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On the Story

Stewart Faces Five Months in Prison; Revised Policy Treats Obesity Under Medicare

Aired July 17, 2004 - 10:00   ET

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

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


BETTY NGUYEN, CNN ANCHOR: Now in the news:
A state of emergency has been opposed in Gaza and the Palestinian leadership is in a state of confusion. The Palestinian prime minister tried to resign a short time ago but was rebuffed by President Yasser Arafat. The Palestinian leader also sacked a police chief who had been kidnapped briefly on Friday. The abductors accused the chief of corruption and demanded he be fired.

To Iraq now: a U.S. soldier was killed today in a roadside bomb near a northern town. Another American was injured. Elsewhere, at least six people were killed by a pair of simultaneous car bombs. One of the targets was Iraqi's justice minister, but he was nor hurt. The other attack was near an Iraqi national guard base.

The tiny contingent of Filipino troops in Iraq has dwindled even further. The commander was among 11 Filipino troops arriving in Kuwait today en route to Manila. Kidnappers of a Filipino truck driver in Iraq had demanded the Philippines withdraw its forces. Thirty-two Filipino troops remain in Iraq.

And in this country, near Carson City, Nevada, firefighters overnight managed to keep erratic flames from reaching dozens of homes. But mandatory evacuations remain in effect, with winds expected to return today. The blaze near Nevada's capital has destroyed several homes.

Keeping you informed, CNN, the most trusted name in news.

I'm Betty Nguyen at CNN headquarters in Atlanta. ON THE STORY begins right now.

DANA BASH, CNN WHITE HOUSE CORRESPONDENT: Welcome to CNN's ON THE STORY, where our journalists have the inside word on the stories we covered this week.

I'm Dana Bash, on the political story of how President Bush was reaching out this week to his conservative base.

DEBORAH FEYERICK, CNN CORRESPONDENT: I'm Deborah Feyerick in Westport, Connecticut, ON THE STORY of Martha Stewart, her prison sentence, and what people in her hometown think about it.

KATHLEEN HAYS, CNNfn CORRESPONDENT: I'm Kathleen Hays, ON THE STORY of the other big legal story for women this week: the sexual discrimination case on Wall Street.

ELIZABETH COHEN, CNN MEDICAL CORRESPONDENT: I'm Elizabeth Cohen, ON THE STORY of the government paving the way towards recognizing obesity as an illness and what this may mean for millions of people seeking treatment.

ELAINE QUIJANO, CNN CORRESPONDENT: And I'm Elaine Quijano, ON THE STORY of how the failure of the gay-marriage ban here in Washington may play out on the campaign trail.

We'll also be ON THE STORY in Iraq where Jane Arraf has the latest on how violence roared back on to the scene there this week.

And we'll talk about why new cholesterol guidelines could mean a lifetime prescription for millions of people.

We want to hear from you at ONTHESTORY@cnn.com.

Now straight to Deborah Feyerick and Martha Stewart.

(BEGIN VIDEO CLIP)

MARTHA STEWART, DOMESTIC MAVEN: I'll be back. I will be back. Whatever I have to do in the next few months, I hope the months go by quickly. I'm used to all kinds of hard work, as you know, and I'm not afraid. I'm not afraid whatsoever.

(END VIDEO CLIP)

FEYERICK: "I'll be back." Famous words. This time, uttered by Martha Stewart, as she spoke to hundreds of reporters and cameras outside court following her sentencing yesterday.

She wasn't just talking to them. More importantly, she was talking about -- talking to those people who she hopes will help save her empire.

COHEN: Deb, her lawyers have said that they plan to appeal this decision. Now, some people are saying maybe that's not the right decision.

FEYERICK: She will appeal this decision. In fact, they have been fighting every step of the way, ever since she was found guilty for making false statements and obstructing justice. They've tried numerous ways to try to get the guilty conviction overturned.

But they do want to appeal. Martha Stewart still remains convinced that she has done nothing wrong, and so she's going to take it all the way. Though, as you mentioned, there are some people who say, It's five months. Get in, get out, get it over with.

HAYS: You know, Deb, one of the things that's interesting for Martha Stewart coming out of the courthouse yesterday -- inside the courtroom, we hear that she was almost in tears, quiet. When she came out, she came out swinging. And far from apologies. I think a lot of people said she's still an angry woman who is going to fight. Let's listen to another -- another piece from what she said yesterday.

(BEGIN VIDEO CLIP)

STEWART: I'm just very, very sorry that it's come to this. That a small, personal matter has been able to be blown out of all proportion and with such venom and such gore. I mean, it's just terrible.

(END VIDEO CLIP)

HAYS: You know, Deb, it doesn't sound like she's saying she's sorry for what she did. She's sorry this happened to her. Big difference. That doesn't sound like an apology to me.

FEYERICK: And it definitely wasn't an apology. I think there was some amount of defiance, but also some amount of resignation in what has happened to her. She really did emphasize that this was a small, personal matter. She was trying to separate herself from the likes of Dennis Kozlowski from Tyco, from Bernie Ebbers of WorldCom and Ken Lay of Enron. She was trying to say that this was a small, personal matter, and because the government has gone as far as it did, that, in fact, you know, her company has really suffered. She had to lay off 200 employees.

And I think when she was speaking to the judge, she really threw herself on the mercy of the court, saying, you know, my fate is in your hand. Please -- please do well by me. I've done a lot of good.

So it was very different inside than outside. But she was talking to two very different audiences in both places.

BASH: And Deb, she's trying to separate herself from the likes of Dennis Kozlowski, but she was also talking about the fact that a lot of people go to jail. She even said, for example, Nelson Mandela went to jail. Maybe some might see that as she's trying to equate herself with Nelson Mandela.

I'm wondering -- you're up there in Connecticut. What are you hearing about the tone that she's taking, in -- obviously outside the courtroom and in her subsequent interview?

FEYERICK: Well, when you speak to people here in Westport, Connecticut, the one thing that they do make clear is that -- you know, Martha Stewart, she had a house here. This is where she filmed her television series. But they don't feel any sort of real kinship with Martha Stewart because she wasn't as much part of the community as, let's say, Joanne Woodward or Paul Newman, who also live up in this area.

Some people say that, you know, all she did was make false statements during the course of an investigation, that that doesn't warrant five months in prison. Others say she lied, she knew she was lying and she was sort of oblivious to the ramifications that those kinds of actions would have, and they say that five months just isn't enough.

So certainly here in Westport, you cannot get one steady stream of opinion because there are just so many on how much time she should or should not be doing.

COHEN: Deb, can you go over -- you talked about her lying. In what circumstances did she lie? Was she under oath? What were the questions asked and what was the alleged lie that she made?

FEYERICK: Well, that's what's so interesting. Initially, when the SEC, the Securities and Exchange Commission, began its investigation of Martha Stewart, she thought that it was going to be for insider trading.

However, when it turned out that they really couldn't get her on insider trading, it took on a very different nature. And so prosecutors charged her with making false statements during the course of that investigation, where she explained her sale of, you know, the infamous ImClone stock, the biotech company stock, saying, My broker and I, we had a prearranged agreement that if the stock hit 60, then we would sell. Prosecutors always convinced -- and they certainly convinced a jury -- that she made up that story to try to cover the trade.

So what sort of began as insider trading, then began to -- then sort of transformed itself into simply making false statement. That is, how did she explain that trade to those investigators? And believe me, the government takes it very, very seriously when you make false statements.

She could have recanted. She could have said, "I'm sorry. I was wrong. I misremembered. That isn't what happened." She could have gone back at anytime.

But she told them a story, and that was the story and that was her version of events and what happened. And so -- so there was a distinction.

But it wasn't stock fraud. It wasn't insider trading. And even the securities charge that initially had been in the indictment was tossed out. The judge said there's absolutely no way that you can prove that Martha Stewart, simply by saying, you know, that she was innocent, tried to manipulate her own stock prices.

So prosecutors got her on obstruction of justice and making false statements.

QUIJANO: Deb, even if her appeal does not -- is not successful. I mean, she's not going to be going to jail for a while.

What might we be seeing her do in the meantime, in the interim? And how is she going to back from this? Can she?

FEYERICK: There's been a lot of discussion on that. Martha Stewart, before she was sentenced, began putting some of her financial affairs in order. She cashed out some of her stock. She also sold a couple of properties that she owned.

She will, it seems, even by her statements yesterday, begin to hammer out what will be her role in the company. She cannot be an executive. Because, again, you hand out prospectus -- prospectuses to certain clients and it's really bad to have somebody on the board of directors who is a convicted felon. It just doesn't look good to investors.

So instead what she will do is she'll take much more of a creative role. But Martha Stewart -- don't count her out. She is a very hard-working woman. She is extremely ambitious. She did build this company out of nothing. And I think even people that didn't know have respect for what she did.

HAYS: Deb, and let's don't forget, her stock rallied yesterday. It looks like Wall Street is saying, Well, number one, the uncertainty is behind us. And we know investors don't like uncertainty. But beyond that, it seems that they're betting that Martha Stewart the company can continue, can survive. And of course, that was the other amazing thing outside the courthouse, when she kind of smiled and said, Well what can you do for me? Buy my magazine. Buy the products. They're great. And I think a lot people are betting that she will thrive, and she will definitely come back from this.

FEYERICK: And that was pretty brazen. But, you know, I'm sure a lot of business people out there said they would have done exactly the same. They would have said, This wasn't about my company, this was about a small personal matter. You know, you really like me? You really want to support me? Then buy my products. Buy my magazines.

Whether that's enough to really, you know, secure the foundation of the company, that's one thing that her now CEO -- that they're really trying to work on. How do you separate the company from Martha Stewart? And that's been the big question ever since she was indicted.

COHEN: From Martha to medical, and how the government is changing the way we look at obesity and how many people may be able to file claims in the future for expensive weight-loss procedures.

We're back on that story after this.

(COMMERCIAL BREAK)

COHEN: This week, the government (UNINTELLIGIBLE) said it's changing the rules on two big medical issue: cholesterol and obesity. And this means changes in how we think about these health problems and how much we pay to control them.

Welcome back. We're ON THE STORY.

FEYERICK: Elizabeth, I went for a general checkup this week, and one thing that my doctor said was that -- you know, they've known about these rules about cholesterol for a long time. But there was a conference. They sort of released this study.

What is this study? Is it real? And who should be paying attention?

COHEN: Well, Deborah, there have been a group of studies that have been coming out over the course of years that doctors say points to that people -- not people like you, but people who are at high risk for heart disease, who have had heart disease in the past, who are overweight or who have diabetes or a bunch of those kings of issues -- that those people need to consider take drugs at a much earlier time than previously been thought. Previously they said when your bad cholesterol hits 100, think about taking drugs -- drugs if you're in that high-risk group.

