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Rice's Dinner Diplomacy with Iran. Battlefield Stress Higher than Originally Thought. China's U.S Mortgage Rate Mortgage Influence Capability. States Moving Primary Caucus to an Earlier Date. Anbar Province's Decline In Violence. Louisville Officials Brushing Up on Royal Protocol.

Aired May 4, 2007 - 1900   ET


Happening right now, brief encounters but no breakthrough -- Secretary of State Condoleezza Rice takes a shot at dinner diplomacy with Iran. Did a lady in red though get in the way?

Also this hour, pulling back the layers of failed intelligence on Iraq -- I'll talk about it with a former British diplomat who accuses his own government of exaggeration, manipulation and dishonesty.

And $65 million questions about a family on the brink of losing everything, all because of a pair of pants.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

A lady in red stealing the spotlight at an international conference on Iraq -- the world was watching to see if Secretary of State Condoleezza Rice would speak with her Iranian counterpart, talks some say are necessary to ending the violence in Iraq, but it didn't happen, and the question now is why?

Our State Department correspondent Zain Verjee is in Sharm el- Sheikh in Egypt with the latest -- Zain.

ZAIN VERJEE, CNN STATE DEPARTMENT CORRESPONDENT: Wolf, Iran and the U.S. came face-to-face here in Egypt but did a violinist keep them apart?


VERJEE (voice-over): A lady in red, did she get in the way of some potential breakthrough diplomacy between the United States and Iran? At a closed door dinner in Egypt, Iran's foreign minister fled the room just before Secretary of State Condoleezza Rice arrived dashing her plans for a bit of conversation.

CONDOLEEZZA RICE, SECRETARY OF STATE: You can ask him why he didn't make an effort. Look, I'm not given to chasing anyone.

VERJEE: We did.

MANOUCHEHR MOTTAKI, IRANIAN FOREIGN MINISTER: There's some technical issue I could not happen. VERJEE: Others told us Manouchehr Mottaki was offended by a Russian violinist in a sexy red dress. Rice's spokesman wasn't convinced. He said I'm not sure which woman he was afraid of, the woman in the red dress or the secretary of state. Officials from the two sides finally sat down together. Their chitchat lasted a mere three minutes.

UNIDENTIFIED MALE: We are not looking for some kind of demonstration. We are not looking for some kind of show, you know. We are not looking to talks just for talks.

VERJEE: Mottaki told CNN he thinks Rice wants better relations with Iran.

UNIDENTIFIED MALE: We see some changes in words, and we hope these words be translated in practice.

VERJEE: Iraq's foreign minister says the proxy war between Iran and the United States is bad for his country, and it's time for the two to talk.

HOSHYAR ZEBARI, IRAQI FOREIGN MINISTER: It is in my country's interest really to see a reduction of this tension.

VERJEE: That's why the U.S. is reaching out.

RICE: The United States has no desire to have anything contribute to a more difficult set of circumstances for Iraq.


VERJEE: Secretary Rice says this week's conference was a breakthrough for everyone because, for once, the United States and Iran were on the same side, Iraq -- Wolf.

BLITZER: Zain Verjee reporting for us from Sharm el-Sheikh.

A deadly new violence meanwhile in Iraq claiming five more U.S. lives as the U.S. military seizes 16 terror suspects accusing of helping bringing deadly armor-piercing explosives into Iraq from Iran. And now we're learning that the unrelenting carnage and the seemingly endless insurgency is taking a new toll on U.S. troops, much more severe than anyone imagined.

Our senior Pentagon correspondent Jamie McIntyre has details of a ground breaking study -- Jamie.

JAMIE MCINTYRE, CNN SR. PENTAGON CORRESPONDENT: Wolf, the ground breaking part of the study focused on battlefield ethics for the first time asking soldiers and Marines their attitudes about torture and abuse. Among the findings, 10 percent of soldiers reported mistreating non-combatants or damaging their property. More than one-third of all soldiers and Marines said they thought torture should be allowed to save the life of a comrade.

The Army study focused on front line combat units in Iraq. It found that troops deployed longer than six months or more than once were more likely to have a mental health issue. That finding comes as the Army has just extended basic tours to 15 months with one year off. The study suggests that battle-weary troops really need at least 18 months to three years to recover -- Wolf.

BLITZER: Jamie, that's very disturbing stuff. Thank you. Jamie is at the Pentagon.

What does China have to do with your mortgage -- a lot more apparently than many people realize. CNN's John Vause explains how decisions in Beijing could impact our wallets -- John.

JOHN VAUSE, CNN CORRESPONDENT: Wolf, What could ultimately be the world's biggest investment fund will be controlled by a government whose own leaders admit is rife with corruption.


VAUSE (voice-over): Would you trust this man with hundreds of billions of dollars? The Chinese government does and what Lou Jiwei decides in Beijing could end up costing American homeowners.

RICHARD MCGREGOR, FINANCIAL TIMES: In theory Chinese investment decisions could have a -- cause a spike in U.S. interest rates.

VAUSE: Lou is the head of a new government agency which will soon be investing part of China's massive stockpile of foreign cash reserves worth $1.2 trillion U.S. and growing fast -- billion-and-a- half dollars every day.

