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The Situation Room

Elizabeth Warren Interview; Fourteen Days to Possible Debt Disaster; Bachmann's Reversal on "Cut, Cap and Balance"; U.S. Direct talks with Gadhafi Regime; Brutal Taliban Execution Video; Social Issues, Center Stage; Murdoch's Moment of Truth Nears; DEA, FBI Investigated In Weapons Probe; Cain Slams Proposed Mosque

Aired July 18, 2011 - 17:00   ET

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

WOLF BLITZER, CNN ANCHOR: Thanks very much, Brooke.

Happening now, two weeks to go before the United States may -- repeat -- may plunge into an unprecedented financial crisis. The White House throwing a veto threat into the combustible mix of negotiations and political posturing over the nation's debt limit.

Plus, media mogul Rupert Murdoch is just hours away from being grilled and lambasted by British lawmakers. And now a whistleblower in the growing phone hacking scandal reportedly is dead.

And a 77-year-old man defends his home and family with an -- from an intruder with a gun. Stand by for the dramatic story that's even more compelling because -- get this -- he's a member of the United States Congress.

I'm Wolf Blitzer.

And you're in THE SITUATION ROOM.

It's 14 days and counting -- the United States of America could default on its debt for the first time in history. We can't state it often enough -- this showdown over the debt limit has enormous consequences for all of us. And time is quickly running out to prevent what the president calls Armageddon.

Let's check in with our Congressional correspondent, Kate Bolduan.

She's standing by with the latest.

Where does all the behind the scenes negotiations, Kate, where does it stand right now?

KATE BOLDUAN, CNN CONGRESSIONAL CORRESPONDENT: Hey there, Wolf.

I'll tell you, the two top Republicans in the House, House Speaker John Boehner and Majority Leader Cantor, they met with President Obama yesterday at the White House for a closed door meeting on the debt talks. No official readout from the White House, though President Obama said: "We are make -- we're making progress," when asked today by reporters how the debt talks were going when he was leaving an event in the Rose Garden. On the part of Speaker Boehner, a spokesman for him says that, as they've said, really, all weekend, that the lines of communications remain open, but no progress or agreement to report at this point.

At the very same time, Wolf, the House is scheduled to take up a measure -- a separate measure tomorrow -- that would dramatically cut spending and also make raising the debt ceiling contingent on pass -- on Congress passing a balanced budget amendment to the constitution. This is something long supported by conservatives, not supported by Democrats.

And President Obama today, he issued a veto threat on this measure, known as the "Cut, Cap and Balance," although the president's spokesman called it something very different this afternoon.

Let's listen here.

(BEGIN VIDEO CLIP)

JAY CARNEY, WHITE HOUSE PRESS SECRETARY: What we are witnessing here with this measure is classic Washington posturing and kabuki theater. You know, this is a measure that is designed to duck, dodge and dismantle -- duck responsibility, dodge obligations and dismantle, eventually, if in -- if enshrined into law, which it will not be -- but it would essentially require the dismantlement of our -- our social safety net -- Social Security, Medicare and Medicaid.

(END VIDEO CLIP)

BOLDUAN: Now, the reality is, this measure very likely wouldn't even make it to the point of getting to the president, as -- as it's unlikely to make it through the sentit -- Senate, largely becoming a symbolic vote for Republicans, if you will.

But as you mentioned, Wolf, the deadline is approaching now within two weeks. And because of that, the House majority -- Senate majority leader, Harry Reid, he announced today that he is keeping the Senate in session, working even Saturdays and Sundays, until this debt crisis is solved.

Now, unclear, really, what the Senate could be working on if negotiators have not reached a deal. But I will tell you, the fact of the matter is that the Senate -- in the Senate, there are some rules that require a certain amount of time to go by between procedural votes to get a measure even to the point of final passage.

So I will tell you that this probably -- these extra days in session will likely come in handy as the clock ticks down -- Wolf.

BLITZER: We're going to have a major debate the next hour here in THE SITUATION ROOM. Two members of the House of the Representatives, a liberal Democrat, a conservative Republican. They're going to go at it and we'll see what they have to say.

Thanks very much, Kate, for that. Republican Congresswoman, Michelle Bachmann, is reversing course today, signing onto the GOP's "Cut, Cap and Balance" plan to reduce spending and require a balanced federal budget. The Tea Party favorite had previously refused to support it, saying it was too timid.

Bachmann announced her change of heart just a little while ago in the key primary state of South Carolina.

(BEGIN VIDEO CLIP)

MICHELLE BACHMANN (R), PRESIDENTIAL CANDIDATE: Well, I invite the president of the United States to do what I am doing. That's go meet with real people and real businesses across the country. I invite the president of the United States to travel with me to South Carolina, to Iowa, to Texas, to New Hampshire, to Florida. The people and the businesses that I am meeting with are demanding that the people in Washington, DC listen to them and stop the debt-fuelled spending.