Now they say, Think about taking drugs -- drugs if it hits 70. So that's a big difference. And so many more people would be taking drugs if the doctors pay attention to these new guidelines from the National Institutes of Health.

BASH: And there's controversy about whether or not there -- the doctors -- there were doctors involved in the study and whether or not that sort of maybe tainted the study.

Is that true? And if so, isn't that sort of the way it works in this field?

COHEN: That is the way it works, but many consumer advocates find that kind of troubling. What they said is if they want to -- if, you know, doctors who set these guidelines, the doctors who said, you know, Gee, let's move the bar lower, most of those doctors have taken money at some point in time from the drug company...

(CROSSTALK)

HAYS: We know these cholesterol drugs are big, big -- they're huge for the pharmaceutical companies. I mean, so why wouldn't we be worried there's some pushing -- and particularly in an administration where there have been charges that they have been sometimes more lenient on these kinds of rules and more welcoming to this sort of mix of business with regulation, for example.

COHEN: And the problem is, is that you would really be hard- pressed to find doctors who can talk about these guidelines and who can help set these guidelines, who have not taken money from these pharmaceutical company. Who do want pharmaceutical companies want helping them and consulting them? People who are experts in the field. Who does the NIH want to help come up with new cholesterol guidelines? People who are experts in the field.

So it's kind of -- it gets very, very tricky here. But consumer advocates are saying, Look, you have a bunch of doctors saying, Let's start taking cholesterol drugs sooner, earlier. Let's put millions more people on these drugs. And they're getting money from these pharmaceutical companies. So it's understandable why they're concerned here.

QUIJANO: How clear is it? I mean, is it pretty straight forward, these new rules and the new guidelines? Can you just sort of look at a formula and plug your numbers in and there you have it? COHEN: You know, unfortunately, you can't, because it depends on what your own individual risk is. Your risk as a young, healthy person, is going to be different from someone who is older and overweight and has diabetes, et cetera. And then when do you diet and exercise, when do you do drugs?

And unfortunately, there's not a really clear way to figure this out. You go on the NIH's Web site, where they have ways to help figure out what you ought to be doing -- it's extremely confusing. If you're not a mathematician, it's going to be very tough to look at it.

And so there isn't a lot of clarity out there all time.

FEYERICK: Elizabeth, what about the new word on obesity: who is obese, what counts, and what the government is planning on doing about it?

COHEN: Right. There are Medicare rules that may be changing very soon.

What -- the way that this works is that the Medicare recipients have always been told, Obesity's not a disease. If you're obese, that's your problem. You figure out a way to pay for that.

And now the government is paving the way. They've taken out some of that language. They're not saying, We're going to pay for Medicare recipients to go on Jenny Craig or to get obesity-related surgery. But they're paving the way for that to happen. And so of course that makes many people say, Oh, my goodness, that's a ton of money. Because, there -- you know, two-thirds of Americans are overweight or obese. And if you start paying to treat them, a lot of money.

BASH: And how do you draw the line? How do you decide whether or not somebody's actually obese and needs it, or somebody who wants to fit into the dress they wore in high school?

COHEN: Right. Exactly. And -- because there are some -- there are some studies that show even just being 20 pounds overweight is a threat to your health. And other people sill say, Oh, that's not really a big deal. That's OK. And since so many Americans are overweight or obese, it would be very hard to draw those in-lines. And they're not drawing them yet. They're just (UNINTELLIGIBLE)

HAYS: The other thing that's hard, I think, is that if you were going to start paying for obesity treatments -- I mean, someone goes on a high-protein, low-carb diet, they do great. Somebody goes on Jenny Craig, they do great. Somebody counts calories, they do great. And then somebody else does any one of those things and does nothing.

How could the government even begin to decide what kind of weight-loss treatment it would fund and what it wouldn't?

COHEN: It would be a mess. I mean, we think coming up with cholesterol guidelines is difficult, this would be a complete mess. It would be very, very difficult to do. But on the other hand, you have obesity as this huge public- health problem in the United States. So it's a fair question: how can Medicare not pay to treat obesity? It causes diabetes, heart disease, strokes, et cetera. How can you not pay for it?

But it becomes tough. And then what becomes even tougher is that private insurers often like to follow whatever Medicare does. So it wouldn't just be Medicare recipients, it would be private insurers. So if anybody's really nervous right now, it's private health-care companies. I mean, the thought of paying for everyone's Jenny Craig I'm sure is making them very anxious.

QUIJANO: On the topic, though, of diets. I mean, e-diets. This is something that we heard that was interesting -- that e-diets apparently don't work as well as the old-fashioned, stick-to-the-book. What's behind that?

COHEN: That's right. There had been great hope that Internet dieting sites was going to be maybe part of the answer to America's obesity epidemic. But a study that said that one particular site, ediets.com, which people -- all the nutritionists say is a great site -- it didn't work. They put 200-pound women on it, women who weighed 200 pounds. And over the course of a year, they lost 1.8 pounds. And the reason: they didn't log in. They didn't use it. There you go.

(CROSSTALK)

BASH: Elizabeth, we're going to go from medical news to a fever- pitched, or at least some serious heating up on the campaign trail.

Back on that story in a minute.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: The other day, my opponent said that a punch of entertainers from Hollywood conveyed -- conveyed the heart and soul of America. No, I believe the heart and soul of America is found in places in Wisconsin.

(END VIDEO CLIP)

BASH: The president's supporters in Wisconsin, cheering him on for recognizing them as the heart and soul of America. That was just a taste of the president's campaigning this week, a battle to attract voters by talking about shared values, cementing the political base, and reaching out to conservative Democrats, as well as conservatives in his own party.

HAYS: You know, Dana, I think one of the president's appeal and charm for many people is his humor, his graciousness. He can joke around with anybody. This week, I think, we began to see much more of the sharp, tough attack side of bush.

BASH: Absolutely. Absolutely. And I was with him on his campaign swing -- which, by the way, is where I lost my voice, on a campaign swing...

QUIJANO: You're doing great today, Dana.

BASH: ...sort of the -- through the Great Lake states at the beginning of the week, three states he lost by a somewhat narrow margins, three states he desperately wants to win back: Michigan, Minnesota and Wisconsin.

The beginning he was really trying to -- the first day, he was in Michigan and Minnesota, talking to some of the -- in the areas where there are conservatives, but they're registered Democrats. He wants them to come to his side.

The second day, he was really trying to rally conservative Republicans who sort of came out for him before, but he wants more of them.

And it was very interesting, as you mentioned, to hear the way he spoke. Very sharp in his attack. Very direct attempt to try to, as they did when John Kerry was first nominated, to try to label this team as not somebody who shares their values. Really try to appeal to conservatives in a way we didn't see necessarily in these areas in 2000, when he was running as a compassionate conservative. Really talking up same-sex marriage and abortion and issues that he says doesn't really agree with their liberal -- you know, used the "l" word, like, you know, at every single event, with the way he's trying to paint them.

And you listen to their camp -- to the Bush campaign, and they constantly say that they're playing within the 45-yard line, that the country is so polarized, there's so few people in the middle to really appeal to. It's clear that a big part of their strategy is to try to make sure that the people on their side of the field actually get out and vote. And that's what you saw this week, but in a very stepped up way, Kathleen.

FEYERICK: Dana, this whole week, with the emphasis on values, it doesn't sort of take away the sting of the two reports on Iraq, and that the information that both the British government, as well as the U.S. government used was flawed. They said the information just wasn't the right information, based on which to go to war.

Tony Blair took responsibility. George Bush did not. He said, in fact, what we did was the right thing.

When you talk about values, is that a way to sort of deflect, talking about maybe the reasons for going to war weren't exactly as solid as perhaps the country was led to believe?

BASH: Well, that's definitely some of what the democrats were saying this week, Deb. I think we have a sound bite of Tony Blair talk about the report that he got in his country this week.

Let's listen to that.

(BEGIN VIDEO CLIP) TONY BLAIR, BRITISH PRIME MINISTER: Any mistakes made, as this report finds, in good faith, I of course take responsibility. But I cannot honestly say that I believe getting rid of Saddam was a mistake at all.

(END VIDEO CLIP)

BASH: Now that is half of what we heard from the president all week, as Deb just mentioned. Half of it is that, just like Tony Blair said, he still thought going against Saddam Hussein, getting rid of Saddam Hussein was the right thing to do.

Taking personal responsibility, uh-uh. Did not hear that from the president at all. And it's something that John Edwards, in his first solo appearance, seized on immediately and said, Where does the buck stop? Why aren't you taking responsibility?

But there's a big difference between Tony Blair and George W. Bush, and that's George W. Bush has an election in less than four months, and his campaign thinks that they have the good fortune of running against somebody who actually voted for this war. And they really played they up.

And it -- time and time again, the president said, It wasn't just me. It was the U.N. and it was Congress. And it wasn't just Congress, it was you, Senator Kerry, you, Senator Edwards. You had the same information and you voted with me. And shame on you for voting against the money afterward.

COHEN: But the legislators say that they voted for the war because Bush convinced them, basically. I mean, they said that he supplied the wrong information.

BASH: Right. Right. And that's what they're saying. And so the defense this week -- all of this week, Elizabeth, was that, you know, he actually said , Yes, there aren't -- as far as we know, aren't stockpile, the stockpiles we thought. But sort of the subtext -- or the -- actually, not really the subtext, what he was saying is "I was just as snowed as you were."

And the big question is whether or not Americans are going to believe that. Because even as much as the president in these states, where he's trying to appeals to the conservatives this week and even next week, he still has a big -- there's still a big question mark about, now, his credibility. And the Iraq war, if you talk to experts in these states, they say even the people who support him on same-sex marriage, and on abortion, who are listening to him and agree with him on social issues, they now have a big question about his credibility and the Iraq war. And the big question is going to be how these people vote, whether or not they stick to the social issues or whether or not they really don't vote for the president because of the Iraq war.

QUIJANO: But wouldn't you say, Dana -- I mean, that trait, of the president over and over coming out, saying, It wasn't just me. It was Congress. They looked at the intelligence. The U.N., they looked at the intelligence.

You know, that characteristic of the president to be very strong in his views, very unyielding in the way that he continues to defend his reasons for going to Iraq, doesn't -- wouldn't you say -- I mean, that is something that draws people to him, very much so?

BASH: Right. Right. And that's another part -- that's a very good point, Elaine. And that's another part of what the president's message was this week. It wasn't just, you know, I did what I had to do based on the intelligence. It was, I did what I had to do after September 11. And after September 11, based on what I saw, I couldn't just sit here and not, you know, go after Saddam Hussein.