UNIDENTIFIED MALE: The present trend (UNINTELLIGIBLE) they could have $2 trillion.

VAUSE: It's the end result of a booming economy. Beijing's central bank has been buying U.S.-issued Treasury bills earning a low four percent interest rate, effectively loaning Americans cheap money and along the way propping up the U.S. dollar.

DONG TAO, CREDIT SUISSE: Now if you can double that to eight percent, which is still below the average of the fund returning to World, that's equivalent to China's entire national education budget.

VAUSE: If China stops buying Treasury bills, the dollar could plunge. To prop it up the Fed would increase interest rates and that means higher mortgage costs and never before has there been an investment fund potentially this big, hundreds of billions of dollars. Analysts warn it could move markets and the value of your 401k by the touch of a bureaucrat's button.

UNIDENTIFIED MALE: Sometimes when we talk about a huge fund, worth like $20 billion U.S., a movement could move the market and now we're talking about 200 billion every year.


VAUSE: For the catch here for the Chinese if they hurt the U.S. economy, they also hurt their number one customer -- Wolf.

BLITZER: John Vause in Beijing -- thank you.

And the United States certainly is China's number one customer by far. Washington has a trade deficit with Beijing -- get this -- totaling $232 billion -- $232 billion trade deficit with China.

Let's go to Jack Cafferty in New York. Those are shocking statistics, especially when you understand the old adage as you and I do money talks, and the Chinese could have a huge impact on markets here, interest rates here, a lot of stuff here, Jack. I don't know if you appreciate what john Vause was just reporting.

JACK CAFFERTY, CNN ANCHOR: Well you know, of course I appreciate it. I don't know if he went far enough. We are extremely vulnerable to the Chinese because they hold all of this debt that belongs to the United States. The war in Iraq is being financed by the Chinese, and if they ever decide to call those IOUs, whether it does damage to their market or not, we are in more than a heap of trouble. I mean we're in a very precarious position vis-a-vis the Chinese.

The top candidates in the race for the White House are expected to each raise at least $100 million which is not chump change and that's before somebody gets the nomination. "USA Today" reports how this has prompted the presidential candidates to raise money in all sorts of ways, some less traditional than others.

Mitt Romney, for example, paying college students a commission for the donations they collect. Here's my favorite. Hillary Clinton's campaign is arranging meetings with former President Bill Clinton, and then there's the merchandise, T-shirts, hats, bumper stickers, that's not new, but check out some of the stuff that the '08 candidates are selling.

There's the Hillary Clinton kid pack. This includes a ruler, a pink piggy bank and a Hillary cares about me T-shirt. Senator John McCain is offering mouse pads for $75 apiece. Good luck on selling a bunch of those. A donation to the John Edwards campaign gets you money land, a CD featuring country tunes by the likes of Merle Haggard, Emmylou Harris and Bruce Hornsby.

Edwards is also selling mouse pads, but his go for 9.50, considerably less than John McCain's do -- Republican mouse pads much more expensive. Mitt Romney has "Kids for Mitt" bibs, and there's more paraphernalia for kids on Rudy Giuliani's Web site where you can get onesies for infants and you can also pick up "Rudy 2008" aprons.

Dennis Kucinich supporters can get women's T-shirts with the red, white and blue peace symbol. So here's the question. Would a John McCain mouse pad, a "Hillary Cares About Me" T-shirt or a country music CD from John Edwards persuade you to donate to a presidential campaign?

It's Friday night. It's the best I can do. What do you want from me? E-mail or go to I don't want to hear it.

BLITZER: What are onesies? What are onesies?

CAFFERTY: I don't know. I was going to ask that, and I was afraid to because I suppose that I would be accused of being a complete moron. My guess is it must be some sort of diaper, but I'm just guessing.

BLITZER: No, no, you know, it's the one-piece outfit -- there it is -- "Rudy USA", that onesie, that one piece. Eric Sherling (ph), our executive producer is telling me what a onesie is, Jack.

CAFFERTY: Yes, he wears one.


BLITZER: Jack. Stand by.

Coming up, why the 2008 presidential election could have people voting at the end of this year.

Fresh claims that the war in Iraq was launched based on intelligence that was purposefully manipulated. Now a diplomat on the inside breaking his silence.

And lawsuit outrage -- a judge sues his dry cleaners -- get this -- for $65 million over a lost pair of pants. We're not making this up -- a family-owned business facing financial disaster.

Stay with us. You're in THE SITUATION ROOM.


BLITZER: Tonight the 2008 primary season calendar is in chaos. Florida's new decision to move up its primary has left other states with early contests really scrambling right now. And it may leave a lot of voters scrambling toward the end of this year.

Here's our chief national correspondent John King.

JOHN KING, CNN CHIEF NATIONAL CORRESPONDENT: Wolf, just one piece of advice, we need to get our Hanukah and Christmas shopping done early this year because we might be heading straight from Thanksgiving dinner to the snows of Iowa and New Hampshire.


KING (voice-over): A 2008 primary season that had an unprecedented early calendar to begin with now has a remote chance of seeing the first votes actually cast this year.

KATON DAWSON, SOUTH CAROLINA REPUBLICAN PARTY CHAIR: It's possible. You know, I can't control what New Hampshire or Iowa do. I mean, certainly, they're good partners with South Carolina in this process.

