of weeks ago, they were sounding very cautious about the turnaround on the Dow. And they were telling me, look, this could just be a bear bubble. Yesterday, when I spoke with them, the ones I spoke with seemed a lot more positive in their reaction to the news in the financial market.

HARRIS: Well, we like the silver lining around here, and we appreciate it. We really do.

CNN Radio's Steve Kastenbaum for us.

Steve, appreciate it. Thank you.

So what's next for the banks? Those that need a cushion have to raise capital. They've got a month to craft a capitalization plan.

Some may sell assets, issue new stock, or even dip into the bailout kitty once again. Once the plans are approved, banks will have six months to raise the money. Many of the 19 U.S. banks hold news conferences tomorrow to put their spin on the government assessments.

You can count on coverage right here on CNN. A little after the half hour, I will talk with M.I.T. professor Simon Johnson, a former chief economist at the International Monetary Fund.

What do the stress tests mean to you? Is your bank safe? We'll get some answers here.

Wildfires out of control in California. Meteorologist Rob Marciano is watching the winds, the high temperatures to see when firefighters might get a big of a break.

NICOLE LAPIN, CNN.COM CORRESPONDENT: And I'm Nicole Lapin, monitoring all of the new video coming into the network right now. We'll take you to the front lines when CNN NEWSROOM continues.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

SEN. MITCH MCCONNELL (R), MINORITY LEADER: Well, that's a start, but with Democrats in Congress adding to the national debt at the rate of more than $100 billion every month already this year, and with a budget that triples the already unsustainable public debt over the next decade, it's clear that there's not much more that we can do to protect our children and grandchildren from the unprecedented trillions in additional debt proposed by this administration.

(END VIDEO CLIP)

HARRIS: So there you go. Republicans already speaking out against President Obama's 2010 budget.

White House Correspondent Suzanne Malveaux joining us live.

And Suzanne, it looks like it's going to be a pretty tough sell, this budget, with this group of Republicans.

SUZANNE MALVEAUX, CNN WHITE HOUSE CORRESPONDENT: It's going to be a pretty tough sell on both sides, Tony. Some of the Democrats not quite happy with some of these cuts in the budget itself.

We're talking about something that is close to $3.5 trillion. And it really is just one half of one percent of that spending. So obviously the big question here is, $17 billion, does it really make that much difference?

It's something I asked the director of OMB, Peter Orszag, this morning. And he said, well, you've got to take into account there's some savings that we believe through health care reform, about $300 billion or so. It's also the same point that the president made earlier when he was announcing his budget.

I want you to take a listen.

(BEGIN VIDEO CLIP) BARACK H. OBAMA, PRESIDENT OF THE UNITED STATES: Now, some of the cuts we're putting forward today are more painful than others. Some are larger than others. In fact, a few of the programs we eliminate will produce less than $1 million in savings. And in Washington, I guess that's considered trivial. Outside of Washington, that's still considered a lot of money. But these savings, large and small, add up.

(END VIDEO CLIP)

MALVEAUX: Tony, that really is the point. He says it's significant, this is just the beginning.

Now, if you want information here, this is a book that you've got to go to. It's also online, as well. But we've been thumbing through this, trying to make sense of all this.

Where are the cuts? Where are they going to cut this budget? A couple of things here.

One of the larger savings, it is going to be the F-22 fighter aircraft, $2.9 billion cut in savings. We also heard about the presidential aircraft, the helicopter, a lot of controversy over the suped-up version. How much is that going to cost?

Well, they say that they're going to cut some of that program, about $750 million in savings there. And if you want to take a look at education, for instance, a lot of cuts in educational programs. Which ones are going to affect you? There's one of them called the Safe and Drug-Free Schools and Communities state grants, about $295 million cut from there.

These are the kinds of details that are being offered by the administration to say, look, you know, there's some programs that are working, there are some that are not working. It's important to know which ones and where your money is going -- Tony.

HARRIS: No, I think that's true.

All right, Suzanne. Appreciate it. Thank you.

You know, our Josh Levs is following all of this online. He is here to show us more of the programs the president would cut.

Josh, what do you find?

JOSH LEVS, CNN.COM CORRESPONDENT: Yes. You know, Tony, I'll tell you, it's really interesting.

Fortunately, the team at CNN Money, has been doing a great job breaking it down. We're doing the same thing right here for you in the newsroom.