And as you point out, very astutely, Elaine that is something that the White House and the president's political team still thinks, no matter what, is still one of his best assets, is that he is going to do what it takes to protect America. And that's why also, he said in that speech on Monday -- he was in Tennessee -- he said, America is said. I've made America safer and Iraq has made America safer. He said that, you know, half a dozen times at least.

That is what he's going to continue to say. Whether or not people buy it (UNINTELLIGIBLE

HAYS: Well, and we know that this is such a big issue, though -- John Kerry what he voted for, what he didn't vote for. And of course we're going to be talking more about this issue, more about politics later in the hour.

Do want to thank Deborah Feyerick, getting back ON THE STORY with Martha Stewart in Connecticut. Deb, thanks so much.

I'll be back ON THE STORY of the big Wall Street sex- discrimination settlement this week. All coming up.

But first, a check of what's making headlines now in the news.

NGUYEN: Well, good morning. I'm Betty Nguyen at the CNN Center in Atlanta. Here's what's making news.

A U.S. soldier died in Iraq after his convoy was struck by a roadside bomb. This after a violent day of car bombings killed at least six others in and around the capital of Baghdad. A group linked to suspected terrorist mastermind Abu Musab al-Zarqawi claimed responsibility for one of the attacks on the Iraqi justice minister's convoy. The minister was not hurt, but four of his bodyguards are among those killed.

Palestinian President Yasser Arafat says he will not accept the resignation of Prime Minister Ahmed Qureia. The move comes after a chaotic day that saw a shakeup of Palestinian security forces and a state of emergency imposed in Gaza.

And President Bush says government must do what it can to help families raise responsible children. The president made those comments during his weekly radio address, just moments ago. Bush spoke of the annual report, which released yesterday, that shows a decrease in violent crime among teenagers and a decline in drug use among youth.

(BEGIN AUDIO CLIP)

BUSH: The decisions are children make now will affect their health and character for the rest of their lives. And when they make the right choices, they are preparing themselves to realize the bright future our nation offers each of them.

(END AUDIO CLIP)

NGUYEN: Keeping you informed, CNN, the most trusted name in news.

I'm Betty Nguyen. ON THE STORY will be right back.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

ALLISON SCHIEFFELIN, PLAINTIFF: All I want to say is that I am so happy that there is a great settlement that's good for everybody.

(END VIDEO CLIP)

HAYS: Allison Schieffelin, a happy woman and a winner. Maybe all women on Wall Street and beyond gained from the $54 million sex- discrimination settlement agreed to by brokerage firm Morgan Stanley. The lead plaintiff gets $12 million. Other women split $40 million. And $2 million goes to training to avoid such problems in the future.

Welcome back. We're ON THE STORY.

QUIJANO: Kathleen, let me have you break this down for us. I mean, what was this particular case all about?

I mean, first of all, the EEOC getting involved is unusual on Wall Street there. But was this about, you know, somebody saying something to her or doing something inappropriate?

HAYS: Once again, it just seems the tide is really turning when it comes to women at work, when it come to women saying, We're doing the same job as men. You can't hide it any more. You can't say it's because, Well, he had the slightly better experience because the numbers just aren't showing that.

This is a very interesting case. Well, the EEOC does bring complaints. But this would have been the first big litigation against a Wall Street firm. It costs a lot of money to do this. You'd want to know you have a very strong case.

This woman had been working at Morgan Stanley since 1986. Morgan Stanley prides itself on being a performance-oriented firm. You know, you perform, you get ahead. In 1997, she filed a sex-discrimination complaint with the EEOC and she claims, then, in 1998, when she asked for a promotion, she didn't get it because she had become viewed as a troublemaker.

But she looked around her department and said, Why are there no women managing directors? There's about -- actually about 1,000 managing directors in all of Morgan Stanley, 51,000 employees overall. So it is a small number.

Another department, 50 people, only three managing directors. So at that point, that's when she decide to step up the case, the EEOC got involved, to bring this charge about pay and promotion and charging that the numbers just show you that there is a pattern, a systematic pattern, women in the same jobs, not earning same as men and not getting the same opportunity to advance in the firm.

COHEN: Now Kathleen, I know this is mostly about money and promotion, but there was also that breast-shaped birthday cake.

HAYS: That was brought up. And you know -- but -- and it's interesting, when I -- I've come Wall Street for awhile, and a trading room can be one of the most interesting places to be, and probably one of the oddest for people who think of Wall Street being genteel bankers.

It's a macho culture. It has been for years. It's bawdy. Dirty jokes, strippers come in for someone's birthday -- or they used to. That is gradually changing. And there were allegations of that. There were allegations that, for example, there was a trip planned to Las Vegas to take clients to go to strip joints, but she couldn't go because the guys said, Well, but we'd feel uncomfortable, you know, going with a woman, our clients would feel uncomfortable.

Fifty-four million dollars, even though it's a small part of what Morgan Stanley, makes in a year, maybe equal to what they can make in a day, people say will make a difference. And remember, the Wal-Mart class-action suit that got going last month, that was also years in the making.

Another -- you know, women at a different point maybe on the work ladder -- that we're not talking the same kind of money. Allison Schieffelin actually made $1.3 million her last year at Morgan Stanley. But another case where two-thirds of the women at Wal-Mart are -- two-thirds of the workers are women, only 16 percent are managers.

Again, more and more of these cases are just resting on the numbers. How could you have numbers like that if you're really being fair?

BASH: Kathleen, knowing Wall Street the way you do, how much of an impact do you think this case is going to have on other firms?

HAYS: There are already other suits being brought. We'll see if they settle as well. Probably more and more people realizing that they have to have programs where they really monitor what's going on. And managers will have to -- in black and white, in figures, in numbers, give their reasons why they are promoting certain people, why people are get the salaries they're getting. I think in a way, you know, salary's like a dirty little secret. People don't want to talk about how much they make.

BASH: Not just on wall street.

HAYS: Everywhere. Exactly. But more and more, I think people are saying when it comes out and when you look across the table and see the guy who is basically doing your job the same amount of time, but he makes 20 percent more, he gets the promotion, you get passed over. You know, are you somebody who isn't measuring up or you aren't somebody who is just getting a fair shake? And that's (UNINTELLIGIBLE) more and more.

COHEN: And Kathleen, Schieffelin got $12 million, which certainly is a lot.

But on the other side, she's a whistleblower. Who is going to hire her now?

HAYS: Well, she says her career was ruined. And in fact, Morgan Stanley -- let's point out that the top-paid woman at the firm, Zoe Cruz (ph), who runs their global bond operation, made $16 million last year. She made more than Phil Purcell, the CEO, the man who settled this.

Morgan Stanley settled. They claim they are all about diversity; this is a performance issue. An attorney that was on my show this week, "THE FLIP SIDE," said he thinks still that women do make different choices, that they do have different career paths and that's reflected here.

Clearly, the EEOC and every woman's advocate says yes, that's true to a certain extent, but there are so many cases where the experience is the same, the education is the same, you just cannot justify these big disparities any more.

QUIJANO: Kathleen, I want to shift gears a little bit and talk about the economy in general.

I mean, Dana and I have both been our on the campaign trail this week, and the economy is a theme that we hear over and over again. President Bush bringing it up just this week.

Let's take a listen to something that he had to say.

(BEGIN VIDEO CLIP)

BUSH: This economy of ours is strong and it's growing stronger. Since last summer, our economy has been growing at its fastest rate in nearly 20 years. In less than a year's time, we've added 1.5 million new jobs.

(END VIDEO CLIP)

QUIJANO: So we they're that over and over again. I mean, that is the figure. And then he talks about home ownership being on the rise.

You know, what's sort of the truth of it all? And is it going to be this way, you know, come, you know, November?

HAYS: The problem right now for the president, the problem right now for Wall Street, the stock market, which has been kind of waffling, as we had a strong first quarter. It's clear that the economy lost momentum in the second quarter. And now we've seen retail sales softening up, industrial production. You know, the new claimants for unemployment benefits staying at a level that isn't as low and healthy as you'd like it to be.

Stocks reporting their earnings for the second quarter, some of them good. Kind of mixed. Wall Street needed something better. And some of the guidance looking ahead, not quite as robust as people want to see.

So I think there's a question: will the economy have the kind of strength the president wants to see come September, October?

Inflation numbers, good news: they're tame. Maybe we won't have to see as much Federal Reserve rate-hiking. That could be good for the president.

On the other hand, does it all show that there was a burst of activity in the beginning of the year that's cooling off, and there's no time for more tax cuts, you're not going to cut rates again? So I think people on Wall Street are really at a juncture right now, and they're kind of concerned, and they're kind of concern, hopeful -- got their fingers crossed the president's right. But there is a concern about where we're heading right now.

QUIJANO: All right. Kathleen, thanks for that.

One factor hanging over the economy and the political campaign is Iraq. We're back on that story with Baghdad bureau chief Jane Arraf after this.

(BEGIN VIDEO CLIP)

ANNOUNCER: Jane Arraf is CNN's Baghdad bureau chief. Until the fall of Saddam, she often was the only Western journalist in Iraq. Her reporting so angered Saddam Hussein he banned her from the country in December 2002.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: (SPEAKING IN ARABIC)

(END VIDEO CLIP)

JANE ARRAF, CNN BAGHDAD BUREAU CHIEF: That's a member of Iraq's national guard, saying, in the aftermath of a car bomb, "If there are terrorists, don't go behind our backs. Come and attack us to our face." That was the start Wednesday of a new wave of violence in this country.

I'm Jane Arraf in Baghdad. Welcome back to ON THE STORY.

HAYS: Jane, this is so disheartening, watching it from here. I can only imagine how people feel there. Barely two weeks into the new regime and once again, the violence escalates.

ARRAF: It is a roller coaster.

It had been amazingly quiet for the past two weeks. And we're talking about amazingly quiet. I mean, the occasional car bomb, OK -- the occasional rocket, the occasional mortar. But nothing like these dramatic, targeted attacks. And today, of course, we've seen more.

An assassination attempt on the justice minister, which killed four people and wounded many more, one that's blamed on Abu Musab al- Zarqawi, who seems to have taken responsibility.

It is disheartening, but not completely demoralizing to Iraqis, who are a very tough bunch.

QUIJANO: I wanted to ask you a little bit more about that, Jane. What is sort of the real fear level out there? I mean, are people starting now to get back into some kind of normal routine, or are they still very much in fear when they go out and try to go about their daily lives? What is the sort of the reality of the situation?

ARRAF : It really varies which neighborhood they're in.

There's one neighborhood, particularly in Baghdad, not too far from here where gunfights have broken out. It's known as Little Fallujah and people there do not go out a lot.

But in other places, you go out at night, there are weddings going on. You can't walk through the streets because there's so many shoppers. It's remarkable. And somehow people have learned to deal with this.