(END VIDEO CLIP)

BLITZER: Most of Bachmann's Republican primary rivals sign on -- signed on to the "Cut, Cap and Balance" plan before she did. Bachmann actually will get a vote to get -- to vote on it. She's a member of the House of Representatives.

Much more on this story coming up.

But now a story we broke here on CNN. U.S. government officials holding face-to-face talks with representatives of Moammar Gadhafi's regime. Both sides confirming the discussions to CNN. But the United States emphasizing this was not -- repeat, not a negotiation.

CNN's Ivan Watson was the first to report this development.

He's joining us now from the Libyan capital of Tripoli.

All right, what happened here -- Ivan?

Tell our viewers what we know.

IVAN WATSON, CNN CORRESPONDENT: Well, this was a secret meeting that took place, Wolf, on Saturday in Tunisia, which is a neighbor to the west of Libya, involving high-ranking U.S. government officials and representatives of Moammar Gadhafi's internationally isolated regime.

And we were finally able to confirm that this meeting -- this secret meeting took place -- when we spoke with Gadhafi's government spokesman, Musa Ibrahim, just a few hours ago.

Take a listen to this exclusive video.

(BEGIN VIDEOTAPE)

WATSON: Is this the first step, this round of talks? MUSA IBRAHIM, GADHAFI REGIME SPOKESMAN: This is -- this is the first step. And we welcome any further steps. And we are prepared to talk more and explain what is happening in Libya and take the matter forward. We don't want to be stuck in the past. We are people who want to move forward all the time for the good of the Libyans and the good of the international community.

WATSON: Who participated?

IBRAHIM: If I may, you know, this is -- it's not the time now to name people, but, you know, it's a first step dialogue, OK?

WATSON: But it was direct, face-to-face, Libyan-American talks...

IBRAHIM: Yes.

WATSON: -- in Tunisia on Saturday?

IBRAHIM: Yes, OK?

WATSON: Thank you.

(END VIDEO TAPE)

WATSON: Now, Wolf, since we spoke to Musa Ibrahim, State Department officials have told CNN that the participants from the American side were U.S. ambassador to Libya, Gene Cretz, who was recalled last December amid Libyan anger over the WikiLeaks reports that were coming out; Jeff Feltman, the assistant secretary of State, and a National Security Council official.

State Department officials telling CNN that this was a three hour meeting in the Tunisian capital involving four representatives from the Libyan side. And they do not want to call this a negotiation or talks. They say that this was, quote, "a one time meeting to send a clear message to the Libyans that Moammar Gadhafi must go."

And very interesting to point out that this secret meeting took place in Tunisia, Wolf, one day after U.S. Secretary of State Hillary Clinton formally announced that the U.S. was recognizing that rebel council, the Transitional National Council, in eastern, opposition- controlled Libya, in the city of Benghazi, as the US's official partner here in Libya. They officially recognized the U.S. government -- according to the U.S. government here in Libya -- Wolf.

BLITZER: Because, Ivan, U.S. officials are being adamant. They're simply saying this was not a negotiation, this was basically an ultimatum. They delivered a message to the Libyans at this very high level...

WATSON: That's right...

BLITZER: -- U.S. officials...

WATSON: And they...

BLITZER: And they were basically saying, Gadhafi must go, period.

WATSON: That's right. And Musa Ibrahim, the Gadhafi spokesman, tried to spin that a different direction, saying this was a chance for us to sit down, explain our position, deny any charges that we had attacked our own civilian population, deny any of the allegations that have been made consistently against the Libyan government, which led to a United Nations Security Council resolution which has led to four months of NATO bombing of Libya and of Gadhafi's forces here.

So we've got both sides now trying to spin in different directions in this secret meeting that took place -- a face-to-face meeting between representatives of two governments definitely not seeing eye to eye, certainly, over the last five months.

BLITZER: And, as you point out, a day after Hillary Clinton announced the U.S. was recognizing the rebels as the legitimate governing authority of Libya.

Ivan Watson on the scene for us in Tripoli.

Thanks very much.

By the way, on my blog at CNN.com/situationroom, I write about that $33 billion that the United States government has frozen in Libyan assets here in the United States. Now that the U.S. has recognized the rebels, a lot of that money, if not all of it, is going to go to them to start buying weapons and spare parts.

But should the U.S. deduct whatever it's cost U.S. taxpayers to help the Libyans -- protect the Libyans over these past four months, about $1 billion so far?

Check out my blog -- CNN.com/situationroom.

From Pakistan, a very graphic video released by Taliban fighters showing at least 16 men executed. It reveals a lot about the bloody fight against the Taliban right now.

CNN's Reza Sayah is in Islamabad.