And you can see right here, "Weeding the Budget of $17 Billion." It's one of the headlines right now. The story -- I encourage you to go to CNN Money -- also helps you understand what's happening with the budget, where your tax dollars are going.

Now, Tony, I want to show you the complexity of cutting a program, how tricky this can be for a president.

One program that we've heard is going to be cut is this right here. It's called Even Start, and it's an education program. Now, I was just looking back and I saw that in a House Democratic news conference a few years ago, one of the lawmakers then slammed President Bush for wanting to cut budgets from this program.

Let's take a look.

(BEGIN VIDEO CLIP)

REP. MIKE ROSS (D), ARKANSAS: President Bush's budget also cuts funding for after school programs. It eliminates the Even Start program, a unique program that integrates early childhood education, adult literacy, and parenting into a unified family literacy program. These programs work.

(END VIDEO CLIP)

LEVS: Now, it's been a bunch of years, you've got a new economy. Perfectly plausible that Representative Ross now thinks, hey, you know what? It should be cut. I've reached out to him and we'll see.

But Tony, this is where things get so tricky -- taking cuts, bringing them into Congress, and seeing what various lawmakers, various perspectives say about them.

Let's keep in mind as we talk today, folks, these are all proposed cuts, and we'll continue breaking it down for you here in the NEWSROOM.

HARRIS: Right. You know, it's interesting. There was a lot of screaming around the country over the bailout money.

You give X billions to the automakers, you give X billions to the financial institutions. And yet, if you're talking about saving $17 billion, that's a figure that seems to be dismissed. But I know you're hearing a lot from our viewers about what they would cut in the budget.

LEVS: Yes, they are. Yes, we're hearing about that, and we're hearing about what you were just saying, actually.

HARRIS: Yes.

LEVS: Let's zoom in over here.

Of course, the best place in America to weigh in on this would be at brand new CNN Tony NEWSROOM Blog.

HARRIS: Come on now.

LEVS: Check it out. The question we're presenting to you right here today at NEWSROOM Blog, click on "Tony."

I'll show you an example of what one of our comments says.

James: "What's the sense in trimming the budget if all we do is print money to prevent a banking collapse? At this point it seems counterproductive."

And if you do Facebook, I've got a question going at my page, Josh Levs CNN.

Benjamin Solitaire says, "I would cut subsidies for industrial agro-businesses."

And over at Twitter, MsOpinions is telling me, "Politicians, salaries and perks."

We'd love for you to weigh in. I've got a couple graphics to show you.

HARRIS: Nice.

LEVS: So you've got your pick. Let's take a look at what you want to do.

HARRIS: Yes.

LEVS: If you do Facebook, Twitter, there you go, you've got my pages. And of course, at the very top of the list, CNN NEWSROOM Blog. And there you go, the pretty picture that we're all so proud of, Tony's blog.

HARRIS: Well, that's a handsome young man there. Boy -- and you're not bad looking yourself there, Josh.

LEVS: Well, thanks. I'll let that one go.

HARRIS: It is TV, I suppose.

LEVS: We have good makeup artists here.

HARRIS: And great makeup artists help.

LEVS: There you go.

HARRIS: Josh, appreciate it. Thank you, sir. See you next hour.

LEVS: Thanks, Tony. You got it.

HARRIS: You know, she is a granny you don't want to mess with, but she was terrified all the same.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: It was horrifying. I was so scared talking to that lady on 911, I couldn't hardly talk. (END VIDEO CLIP)

HARRIS: We will show you how she found the words and her Glock to get herself out of a scary road rage incident. That's coming up.

(COMMERCIAL BREAK)

HARRIS: We are focusing each week on people who impact your world. Today, we meet a young American woman who was deeply moved by a visit to Uganda. She later found a way to help people she met help themselves.

Details now from our Hala Gorani.

(BEGIN VIDEOTAPE)

HALA GORANI, CNN INTERNATIONAL CORRESPONDENT (voice-over): American Brittany Merrill dances with Ugandan widows, celebrating the opening of a clean water well. Merrill helped fund this well, but it's in the hands of these women to keep it flowing now. BRITTANY MERRILL, FOUNDER, UAPO: We were side by side with local Ugandans as their friends and as their partners, and really as a family to help them facilitate their own development.

GORANI: Merrill founded the Uganda American Partnership Organization in 2006 to build a simple home for a woman and children who changed her life.

