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THE SITUATION ROOM

'All-Out War' in Gaza; Auto Bailout May Grow; Shopping Dropping Fast

Aired December 29, 2008 - 16:00   ET

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


SUZANNE MALVEAUX, CNN ANCHOR: Happening now, breaking news, Israel's all-out war against Palestinian militants in Gaza on this third day of deadly attacks and counterattacks. It is a region that is in crisis, a peace process in shambles, and President-elect Obama in the hot seat.
Plus, new signs that carmakers are gearing up to ask for a bigger bailout. This hour, questions about whether the Obama White House can stand the heat from the auto industry and its unions.

And the daughter of a political dynasty dividing the nation. We have fascinating new poll numbers on whether Caroline Kennedy is qualified o be a U.S. senator.

Wolf Blitzer's off today. I'm Suzanne Malveaux.

And you're in THE SITUATION ROOM.

This hour, Israeli tanks standing ready on the outskirts of Gaza. Palestinians are bracing for a possible raid into their territory. This, after three days of punishing Israeli attacks against the militant group that rules Gaza.

Israel says it is targeting the Hamas leadership, holding it responsible for a barrage of rocket attacks on southern Israel. Israeli police report that more than 40 rockets and shells fired by militants today killing one Israeli, the second to die in this new explosion of violence. Palestinian medical sources report that more than 300 Palestinians have been killed in Israeli airstrikes, most of them Hamas militants.

More than 1.5 million people are packed into Gaza. It's a tiny strip of land where Egypt and Israel meet. It is just 146 square miles, about twice the size of Washington, D.C.

Our CNN's Paula Hancocks is on the Israeli/Gaza border.

And Paula, obviously you're watching all the developments. What is happening at this very moment?

PAULA HANCOCKS, CNN INTERNATIONAL CORRESPONDENT: That's right, Suzanne.

Well, I've actually headed back to the Jerusalem bureau now, but I've been spending all day on the border, and I can tell you there has been no letup in the air assaults on either side, Israeli airstrikes into Gaza and militants and Hamas attacks and rocket attacks on Israel.

(BEGIN VIDEOTAPE)

HANCOCKS (voice-over): Israeli tanks taking the road to Gaza as fighter jets and Apache helicopters fly overhead. Israel continuing to flex its military muscles.

From the border, we see airstrike after airstrike, black plumes of smoke rising consistently from the densely populated strip. One and a half million Gazans live in fear of the next strike, civilians caught up in a battle Israel insists is not targeted at them. But the air assault is by no means one way, as we found out just inside the Israeli border.

(on camera): I think that's actually a red alert in this particular area now. We're hearing rockets coming in. Let's just get down.

(voice-over): At least 75 rockets hitting Israel today. Hamas militants apparently undeterred by more than 300 Israeli airstrikes on Gaza since Saturday.

Israel's aim to stop the rockets is not yet working. Does this mean it has to send the ground troops in?

It certainly looked like they would today. Tanks moving in, more being transported from other parts of Israel.

We were moved from the area we were reporting from on the border, and it quickly became a military zone. Israeli officials have already warned ground troops are a real possibility, an escalation that can only lead to more injuries and more deaths whether Hamas fighter, civilian, or Israeli soldier.

(END VIDEOTAPE)

HANCOCKS: Now, world governments are calling on an end to this violence, but it is so much easier to ignite this conflict than it is to calm it down -- Suzanne.

MALVEAUX: And Paula, I understand just within the last half hour, there have been more and more rockets deeper into Israeli territory. Is that correct?

HANCOCKS: That's right, yes. There was a rocket attack into a town called Ashdod -- a city, I should say.

This is about 20 miles north of Gaza. Now, this is an area that is not usually hit, showing the militants have long-range missiles. And also, one more Israeli has been killed, it has been confirmed, by a rocket attack in a kibbutz, Nahal Oz, just on the Israeli border, as well. So these rockets getting further, and they are killing.

MALVEAUX: OK. Thank you so much, Paula Hancocks. We'll keep up with you as news develops.

Gaza has been a flash point for decades. Israel seized Gaza from Egypt in the 1967 Six-Day War and occupied it for 38 years.

In 2005, after years of deadly attacks and reprisals, Israel uprooted its settlements and left Gaza. But that didn't end the violence.

In 2007, the militant Hamas group took control of Gaza. Palestinians launched rockets on Israeli communities, and Israel responded with airstrikes, ground assaults and economic blockades.