REZA SAYAH, CNN CORRESPONDENT: Wolf, this is a graphic look at how brutal and ugly Pakistan's war against the Taliban can get. We warn you, this is explicit video. Some of you may find this very disturbing. If you'd like to turn away, this is a good time to do so.

Let's walk you through this video. It was released by the Taliban, posted online. Men wearing traditional Pakistani garb, all of them with their hands tied behind their back. In front of them, you see three armed men. We assume these are Taliban fighters. One of them is scolding the men who are lined up, accusing them of being enemies of Islam, saying that these executions are about to take place in revenge for six children who were allegedly executed by Pakistani security forces in the Swat Valley, a former Pakistani Taliban stronghold.

Now, the military here vehemently denies those executions took place. After the scolding is over, that's when you see and hear the gunfire.

(VIDEO CLIP)

SAYAH: During the gunfire, you see these men topple to the ground, some of them moaning and writhing in pain. What we're not going so show you is what happens next. That's when at least one, maybe two of these gunmen, walk up to these victims and shoot them again, sometimes in the head, in an apparent effort to make sure that they're dead.

The military here believes these men who were killed were police officers kidnapped during a cross border attack on June 1. On that day, militants crossed over from Afghanistan and attacked a village on Pakistani soil. The military believes the gunmen were members of the Pakistani Taliban in the Swat Valley. Again, a Pakistani Taliban stronghold in 2009, until a military operation here chased them away.

We cannot independently verify the identity of the gunmen or the victims. The military here says this is clearly an effort by the Taliban to intimidate security forces and local villages -- a tactic they say will not work -- Wolf.

BLITZER: Reza Sayah with an amazing -- a very, very amazing story.

Thanks very much for that.

It's a startling claim by a man who wants to be president of the United States. We're going to focus on new remarks by Republican presidential candidate, Herman Cain, who's taking his very vocal concerns about Muslims to a whole new level.

And when Rupert Murdoch faces British lawmakers in a matter of hours, he may feel like he and his entire media empire are on trial.

Stay with us.

You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: A new feature at CNN to tell you about. Starting today, CNN TV will now be streamed live on cnn.com and via the CNN app for iPad, iPhone and iPod. On cnn.com, you'll find a larger, higher quality video player with HD quality.

So now you can watch CNN including THE SITUATION ROOM in more places more often excellent news for our viewers out there. Jack Cafferty is here with "The Cafferty File". Now people can watch you stream on a mobile device, an iPad, Jack. This is great.

JACK CAFFERTY, CNN ANCHOR: I have no idea what any of that means, but I'll trust you that it's good.

BLITZER: It's really good.

CAFFERTY: Republican Congresswoman Michele Bachmann of Minnesota has been a rising star of sorts in a lacklustre to say the least field of GOP candidates who hope to challenge President Obama next year.

Bachmann came out on top in three separate polls of likely Iowa Republican voters last week. Go figure. But Bachmann's running into a lot of criticism for her rather extreme positions on some of the social issues.

Let's begin with the gay community. Michele Bachmann's husband Marcus runs a Christian counseling business. Former clients have said that he encourages homosexual patients to try to change their sexual orientation, or at least repress it. Critics called pray away the gay.

In an interview last week with the "Minnesota Star Tribune," Marcus Bachmann did not deny that he and other counselors at the clinic do use that technique, but he said they only do so at the request of the patient.

Michele Bachmann has been sort of skirting around her own views on homosexuality, but that party is about to come to a screeching halt. She recently signed something called the marriage vow, written by a very conservative group in Iowa.

Among other things it's a vow to be faithful to your spouse. Fair enough, but the vows also condemn adultery, pornography and gay marriage and describe homosexuality as a choice. In a speech in 2004, Michele Bachmann said being involved in the gay and lesbian lifestyle amounts to, quote, "personal bondage, personal despair and personal enslavement. Sort of like traditional marriage, unquote."

That was my ad, not hers. Comedians and bloggers as you can imagine having a field day with all of this. But on a more serious note, there is a group called "The Human Rights Campaign," a gay rights group that's vowing now to go after Michele Bachmann and her beliefs in the upcoming campaign.

They call Michele Bachmann, quote, "The very definition of a target- rich environment," unquote. If they're serious, she could have a serious problem.

Here's the question, when it comes to the gay community, is Michele Bachmann living in the twilight zone? Go to cnn.com/cafferty file, post a comment on my blog.

Problem with starting this whole process in Iowa is that's a very conservative state and if she comes out of there winning the those caucuses, she's got some momentum and heads into New Hampshire with, you know, some kind of a lead. We'll see where it goes from there. It could happen.

BLITZER: And then South Carolina that follows New Hampshire. All right, Jack, thank you.

Let's go to Britain right now where the scandal surrounding Rupert Murdoch's media empire is growing more explosive. At the start of a very critical week, a former "News of the World" reporter who blew the whistle on allegations of phone hacking has reportedly been found dead.