I was speaking to the sister of one of two very dear colleagues of ours who were killed this year. And she's now looking for a job. She's Iraqi, as they were. And she said, People say to me, but you'll be targeted. And she said, I realize that no matter what I do, no matter what anyone does, they could be targeted.

There's a sense here that it's a dangerous place, but now it's their place and they have to get on with it. And I think we're seeing that increasingly.

COHEN: Jane, you mentioned earlier about al-Zarqawi taking responsibility for that attack this week.

Tell us a little bit about him. Which group is he connected to? ARRAF: Well, that's the Jordanian-born fugitive, of course, who's the most wanted man in Iraq, one of the most wanted men in the world now. And he's taken responsibility for a lot of the more spectacular attacks, particularly assassinations of senior officials, spectacular car bombs that could not have been done without planing and coordination and a fair degree of sophistication.

The latest message on a Web site says his group, Towhid wal Jihad, which is Unity of God and Jihad, did the attack on the justice minister. Now, the justice minister escaped. But a car pulled up to him and detonated, killing what are believed to be four of his bodyguard.

And it really shows that these are very targeted attack. This is the second major one this week. Earlier, there was the assassination of the governor of a major province in the north, Nineveh, which includes the city of Mosul. It's very, very worrying, and chillingly effective.

BASH: Jane, an interesting move this week by Prime Minister Allawi was the offer of amnesty. Tell us a little bit about that, and whether you think just in talking to folks on the ground there, you think this will actually work at all.

ARRAF: That really goes to the heart of what kind of country this is going to be.

Now, it started out with talk that -- OK, we're going to announce today that we are going to have an amnesty and it's going to be low- level insurgents, essentially. And then the announcement was delayed and delayed. And part of the reason it's been delayed, it seems, is that there was some, what U.S. diplomats call ambiguous language in the draft, which might have provided amnesty for insurgents who have been involved in killing Americans.

Now, the new U.S. ambassador here, John Negroponte, had a lunch for journalists today. And he said that that language is now not ambiguous. But still, they haven't announced the amnesty, which means it's still controversial. Who do you pardon? Who do you forgive? Negroponte was saying -- when I asked him, well, Will you let in current Baathists, as has been mentioned? Will you let in former Mahdi Army people,Muqtada al-Sadr? He said, that is up to the Iraqis. He can't really say anything else on the record, but a very tricky thing.

HAYS: Jane, I just have to bring in kind of the Wall Street angle on this.

You know, oil back up to $41 a barrel this week. It had a lot to do with the Saudis saying we don't really need to have an OPEC meeting, we're going to cut -- we're going to raise our production a little bit overall, and people worried about output.

But specifically, in the oil markets this week, it seemed like there was renewed chatter, rumors, concern, about attacks, slowdown, stoppages in the flow of Iraqi oil. Have you heard anything along those lines?

ARRAF: You know, it seems pretty clear it's going to be a long and troubled road to get Iraqi oil up to speed.

What we know about the state of the oil industry is not very encouraging. The pipeline in the north has not been operating due to repeated sabotage. It won't operate for some time, according to industry sources. And that's the pipeline that takes all of the crude north to the Turkish port for export.

Now it is still being exported south in Basra. But that pipeline, as well, is being subject to repeated sabotage. And if it weren't for the sabotage, there are all sorts of other thing. So it's going to be a long time before it's back to normal.

QUIJANO: Well, Jane, thank you very much for your insights. Tell us what is ON THE STORY ahead for you?

ARRAF: You know, every day here is kind of amazing. You wake up sometimes really suddenly, because there's an explosion, kind of not knowing what's going to happen that day.

But one of the things we're looking out, looking a little bid ahead, is a gathering, major gathering at the end of the month to basically pave the way for national elections. That's going to be the next really big thing. And day-to-day, are they getting a hold of these insurgents and is it the city really come back to life? We're going to be following at that.

QUIJANO: All right, Jane. We look forward to your report.

Well, Iraq was briefly overshadowed this week by another subject here in Washington: a ban on gay marriage. I'm back on that and more on politics after this.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

BUSH: Although we have not found stockpiles of weapons of mass destruction, we were right to go into Iraq.

(END VIDEO CLIP)

QUIJANO: A theme on the campaign trail this week: President Bush saying the U.S. was right to go to war with Iraq despite that highly critical bipartisan Senate report that said intelligence before the war was wrong and exaggerated.

Now, that was just one topic that came up. But really, what was in the news this week, we know, the issue of gay marriage. That was something that, certainly leading up to what was supposed to be this vote, perhaps as early as Wednesday. You know, the president last week devoted his entire radio address to the issue of marriage. And really, this was an effort... HAYS: Elaine, this is so convoluted, though.

QUIJANO: It is convoluted.

HAYS: Because on the one hand, people think, cynical politics. He wants to rally the conservative base.

So you call a vote, you know you won't get the votes for it. And meanwhile, you're supposedly going to embarrass the Democrats. sI'm confused.

QUIJANO: Well, I think...

(CROSSTALK)

(LAUGHTER)

QUIJANO: No, but that's exactly, in essence, what they were trying to do is get these senators on the record, where do they stand? And they wanted to have an issue -- as you said, that the conservatives would rally around. But, you know, what ended up having is true conservatives coming out and saying, Well, we shouldn't have this kind of issue coming before the federal government. This should be left to the states to decide individually.

And so as a consequence -- you know, the other side of it is that the Kerry folks are saying, Well, this is an issue we can rally around. Because look, this shows the GOP is anti-gay, is homophobic, and the idea, then, that it would even get to this particular point where they were trying to get folks rallied, and so riled up, in essence, you know, has kind of galvanized the other side in a sense.

I mean, would you say that's fair to say, Dana?

BASH: Yes, and it's definitely played into what we were talking about earlier, which is the president out talking to more conservative voters, trying to rally them. It sort of was a nice mirror image for the Republicans, for the president's campaign, to have them talking about that back in Washington.

COHEN: And Elaine, perhaps the issue here is that voters really don't care that much about gay marriage.

QUIJANO: Well, that's interesting too. Because, you know, you ask them, the surveys will show, that they're concerned about things like terrorism, and they're concerned about the economy, of course. And Iraq certainly among them.

But the issue of gay marriage itself -- you know, they have an opinion of course. But in terms of their day-to-day lives and the issues that are kind of, you know, close to them and maybe driving their vote, this isn't really one of them.

But as we said, you know, this was an attempt to really kind of target a specific group there conservative base. And -- you know, like I say, kind of having a different effect too, compared to what President Bush maybe had hoped for.

BASH: Elaine, we have to talk about the whole dump Cheney question.

(CROSSTALK)

BASH: And the fact that the Bush campaign had sort of laughed, you know, it off for a long time. This week, of course, it -- maybe to no small measure, it was actually on the front page of The New York Times.

But they didn't laugh it off this week. They really addressed it. He addressed it.

QUIJANO: Right, it was so interesting to see because we saw Dick Cheney giving a C-SPAN interview. And, you know, he's talking about this particular idea that -- you know, like you said, a while ago, awhile ago, people said, Oh, come on. This is nothing. And Scott McLellan did actually kind of chalk it up to the rumor mill. You know, the White House press secretary, saying in a briefing that, you know, this is just inside-the-Beltway talk. There's not much to this.

But the fact is, is that the poll numbers have not been there, that the approval number on Cheney is something that has some Republicans privately concerned. And so the idea that perhaps maybe a dream team of McCain and George Bush might be something that might help...

BASH: Yeah, right...

(LAUGHTER)

HAYS: ...get a different doctor, and then that doctor will say, No, he's not OK, and that maybe we would see some (UNINTELLIGIBLE) we get closer to the convention, maybe they would pull this rabbit out of the hat. But apparently the view is, no, Cheney is the guy who helps anchor the conservative base.

And, of course, the other conspiracy would be, no, he's such an important powerful player in this administration, there's no way Bush could dump him even if he wanted to.

COHEN: And how important is this conservative base?

QUIJANO: Well, I mean, it's everything. I mean, that's everything that they're relying upon this time around. They're not really looking at swing voters. I mean, you heard Dana talk about that.

BASH: Exactly. They're look at swing voters, obviously, you know to -- they need them to a certain extent. But the bottom line is they feel like last time around, four years ago, the conservatives they really relied on to get out and vote didn't necessarily do it in the numbers that they wanted.

And in these states where you're talking about fewer than 6,000 votes. In New Mexico, 500 votes. It's something that really, really matters. They need to not sit on their hands. They need to get out there, and they need to get their friends to get out there.

HAYS: Do you know what I want to know? Do you think conservatives will rally around twins? Is that the idea?

QUIJANO: Yes, we saw. We saw both of them now.

HAYS: Because we hadn't seen then if a while.

QUIJANO: Well, this time last week, we saw -- we had seen Jenna out there, and it's funny because I was talking about this to some other (UNINTELLIGIBLE), an interesting contrast in sort of campaign styles.

But we haven't heard from them yet. We've seen them.

(CROSSTALK)

COHEN: Is this the Chelsea Clinton approach? You saw Chelsea a lot, but you hardly ever heard from her. Is that what they're trying to do?

QUIJANO: Perhaps, but, you know, it's interesting because we did sort of in effect hear they were in Vogue. You know, that was the big news this week that they both had their spread out in Vogue and that they had their beautiful ball gowns on, and there was a -- you know, talked about how they view the whole campaign process.

But, you know, we did actually see Barbara out on the campaign trail, sort of her debut. But it is interesting, just the style, because you see Barbara -- she was out there apparently shaking hands with EMTs -- I said that last week. And she's out and about with her home video camera. Barbara very much sort of absorbing things...

COHEN: Maybe we'll get the twins ON THE STORY next week.

(CROSSTALK)

(LAUGHTER)

COHEN: We're back ON THE STORY after this.

(BEGIN VIDEOTAPE)

ANNOUNCER: A New England girl is in the news by reporting the news this week along with another 12-year-old. What's her story? More after the break.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ANNOUNCER: Avery Stone from Providence, Rhode Island, and Lily Wasserman from Belmont, Massachusetts, are heading to Boston. The two 12-year-olds will report from the Democratic convention, interviewing politicians and delegates for TIME for Kids magazine. Their daily journals will be posted on the magazine's Web site, timeforkids.com. The two girls were chosen from 1,000 candidates nationwide.

(END VIDEOTAPE)

HAYS: Thanks so much to my colleagues for another entertaining, interesting, fun hour. Thank you for watching ON THE STORY. We'll be back next week, ON THE STORY in Boston, ON THE STORY of the Democratic National Convention.