KING: Those three early states are fiercely protective of their nominating roles. And, as a result, an election calendar already front loaded with early contests is in flux again.

Until this week, it was penciled in this way: the Iowa caucuses January 14; followed by Nevada five days later; and the New Hampshire presidential primary January 22. South Carolina planned its Democratic primary January 29 and its Republican primary February 2.

But Florida's move this week rips that version up. Florida set its primary for January 29. And the domino effect is already in the works, because South Carolina insists on being first in the South.

DAWSON: We are a very proud, maverick type state and we will do whatever it takes to retain our position in presidential politics.

KING: Assuming South Carolina moves up, New Hampshire will be required by state law to move. January 8 is a strong possibility, which will impact Nevada and perhaps land the Iowa caucuses at about 10 shopping days left until Christmas -- Christmas 2007.

KATHLEEN SULLIVAN, FORMER NEW HAMPSHIRE DEMOCRATIC PARTY CHAIR: There is still so much uncertainty with this calendar that it's not good for the candidates either. They don't know where to focus.

KING: The irony is that the biggest day on the 2008 calendar could have little impact. February 5 will feature nominating contests in at least 10 and as many as 25 states, including California, New Jersey, Missouri and New Mexico, but history shows early wins and momentum matter most and activists in both parties predict most of the candidates will be broke by South Carolina.

SULLIVAN: So it's going to be over. So you're going to have people in 46 other states, plus the District of Columbia, who are going to be sitting there saying what happened? Why does our vote not matter?


KING: Critics of the front loading say the two national parties need to step in and use a mix of incentives and penalties to get states to spread out these nominating contests, but it's hard to get the state to listen, especially this cycle because there's no incumbent president or vice president in the running and so both parties have wide open contests -- Wolf.

BLITZER: John King reporting for us -- thank you. Mid December, that is coming up.

Meanwhile, Iraq's Anbar province has been a bloody battleground for U.S. troops and now it's the target of an unconventional security crackdown -- our Tom Foreman (UNINTELLIGIBLE) of "This Week at War". There have been some significant changes based on everything you've picking up, Tom, in the al Anbar province.

TOM FOREMAN, CNN CORRESPONDENT: And the area where nobody thought it could happen. Wolf, a year ago Anbar province was an insurgent stronghold where al Qaeda operated freely, but now "The New York Times" said this week that Anbar province is undergoing a surprising transformation. Violence is ebbing in many areas, and the insurgency appears to be in retreat.

What has caused this dramatic change? Well, it appears to be in part the innovative tactics of Army Colonel Sean McFarland who took charge of Anbar a year ago. He put units in outposts in the most dangerous neighborhoods, staffed the Iraqi police with local recruits and convinced the Sunni tribal leaders to join the Americans in fighting al Qaeda. Retired Brigadier General David Grange today said that this is the kind of innovation that is essential.


BRIG. GEN. DAVID GRANGE (RET.), CNN MILITARY ANALYST: You know, you have to try something, because what was happening before did not work, and I'm very confident that McFarland's tactic here is the way to go.


FOREMAN: Military consultant Michael O'Hanlon utterly agrees with that, but he also points out that even with this good news we're far from declaring victory in Iraq.


MICHAEL O'HANLON, BROOKINGS INSTITUTION: There's a lot of bad news. Civilian fatalities have really not declined in Iraq. The economy is still a mess. Political reconciliation is still a long ways off and happening only very slowly.


FOREMAN: O'Hanlon though and all of them very excited about this. The hope is that since what McFarland did in Anbar comes off of the same play book as General Petraeus is using in Baghdad. There's some hope that maybe this could work there, too.

BLITZER: Is there some concern though that in the process of these Sunni tribal leaders creating a strong local force in the Anbar province, the prospects of a major national Iraqi military are diminished?

FOREMAN: That is exactly what the worry is here, the notion that if you allow the tribal leaders in this area, the sheiks there to build up their own forces, that that will become the vanguard of a new battle. CNN's Nic Robertson was told by the sheiks there they fully expect to fight the Shiites with the army they are forming right now. Nonetheless, with all the problems we have there, nobody thought Anbar could turn around, and right now everybody is saying this is good news, at least for the short term.

BLITZER: One additional ingredient that I've heard a lot of talk about, that Saudis and other rich Arabs are paying off some of those Sunni tribal leaders, the sheiks in the al Anbar province and that's encouraged them to take up arms against these insurgents. We're going to watch this story very, very closely and Tom is going to have a lot more of this coming up on "This Week at War". It airs Saturday night 7:00 p.m. Eastern and Sunday at 1:00 p.m. Eastern right after "LATE EDITION".

Up ahead tonight here in THE SITUATION ROOM, explosive allegations by a British official and Iraq expert. He calls the run up to the war -- and I'm quoting now -- "a gross exaggeration" and that's just for starters.

Plus, ferret furor coming back to haunt a Republican presidential candidate. CNN's Jeanne Moos takes a most unusual look.

Stay with us. You're in THE SITUATION ROOM.


BLITZER: Britain's Queen Elizabeth II spent the day in Virginia helping commemorate the founding of the first British settlement in North America. The queen now heading off to Louisville where she will be attending the Kentucky Derby tomorrow -- officials there are brushing up on royal protocol.