The British Press Association says police are treating it as an unexplained but not, at least for now, suspicious death. Other new developments in the scandal, the British Prime Minister David Cameron says he'll request a special session of parliament on Wednesday.

A separate investigation of police corruption is widening after a second top London police official resigned. All this just hours before Murdoch faces British lawmakers.

CNN senior international correspondent Dan Rivers is in London.

DAN RIVERS, CNN SENIOR INTERNATIONAL CORRESPONDENT: Well, Wolf, the phone hacking scandal is about to reach its incredibly dramatic climax as Rupert and James Murdoch arrive at the palace of Westminster behind me to face probing questions from politicians about how much they knew about the illegal activities going on in some of their newspapers.

(BEGIN VIDEOTAPE)

RIVERS (voice-over): When Big Ben strikes 2:30 in London, the bell will be tolling for Rupert Murdoch, his son, James and former chief executive Rebekah Brooks.

Their appearance before a British parliamentary committee may be the most important hour of their entire careers. And the big political beasts in this building are smelling blood.

Even if Rebekah Brooks' arrest may mean she's unable to shed light on what really happened. Hacking victims like former deputy Prime Minister John Prescott think Rupert Murdoch's got a lot to answer for.

JOHN PRESCOTT, FORMER BRITISH DEPUTY PRIME MINISTER: Everybody is scared to death of doing anything he doesn't like. He's the spider in the middle of this web and it's about time we took him on.

RIVERS: The chairman who will be in charge of the grilling is keen to hear why the company previously told him phone hacking was just the work of a rogue reporter. Then later admitted that wasn't true.

JOHN WHITTINGDALE, CHAIRMAN, COMMONS CULTURE COMMITTEE: We took evidence from senior executives of News International and James Murdoch has now publicly stated that parliament was misled.

Parliament takes that very seriously. They want to ask him why he's discovered we have been misled, who misled us and how long he's known about that.

RIVERS (on camera): For Rupert Murdoch, this isn't a court appearance, but it may feel like he's on trial. For years, Rupert Murdoch has been behind numerous cruel tabloid headlines.

Now suddenly he's on the front page himself and that's a pretty awkward place for a press baron to be, suddenly the target of what they call in Britain, the gutter press. Dan Rivers, CNN, London.

(END VIDEOTAPE)

BLITZER: Members of Congress are used to political fights, but we're going to tell you how a 77-year-old Democrat from Iowa may have actually fought for his life against a gunman.

And why didn't President Obama choose the woman who came up with the idea for a Consumer Financial Protection Bureau? I'll speak with Elizabeth Warren right here in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: It was a very odd scene over at the White House today. President Obama announcing the man he's chosen to head the new Consumer Financial Protection Bureau.

Also there, the woman who didn't get the job. Just ahead, I'll speak with Elizabeth Warren about the bureau she envisioned and the controversy preventing her running it.

Right now, let's go to our White House Dan Lothian for some background. Elizabeth Warren once made it clear she was going to get the job. We all thought she was going to get the job. She was the obvious choice so what happened?

DAN LOTHIAN, CNN WHITE HOUSE CORRESPONDENT: That's right. Well, you know, liberals really thought that she was the best person for the job saying that she was a fierce consumer advocate.

But Republicans did not like her. And after that, as Elizabeth Warren pointed out in an opinion piece today, the new agency has some enemies in Washington.

(BEGIN VIDEOTAPE)

LOTHIAN (voice-over): Last September, when President Obama unveiled the Consumer Financial Protection Bureau in the Rose Garden, he praised former Harvard Professor Elizabeth Warren as the architect.

PRESIDENT OBAMA: She will help oversee all aspects of the bureau's creation.

LOTHIAN: But back in the Rose Garden Monday, it was former Ohio attorney general and five-time "Jeopardy" winner - who got the nomination as director.

PRESIDENT OBAMA: That's why all his confirmation - all his answers at his confirmation hearings will be in the form of a question, that's a joke.

LOTHIAN: But that confirmation hearing that the president joked about is one reason Cordray not Warren got the nod. Yes, the White House said he's the right fit for the job, moving up from director of enforcement, but they didn't discount threats from conservatives to block Warren if she had been nominated.

UNIDENTIFIED MALE: Had there not been that stiff opposition, would she have been the person nominated?

JAY CARNEY, WHITE HOUSE PRESS SECRETARY: You know, hypotheticals are hard to answer. As an observation of fact, the kind of opposition she engendered is clear. As another observation in fact, some Republican senators have a blanket opposition to the agency as it is.

LOTHIAN: More on that in a moment, but why didn't conservatives like Warren? Some feared a heavy-handed approach to the financial industry, Wall Street in particular.