MERRILL: She took 24 children into her home off the streets. And I saw a woman whose faith and determination caused her to sacrifice everything she had to care for these children. She went without food so she could feed them, and I felt called to help.

GORANI: Merrill shared Sarah Camara's (ph) story with friends and family. She quickly realized there were many more children who needed a home. After five years of dancing, praying, and fund- raising, UAPO finished a family-style home for 180 street children. These children now have mosquito nets, clean water, a loving home, and hope, all thanks to Merrill and Camara (ph) bringing two worlds together.

Hala Gorani, CNN, Atlanta.

(END VIDEOTAPE)

HARRIS: So how cool is that?

Find out more on how you can help children around the world. Just log on to our Web site, CNN.com/impact, or log on to our blog at CNN.com/newsroom and click on my big head. It will take you to our page. It is really that easy to start making a difference.

Cracking under the pressure. What do these bank stress tests mean for you and your bank account?

(COMMERCIAL BREAK) HARRIS: Fed chief Ben Bernanke said earlier this week that the economy is stabilizing. And today we have new reports that show evidence of that. We have reports on productivity, new jobless claims, and retail sales.

Stephanie Elam is at the New York Stock Exchange.

You hear all of the energy I put into the annunciating of your name there? Just excited to see you, Stephanie.

STEPHANIE ELAM, CNN BUSINESS CORRESPONDENT: Thank you. You sound like my dad. That's how he says it. He says it all. He says every syllable.

HARRIS: I'm old enough to be your dad, as a matter of fact.

ELAM: I don't think so, Tony.

HARRIS: OK.

Stephanie, go through some of the details on this reporting. Some of it's pretty good.

ELAM: Yes, some of it surprised Wall Street. That's for sure. And it prompted an early rally, although you wouldn't be able to tell it right now by the numbers.

But taking a look at our new jobless claims numbers here, they fell to 601,000. That's the lowest level that since we've seen since January. But continuing claims hit another record high of 6.35 million. So these are the people that are relying for government assistance to get them through for one week or more. That's obviously not good to see, a number that high.

Let's take a look at the numbers right now.

The Dow Jones industrials off 92 points now at 8419. The Nasdaq off 37 points, at 1,721. So off more than two percent on Nasdaq right now -- Tony.

HARRIS: So, Stephanie, one number's up, the other is down. What does that tell us?

ELAM: Well, it tells us that employers are cutting fewer jobs if we're going to find that silver lining in there. And you can tell by taking a look at the numbers here.

New jobless claims peaked in late March. Yesterday, a report showed a drop in private sector job cuts. Tomorrow, we're going to get that big jobs report from the government, and it's expected to show fewer job losses.

But here's the deal -- those continuing claims, they're hitting record high after record high, so that shows that employers aren't hiring either, and new claims are expected to rise in the near term. That's because thousands of automakers, well, as we know, they are out of work.

Chrysler is bankrupt, and GM is idling 36 plants. GM is also dealing with that $6 billion first quarter loss. That was better than expected, but that is still a very huge number, Tony. So that's going to factor into more job losses.

And keep in mind that jobs, that a lagging indicator. That's something that drags behind as the economy gets better as one of the last things to turn around. So we expect to see more losses of jobs in the months ahead.

HARRIS: That's an important bit of information to remember.

Stephanie, appreciate it. See you next hour. Thank you.

ELAM: Thanks.

HARRIS: The Federal Reserve has had 19 top U.S. banks under stress scenarios since February. Today we get results. Much of the information has already leaked out.

A number of published reports says Bank of America, Wells Fargo, GMAC, and Citigroup will need to raise cash. Together, they need about $65 billion in new capital. JPMorgan Chase, Goldman Sachs, MetLife all reported to be in good shape and apparently won't need to increase their cash on hand.

I want to ask my guest about the bank stress tests and what they may mean to customers of these big banks, you and me.

Simon Johnson is a professor of economics at M.I.T. and a senior fellow at the Peterson Institute. He is a former chief economist at the International Monetary Fund.

Good to see you again, Simon.

I'm wondering, are you hearing anything in the early leaks on the findings that concerns you?

SIMON JOHNSON, FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS: Well, I think it's a very well done public relations exercise. It's obviously feeding into the renewed euphoria in the financial markets.