In June, Israel and Hamas agreed to a six-month truce, but it started unraveling last month, and it officially ended December 19th. Soon after, 200 rockets and mortars landed in Israel. Israel reports 3,000 attacks like that this year, prompting this new massive response by Israeli forces.

Now, the Bush administration is blaming Hamas for the violence in Gaza, accusing the group of showing "its true colors as a terrorist organization." The White House is calling on Hamas to end its rocket attacks on Israel, and the United Nations secretary-general is condemning both sides and pressing for a cease-fire.

(BEGIN VIDEO CLIP)

BAN KI-MOON, U.N. SECRETARY-GENERAL: All this must stop. Both Israel and Hamas must halt their acts of violence and take all necessary measures to avoid civilian casualties. A cease-fire must be declared immediately. They must also curb their inflammatory rhetoric. Only then can dialogue start.

(END VIDEO CLIP)

MALVEAUX: Let's now bring in our Senior White House Correspondent Ed Henry. He is with President-elect Obama in Hawaii.

Ed, obviously they're keeping a close eye on all these developments. What are you hearing from team Obama today on the latest?

ED HENRY, CNN SR. WHITE HOUSE CORRESPONDENT: Well, the president- elect, Suzanne, is not saying anything himself, but his advisers are talking in private about this. And the president-elect is taking key steps of his own.

He's getting regular intelligence briefings about this situation, other crises around the world, even duringing this working vacation. Second, he's consulting very close with the Bush administration.

Over the weekend, he had he an eight-minute phone call with Secretary of State Condoleezza Rice to get the latest information on the ground. They continued to consult.

And finally, last evening, the president-elect spoke to some of his own advisers -- retired Marine General Jim Jones, the incoming national security adviser, and Senator Hillary Clinton, his incoming secretary of state if she's confirmed by the U.S. Senate. But he's being very careful not to step opt Bush administration's toes.

Team Obama says they don't want to send mixed signals since he is not setting U.S. foreign policy yet. And senior adviser David Axelrod was on NBC's "Meet the Press" yesterday underling that same point.

(BEGIN VIDEO CLIP)

DAVID AXELROD, SR. ADVISER TO PRESIDENT-ELECT OBAMA: He did, as you said, visit Sderot in July, and he said then that he thought that when bombs are raining down on your citizens, it's obviously unacceptable and there is an urge to act. And so -- but again, I don't want to go beyond that because we only have one government and one president at a time. And he's going to continue to consult with Secretary Rice and the president and the administration on this and monitor these events, and he'll be prepared to take over on the 20th and discharge his responsibilities then.

(END VIDEO CLIP)

HENRY: But the other challenge here is that team Obama doesn't know exactly what kind of Mideast they're going to inherit on January 20th. I just got off the phone with an adviser of the president-elect who said, "Look, this situation is so fluid, that the Mideast we're going to inherit right now, if we were going to be sworn in now, basically is different from what it was a week ago. So who knows what it will be on January 20th."

And so they're realizing that this is changing so quickly, that it's going to be a big, big challenge very earl in the incoming Obama administration -- Suzanne.

MALVEAUX: And Ed, at least throughout the campaign, Obama was pretty consistent when he was talking about Israeli policy, U.S./Israel policy. Do we expect that there's going to be anything that's distinctive in dealing with the Middle East from the Obama administration, drastically different than what we're seeing from Bush?

HENRY: Interesting question. We keep asking Obama aides. They're not really giving us an answer because, again, they're trying to defer until January 20th. But when you look on the surface at what David Axelrod said about Israel having a right to defend itself, as Barack Obama said as a candidate this summer while he visited Israel, that's pretty much no daylight from what we're hearing form the Bush administration right now.

I think where we may see a different approach in trying to bring more allies to the table so it's not just a U.S.-only approach, but moving forward, trying to bring more allies to the table. But let's face it, given the fragile nature of what's happening there on the ground right now, it's going to be extremely difficult for Barack Obama as the new president early next year to try to bring all these parties together -- Suzanne.

MALVEAUX: Good point, Ed. And it's just one of many problems he's going to have to deal with in the weeks to come.

Thank you very much, Ed.

Muslim nations are angrily condemning Israel for its massive bombing campaign in Gaza. The violence triggered street protests in Arab communities in Europe and Muslim nations, as well as in Israel and the West Bank.