That opposition could have led to a nasty confirmation battle during a time when big money and every vote counts. But it's unclear Cordray will have an easier rise because as the U.S. Chamber of Commerce points out it's not about one name, but a position in bureau unaccountable to Congress.

DAVID HIRSCHMANN, U.S. CHAMBER OF COMMERCE: The personality game is always easier follow, but the basic reality here is that we've added another huge powerful regulator on top of a system that everybody agrees was broken and haven't decided how it's going to all work together.

(END VIDEOTAPE)

LOTHIAN: Now, the White House vows to fight to have Cordray confirmed. As for Warren, someone close to Warren tells CNN she's expected to return to Harvard amidst speculation that she might be interested in running for that Senate seat now occupied by Senator Scott Brown. Wolf --

BLITZER: All right, Dan Lothian, thanks very much.

Joining us now from the White House is Elizabeth Warren. Thanks very much for coming in.

ELIZABETH WARREN, WHITE HOUSE ADVISER: It's a pleasure to be here.

BLITZER: Why do you think you're so controversial?

WARREN: You know, I'm going to say, I really don't get it. The stuff I work on are things like how bad fine print is and how it is that credit agreements should not be written in language that ordinary folks can't read and understand.

And why it shouldn't take an army of folks, of lawyers to be able to interpret a mortgage agreement for you. I think that's stuff, Democrats, Republicans all kinds of folks think are good things for hard works middle class Americans.

I really don't get the part. What is the one thing I've done that makes me controversial? I think this is politics.

BLITZER: We're going to go through some of those issues. All right, the Consumer Financial Protection Bureau, really your brain child, as the president of the United States himself said. How disappointed are you that he didn't nominate you to head it? WARREN: Golly, not at all. What you really have to understand here is my job was to set this agency up and it was an enormous privilege to be able to do that. One of the people I recruited right from the beginning was Rich Cordray, the former Ohio attorney general -- a guy with an incredibly impressive resume for standing tough and being smart.

And, this is a new time for the consumer agency. This is the week that it's the one-year anniversary of first coming into existence. This is the week that we pick up a bunch of our new powers. And this the week that the president makes a nomination for someone to lead this agency going forward. That's a good thing.

BLITZER: Senator Shelby, the Republican senator from Alabama, he issued a statement saying this, and I'll read it to you. He says, "until President Obama addresses our concerns by supporting a few reasonable structural changes, we will not confirm anyone to lead it. No accountability, no confirmation." Do you think the president will be ready to make those kinds of changes that Senator Shelby and others are asking that will allow Mr. Cordray to be confirmed?

WARREN: Let me be really clear. We started this fight two years ago. And Senator Shelby and others who were his allies did not want any consumer agency at all. And if it absolutely was the case politically that there had to be one, they wanted some weak agency that couldn't get anything done. We had that fight, and then, we had a straight up vote on it. And in a straight up vote in the United States Senate just over a year ago, that side lost.

The side that carried the day is a good, strong agency. And here we stand a year later with the minority, the side that lost, saying, well, I don't like how that came out. And so, I think I have the capacity to stick a stick in the spokes, unless, the majority will do what the minority wants it to. You know, that's not how democracy works, and it's not how this agency works. It's just wrong.

BLITZER: I take it you don't want any changes, but the U.S. Chamber of Commerce today came out with a tough statement saying, unless, there are these change, it's a jobs killing bureau. An unaccountable agency, it says with broad enforcement powers, could do serious damage to the credit markets at a time when small business lending is still reeling. And they point out that most new jobs are created by small businesses. What do you want to say to the U.S. Chamber of Commerce?

WARREN: You know, you can keep saying this. They've been saying it. They said it before the last set of votes. They say it now, but let's just look at the reality. What have we started doing? How about our mortgage project? What we've done is we've taken a stack of incomprehensible mortgage forms, and we've said we want to get it down to one page. We put a prototype out there.

We've shared it with banks. We've shared it with mortgage brokers. We've shared it credit unions. We've shared it with consumers, and we have gotten praise back from everyone, from the American Enterprise Institute to the consumer Federation of America. They said wow, that really works. You can cut regulatory burdens at the same time that you can increase value for families.

That's what we're here doing day by day by day. What these guys want is to rip the arms and the legs off this agency before it can ever get started. That's all this is about. They can say whatever words they want, but I understand what this fight really is.

BLITZER: Well, what they say they'd like to see it like the SEC, a commission as opposed to an agency, so it wouldn't have the enormous power that it now has.

WARREN: So, it can have trouble in terms of doing investigations. No. When Congress voted for this a year ago, they put enormous restrictions on this agency. Unlike any other federal agency, this is an agency when we make a rule, we can actually be overruled by other federal agencies that exist nowhere else in government.

Unlike other federal banking regulators, we have caps on our funding and can't determine our own funding levels. There are powerful restrictions on what we can do. What these guys want is not accountability. What they want is an agency that simply is too hamstrung to act.