I think substantively, there's very little here. We're learning very little. They haven't really stressed the balance sheet of the banks in any meaningful way. So it's mostly a whitewash.

HARRIS: Wow! So this has been -- why do you say it's been a whitewash. I mean, my goodness, we were hearing for at least a couple of months that these banks were very concerned, did not necessarily take kindly to the idea of having their books opened up and put under this kind of stress. So why are you saying that this has been essentially an exercise -- well, a bit of a whitewash?

JOHNSON: Well, basically, it's like this. You go to the doctor to have your heart checked and the doctor says get on the treadmill, I need to raise your pulse, and you start negotiating with the doctor. Say, how about this, doctor, I sit in a chair on the treadmill and we check my heart? And if the doctor says, OK, you haven't really had a stress test. So that's what we are on the banks.

HARRIS: OK. What does it mean if one of your portfolios is in one of these banks that needs to raise, really, billions in capital?

JOHNSON: Not much. I think most of these capital raising they're talking about is already in the works. And of course, a lot of the shift is on purely on paper. There are going to be conversions of preferred stock into common equity, that's just an accounting maneuver. It doesn't in any meaningful way increase the capital cushions of these banks.

Almost all of the banks, from what we see right now, are getting a free pass. Which, maybe, is good news short-term for investors. I think you have to worry about the longer term structure and stability of the financial system as we start to come out of this crisis.

HARRIS: How concerned, if any, if I should be concerned at all, with the actual dollar amounts these banks need to raise? Am I right to assume that a bank needing say $6 billion is in less trouble, is less stable than a bank needing $20 billion?

JOHNSON: Well, you obviously have to scale it to the size of the banks and what you think is going on with the balance sheet.

The key thing is these numbers are very small compared to the amount of losses we know they've incurred, the amount of losses that the IMF or even Wall Street itself is estimating are still to come. It's almost a Goldilocks-kind of outcome. They've said, oh, we've had a trillion dollar kind of crisis. The good news is, you've got almost exactly the right amount of capital. You've got to adjust a couple of billions here or there. So it's not - you don't have too little, you don't have too much, you're just right, congratulations.

HARRIS: Do you trust the results? I'm trying to pull back, peel away at the cynicism, the skepticism that I'm hearing in your analysis here. Do you trust these results?

JOHNSON: Look, the results are the level of the individual banks are almost completely meaningless, but the information here is about government policy and the way in which the government is going to support the financial sector going forward.

Goldman Sachs had a very good report on this, out this week. And I increasingly regard Goldman Sachs as a branch of the U.S. government. And they said that our pre-provision earnings are going to go up in the financial sector, because we've got big government subsidies in terms of cheap debt guaranteed by the FDIC. The government's going to take legacy loans off on generous terms as needed. And the yield curve is going to steepen, which means Goldman Sachs is expecting some inflation, and the banks are going to make out like bandits on that. Now, if you like that way of running the economy, if you want to refloat the bubble and postpone the day of reckoning, then it's attractive. If you're worried about the build-up of debt, unsustainable borrowing, and the political power of the financial sector and the shenanigans that has led us into, then you should be a little bit more worried.

HARRIS: What are you most concerned with?

JOHNSON: I'm mostly concerned with the political power of the financial system. I think there was a moment when you could really start a transformation, back in January, February, March. That moment has gone. We are now locked into a path for the next one to two years of trying to refloat the financial sector.

Everyone agrees it's got too big and too bloated, you need to transfer resources out of it. But the more you put subsidies into the financial sector to keep it going, the less incentive there is for anyone to move out.

Basically, we've created an enormous rent-seeking sector, the kind of thing you see in a Russia or an Indonesia, in problematic, emerging-market countries. We've created it in the United States, it's called finance. It's particularly in the big banks. It is a huge issue that will be dealt with one way or another. And the more you postpone it, the bigger the day of reckoning.

HARRIS: Do you disagree with the whole approach to the TARP program?

JOHNSON: I think I disagree with the strategy of trying to bend over backwards to be nice to the banking sector and trying to reward people who have become too big to fail with massive subsidies. That's not what we do with other sectors, that's not what we're doing with Chrysler, it's not what we're doing with GM. Everyone else in the economy can fail. And when things go bad, they make mistakes, they should fail.

We need to design a financial system in which individual pieces can fail without generating systemic risk. None of the regulatory reform proposals currently on the table do that. It is a huge problem and if we don't fix it now very soon, we will regret it down the road.