LOUIS WATERMAN, CHURCHILL DOWNS HOST TO QUEEN: You don't ever touch the parsonage of the queen. If she extends her hand, you certainly may shake it. It will generally at all times be a gloved hand, but you may -- you may shake her hand. After that, you do not touch the queen under any circumstances. There are five people that are on a list on a Web site you can find, five Americans that have touched the queen. That's a big no, no. You don't want to be number six.


BLITZER: CNN's Richard Quest is following the queen's visit. Richard is there. He's in Virginia. What's the big deal about actually touching her majesty? Explain that to our viewers, Richard.

RICHARD QUEST, CNN CORRESPONDENT: Wolf, Wolf, nothing annoys me more than this idea that you can't touch the queen. The reality is she's an 80-year-old woman who for the last 50 years has never been touched. If you go and put your arm or hug her or anything like that, she is going to recoil, not because she is standoffish or royal, but because it's never happened.

I think we need to have a demonstration. I need a volunteer at this point. This lady will do. Come on. We're going to volunteer how you actually should handle it. Now what you do not do, Wolf, when you meet the queen is this. That is a no-no, right. Nor do you just even go hello.

That is also a no-no. Instead, you wait for the queen to offer her hand to you. If she doesn't it means that she's not wanting to shake hands with you. She's moving on, but if she does want to, her hand will come out. At that particular point you reach out, she does the squeezing, and that is the correct way to shake the queen's hand -- Wolf. BLITZER: Richard Quest, thank you for that, very, very useful. She's going to be here in Washington. If I get anywhere near her majesty I'll know exactly what to do thanks to her subject. That would be you. Thanks, Richard Quest. He's going to be covering this trip...

QUEST: Thanks, Wolf.

BLITZER: ... all across the way. Of course royalty does have its privileges, but free pizza and booze might not necessarily come to the mind when you think of royal perks, but that's just what the queen will be presented with tomorrow in Louisville. Kentucky Derby sponsor Crown Royal is giving the queen a barrel of specially blended whisky to be opened only on her command. And not to be outdone, Louisville- based Papa John's Pizza is promising her and her family -- get this -- free pizza for life.

Just ahead, new allegations the British government manipulated intelligence on Iraq. Find out why a credible source is now speaking out.

Plus the owners of a dry cleaner facing the loss of everything over a pair of pants -- at the center -- get this -- of a $65 million lawsuit? We'll explain what's going on.

Stay with us. You're in THE SITUATION ROOM.


BLITZER: To our viewers, you're in THE SITUATION ROOM.

Happening now, a judge says New York City should go public with intelligence it gathered ahead of the 2004 Republican National Convention. Ninety of the more than 1,800 protesters arrested are suing the city, which says the documents could influence jurors. The papers remain sealed pending an appeal.

World Bank employees weighing in on the controversy swirling around its president, Paul Wolfowitz -- more than 700 have now signed a letter calling for resolution to the crisis. Wolfowitz could lose his job over a promotion and raise for his girlfriend who also works for the World Bank.

And the cost of gas now averaging -- get this -- $3 a gallon, $3.01 to be precise nationwide. AAA says that's up more than 30 cents a gallon since last month alone and nearing an all-time record.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

Tonight fresh claims that the war in Iraq wag launched based on intelligence that was purposefully manipulated. A former British diplomat now talking at length about his powerful charges that he says the British government tried to keep quiet.

Our Brian Todd has more on the accusations that are being leveled, the secrets that are being spilled. Carne Ross, he's the diplomat, Brian. Why is he speaking out now?

BRIAN TODD, CNN CORRESPONDENT: Wolf, he says he could not speak out earlier because the evidence he presented to a special British commission about the run up to war was essentially sealed until the British Parliament requested that evidence and made it public themselves. Now Carne Ross is not only speaking out, he's facing accusations of betraying his government for personal gain.


TODD (voice-over): He was Britain's top expert on Iraq at the United Nations until just before the start of the war. Now Carne Ross says his government had this intelligence at that time on the threat posed by Saddam Hussein.

CARNE ROSS, FORMER BRITISH DIPLOMAT: Iraq did not pose a threat to us or its neighbors, that its stocks of WMD were residual and not substantial, and that containment was working.

TODD: In his new book, "Independent Diplomat," Ross says the case for war presented by the U.S. And Britain "was a gross exaggeration of what we knew," and Britain's behavior at the U.N. At that time "was, at best, manipulative and, at worst, dishonest."

Ross has so angered the British government that he says London tried to discourage him from publishing it and deleted some sections after he sent the manuscript for approval.

An official with Britain's Foreign and Commonwealth Office didn't respond to that claim, but did give us a statement, saying that office is "disappointed that Mr. Ross has chosen to betray the trust and confidence placed in him, and the book is also frequently inaccurate."

Ross not only stands by his claims, he says Tony Blair's government was submissive to the Bush administration, figuring it could do nothing to stop the Americans from going to war.

One analyst says Britain's reputation as a loyal, but honest behind-the-scenes partner with the U.S. Did seem to break down at the most crucial time.