BLITZER: Let's talk about Elizabeth Warren's political future. A lot of people want you to think about seriously running against Scott Brown for the United States Senate from Massachusetts where you live. Are you giving that serious thought right now?

WARREN: You know, I have to tell you, I've spent 14 hours a day on the work standing up this agency. It has been all absorbing. And now is the moment when I'm going to get to step away from that, and I'm going to get to take a little vacation with my grandchildren. We're headed to Lego land. That's my immediate future.

BLITZER: What about after you get some R&R from, you know, enjoy a little relaxation, would you then seriously consider challenging Senator Brown?

WARREN: I got to go home to Massachusetts. I got to get back in the house I've lived in for 15 years and settle in, and then, I'll think about my future.

BLITZER: All right. We'll stay in close touch and hear what you have to say. Good luck with the next challenge. Thanks very much for joining us.

WARREN: Thank you.

BLITZER: It's known as operation "Fast and Furious." Ahead, why government agencies are being investigated in connection in connection with a controversial gun purchasing program?

Plus, a dire new warning in a mass school cheating scandal. Resign or be fired? Details ahead.

(COMMERCIAL BREAK) BLITZER: Dramatic development in the case of a controversial ATF gun purchasing program. Lisa Sylvester has that and some of the other top stories in the SITUATION ROOM right now. What happened, Lisa?

LISA SYLVESTER, CNN CORRESPONDENT: Hi there, Wolf. Well, Congress is giving the FBI and DEA one week to hand over documents for its investigation into operation "Fast and Furious," the ATF program allowing the illegal purchase of thousand of assault weapons, many of each wound up at a Mexican crime scene. Sources say the ATFs embattled acting director implicated the two agencies in the controversial operation.

And a dire warning for dozens of Atlanta public schools officials charged with cheating on standardized test resign or be fired. The interim superintended is given those identified at the serving 2009 reports three days to leave the job or face termination hearings.

And the U.S. mission in Afghanistan is now officially in new hands. The top commander of NATO forces in the region, General David Petraeus, transferred authority to Marine Lieutenant General John Allen during a ceremony today. Petraeus will assume his new role as CIA director in September -- Wolf.

BLITZER: Looking forward to see Gen. Petraeus over at the CIA once he gets back here to Washington.

SYLVESTER: That's instability unclosed.

BLITZER: He will be (INAUDIBLE). Thank you.

The Texas governor, Rick Perry, keeps referring to a higher power as he considers running for president. Is he dragging religion into the Republican primary?

And it's not like any fight he's seen in Congress. A 77-year-old Democrat takes on a gunman in his own home.

(COMMERCIAL BREAK)

BLITZER: Joining us in our "Strategy Session," Democratic strategist, Jamal Simmons. He's a principal over at the Raven Group here in Washington. Also, our CNN political contributor, Republican strategist, Alex Castellanos. Guys, thanks very much for coming in.

Rick Perry, I think he's going to run. I don't know that for sure. The governor of Texas, he's giving a lot of indications he's going to run, but he's causing a little controversy because of all the religious connections he's bring in to this campaign. He told the "Des Moines Register" on Friday, "I'm not ready to tell you that I'm ready to announce that I'm in, but I'm getting more and more comfortable everyday that this is what I've been called to do. This is what America needs." Are you comfortable, Alex, that he is bringing God, basically, into a lot of his political activities right now in a political campaign like this?

ALEX CASTELLANOS, REPUBLICAN STRATEGIST: Well, if you're going to have just one vote in a Republican primary, God is to vote probably a good one to have. In a Republican primary, it doesn't hurt. Huckabee, Mike Huckabbe, a minister, run, and he was a runner-up to John McCain. So, a certainly a constituency to it.

Of course, the problem with that is it narrows you. It takes the spotlight off the real issues right now, jobs and growth. It's the agenda Obama wants, but it helps in the Republican primary.

BLITZER: You know, in early August, he's got a day of prayer and fast, he's organized in Texas as the governor of Texas, if you will, because of all the problems out there. Any problem with that?

JAMAL SIMMONS, DEMOCRATIC STRATEGIST: You know, Wolf, I'm a son of an administer (ph), grew up in the church and all that, I think for a lot of Americans talking about being called is normal language. People will talk about that whether they've been called to be a doctor or whatever it is in their life. So, for a lot of people, that's not going to unnerve them.

The danger for Rick Perry, though, is that it becomes such a religious candidate that in the primary or the general election is very hard for him to appeal to secular voters. People who aren't that religious and whether or not they feel kind of unnerve by all of this religious talk.

BLITZER: The tradition of separation of church and state, if you will. Go ahead.

CASTELLANOS: People right now want to know what you're going to do to turn this economy around and create jobs. And everyday, he's talking about something that is different than that is one day he's missing an opportunity.