Jack Cafferty is off today. But right now, Iran is stirring the cauldron of tensions and violence in Gaza. We're examining Tehran's support for Hamas and whether it is profiting from it.

Plus, the car industry crisis and yet another challenge for Barack Obama. Can he stand up to unions that helped him win the White House?

And shopping in the new year may be a whole new experience with consumers' cash drying up and stores vanishing.

(COMMERCIAL BREAK)

MALVEAUX: Just days before the new year, let's check where the big auto industry bailout stands right now and the prospects for an even bigger rescue down the road.

Well, it may all hinge on President-elect Obama and how much heat he feels from the autoworkers union.

Let's bring in CNN's Samantha Hayes.

Samantha, big labor contributed a lot of money, a lot of time, obviously, to Obama's campaign. I guess the question is, do they expect that they're going to get an easier deal when he comes into office?

SAMANTHA HAYES, CNN CORRESPONDENT: They probably do. And pretty soon they're going to be receiving some of the billions of dollars in bailout money. There's already indication that GM will be coming back for more as soon as the new Democratic president is in the White House.

(BEGIN VIDEOTAPE)

HAYES (voice-over): Even before the Iowa caucuses more than a year ago, Barack Obama let big labor know he was a friend.

SEN. BARACK OBAMA (D-IL), PRESIDENTIAL CANDIDATE: If the Democratic Party needs anything, it needs (INAUDIBLE).

HAYES: Workers will soon be testing that promise. And the United Auto Workers in particular. Under President Bush, the big three are getting more than $17 billion, but union bosses don't like the terms of the current deal.

RON GETTELFINGER, UAW PRESIDENT: I think it's unfair to say that workers have to work at a rate that's comparable to other foreign brands that manufacture here.

HAYES: Economist Peter Morici says a Democratic administration bodes better for big labor, but the economy will decide how far the incoming president will go. PETER MORICI, ECONOMIST, UNIVERSITY OF MARYLAND: When you get a Democratic administration, you get changes at the Labor Department and in policies. And that generally makes it easier for unions to organize. They will get some concessions from Obama, but he's not going to give away the store.

HAYES: The Center for Responsive Politics says unions spent about $180 million to put Democrats in power in 2008. Other sources say it was much more than that. Nevertheless, the influence of labor unions may be fading.

GARY BURTLESS, BROOKINGS INSTITUTION LABOR ECONOMIST: Unions have been very hard hit over the last 30 years in -- mainly because they haven't been successful in organizing new workers.

HAYES: As a senator, Mr. Obama sponsored the Employee Free Choice Act. If signed into law in 2009, employers would be required to recognize a union if a majority of workers signed membership cards, but the priority is still jobs.

THEA LEA, AFL-CIO POLICY DIRECTOR: I think one of the first issues facing the new administration is going to be the size and the shape and the content of the economic recovery package. And that's where working people are really going to need strong advocates to make sure that we're creating as many good jobs in the United States as possible.

(END VIDEOTAPE)

HAYES: The unions may also have a friend in President-elect Obama's choice for labor secretary. Hilda Solis, her parents were union workers, and she has supported a higher minimum wage and the right to form unions.

MALVEAUX: And they've certainly spoken very well of her, so they're hoping that she makes a difference, an impact there.

HAYES: Yes. Also, you know, Vice president-elect Joe Biden, they feel they have a strong connection to him, as well.

MALVEAUX: OK. Thank you so much, Samantha.

It is a gloomy week after Christmas for retailers right now. The slump in sales this holiday could continue into the new year, and that means drastic changes for stores and shoppers.

Here's CNN's Deborah Feyerick.

And Deborah, you know, I'm hearing it's just not that pretty out there.

DEBORAH FEYERICK, CNN CORRESPONDENT: It is definitely not that pretty. And I don't know if you went to any of the sales over the weekend, but next time you go shopping, take a good look at some of the stores around. They may not be there in six months. They're casualties of the recession. (BEGIN VIDEOTAPE)

FEYERICK (voice-over): With markdowns, you would think people would be buying like crazy. So why aren't they?

(on camera): People are still edgy.

UNIDENTIFIED MALE: Oh, absolutely. People are just very worried about what's going to happen to their job, what the future outlook is going to be. You know, if you're that next percentage point on the unemployment rolls, you don't want to spend right now.