MICHAEL O'HANLON, BROOKINGS INSTITUTION: It did not convince the United States to slow down the decision about when to launch the war. It did not manage to secure a second U.N. Security Council resolution authorizing the war explicitly. Therefore, it did not manage to create much international legitimacy.


TODD: As a result, Michael O'Hanlon says Tony Blair will take a serious historical hit from the Iraq experience, and Britain may be much less willing to publicly support the Americans in the future -- Wolf.

BLITZER: All right, Brian, thanks very much.

We just heard some very blunt talk about pre-war intelligence and the case against Saddam Hussein's Iraq.

The former British diplomat in question, the diplomat, Carne Ross, is the author of a new book entitled "Independent Diplomat."


BLITZER: Mr. Ross, thanks very much for joining us.

ROSS: Thanks for having me.

BLITZER: So the bottom line is your suggestion that the intelligence was manipulated to justify going to war? Is that what you're suggesting?

ROSS: Well, it's not really a suggestion. It's actually a recollection of fact. All the time I worked on Iraq as a British diplomat, our assessment, both inside the British government and inside the U.S. government, was that Iraq was not a threat.

And yet by the time the dossier or the public manifestation of the government's claims came out in September 2002, the governments were claiming something much more ambitious.

BLITZER: And so this was not an honest mistake, the fact that the U.S. and the British government and other governments around the world concluded Saddam Hussein had stockpiles of chemical and biological weapons, but it was -- well, what are you suggesting?

I don't want to put words in your mouth.

ROSS: Sure.

It's not an honest mistake. I mean, both governments claim to this day that they were somehow misled by the intelligence. The intelligence was, in fact, pretty clear that Iraq had only residual stocks. It's not that they had nothing, but they had not nearly enough to pose a threat. And that, emphatically, was our internal assessment for all the years I worked on it, between '98 and 2002.

So for these governments now to pretend that it was the intelligence that misled them is false.

BLITZER: You're familiar with the so-called Downing Street memo that was written in July...

ROSS: Yes.

BLITZER: ... Of 2002 by Sir David Manning. He was then a foreign policy adviser to the prime minister. He's now the British ambassador here in Washington.

ROSS: Yes.

BLITZER: Among other things, that memo, which was strictly classified, but was later revealed, said this: "Bush wanted to remove Saddam through military action justified by the conjunction of terrorism and WMD, but the intelligence and facts were being fixed around the policy."

The memo goes on to say: "The NSC had no patience with the U.N. route, no enthusiasm for publishing material on the Iraqi regime's record. There was little discussion in Washington of the aftermath of military action."

Give us the context of this memo, because it's caused, as you well know over these years, a huge stir, especially the line that intelligence and facts were being fixed around the policy.

ROSS: Well, I think that confirms what I'm saying.

It's pretty clear the Bush and the Blair governments took a decision to go to war and then tried to use the weapons inspection route and the claims of Iraqi WMD as a justification after the fact when, in fact, the intelligence and the facts of WMD did not justify that course. That was not the real reason they went to war.

BLITZER: As you know, the -- the British government has issued statements to the effect that you betrayed the trust and confidence placed in you as a diplomat in order to seek personal gain by writing this book...

ROSS: Yes.

BLITZER: ... And that they don't agree with much of the content of the book. They argue that the book frequently is inaccurate and misrepresentative of the Foreign Office and foreign policy.

I want you to respond to those serious charges from your own government.

ROSS: Well, I challenge them to name where it's inaccurate. I mean, they have given me a list of supposed inaccuracies, but, in fact, they're differences in judgment over my own personal experience.

The book is a recollection of my own work. I'm not making claims about other people's experience, simply my own. And I think my memory of my own work is pretty accurate. And I would challenge the government to name those inaccuracies and debate me about them.

As for the betrayal of trust, well, that's a fair -- fair criticism. I am betraying the trust that was put in me. But I think these -- these issues are more important, frankly, and that the public should know what their governments have done in their name. And I think this is an extremely, extremely serious matter to go to war on the basis of a -- of a falsehood.

BLITZER: The -- some have suggested you should have spoken up earlier, just before the war or at the war and gone public...

ROSS: Yes.

BLITZER: ... With your concerns then, when they might have had an impact.

What do you say to those?

ROSS: They're right. I am ashamed that I didn't speak up earlier. I was afraid to. Friends of mine who were encouraging me to suggested I should have. I was too afraid. I was too attached to my career. I regret it.

Friends of mine, such as David Kelly, paid a very great price for the fact that some of us did not speak out at the time. I deeply regret it.

BLITZER: Carne Ross is the author of "Independent Diplomat: Dispatches from an Unaccountable Elite."

Thanks very much for coming in.

ROSS: Thanks for having me.


BLITZER: And the former assistant defense secretary, Richard Perle, is also speaking out about the case for the war in Iraq and who's to blame.

He's among those, as you know, singled out in the harsh new indictment by the former CIA director, George Tenet.


BLITZER: Richard, given what we know now -- obviously, four years later we're all a lot smarter -- are you sorry that you had that sense, that drive to go in to remove Saddam through military might?