Still ahead, "PEOPLE IN THE NEWS," with -- who else? -- Martha Stewart. Coming up right, a check of the top stories.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com


Aired July 17, 2004 - 10:00   ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
BETTY NGUYEN, CNN ANCHOR: Now in the news:
A state of emergency has been opposed in Gaza and the Palestinian leadership is in a state of confusion. The Palestinian prime minister tried to resign a short time ago but was rebuffed by President Yasser Arafat. The Palestinian leader also sacked a police chief who had been kidnapped briefly on Friday. The abductors accused the chief of corruption and demanded he be fired.

To Iraq now: a U.S. soldier was killed today in a roadside bomb near a northern town. Another American was injured. Elsewhere, at least six people were killed by a pair of simultaneous car bombs. One of the targets was Iraqi's justice minister, but he was nor hurt. The other attack was near an Iraqi national guard base.

The tiny contingent of Filipino troops in Iraq has dwindled even further. The commander was among 11 Filipino troops arriving in Kuwait today en route to Manila. Kidnappers of a Filipino truck driver in Iraq had demanded the Philippines withdraw its forces. Thirty-two Filipino troops remain in Iraq.

And in this country, near Carson City, Nevada, firefighters overnight managed to keep erratic flames from reaching dozens of homes. But mandatory evacuations remain in effect, with winds expected to return today. The blaze near Nevada's capital has destroyed several homes.

Keeping you informed, CNN, the most trusted name in news.

I'm Betty Nguyen at CNN headquarters in Atlanta. ON THE STORY begins right now.

DANA BASH, CNN WHITE HOUSE CORRESPONDENT: Welcome to CNN's ON THE STORY, where our journalists have the inside word on the stories we covered this week.

I'm Dana Bash, on the political story of how President Bush was reaching out this week to his conservative base.

DEBORAH FEYERICK, CNN CORRESPONDENT: I'm Deborah Feyerick in Westport, Connecticut, ON THE STORY of Martha Stewart, her prison sentence, and what people in her hometown think about it.

KATHLEEN HAYS, CNNfn CORRESPONDENT: I'm Kathleen Hays, ON THE STORY of the other big legal story for women this week: the sexual discrimination case on Wall Street.

ELIZABETH COHEN, CNN MEDICAL CORRESPONDENT: I'm Elizabeth Cohen, ON THE STORY of the government paving the way towards recognizing obesity as an illness and what this may mean for millions of people seeking treatment.

ELAINE QUIJANO, CNN CORRESPONDENT: And I'm Elaine Quijano, ON THE STORY of how the failure of the gay-marriage ban here in Washington may play out on the campaign trail.

We'll also be ON THE STORY in Iraq where Jane Arraf has the latest on how violence roared back on to the scene there this week.

And we'll talk about why new cholesterol guidelines could mean a lifetime prescription for millions of people.

We want to hear from you at ONTHESTORY@cnn.com.

Now straight to Deborah Feyerick and Martha Stewart.

(BEGIN VIDEO CLIP)

MARTHA STEWART, DOMESTIC MAVEN: I'll be back. I will be back. Whatever I have to do in the next few months, I hope the months go by quickly. I'm used to all kinds of hard work, as you know, and I'm not afraid. I'm not afraid whatsoever.

(END VIDEO CLIP)

FEYERICK: "I'll be back." Famous words. This time, uttered by Martha Stewart, as she spoke to hundreds of reporters and cameras outside court following her sentencing yesterday.

She wasn't just talking to them. More importantly, she was talking about -- talking to those people who she hopes will help save her empire.

COHEN: Deb, her lawyers have said that they plan to appeal this decision. Now, some people are saying maybe that's not the right decision.

FEYERICK: She will appeal this decision. In fact, they have been fighting every step of the way, ever since she was found guilty for making false statements and obstructing justice. They've tried numerous ways to try to get the guilty conviction overturned.

But they do want to appeal. Martha Stewart still remains convinced that she has done nothing wrong, and so she's going to take it all the way. Though, as you mentioned, there are some people who say, It's five months. Get in, get out, get it over with.

HAYS: You know, Deb, one of the things that's interesting for Martha Stewart coming out of the courthouse yesterday -- inside the courtroom, we hear that she was almost in tears, quiet. When she came out, she came out swinging. And far from apologies. I think a lot of people said she's still an angry woman who is going to fight. Let's listen to another -- another piece from what she said yesterday.

(BEGIN VIDEO CLIP)

STEWART: I'm just very, very sorry that it's come to this. That a small, personal matter has been able to be blown out of all proportion and with such venom and such gore. I mean, it's just terrible.

(END VIDEO CLIP)

HAYS: You know, Deb, it doesn't sound like she's saying she's sorry for what she did. She's sorry this happened to her. Big difference. That doesn't sound like an apology to me.

FEYERICK: And it definitely wasn't an apology. I think there was some amount of defiance, but also some amount of resignation in what has happened to her. She really did emphasize that this was a small, personal matter. She was trying to separate herself from the likes of Dennis Kozlowski from Tyco, from Bernie Ebbers of WorldCom and Ken Lay of Enron. She was trying to say that this was a small, personal matter, and because the government has gone as far as it did, that, in fact, you know, her company has really suffered. She had to lay off 200 employees.

And I think when she was speaking to the judge, she really threw herself on the mercy of the court, saying, you know, my fate is in your hand. Please -- please do well by me. I've done a lot of good.

So it was very different inside than outside. But she was talking to two very different audiences in both places.

BASH: And Deb, she's trying to separate herself from the likes of Dennis Kozlowski, but she was also talking about the fact that a lot of people go to jail. She even said, for example, Nelson Mandela went to jail. Maybe some might see that as she's trying to equate herself with Nelson Mandela.

I'm wondering -- you're up there in Connecticut. What are you hearing about the tone that she's taking, in -- obviously outside the courtroom and in her subsequent interview?

FEYERICK: Well, when you speak to people here in Westport, Connecticut, the one thing that they do make clear is that -- you know, Martha Stewart, she had a house here. This is where she filmed her television series. But they don't feel any sort of real kinship with Martha Stewart because she wasn't as much part of the community as, let's say, Joanne Woodward or Paul Newman, who also live up in this area.

Some people say that, you know, all she did was make false statements during the course of an investigation, that that doesn't warrant five months in prison. Others say she lied, she knew she was lying and she was sort of oblivious to the ramifications that those kinds of actions would have, and they say that five months just isn't enough.

So certainly here in Westport, you cannot get one steady stream of opinion because there are just so many on how much time she should or should not be doing.

COHEN: Deb, can you go over -- you talked about her lying. In what circumstances did she lie? Was she under oath? What were the questions asked and what was the alleged lie that she made?

FEYERICK: Well, that's what's so interesting. Initially, when the SEC, the Securities and Exchange Commission, began its investigation of Martha Stewart, she thought that it was going to be for insider trading.

However, when it turned out that they really couldn't get her on insider trading, it took on a very different nature. And so prosecutors charged her with making false statements during the course of that investigation, where she explained her sale of, you know, the infamous ImClone stock, the biotech company stock, saying, My broker and I, we had a prearranged agreement that if the stock hit 60, then we would sell. Prosecutors always convinced -- and they certainly convinced a jury -- that she made up that story to try to cover the trade.

So what sort of began as insider trading, then began to -- then sort of transformed itself into simply making false statement. That is, how did she explain that trade to those investigators? And believe me, the government takes it very, very seriously when you make false statements.

She could have recanted. She could have said, "I'm sorry. I was wrong. I misremembered. That isn't what happened." She could have gone back at anytime.

But she told them a story, and that was the story and that was her version of events and what happened. And so -- so there was a distinction.

But it wasn't stock fraud. It wasn't insider trading. And even the securities charge that initially had been in the indictment was tossed out. The judge said there's absolutely no way that you can prove that Martha Stewart, simply by saying, you know, that she was innocent, tried to manipulate her own stock prices.

So prosecutors got her on obstruction of justice and making false statements.

QUIJANO: Deb, even if her appeal does not -- is not successful. I mean, she's not going to be going to jail for a while.

What might we be seeing her do in the meantime, in the interim? And how is she going to back from this? Can she?

FEYERICK: There's been a lot of discussion on that. Martha Stewart, before she was sentenced, began putting some of her financial affairs in order. She cashed out some of her stock. She also sold a couple of properties that she owned.

She will, it seems, even by her statements yesterday, begin to hammer out what will be her role in the company. She cannot be an executive. Because, again, you hand out prospectus -- prospectuses to certain clients and it's really bad to have somebody on the board of directors who is a convicted felon. It just doesn't look good to investors.

So instead what she will do is she'll take much more of a creative role. But Martha Stewart -- don't count her out. She is a very hard-working woman. She is extremely ambitious. She did build this company out of nothing. And I think even people that didn't know have respect for what she did.

HAYS: Deb, and let's don't forget, her stock rallied yesterday. It looks like Wall Street is saying, Well, number one, the uncertainty is behind us. And we know investors don't like uncertainty. But beyond that, it seems that they're betting that Martha Stewart the company can continue, can survive. And of course, that was the other amazing thing outside the courthouse, when she kind of smiled and said, Well what can you do for me? Buy my magazine. Buy the products. They're great. And I think a lot people are betting that she will thrive, and she will definitely come back from this.

FEYERICK: And that was pretty brazen. But, you know, I'm sure a lot of business people out there said they would have done exactly the same. They would have said, This wasn't about my company, this was about a small personal matter. You know, you really like me? You really want to support me? Then buy my products. Buy my magazines.

Whether that's enough to really, you know, secure the foundation of the company, that's one thing that her now CEO -- that they're really trying to work on. How do you separate the company from Martha Stewart? And that's been the big question ever since she was indicted.

COHEN: From Martha to medical, and how the government is changing the way we look at obesity and how many people may be able to file claims in the future for expensive weight-loss procedures.

We're back on that story after this.

(COMMERCIAL BREAK)

COHEN: This week, the government (UNINTELLIGIBLE) said it's changing the rules on two big medical issue: cholesterol and obesity. And this means changes in how we think about these health problems and how much we pay to control them.

Welcome back. We're ON THE STORY.

FEYERICK: Elizabeth, I went for a general checkup this week, and one thing that my doctor said was that -- you know, they've known about these rules about cholesterol for a long time. But there was a conference. They sort of released this study.

What is this study? Is it real? And who should be paying attention?

COHEN: Well, Deborah, there have been a group of studies that have been coming out over the course of years that doctors say points to that people -- not people like you, but people who are at high risk for heart disease, who have had heart disease in the past, who are overweight or who have diabetes or a bunch of those kings of issues -- that those people need to consider take drugs at a much earlier time than previously been thought. Previously they said when your bad cholesterol hits 100, think about taking drugs -- drugs if you're in that high-risk group.