BLITZER: Do you think he's going to run?

CASTELLANOS: Everything I hear, everyday, it looks like he's getting close and closer to running. There's such a vacuum on the Republican side right now. This is the strangest year I've ever seen. A lot of candidates, but nobody is in love with anybody. So, that vacuum, I think, is going to --

BLITZER: Do you think he's going to run?

SIMMONS: It looks like he's going to run, but I tell you, I worked for Wesley Clark in 2003 and 2004.

BLITZER: He didn't do that well

SIMMONS: He didn't do that well and part of the problem was he waited so late to get in. He didn't get in until September of that year, and it's very hard to build that battleship while you're already sailing.

CASTELLANOS: And this is no easy thing for Perry either. In Texas, he's never quite filled George Bush's boots. A lot of people think he's George Bush but with a dimmer light bulb. And, it's going to be tough for him on the national scene, unless, he gets out there and creates a clear image of a guy who can do something about the economy.

BLITZER: This whole Rupert Murdoch scandal that News Corporation is involved in. As you know, they've been pretty active in politics here in the United States, has given away a lot of money, like a lot of big corporations have, nothing wrong with that. But is there a problem, a political problem now, for some of the recipients of that money over the years?

SIMMONS: If you've taken money from somebody who's been arrested or indicted, that's certainly money you got to give back. So, my liberal friends may not like it, but I think, before you start giving back money from everybody who's been associated with News Corporation, we do have a certain assumption of innocence until this thing has been resolved, and you can't just start to do that.

I mean, there's so much money in politics right now. People make mistakes. Thing happen. You can end up with taking all your cash that's coming in and giving it away every time somebody makes a mistake.

CASTELLANOS: Of course, the problem is the latest thing he's being handled. I don't know if you saw the full-page apology that Rupert Murdoch himself hand in some British newspapers. It said --

BLITZER: It was a very robust apology.

CASTELLANOS: Robust. But, you know, it's interesting. It didn't say we're sorry, we did this. It's we're sorry there's wrongdoings that occurred like we're sorry it rained or sorry we stomped at your toe, we have nothing to do with it. If you stand next to the choir, people are going to think you're singing the same song. So far, he's responded to this with such rapidity.

He's closed down a newspaper, fired the head of his U.S. journalistic operations. People are beginning to think, well, is he shutting down paths of investigation before there can be one?

SIMMONS: And there is a big danger that this thing grow (INAUDIBLE) everybody at which point that I think if you're a candidate you do start looking for ways --

BLITZER: But there's a very strong editorial of the "Wall Street Journal," today, a news paper own by News Corporation saying, the last time the liberal press demanded a media prosecutor, it was to probe late conservative columnist, Robert Novak, in pursuit of White House aid, Scooter Libby. But the efforts soon engulfed a reporter for "The New York Times" which have led the posse to hang Novak and his sources.

Is the media, let's call the mainstream media, the liberal media, whatever you want to call it, going too far in going after Rupert Murdoch's news organization in the United States?

SIMMONS: I don't think so at all. I mean, you got allegation of police corruption. You got in firing in England, but you also got a question of whether or not they try to do something like that with 9/11, the victims --

(CROSSTALK)

SIMMONS: There's the foreign corrupt practices act may be at stake here. So, there's a lot of big questions people ought to be asking them.

CASTELLANOS: Anybody know I'm defending the media, but practically, I think playing this one straight up, and there's no story that gets as much traction in the media as a story about the media.

BLITZER: No problem defending the media. Thanks very much. All right, guys.

CASTELLANOS: Thanks.

BLITZER: Republican presidential candidate, Herman Cain, now taking his controversial comments about Muslims even further. Has he gone too far?

And money pressure on Congress to solve the debt crisis, but our both sides just playing games. I'll ask two key lawmakers. They will debate right here in the SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Jack is back with the "Cafferty File" -- Jack.

JACK CAFFERTY, CNN CONTRIBUTOR: The question this hour is, when it comes to the gay community, is Republican congresswoman and candidate for president, Michele Bachmann, living in the twilight zone?

Dennis in Florida writes, "Obviously, yes. The problem Michele Bachmann, Sarah Palin, and other extremists have is that they believe every issue in the world is black and white. They have no understand of the concept of gray. You either agree with them on everything or you're obviously wrong. To them, freedom of choice means you accept their choice."

Annie writes from Georgia, "Twilight zone? Maybe, the new Christian reality? Definitely. Nothing like a good God-fearing loving Christian's brand of hate to make you feel all warm and fuzzy inside, is there? What kind of monster is this woman, and what does that make us for thinking she or her twin, Palin, are even remotely qualified for public service let alone the presidency? Some of these are nasty."