RICHARD PERLE, FORMER DEFENSE SECRETARY: Well, I'm sorry that after removing Saddam we did not hand things back to the Iraqis. I'm sorry that we embarked on an occupation that became the basis for an insurgency against us. And I think the right thing to have done -- and I said it at the time -- was to hand things to the Iraqis as soon as Saddam was removed from office.

BLITZER: Who bears responsibility for that blunder?

PERLE: Well, ultimately, the decision-maker in this democracy is the president of the United States and his closest advisers. And they made the decision -- and I think wrongly -- that we would send thousands of Americans to Iraq and try to administer that country.

They did it with good will and good intentions. I certainly don't fault them for that. But it was politically inept and I think it contributed to the situation we're in today.


BLITZER: Richard Perle also addressed allegations by George Tenet that Perle called for Iraq, under Saddam Hussein, to pay the price for 9/11 immediately after the attacks. Perle says, and I'm quoting now: "It never happened. I never said the things he" -- George Tenet -- "attributes to me."

Still ahead tonight, clothes can be expensive these days, but a pair of pants worth $65 billion? $65 million?

One judge thinks so. We're going to explain what's going on.

And speaking of millions, Don Imus wants tens of millions of dollars from his former employer. We're going to tell you how he's coming up with that sum.

Stay with us. You're in THE SITUATION ROOM.


BLITZER: This is a truly shocking story -- a $65 million lawsuit over a missing pair of pants. We're not making this up.

Just about everyone agrees it's a frivolous lawsuit, but it's surreal, nonetheless, and it's threatening the American dream of an immigrant family.

Let's go back to Carol Costello.

She's here in Washington.

What exactly is at stake here for this family -- Carol.

CAROL COSTELLO, CNN CORRESPONDENT: Oh, Wolf, they could lose everything. You know, we've all been there. It can really make you angry if your dry cleaner lost your favorite whatever. But come on.

Is your anger worth a cool $65 mil?


COSTELLO (voice over): Meet the Chungs, immigrants from South Korea who built a successful business in just seven years and are now on the brink of losing its all.

CHRIS MANNING, CHUNG FAMILY ATTORNEY: They emigrated here with hopes of achieving the American dream. It's turned into an American nightmare.

COSTELLO: The Chungs' nightmare has become not just the talk of the town, but talk across the globe. A nightmare, yes.

How many of us can say we're the alleged victims of pair of pants?

Take a look. They could cost the Chungs $65 million.

MANNING: It's incredibly stressful for them both physically and emotionally. They don't understand how one pair of pants can somehow grow into what this has become.

COSTELLO: And, he says, they don't know why Roy Pearson, a judge in D.C. would be so upset over a missing pair of pants that he would file a lawsuit.

It all started in 2005, when the Chungs lost and then a few weeks later said they'd found Pearson's pants. You'd think it would end there.

But according to Manning, Pearson claimed these pants are not his.

MANNING: My clients know for a fact that they are his. There are some very significant markings on the pants. Specifically there are three belt loops, one after the other, that my clients remember whenever they had brought -- whenever Mr. Pearson had brought the pants in originally.

COSTELLO: But he says Pearson denied that. The Chungs made him three settlement offers -- $3,000, then $4,600, then $12,000.

Pearson said no, then added a twist that's inspired news stories and blogs from Washington to New Zealand. He now claims he has to drive to a dry cleaners farther away from his home, so he threw in the cost to rent a car every weekend for 10 years, then factored in fines of $1,500 per violation, per day. That's the penalty imposed for offenses of D.C.'s consumer protection law. He multiplied that by three people who own Custom Cleaners.

Grand total -- $65 million.

MANNING: I think everyone is baffled by the point that he's trying to make.

COSTELLO: And Pearson isn't talking. His attorney did not return our calls.

The Chungs left so frightened at their future, they're pondering a move back to South Korea to start all over again.


COSTELLO: And the reason the Chungs didn't appear on camera is because they really don't speak much English.

Judge Pearson, the man suing, is now the target of the American Tort Reform Association. They say Pearson's suit raises serious questions about his judgment and judicial temperament, and they're wondering if he's really fit to be a judge at all -- Wolf.

BLITZER: Carol, thank you.

We'll stay on top of this story and see how it unfolds.

Of course, frivolous lawsuits are nothing new. Among some of the most unusual cases we found -- look at this -- a Virginia inmate who sued himself for $5 million for getting drunk and committing crimes. He claimed he violated his own civil rights, but he wanted the state to pay for it all because he was a ward of the prison system and couldn't work. And check this out. There's the FBI agent in Nevada who crashed his truck while drunk -- in fact, three times over the limit. He sued the manufacturer and the dealer, saying the truck malfunctioned and filled with heavy smoke as he passed out.

And there was the Oregon man who sued Michael Jordan and Nike's founder for defamation, claiming he looks just like Michael Jordan, was tired of being mistaken for the basketball star. That despite the fact that he's eight years older, three inches shorter, 25 pounds lighter.

So how do you put a price on the value of your reputation?

The radio talk show host, Don Imus, has. He's suing his former employer for firing him after his racially charged comments. Imus wants millions of dollars, money he feels he's owed for the damage to his name.

Our Randi Kaye is in New York -- Randi, you've got some details about what's going on.

RANDI KAYE, CNN CORRESPONDENT: I do, Wolf -- $120 million.