HARRIS: And your final word on the stress test? A nonevent?

JOHNSON: It is an event that tells us what the government's attitude is toward big finance. It shows us they're trying to refloat the financial bubble that got us into this much trouble. And I think you need to back it up with some real substantive reports. I think you have to use antitrust. Apply antitrust to the financial sector and go after anybody who is too big to fail, is too big to exist at this point. They need to be broken up.

HARRIS: Boy, you are - you are an interesting guy. Man, well, I guess that's why you're a guest on CNN in the NEWSROOM with us.

Simon, appreciate it. Thanks for your analysis.

JOHNSON: Thank you.

HARRIS: Wow. We are keeping an eye on the fire situation in Santa Barbara. Our Nicole Lapin will join us in just a couple of minutes with some of the amazing pictures that are coming into our NEWSROOM.

(COMMERCIAL BREAK)

HARRIS: Middletown, Connecticut, on high alert right now. Police are warning Wesleyan University officials and local Jewish leaders to be extra vigilant following the fatal shooting of a student. The suspect is still on the loose. Police believe he may be targeting the school and Jews.

(BEGIN VIDEO CLIP)

CHIEF LYNN BALDONI, MIDDLETOWN POLICE: The nationwide APB has been issued for Steven Morgan who has past connections to New York, Colorado, and Massachusetts.

As of this time, investigators are not certain if the suspect remains in the Middletown area.

Additionally, evidence uncovered overnight suggests that Mr. Morgan may be focused on the Wesleyan Community Campus as well as the Jewish community.

(END VIDEO CLIP)

HARRIS: University officials have told students to remain indoors and staff to stay home, as well.

On the line with us right now is the mayor, Sebastian Giuliano of Middletown.

Mr. Mayor, can you tell me about the advice you're giving your community? And I don't want to be overly dramatic here and describe your town as a town in fear, but it certainly sounds like there is real reason for concern here.

MAYOR SEBASTIAN GIULIANO, MIDDLETOWN, CONNECTICUT (via telephone): Well, I think any time you have somebody who committed a crime like this still at large, there's reason to be concerned. You know, this person's dangerous.

So, I think, I would say they're not in fear, but they are alert and aware that this person has not been apprehended. And until he is, they're being extra careful.

HARRIS: Mr. Mayor, how many people in your town?

GIULIANO: Forty-eight thousand.

HARRIS: Forty-eight thousand. And for anyone who might be watching, what is your advice to the people of Middletown, of your city now?

GIULIANO: Again, be alert. You know, lock your doors. I'm not suggesting that a home invasion might happen, but this person is, again, not been apprehended.

If you see somebody who looks like him, call the police, assume he's dangerous, assume he's armed. Don't confront him yourself.

If you know anything, if you think you've seen him, calm the police. Any tip is a good tip. There's no such thing as a bad tip. You know, the police need information from us if we have it to give.

HARRIS: I've got to ask you because I don't know much about this suspect, and I'm hoping you know a little more that you can share with us. What kind of information has been developed on the suspect, Steven Morgan, that you feel comfortable in sharing?

GIULIANO: Well, I think, you know, the fact that he - that there is a history between him and the victim that may go as far as back to Colorado. And at least goes back to New York two years ago when she made a complaint to the New York Police Department about him during the time she was a student at New York University.

HARRIS: And I have a report here from the "Associated Press." The New York Police report shows that suspect in the Connecticut bookstore shooting threatened a victim -- threatened the victim in 2007, and that's what you're referring to?

GIULIANO: That's what I'm referring to is there's at least that history.

It looks like he targeted her. The concern for the Wesleyan community and the Jewish community in general, I think, both of which she was a member of, I think was developed out of evidence that the police may have gotten when they executed search warrants on his car, on the motel room he was staying in. And you know, something turned up that caused them to believe that there might be a threat beyond her or a threat to the larger communities that she belonged to.

HARRIS: OK.

GIULIANO: Being in the Jewish community in Wesleyan.

HARRIS: I see.

Mr. Mayor, appreciate your time. Thank you.

GIULIANO: You're welcome.

HARRIS: Thanks for that update. Mayor Sebastian Giuliano of the mayor of Middletown, Connecticut. We will, of course, continue to follow this story and bring you the latest updates as we get them in the CNN NEWSROOM.