Now they say, Think about taking drugs -- drugs if it hits 70. So that's a big difference. And so many more people would be taking drugs if the doctors pay attention to these new guidelines from the National Institutes of Health.

BASH: And there's controversy about whether or not there -- the doctors -- there were doctors involved in the study and whether or not that sort of maybe tainted the study.

Is that true? And if so, isn't that sort of the way it works in this field?

COHEN: That is the way it works, but many consumer advocates find that kind of troubling. What they said is if they want to -- if, you know, doctors who set these guidelines, the doctors who said, you know, Gee, let's move the bar lower, most of those doctors have taken money at some point in time from the drug company...

(CROSSTALK)

HAYS: We know these cholesterol drugs are big, big -- they're huge for the pharmaceutical companies. I mean, so why wouldn't we be worried there's some pushing -- and particularly in an administration where there have been charges that they have been sometimes more lenient on these kinds of rules and more welcoming to this sort of mix of business with regulation, for example.

COHEN: And the problem is, is that you would really be hard- pressed to find doctors who can talk about these guidelines and who can help set these guidelines, who have not taken money from these pharmaceutical company. Who do want pharmaceutical companies want helping them and consulting them? People who are experts in the field. Who does the NIH want to help come up with new cholesterol guidelines? People who are experts in the field.

So it's kind of -- it gets very, very tricky here. But consumer advocates are saying, Look, you have a bunch of doctors saying, Let's start taking cholesterol drugs sooner, earlier. Let's put millions more people on these drugs. And they're getting money from these pharmaceutical companies. So it's understandable why they're concerned here.

QUIJANO: How clear is it? I mean, is it pretty straight forward, these new rules and the new guidelines? Can you just sort of look at a formula and plug your numbers in and there you have it? COHEN: You know, unfortunately, you can't, because it depends on what your own individual risk is. Your risk as a young, healthy person, is going to be different from someone who is older and overweight and has diabetes, et cetera. And then when do you diet and exercise, when do you do drugs?

And unfortunately, there's not a really clear way to figure this out. You go on the NIH's Web site, where they have ways to help figure out what you ought to be doing -- it's extremely confusing. If you're not a mathematician, it's going to be very tough to look at it.

And so there isn't a lot of clarity out there all time.

FEYERICK: Elizabeth, what about the new word on obesity: who is obese, what counts, and what the government is planning on doing about it?

COHEN: Right. There are Medicare rules that may be changing very soon.

What -- the way that this works is that the Medicare recipients have always been told, Obesity's not a disease. If you're obese, that's your problem. You figure out a way to pay for that.

And now the government is paving the way. They've taken out some of that language. They're not saying, We're going to pay for Medicare recipients to go on Jenny Craig or to get obesity-related surgery. But they're paving the way for that to happen. And so of course that makes many people say, Oh, my goodness, that's a ton of money. Because, there -- you know, two-thirds of Americans are overweight or obese. And if you start paying to treat them, a lot of money.

BASH: And how do you draw the line? How do you decide whether or not somebody's actually obese and needs it, or somebody who wants to fit into the dress they wore in high school?

COHEN: Right. Exactly. And -- because there are some -- there are some studies that show even just being 20 pounds overweight is a threat to your health. And other people sill say, Oh, that's not really a big deal. That's OK. And since so many Americans are overweight or obese, it would be very hard to draw those in-lines. And they're not drawing them yet. They're just (UNINTELLIGIBLE)

HAYS: The other thing that's hard, I think, is that if you were going to start paying for obesity treatments -- I mean, someone goes on a high-protein, low-carb diet, they do great. Somebody goes on Jenny Craig, they do great. Somebody counts calories, they do great. And then somebody else does any one of those things and does nothing.

How could the government even begin to decide what kind of weight-loss treatment it would fund and what it wouldn't?

COHEN: It would be a mess. I mean, we think coming up with cholesterol guidelines is difficult, this would be a complete mess. It would be very, very difficult to do. But on the other hand, you have obesity as this huge public- health problem in the United States. So it's a fair question: how can Medicare not pay to treat obesity? It causes diabetes, heart disease, strokes, et cetera. How can you not pay for it?

But it becomes tough. And then what becomes even tougher is that private insurers often like to follow whatever Medicare does. So it wouldn't just be Medicare recipients, it would be private insurers. So if anybody's really nervous right now, it's private health-care companies. I mean, the thought of paying for everyone's Jenny Craig I'm sure is making them very anxious.

QUIJANO: On the topic, though, of diets. I mean, e-diets. This is something that we heard that was interesting -- that e-diets apparently don't work as well as the old-fashioned, stick-to-the-book. What's behind that?

COHEN: That's right. There had been great hope that Internet dieting sites was going to be maybe part of the answer to America's obesity epidemic. But a study that said that one particular site, ediets.com, which people -- all the nutritionists say is a great site -- it didn't work. They put 200-pound women on it, women who weighed 200 pounds. And over the course of a year, they lost 1.8 pounds. And the reason: they didn't log in. They didn't use it. There you go.

(CROSSTALK)

BASH: Elizabeth, we're going to go from medical news to a fever- pitched, or at least some serious heating up on the campaign trail.

Back on that story in a minute.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: The other day, my opponent said that a punch of entertainers from Hollywood conveyed -- conveyed the heart and soul of America. No, I believe the heart and soul of America is found in places in Wisconsin.

(END VIDEO CLIP)

BASH: The president's supporters in Wisconsin, cheering him on for recognizing them as the heart and soul of America. That was just a taste of the president's campaigning this week, a battle to attract voters by talking about shared values, cementing the political base, and reaching out to conservative Democrats, as well as conservatives in his own party.

HAYS: You know, Dana, I think one of the president's appeal and charm for many people is his humor, his graciousness. He can joke around with anybody. This week, I think, we began to see much more of the sharp, tough attack side of bush.

BASH: Absolutely. Absolutely. And I was with him on his campaign swing -- which, by the way, is where I lost my voice, on a campaign swing...

QUIJANO: You're doing great today, Dana.

BASH: ...sort of the -- through the Great Lake states at the beginning of the week, three states he lost by a somewhat narrow margins, three states he desperately wants to win back: Michigan, Minnesota and Wisconsin.

The beginning he was really trying to -- the first day, he was in Michigan and Minnesota, talking to some of the -- in the areas where there are conservatives, but they're registered Democrats. He wants them to come to his side.

The second day, he was really trying to rally conservative Republicans who sort of came out for him before, but he wants more of them.

And it was very interesting, as you mentioned, to hear the way he spoke. Very sharp in his attack. Very direct attempt to try to, as they did when John Kerry was first nominated, to try to label this team as not somebody who shares their values. Really try to appeal to conservatives in a way we didn't see necessarily in these areas in 2000, when he was running as a compassionate conservative. Really talking up same-sex marriage and abortion and issues that he says doesn't really agree with their liberal -- you know, used the "l" word, like, you know, at every single event, with the way he's trying to paint them.

And you listen to their camp -- to the Bush campaign, and they constantly say that they're playing within the 45-yard line, that the country is so polarized, there's so few people in the middle to really appeal to. It's clear that a big part of their strategy is to try to make sure that the people on their side of the field actually get out and vote. And that's what you saw this week, but in a very stepped up way, Kathleen.

FEYERICK: Dana, this whole week, with the emphasis on values, it doesn't sort of take away the sting of the two reports on Iraq, and that the information that both the British government, as well as the U.S. government used was flawed. They said the information just wasn't the right information, based on which to go to war.

Tony Blair took responsibility. George Bush did not. He said, in fact, what we did was the right thing.

When you talk about values, is that a way to sort of deflect, talking about maybe the reasons for going to war weren't exactly as solid as perhaps the country was led to believe?

BASH: Well, that's definitely some of what the democrats were saying this week, Deb. I think we have a sound bite of Tony Blair talk about the report that he got in his country this week.

Let's listen to that.

(BEGIN VIDEO CLIP) TONY BLAIR, BRITISH PRIME MINISTER: Any mistakes made, as this report finds, in good faith, I of course take responsibility. But I cannot honestly say that I believe getting rid of Saddam was a mistake at all.

(END VIDEO CLIP)

BASH: Now that is half of what we heard from the president all week, as Deb just mentioned. Half of it is that, just like Tony Blair said, he still thought going against Saddam Hussein, getting rid of Saddam Hussein was the right thing to do.

Taking personal responsibility, uh-uh. Did not hear that from the president at all. And it's something that John Edwards, in his first solo appearance, seized on immediately and said, Where does the buck stop? Why aren't you taking responsibility?

But there's a big difference between Tony Blair and George W. Bush, and that's George W. Bush has an election in less than four months, and his campaign thinks that they have the good fortune of running against somebody who actually voted for this war. And they really played they up.

And it -- time and time again, the president said, It wasn't just me. It was the U.N. and it was Congress. And it wasn't just Congress, it was you, Senator Kerry, you, Senator Edwards. You had the same information and you voted with me. And shame on you for voting against the money afterward.

COHEN: But the legislators say that they voted for the war because Bush convinced them, basically. I mean, they said that he supplied the wrong information.

BASH: Right. Right. And that's what they're saying. And so the defense this week -- all of this week, Elizabeth, was that, you know, he actually said , Yes, there aren't -- as far as we know, aren't stockpile, the stockpiles we thought. But sort of the subtext -- or the -- actually, not really the subtext, what he was saying is "I was just as snowed as you were."

And the big question is whether or not Americans are going to believe that. Because even as much as the president in these states, where he's trying to appeals to the conservatives this week and even next week, he still has a big -- there's still a big question mark about, now, his credibility. And the Iraq war, if you talk to experts in these states, they say even the people who support him on same-sex marriage, and on abortion, who are listening to him and agree with him on social issues, they now have a big question about his credibility and the Iraq war. And the big question is going to be how these people vote, whether or not they stick to the social issues or whether or not they really don't vote for the president because of the Iraq war.

QUIJANO: But wouldn't you say, Dana -- I mean, that trait, of the president over and over coming out, saying, It wasn't just me. It was Congress. They looked at the intelligence. The U.N., they looked at the intelligence.

You know, that characteristic of the president to be very strong in his views, very unyielding in the way that he continues to defend his reasons for going to Iraq, doesn't -- wouldn't you say -- I mean, that is something that draws people to him, very much so?

BASH: Right. Right. And that's another part -- that's a very good point, Elaine. And that's another part of what the president's message was this week. It wasn't just, you know, I did what I had to do based on the intelligence. It was, I did what I had to do after September 11. And after September 11, based on what I saw, I couldn't just sit here and not, you know, go after Saddam Hussein.