Our source provided us with an outline, an early version of the lawsuit, soon to be filed by Don Imus and his attorney against CBS Radio.

Imus was at the beginning of a five year contract, so when he was fired, $40 million was actually left on the table. Well, how he plans to sue to recover that money, plus millions of dollars in stock options, future prospects for work on the radio and whatever else he thinks his reputation is worth in dollars, since he claims that was impacted. In all, $120 million.

CBS could also be in for a pretty big fight. It appears, from what we have seen today, that CBS Radio may have turned the other cheek during Imus' racially charged rant about the Rutgers women's basketball team. Apparently, there is a five second delay at CBS' disposal. All it might have taken was a push of the button to avoid this whole mess.

The lawsuit, when it is filed, will suggest CBS had full control of a censor button and could have stopped Imus' comments from airing. It's been used before successfully during Imus' show, when MSNBC's Chris Matthews said something that he shouldn't have.


CHRIS MATTHEWS, MSNBC: I want a guy to run for president who doesn't have a (OBSCENE WORD OMITTED) -- I'm sorry, a ranch.

DON IMUS, HOST: Oh, did you...

MATTHEWS: Wouldn't that be good?

IMUS: Did you beep that? MATTHEWS: Giuliani was answering questions...


Hang on a minute.


IMUS: Did you get that, Lou (ph)?

UNIDENTIFIED MALE: Yes, man, I've got it.

IMUS: What were you swearing for?


KAYE: See, even Imus there was making sure that the delay worked.

We found that clip on YouTube.

Meanwhile, CBS still stands by its statement that it released just yesterday saying the network terminated Imus for cause based on the comments in question and relevant contract terms. It believes the termination was appropriate -- Wolf.

BLITZER: Have you been able to confirm, Randi, that Imus was actually warned by his employers before he was fired?

KAYE: He was supposed to be warned and then if he repeated this offense, CBS would have had the right to terminate him with cause.

His lawyer is confirming that he was never warned in this case and that he's never been warned before. There have been other times where he has said some very offensive racial remarks, including describing Gwen Ifill, now with PBS, at the time -- at the time she was with the "New York Times" -- as "a cleaning woman."

One other interesting note, another possible contract violation on the part of CBS. The lawyer says -- Imus' lawyer is saying that CBS had just five days to fire Imus if they were going to fire him.

Well, CBS didn't fire him until 14 days after the incident. So that may end up working in Imus' favor, if this lawsuit is ever filed and goes to court.

BLITZER: And that -- and by then, a lot of the sponsors of that radio program were saying bye, bye, bye.

KAYE: Absolutely.

BLITZER: All right, Randi, thanks very much.

And Randi is going to have a much longer and more detailed report on this whole Don Imus lawsuit. That will air tonight on "ANDERSON COOPER 360," 10:00 p.m. right here on CNN. Good work, Randi, on that.

Up ahead, why might small animals with small red eyes be coming back to haunt Rudy Giuliani?

Jeanne Moos with a most unusual story -- most unusual.


BLITZER: There is a story coming into THE SITUATION ROOM right now.

Carol is joining us once again.

What's going on -- Carol?

COSTELLO: Well, it's not the most important story in the world, but it is interesting.

We've just gotten news moments ago a judge has sentenced Paris Hilton to 45 days behind bars for violating probation. She'll get no furloughs, no work release. Hilton was originally arrested for an alcohol-related driving arrest last year. Prosecutors also asked the judge to require that she not drink for three months. She's going to the drink, so to speak, for 45 days -- Wolf.

BLITZER: All right, thank you.

Good luck to her.

Let's go to Jack Cafferty in New York -- Jack.

JACK CAFFERTY, CNN CORRESPONDENT: I love when you do that show business stuff.

BLITZER: Yes, thank you.

CAFFERTY: You know, the other inmates in that jail can probably sue for cruel and unusual punishment having to share space with that moron.


CAFFERTY: The question this hour is would a John McCain mouse pad, a "Hillary Cares About Me" t-shirt or a country music CD from John Edwards persuade you to donate to a presidential campaign?

They're all giving away this junk on their Web sites -- in exchange for your donations.

Ed writes from East Canaan, Connecticut: "Jack, no. Nor would a recipe book of waffle recipes from Mitt Romney, marriage counseling from Rudy Giuliani or DVDs of all of Fred Thompson's TV shows sway me. I would, however, pay for a t-shirt that says: 'Americans elected Bush and all we got was this lousy war.'"

Gregg in New York: "I would donate to a McCain retirement fund, a Hillary yoga course and an Edwards tough guy training guide."

Mike in Arkansas: "Hell, no. I want to be paid big bucks for my vote, just like they are."

Rebecca in Woodville, Florida: "Jack, start your weekend early -- go home."

Michael in Redwood City, California: "I'd like a pair of John McCain flip-flops to wear to the beach or maybe a John McCain flak jacket to wear to the market."

Ken in Las Vegas: "Jack, we need to know if the presidential candidates are peddling foreign made products for their fundraising."

Steven writes: "Are you kidding me? $75 for a McCain mouse pad? I'd pay that much just to see him drop out of the race."