From pricey mansions on down, really, no one is immune to a fire burning out of control in Santa Barbara right now. Nicole Lapin joining us now with some of the latest pictures coming in.

And all I keep hearing is the pictures are pretty dramatic, Nicole.

LAPIN: Yes, they're amazing. Actually, this is kind of the hub of where we get all of our video into the network.

HARRIS: That's right.

LAPIN: We have a lot of affiliates out there out in California.

And take a look at KTLA's images right now. You can see the proximity, Tony. Do you see that first shot of how close these flames are to those pricey homes. Now some reports say as many as 20 homes have been destroyed. It's really hard to tell right now, Tony, because we're still in the thick of it. But we've had all of these thousands of people evacuated from about 5,000 homes.

This is KCBS and KCAL, actually. And they're getting down there with those firefighters. More than 880 firefighters on those front lines aided by about six airplanes and five helicopters. And they're even asking for more right now, Tony.

Take a look at "AP," we're also getting some "AP" footage. You can see that smoke right there. This is what we're talking about. That's the exact reason that the number of homes and structures involved couldn't immediately be determined. But local reports say that that thick column of smoke is extending all the way over to the Pacific Ocean.

Back here in Epic (ph), the governor, of course, should be coming out in the next hour. So we're monitoring that router, and as soon as it comes down to us, we will certainly get it over to you, Tony.

HARRIS: Awesome. If you get more of those pretty dramatic pictures, just flag us, and we'll get you back up with those pictures.

LAPIN: Yes, absolutely.

HARRIS: Appreciate it, Nicole. Thank you.

I want to try and get the latest from Rob Marciano in a couple of minutes. We'll do that shortly.

But coming up in about 20 minutes, we're expected to hear from California Governor Arnold Schwarzenegger on the fire situation, of course. We will bring that press conference to you live.

Also ahead, the Pakistani government plans to scrap a tenuous peace deal with the Taliban militants and launch an even more aggressive operation against them.

We're back in a moment.

(COMMERCIAL BREAK)

HARRIS: Let's get a quick check of weather. Rob Marciano in the Severe Weather Center.

(WEATHER REPORT)

HARRIS: We are following new developments in Pakistan's battle against the Taliban. Pakistan is scrapping what's left of a tattered peace deal and stepping up its offensive in the northwestern Swat Valley. Ivan Watson joins us live from Islamabad.

I'm curious. Is this deal being scrapped because it's proven to be unworkable or is the deal being scrapped at the insistence of the Obama administration?

IVAN WATSON, CNN INTERNATIONAL CORRESPONDENT: That's a very good question, Tony. I think it's a mixture of the two. The deal was signed by the Pakistani government last month and in the weeks after that, the Taliban made a land grab. They moved forward to a district that's only about 60 miles in this direction over my shoulder here. So, that made that deal unworkable.

And then, in the immediate aftermath of that land grab by those Taliban militants, you had the Obama administration, Secretary of State Hillary Clinton going out saying that this is posing an existential threat to the security of Pakistan. And that definitely pushed the Pakistani government, which initially had a muddled response, to take some steps which we're now seeing on the ground throughout northwest Pakistan.

HARRIS: Yes, and Ivan, you've been to these camps set up for civilians fleeing the fighting in Swat. What can you tell us about them?

WATSON: Well, aid organizations are warning of a humanitarian crisis. I mean the Red Cross saying they're preparing to treat some 120,000 people and many more are predicted to be fleeing out of some of these conflict zones.

In the camps it's really sad to see. I mean, we watched a family of 18 people just come trudging in up a dirt road carrying toddlers on their hips. The women were carrying their children. You had men carrying their belongings on their back. And walk right into a tent that had been provided for them by the Pakistani government and the United Nations. And that camp was growing in the hour that we spent in that camp. And all of the people were telling similar stories describing artillery air strikes hitting in and around their villages forcing them to give up everything and just run for their lives.

HARRIS: Boy, Ivan Watson live for us from Islamabad, Pakistan. Ivan, appreciate it. Thank you.

And we're seeing angry protests in Afghanistan today over claims of civilian deaths from a U.S. air strike. Also, a deadly suicide bombing as talks continue in Washington on fighting militants in Afghanistan.