Victoria writes in Cedar Rapids, Iowa, "Yes, she's definitely out there. The vast majority of people I know here in Iowa, my mother-in- law notwithstanding, are for gay rights and support gay marriage. We're not as backwoods as some politicians might think. As far as those who are conservative enough to agree with Michele Bachmann, I doubt there are enough of them here to carry the vote."

Sean writes, "I saw that episode of "The Twilight Zone," Jack. It's been on the re-run status for awhile now. It ends with Michele Bachmann getting pushed aside by her own party because she lacks of brain."

Ed in California writes, "Michele Bachmann is in the brain dead zone. She's popular because she spreads and keeps hate alive. And what a hypocrite. Her family accepts farm subsidies, and she and her dear husband both take socialized monetary help from our pockets just to keep his psychotherapy business afloat. She is no good."

And Dan, says, "Well, if the twilight zone is a hate-filled place of appalling ignorance then, yes, she and her husband have the nicest house there. How can someone who thinks they're qualified to lead our nation and purports to be so pro-constitution so readily demonize and deny basic equality to any segment of the American public?"

If you want to read more on this, go to my blog, CNN.com/caffertyfile.

BLITZER: Quickly, Jack. That statement of human rights campaign, they criticized Michele Bachmann, and in criticizing her, they said something along the lines, you read it before, that there was a target-rich environment from which to criticize her?

CAFFERTY: Yes. They plan to go back and explore her record on the subject. Obviously, this vow that she signed, this -- put together by this conservative group out in Iowa which is opposed to gay marriage is a jumping-off place, but she has made speeches in the past where she's, you know, likened homosexuality to, you know, all kinds of horrible things, and they're going to go back and look into her background and her record and start to confront her with some of this stuff as the election campaign unfolds. Could be problematic for her.

BLITZER: And which is totally legitimate. I'm a little worried about that phrase, target-rich environment. It's like bulls eye after the Gabby Giffords incident. I thought that they were going to calm down in using that kind of language in talking about a politician, but I may be overly sensitive about that.

CAFFERTY: That's a veiled point. You know, I think that's a legitimate point of concern, but those are the words they used.

BLITZER: I would tone down that language, if I were them, but that's just me. All right. Jack, thank you.

CAFFERTY: You bet.

BLITZER: He heard his daughter scream and a member of Congress went into action, helping to fend off a man with a gun.

(COMMERCIAL BREAK)

BLITZER: Republican presidential candidate, Herman Cain, is in political hot water after making some controversial comments about the Muslim faith, and this isn't the first time. Let's go to CNN's Joe Johns. He's got the details -- Joe.

JOE JOHNS, CNN CORRESPONDENT: Hey, Wolf. Herman Cain really has found a way to get attention in this campaign. He found the key after admitting he'd think twice about putting a Muslim in his cabinet. Now, he's gone even further.

(BEGIN VIDEOTAPE)

JOHNS (voice-over): There he goes again.

HERMAN CAIN, (R) PRESIDENTIAL CANDIDATE: Our constitution guarantees separation of church and state.

JOHNS: You would think that, by now, Herman Cain would watch his words every time he opens his mouth on the subject of Islam.

CAIN: Islam combines church and state.

JOHNS: But this is a presidential candidate who just keeps pushing. His latest blast on Fox News was about a proposed mosque near Nashville.

CAIN: They are using the -- the church part of our First Amendment to infuse their mosque in that community.

JOHNS: And it didn't stop there.

CAIN: And I happen to side with the people in the community.

UNIDENTIFIED MALE: So you're saying any community if they want to ban a mosque.

CAIN: Yes. They have the right to do that.

JOHNS: Reminiscent of the CNN debate when he said he wouldn't be comfortable with a Muslim in his cabinet.

CAIN: I would not be comfortable because you have peaceful Muslims, and then, you have militant Muslims.

JOHNS: It goes without saying that religion in America, even Islam, is protected by the constitution and treating similar groups like Christianity or Judaism differently from Islam is discriminatory, but not in Herman Cain's world. He explains all this in a video now on YouTube.

CAIN: That's not discrimination. That's just being cautious.

JOHNS: It's nearly unheard of for a candidate with such low name recognition who, by the way, never ran for office before to break double digits in the polls, but there he is in the middle of the pack which is why his statements can't be ignored. Ibrahim Hooper represents the often controversial council on American-Islamic relations. He thinks others in the race need to speak about out Cain's position.

IBRAHIM HOOPER, CAIR: Well, if the Republican candidates and the Republican Party in general really claim to represent patriotic Americans and American values, religious tolerance and inclusion is an American value, and they need to support that.

(END VIDEOTAPE)

JOHNS (on-camera): Not surprisingly, Republicans we approached on this weren't exactly racing to the microphones to weigh in. The Republican National Committee wouldn't touch it either. The other campaigns are not commenting at this time. We also reached out to Cain but haven't heard back -- Wolf.