Gary in New York: "A John McCain mouse pad would pretend to be my mouse pad until the election and then it would start catering to other mice on the religious right. A "true Hillary" t-shirt would be covered with lots of words that didn't say anything. A country music CD from anyone would be immediately "return to sender." But as long as the promotional items had a date for withdrawal on them, I'd vote for any of them."

And, finally, Linda in Bisbee, Arizona: "I don't contribute to presidential candidates, Jack. It only encourages them."


CAFFERTY: If you didn't see your e-mails here, you can go to, where we post more of them online, along with video clips of The Cafferty File.

And now I am going to start my weekend early. I'm going home.

BLITZER: Go home and have a great weekend.


BLITZER: See you here on Monday, Jack.

CAFFERTY: All right, Wolf.

BLITZER: Thank you very much.

Paula Zahn is standing by.

She's joining us at the top of the hour -- Paula, give us a preview.


Appreciate it.

Coming up just about six minutes from now, we'll have more of that breaking news coverage from Los Angeles, where Paris Hilton has been sentenced to jail for violating her probation on alcohol-related charges.

We'll also get an exclusive and unbelievable looked behind closed doors of a controversial rehab center that believes you can actually be cured if you're an alcoholic. You're not going to believe the luxury nor the price, but, hey, it's expensive, Wolf, if you want to surf and have gourmet food and a lot of one-on-one therapy.

Join me for Hooked: Inside Rehab, coming up at the top of the hour.

BLITZER: All right, Paula, thank you.

We'll be watching.

Up ahead here in THE SITUATION ROOM, Rudy Giuliani wants to be president.

Might a ferret, though, stand in his way?

Jeanne Moos with a most unusual story.

That's coming up.


BLITZER: Now a pet peeve in the 2008 election.

Here's CNN's Jeanne Moos.


JEANNE MOOS, CNN CORRESPONDENT (voice-over): Ferrets have a habit of crawling anywhere.

DAVID GUTHARTZ, NEW YORK FERRETS' RIGHTS ADVOCATE: She'll work her way all the way up the sleeve if she's given a chance.

MOOS (on camera): She will?

GUTHARTZ: Oh, yes. MOOS (voice-over): But this must be the first time they've worked their way into a presidential race.

Blame it on the blogs -- "Rudy Giuliani's Ferret Freak-Out," says one.

"Ferret Fighter-In-Chief" says another.

And though the liberal Huffingpost says, "Just In," this story was just in some eight years ago, when Rudy Giuliani had a dustup with a ferret lover on the then mayor's radio call-in show.


RUDY GIULIANI (R), PRESIDENTIAL CANDIDATE: Because there's something deranged about you.

GUTHARTZ: No there isn't, sir.


GUTHARTZ: The law states...

GIULIANI: The excessive...

GUTHARTZ: The law states...

GIULIANI: ... concern that you...

GUTHARTZ: The law is very clear.

GIULIANI: ... for ferrets is something you should examine with a therapist.

MOOS (on camera): You never took the mayor's advice? You never got any therapy?

GUTHARTZ: Why would I?

I'm sane.

MOOS: David Guthartz is pretty fanatic about ferrets. He created the Society for the Prevention of Cruelty to Ferrets.

UNIDENTIFIED FEMALE: Attention please. This car is backing up.

MOOS: He attended public hearings with a stuffed ferret. He made a habit of calling up officials, trying to get New York City's ban on ferrets overturned. And he made one call too many to the mayor.



GUTHARTZ: Don't go insulting me again.

GIULIANI: I'm not insulting you.

GUTHARTZ: Yes, you are insulting me.

GIULIANI: I'm being honest with you. Maybe nobody in your life...


GIULIANI: ... has ever been honest with you.


GIULIANI: But this excessive...

GUTHARTZ: You know, I happen to be more sane than you.


MOOS: All these years later, the tape of that phone call is being recirculated, mainly by Giuliani critics, who want everyone to hear a different side of the mayor, who ended up hanging up on Guthartz.


GIULIANI: There is a...

GUTHARTZ: Mr. Giuliani...

GIULIANI: David...


GIULIANI: ... this conversation is over.

GUTHARTZ: ... listen to me a moment.

GIULIANI: David, thank you.

There is something really, really very sad about you. You need help.


GUTHARTZ: Rudy Giuliani has classic signs of a Napoleonic complex. That's what a maniacal person is.

MOOS: The Giuliani campaign wouldn't comment on the resurrection of the 8-year-old tape.

(on camera): Could a ferret come back from the past to bite Rudy Giuliani? Or me?

(voice-over): Some bloggers have come to Giuliani's defense.

"There was something tremendously appealing about Rudi's refusal to coddle New York's large population of weirdoes."

(on camera): I mean with your hat and your look, you could come across as kind of eccentric.

GUTHARTZ: No. Not in the least bit. I mean I do have a -- a unique look.

MOOS (voice-over): So do ferrets.

(on camera): In this case, I don't think it would be the issue of the actual -- he likes -- she likes hair.

GUTHARTZ: Oh, yes.

MOOS (voice-over): One result of Ferret-Gate...


GIULIANI: This excessive concern with little weasels is a sickness.


MOOS: Giuliani can forget the ferret vote.

Jeanne Moos, CNN, New York.


BLITZER: Let's go to Paula in New York -- Paula.


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