CNN's Stan Grant joining us now from Kabul. And Stan, what are you seeing on the ground? STAN GRANT, CNN CORRESPONDENT: Yes, Tony, the investigation is continuing into the civilian casualties in the western province of Afghanistan. The U.S. Army on the ground there speaking to Afghan army, Afghan police and also local officials to try to ascertain exactly what went on.

Now, preliminary reports coming out unofficially from U.S. military sources are saying that they believe that the civilians were killed by the Taliban. The Taliban launched a grenade attack upon them and then dragged the bodies, paraded the bodies through the village to give the appearance as though they were killed by a U.S. air strike.

The Red Cross, on the other hand, saying they have seen dozens of bodies, including one of their volunteers who was killed by an air strike.

Now just in the last hour or so, U.S. Defense Secretary Robert Gates has given a news conference here in Kabul, Afghanistan, saying that any civilian casualties are deeply regretted. He did also say it is a tactic of the Taliban to kill civilians and try to blame it on U.S. and allied forces. He also had an interesting statistic saying that civilian deaths overall are down 40 percent this year, Tony.

HARRIS: And Stan, as we look at these pictures, I'm wondering how ordinary Afghans are reacting to the civilians deaths and President's Karzai's visit to Washington.

GRANT: Yes, interesting there. I actually spent some time in a Kabul market today speaking to people precisely about that. And one lady actually said to me she is very concerned about the security problems here in Afghanistan. So concerned, she can't send her children to school. And she also said she's concerned about civilian deaths and she blamed it on the U.S. forces.

We also spoke to others there who said that Hamid Karzai has let them down. I said, what do you believe he will do if he's re-elected? They said, nothing. He has done nothing in the past years. They all complained about the economy here as well. Some of the people trying to sell their wares, saying they simply can't sell enough and make enough money to look out for their families, Tony. And these are the people that the U.S. forces and also the Afghan government need to win over to really create a future here.

HARRIS: Absolutely. All right, CNN's Stan Grant from Kabul, Afghanistan for us. Stan, appreciate it. Thank you.

You know, we are dissecting President Obama's plan to slash his budget. Next hour, we will focus on the politics behind it all and what you would like to see cut.

Plus, sex texting, have you heard of this terminology? We will show you where your teens are turning for answers about the birds and bees.

And California's battle against raging wildfires. We are waiting to hear from Governor Arnold Schwarzenegger.

(COMMERCIAL BREAK)

HARRIS: Road rage backfires. Granny is packing a .9 millimeter Glock and she whipped it out when she got fed up with a car full of kids who were taunting her as she and her husband drove home from a Florida restaurant. Here's a reenactment. Granny talks, but doesn't show her face.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: All of a sudden, my husband said, look at that car. He's riding us. He would ride up and back up, ride up and back up. Then they started harassing us and riding next to us and shooting us birds. And getting in front of us and getting back beside us, and I thought, my goodness. They just wouldn't stop.

(END VIDEO CLIP)

HARRIS: It's a reenactment. They did stop when grandma showed her Glock. She says she was scared and called 911. The other driver also reported the incident. No one was charged.

Talk about a dumb move. Ohio police say a man goes into a store, walks around stuffing merchandise under his clothes. Then, get this, he fills out a job application and on his way out the alarm goes off. That's when employees noticed the missing clothes. Officers used the job application track down Stanley - there he is - Stanley Wright (ph) at a hotel for the homeless. Reports say they found him ironing a pair of the stolen jeans. He is now behind bars.

Trying to beat back a dangerous wildfire in Santa Barbara, California. Five hundred acres and growing unchecked in the coastal city. More than 5,000 homes evacuated and undetermined number destroyed or damaged. High winds, low humidity and gusting winds have been driving the flames. Governor Arnold Schwarzenegger holding a news conference any minute now. We will bring that to you live.

But first, a quick report from Kara Finnstrom on the front lines.

(BEGIN VIDEOTAPE)

FINNSTROM: Well, the big worry out here today is once again the winds. Forecasts are for those winds to gust up to 65 miles per hour, possibly at points during the day. And that could pick up some of these hot embers and spread this fire even further.

We have been watching this house behind us burn. Just one example of the many homes here that have been completely destroyed. We watched the top of this roof actually collapse in and it's now burning, as you see, through the doors on the ground below.

No official estimates yet as to how many homes were completely destroyed. But as we've driven through some of these neighborhoods, we've seen 10 to 12 of these homes