And as you point out, very astutely, Elaine that is something that the White House and the president's political team still thinks, no matter what, is still one of his best assets, is that he is going to do what it takes to protect America. And that's why also, he said in that speech on Monday -- he was in Tennessee -- he said, America is said. I've made America safer and Iraq has made America safer. He said that, you know, half a dozen times at least.

That is what he's going to continue to say. Whether or not people buy it (UNINTELLIGIBLE

HAYS: Well, and we know that this is such a big issue, though -- John Kerry what he voted for, what he didn't vote for. And of course we're going to be talking more about this issue, more about politics later in the hour.

Do want to thank Deborah Feyerick, getting back ON THE STORY with Martha Stewart in Connecticut. Deb, thanks so much.

I'll be back ON THE STORY of the big Wall Street sex- discrimination settlement this week. All coming up.

But first, a check of what's making headlines now in the news.

NGUYEN: Well, good morning. I'm Betty Nguyen at the CNN Center in Atlanta. Here's what's making news.

A U.S. soldier died in Iraq after his convoy was struck by a roadside bomb. This after a violent day of car bombings killed at least six others in and around the capital of Baghdad. A group linked to suspected terrorist mastermind Abu Musab al-Zarqawi claimed responsibility for one of the attacks on the Iraqi justice minister's convoy. The minister was not hurt, but four of his bodyguards are among those killed.

Palestinian President Yasser Arafat says he will not accept the resignation of Prime Minister Ahmed Qureia. The move comes after a chaotic day that saw a shakeup of Palestinian security forces and a state of emergency imposed in Gaza.

And President Bush says government must do what it can to help families raise responsible children. The president made those comments during his weekly radio address, just moments ago. Bush spoke of the annual report, which released yesterday, that shows a decrease in violent crime among teenagers and a decline in drug use among youth.

(BEGIN AUDIO CLIP)

BUSH: The decisions are children make now will affect their health and character for the rest of their lives. And when they make the right choices, they are preparing themselves to realize the bright future our nation offers each of them.

(END AUDIO CLIP)

NGUYEN: Keeping you informed, CNN, the most trusted name in news.

I'm Betty Nguyen. ON THE STORY will be right back.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

ALLISON SCHIEFFELIN, PLAINTIFF: All I want to say is that I am so happy that there is a great settlement that's good for everybody.

(END VIDEO CLIP)

HAYS: Allison Schieffelin, a happy woman and a winner. Maybe all women on Wall Street and beyond gained from the $54 million sex- discrimination settlement agreed to by brokerage firm Morgan Stanley. The lead plaintiff gets $12 million. Other women split $40 million. And $2 million goes to training to avoid such problems in the future.

Welcome back. We're ON THE STORY.

QUIJANO: Kathleen, let me have you break this down for us. I mean, what was this particular case all about?

I mean, first of all, the EEOC getting involved is unusual on Wall Street there. But was this about, you know, somebody saying something to her or doing something inappropriate?

HAYS: Once again, it just seems the tide is really turning when it comes to women at work, when it come to women saying, We're doing the same job as men. You can't hide it any more. You can't say it's because, Well, he had the slightly better experience because the numbers just aren't showing that.

This is a very interesting case. Well, the EEOC does bring complaints. But this would have been the first big litigation against a Wall Street firm. It costs a lot of money to do this. You'd want to know you have a very strong case.

This woman had been working at Morgan Stanley since 1986. Morgan Stanley prides itself on being a performance-oriented firm. You know, you perform, you get ahead. In 1997, she filed a sex-discrimination complaint with the EEOC and she claims, then, in 1998, when she asked for a promotion, she didn't get it because she had become viewed as a troublemaker.

But she looked around her department and said, Why are there no women managing directors? There's about -- actually about 1,000 managing directors in all of Morgan Stanley, 51,000 employees overall. So it is a small number.

Another department, 50 people, only three managing directors. So at that point, that's when she decide to step up the case, the EEOC got involved, to bring this charge about pay and promotion and charging that the numbers just show you that there is a pattern, a systematic pattern, women in the same jobs, not earning same as men and not getting the same opportunity to advance in the firm.

COHEN: Now Kathleen, I know this is mostly about money and promotion, but there was also that breast-shaped birthday cake.

HAYS: That was brought up. And you know -- but -- and it's interesting, when I -- I've come Wall Street for awhile, and a trading room can be one of the most interesting places to be, and probably one of the oddest for people who think of Wall Street being genteel bankers.

It's a macho culture. It has been for years. It's bawdy. Dirty jokes, strippers come in for someone's birthday -- or they used to. That is gradually changing. And there were allegations of that. There were allegations that, for example, there was a trip planned to Las Vegas to take clients to go to strip joints, but she couldn't go because the guys said, Well, but we'd feel uncomfortable, you know, going with a woman, our clients would feel uncomfortable.

Fifty-four million dollars, even though it's a small part of what Morgan Stanley, makes in a year, maybe equal to what they can make in a day, people say will make a difference. And remember, the Wal-Mart class-action suit that got going last month, that was also years in the making.

Another -- you know, women at a different point maybe on the work ladder -- that we're not talking the same kind of money. Allison Schieffelin actually made $1.3 million her last year at Morgan Stanley. But another case where two-thirds of the women at Wal-Mart are -- two-thirds of the workers are women, only 16 percent are managers.

Again, more and more of these cases are just resting on the numbers. How could you have numbers like that if you're really being fair?

BASH: Kathleen, knowing Wall Street the way you do, how much of an impact do you think this case is going to have on other firms?

HAYS: There are already other suits being brought. We'll see if they settle as well. Probably more and more people realizing that they have to have programs where they really monitor what's going on. And managers will have to -- in black and white, in figures, in numbers, give their reasons why they are promoting certain people, why people are get the salaries they're getting. I think in a way, you know, salary's like a dirty little secret. People don't want to talk about how much they make.

BASH: Not just on wall street.

HAYS: Everywhere. Exactly. But more and more, I think people are saying when it comes out and when you look across the table and see the guy who is basically doing your job the same amount of time, but he makes 20 percent more, he gets the promotion, you get passed over. You know, are you somebody who isn't measuring up or you aren't somebody who is just getting a fair shake? And that's (UNINTELLIGIBLE) more and more.

COHEN: And Kathleen, Schieffelin got $12 million, which certainly is a lot.

But on the other side, she's a whistleblower. Who is going to hire her now?

HAYS: Well, she says her career was ruined. And in fact, Morgan Stanley -- let's point out that the top-paid woman at the firm, Zoe Cruz (ph), who runs their global bond operation, made $16 million last year. She made more than Phil Purcell, the CEO, the man who settled this.

Morgan Stanley settled. They claim they are all about diversity; this is a performance issue. An attorney that was on my show this week, "THE FLIP SIDE," said he thinks still that women do make different choices, that they do have different career paths and that's reflected here.

Clearly, the EEOC and every woman's advocate says yes, that's true to a certain extent, but there are so many cases where the experience is the same, the education is the same, you just cannot justify these big disparities any more.

QUIJANO: Kathleen, I want to shift gears a little bit and talk about the economy in general.

I mean, Dana and I have both been our on the campaign trail this week, and the economy is a theme that we hear over and over again. President Bush bringing it up just this week.

Let's take a listen to something that he had to say.

(BEGIN VIDEO CLIP)

BUSH: This economy of ours is strong and it's growing stronger. Since last summer, our economy has been growing at its fastest rate in nearly 20 years. In less than a year's time, we've added 1.5 million new jobs.

(END VIDEO CLIP)

QUIJANO: So we they're that over and over again. I mean, that is the figure. And then he talks about home ownership being on the rise.

You know, what's sort of the truth of it all? And is it going to be this way, you know, come, you know, November?

HAYS: The problem right now for the president, the problem right now for Wall Street, the stock market, which has been kind of waffling, as we had a strong first quarter. It's clear that the economy lost momentum in the second quarter. And now we've seen retail sales softening up, industrial production. You know, the new claimants for unemployment benefits staying at a level that isn't as low and healthy as you'd like it to be.

Stocks reporting their earnings for the second quarter, some of them good. Kind of mixed. Wall Street needed something better. And some of the guidance looking ahead, not quite as robust as people want to see.

So I think there's a question: will the economy have the kind of strength the president wants to see come September, October?

Inflation numbers, good news: they're tame. Maybe we won't have to see as much Federal Reserve rate-hiking. That could be good for the president.

On the other hand, does it all show that there was a burst of activity in the beginning of the year that's cooling off, and there's no time for more tax cuts, you're not going to cut rates again? So I think people on Wall Street are really at a juncture right now, and they're kind of concerned, and they're kind of concern, hopeful -- got their fingers crossed the president's right. But there is a concern about where we're heading right now.

QUIJANO: All right. Kathleen, thanks for that.

One factor hanging over the economy and the political campaign is Iraq. We're back on that story with Baghdad bureau chief Jane Arraf after this.

(BEGIN VIDEO CLIP)

ANNOUNCER: Jane Arraf is CNN's Baghdad bureau chief. Until the fall of Saddam, she often was the only Western journalist in Iraq. Her reporting so angered Saddam Hussein he banned her from the country in December 2002.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: (SPEAKING IN ARABIC)

(END VIDEO CLIP)

JANE ARRAF, CNN BAGHDAD BUREAU CHIEF: That's a member of Iraq's national guard, saying, in the aftermath of a car bomb, "If there are terrorists, don't go behind our backs. Come and attack us to our face." That was the start Wednesday of a new wave of violence in this country.

I'm Jane Arraf in Baghdad. Welcome back to ON THE STORY.

HAYS: Jane, this is so disheartening, watching it from here. I can only imagine how people feel there. Barely two weeks into the new regime and once again, the violence escalates.

ARRAF: It is a roller coaster.

It had been amazingly quiet for the past two weeks. And we're talking about amazingly quiet. I mean, the occasional car bomb, OK -- the occasional rocket, the occasional mortar. But nothing like these dramatic, targeted attacks. And today, of course, we've seen more.

An assassination attempt on the justice minister, which killed four people and wounded many more, one that's blamed on Abu Musab al- Zarqawi, who seems to have taken responsibility.

It is disheartening, but not completely demoralizing to Iraqis, who are a very tough bunch.

QUIJANO: I wanted to ask you a little bit more about that, Jane. What is sort of the real fear level out there? I mean, are people starting now to get back into some kind of normal routine, or are they still very much in fear when they go out and try to go about their daily lives? What is the sort of the reality of the situation?

ARRAF : It really varies which neighborhood they're in.

There's one neighborhood, particularly in Baghdad, not too far from here where gunfights have broken out. It's known as Little Fallujah and people there do not go out a lot.

But in other places, you go out at night, there are weddings going on. You can't walk through the streets because there's so many shoppers. It's remarkable. And somehow people have learned to deal with this.

I was speaking to the sister of one of two very dear colleagues of ours who were killed this year. And she's now looking for a job. She's Iraqi, as they were. And she said, People say to me, but you'll be targeted. And she said, I realize that no matter what I do, no matter what anyone does, they could be targeted.

There's a sense here that it's a dangerous place, but now it's their place and they have to get on with it. And I think we're seeing that increasingly.

COHEN: Jane, you mentioned earlier about al-Zarqawi taking responsibility for that attack this week.

Tell us a little bit about him. Which group is he connected to? ARRAF: Well, that's the Jordanian-born fugitive, of course, who's the most wanted man in Iraq, one of the most wanted men in the world now. And he's taken responsibility for a lot of the more spectacular attacks, particularly assassinations of senior officials, spectacular car bombs that could not have been done without planing and coordination and a fair degree of sophistication.

The latest message on a Web site says his group, Towhid wal Jihad, which is Unity of God and Jihad, did the attack on the justice minister. Now, the justice minister escaped. But a car pulled up to him and detonated, killing what are believed to be four of his bodyguard.

And it really shows that these are very targeted attack. This is the second major one this week. Earlier, there was the assassination of the governor of a major province in the north, Nineveh, which includes the city of Mosul. It's very, very worrying, and chillingly effective.

BASH: Jane, an interesting move this week by Prime Minister Allawi was the offer of amnesty. Tell us a little bit about that, and whether you think just in talking to folks on the ground there, you think this will actually work at all.

ARRAF: That really goes to the heart of what kind of country this is going to be.

Now, it started out with talk that -- OK, we're going to announce today that we are going to have an amnesty and it's going to be low- level insurgents, essentially. And then the announcement was delayed and delayed. And part of the reason it's been delayed, it seems, is that there was some, what U.S. diplomats call ambiguous language in the draft, which might have provided amnesty for insurgents who have been involved in killing Americans.

Now, the new U.S. ambassador here, John Negroponte, had a lunch for journalists today. And he said that that language is now not ambiguous. But still, they haven't announced the amnesty, which means it's still controversial. Who do you pardon? Who do you forgive? Negroponte was saying -- when I asked him, well, Will you let in current Baathists, as has been mentioned? Will you let in former Mahdi Army people,Muqtada al-Sadr? He said, that is up to the Iraqis. He can't really say anything else on the record, but a very tricky thing.

HAYS: Jane, I just have to bring in kind of the Wall Street angle on this.

You know, oil back up to $41 a barrel this week. It had a lot to do with the Saudis saying we don't really need to have an OPEC meeting, we're going to cut -- we're going to raise our production a little bit overall, and people worried about output.

But specifically, in the oil markets this week, it seemed like there was renewed chatter, rumors, concern, about attacks, slowdown, stoppages in the flow of Iraqi oil. Have you heard anything along those lines?

ARRAF: You know, it seems pretty clear it's going to be a long and troubled road to get Iraqi oil up to speed.

What we know about the state of the oil industry is not very encouraging. The pipeline in the north has not been operating due to repeated sabotage. It won't operate for some time, according to industry sources. And that's the pipeline that takes all of the crude north to the Turkish port for export.

Now it is still being exported south in Basra. But that pipeline, as well, is being subject to repeated sabotage. And if it weren't for the sabotage, there are all sorts of other thing. So it's going to be a long time before it's back to normal.

QUIJANO: Well, Jane, thank you very much for your insights. Tell us what is ON THE STORY ahead for you?

ARRAF: You know, every day here is kind of amazing. You wake up sometimes really suddenly, because there's an explosion, kind of not knowing what's going to happen that day.

But one of the things we're looking out, looking a little bid ahead, is a gathering, major gathering at the end of the month to basically pave the way for national elections. That's going to be the next really big thing. And day-to-day, are they getting a hold of these insurgents and is it the city really come back to life? We're going to be following at that.

QUIJANO: All right, Jane. We look forward to your report.

Well, Iraq was briefly overshadowed this week by another subject here in Washington: a ban on gay marriage. I'm back on that and more on politics after this.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

BUSH: Although we have not found stockpiles of weapons of mass destruction, we were right to go into Iraq.

(END VIDEO CLIP)

QUIJANO: A theme on the campaign trail this week: President Bush saying the U.S. was right to go to war with Iraq despite that highly critical bipartisan Senate report that said intelligence before the war was wrong and exaggerated.

Now, that was just one topic that came up. But really, what was in the news this week, we know, the issue of gay marriage. That was something that, certainly leading up to what was supposed to be this vote, perhaps as early as Wednesday. You know, the president last week devoted his entire radio address to the issue of marriage. And really, this was an effort... HAYS: Elaine, this is so convoluted, though.

QUIJANO: It is convoluted.

HAYS: Because on the one hand, people think, cynical politics. He wants to rally the conservative base.

So you call a vote, you know you won't get the votes for it. And meanwhile, you're supposedly going to embarrass the Democrats. sI'm confused.

QUIJANO: Well, I think...

(CROSSTALK)

(LAUGHTER)

QUIJANO: No, but that's exactly, in essence, what they were trying to do is get these senators on the record, where do they stand? And they wanted to have an issue -- as you said, that the conservatives would rally around. But, you know, what ended up having is true conservatives coming out and saying, Well, we shouldn't have this kind of issue coming before the federal government. This should be left to the states to decide individually.

And so as a consequence -- you know, the other side of it is that the Kerry folks are saying, Well, this is an issue we can rally around. Because look, this shows the GOP is anti-gay, is homophobic, and the idea, then, that it would even get to this particular point where they were trying to get folks rallied, and so riled up, in essence, you know, has kind of galvanized the other side in a sense.

I mean, would you say that's fair to say, Dana?

BASH: Yes, and it's definitely played into what we were talking about earlier, which is the president out talking to more conservative voters, trying to rally them. It sort of was a nice mirror image for the Republicans, for the president's campaign, to have them talking about that back in Washington.

COHEN: And Elaine, perhaps the issue here is that voters really don't care that much about gay marriage.

QUIJANO: Well, that's interesting too. Because, you know, you ask them, the surveys will show, that they're concerned about things like terrorism, and they're concerned about the economy, of course. And Iraq certainly among them.

But the issue of gay marriage itself -- you know, they have an opinion of course. But in terms of their day-to-day lives and the issues that are kind of, you know, close to them and maybe driving their vote, this isn't really one of them.

But as we said, you know, this was an attempt to really kind of target a specific group there conservative base. And -- you know, like I say, kind of having a different effect too, compared to what President Bush maybe had hoped for.

BASH: Elaine, we have to talk about the whole dump Cheney question.

(CROSSTALK)

BASH: And the fact that the Bush campaign had sort of laughed, you know, it off for a long time. This week, of course, it -- maybe to no small measure, it was actually on the front page of The New York Times.

But they didn't laugh it off this week. They really addressed it. He addressed it.

QUIJANO: Right, it was so interesting to see because we saw Dick Cheney giving a C-SPAN interview. And, you know, he's talking about this particular idea that -- you know, like you said, a while ago, awhile ago, people said, Oh, come on. This is nothing. And Scott McLellan did actually kind of chalk it up to the rumor mill. You know, the White House press secretary, saying in a briefing that, you know, this is just inside-the-Beltway talk. There's not much to this.

But the fact is, is that the poll numbers have not been there, that the approval number on Cheney is something that has some Republicans privately concerned. And so the idea that perhaps maybe a dream team of McCain and George Bush might be something that might help...

BASH: Yeah, right...

(LAUGHTER)

HAYS: ...get a different doctor, and then that doctor will say, No, he's not OK, and that maybe we would see some (UNINTELLIGIBLE) we get closer to the convention, maybe they would pull this rabbit out of the hat. But apparently the view is, no, Cheney is the guy who helps anchor the conservative base.

And, of course, the other conspiracy would be, no, he's such an important powerful player in this administration, there's no way Bush could dump him even if he wanted to.

COHEN: And how important is this conservative base?

QUIJANO: Well, I mean, it's everything. I mean, that's everything that they're relying upon this time around. They're not really looking at swing voters. I mean, you heard Dana talk about that.

BASH: Exactly. They're look at swing voters, obviously, you know to -- they need them to a certain extent. But the bottom line is they feel like last time around, four years ago, the conservatives they really relied on to get out and vote didn't necessarily do it in the numbers that they wanted.

And in these states where you're talking about fewer than 6,000 votes. In New Mexico, 500 votes. It's something that really, really matters. They need to not sit on their hands. They need to get out there, and they need to get their friends to get out there.

HAYS: Do you know what I want to know? Do you think conservatives will rally around twins? Is that the idea?

QUIJANO: Yes, we saw. We saw both of them now.

HAYS: Because we hadn't seen then if a while.

QUIJANO: Well, this time last week, we saw -- we had seen Jenna out there, and it's funny because I was talking about this to some other (UNINTELLIGIBLE), an interesting contrast in sort of campaign styles.

But we haven't heard from them yet. We've seen them.

(CROSSTALK)

COHEN: Is this the Chelsea Clinton approach? You saw Chelsea a lot, but you hardly ever heard from her. Is that what they're trying to do?

QUIJANO: Perhaps, but, you know, it's interesting because we did sort of in effect hear they were in Vogue. You know, that was the big news this week that they both had their spread out in Vogue and that they had their beautiful ball gowns on, and there was a -- you know, talked about how they view the whole campaign process.

But, you know, we did actually see Barbara out on the campaign trail, sort of her debut. But it is interesting, just the style, because you see Barbara -- she was out there apparently shaking hands with EMTs -- I said that last week. And she's out and about with her home video camera. Barbara very much sort of absorbing things...

COHEN: Maybe we'll get the twins ON THE STORY next week.

(CROSSTALK)

(LAUGHTER)

COHEN: We're back ON THE STORY after this.

(BEGIN VIDEOTAPE)

ANNOUNCER: A New England girl is in the news by reporting the news this week along with another 12-year-old. What's her story? More after the break.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ANNOUNCER: Avery Stone from Providence, Rhode Island, and Lily Wasserman from Belmont, Massachusetts, are heading to Boston. The two 12-year-olds will report from the Democratic convention, interviewing politicians and delegates for TIME for Kids magazine. Their daily journals will be posted on the magazine's Web site, timeforkids.com. The two girls were chosen from 1,000 candidates nationwide.

(END VIDEOTAPE)

HAYS: Thanks so much to my colleagues for another entertaining, interesting, fun hour. Thank you for watching ON THE STORY. We'll be back next week, ON THE STORY in Boston, ON THE STORY of the Democratic National Convention.

Still ahead, "PEOPLE IN THE NEWS," with -- who else? -- Martha Stewart. Coming up right, a check of the top stories.

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