FEYERICK (voice-over): Malls were packed after Christmas, but the spending surge storeowners were praying for didn't materialize, a sign the shopping landscape may radically change soon, say retail analysts like Joseph Feldman.

(on camera): Here you have a store that says 60 percent off. What do you think it's going to look like in the next six months?

JOSEPH FELDMAN, TELSEY ADVISORY GROUP: Not all the stores are going to survive. I mean, there's quite a few retailers that are on the endangered list right now.

FEYERICK (voice-over): Stores like Linens and Things, Sharper Image, Bombay Company and Mervyns have all but disappeared. Rumors about Circuit City spurred shoppers to use gift cards sooner rather than later...

UNIDENTIFIED MALE: Since it was going to close down, might as well use it sooner than before it does close.

FEYERICK: ... while companies like Borders, Ann Taylor and the Gap are expected to tighten up and close stores that don't perform well.

FELDMAN: We're going to see store closings, we're going to see Chapter 11 bankruptcies, we're going to see less store expansion. A lot of the retailers that have announced their expansion plans for 2009 have really cut it down it a fraction of what it should be.

FEYERICK: A trade group that represents shopping centers estimates 73,000 retail shops, including restaurants and jewelry stores, will close the first half of 2009. That's on top of the 148,000 stores already expected to close this year. Retail trade groups say only stores and shopping centers that have traditionally done well will likely survive these turbulent times.

SCOTT KRUGMAN, NATIONAL RETAIL FEDERATION: That is going to impact mom and pop retailers more than larger national chains. I do believe you're going to see consolidation. And I think some of the most at- risk companies are probably those companies that don't have a lot of cash reserves.

(END VIDEOTAPE)

FEYERICK: Now, clearly, it's not just so-called mom and pop shops at risk, but smaller designers who may be on the verge of breaking through. They not make it. And overall, that's a lot of jobs that could be lost.

The retail industry waiting with bated breath for President-elect Obama to detail his economic stimulus plan -- Suzanne.

MALVEAUX: And Deborah, I was out there over the weekend, and it really was dismal. A lot of low prices, but not a lot of consumers, not a lot of people out there. Not crowded at all.

Do some of these retailers -- are they looking for a federal bailout plan? Do they hope that they can get some money?

FEYERICK: You know, it's a very good question. Right now, retailers are really just trying to figure out exactly how they can hold on.

It's the banks. The banks have to start making these loans to these small retailers so that they can continue to stay afloat during this very difficult time. That's where the sticking point is.

It's unlikely that the retailers as a whole are going to go to Congress and ask for money. But they need that money from the banks, and right now they're just not getting it.

MALVEAUX: Sure.

OK. Thank you so much, Deborah.

Israeli forces mobilize for what is being called an all-out war on Hamas. But where does Hamas turn for the training and the cash to fight back? The U.S. and Israel say it's Tehran.

And later, he says he won't leave. But is Illinois's embattled governor on his way out sooner than he thinks? We'll check it out.

You're in THE SITUATION ROOM.

(NEWSBREAK)

(COMMERCIAL BREAK)

MALVEAUX: You're in THE SITUATION ROOM.

Happening now, the U.S. sends a message to Hamas: Keep up your aggression and face the consequences from Israel. Will Hamas heed the warning from the White House?

A Briton stuck in Dubai for three months for public displays of affection. His behavior unbecoming and illegal under Islamic law. We'll examine what happened.

And a Christmas mystery on the high seas. An American woman goes overboard on a cruise ship. The Coast Guard, the Mexican navy and now the FBI all joining forces to find out what happened.

Wolf Blitzer is off today. I'm Suzanne Malveaux. And you're in THE SITUATION ROOM.

At this hour, Israeli forces continue to pound Gaza with air assaults. Israeli Defense Minister Ehud Barak today declared Israel in all-out war with Hamas.

Israeli tanks are posted at the border with Gaza, and at least 2,000 reservists have been called up. Israel says it's targeting Hamas leadership for a rocket barrage on southern Israel. Militants in Gaza had fired more than 40 rockets and mortar shells into southern Israel.

Our CNN's Brian Todd joining us now.

Brian, what kind of outside influences are coming into play here? Obviously this is a big stage and this just is not between Israel and Hamas.

BRIAN TODD, CNN CORRESPONDENT: It certainly is not, Suzanne. Iran is now, at the very least, trying to rally support in the Muslim world for Palestinians in Gaza, but Israeli officials believe Tehran is up to much more than that.

(BEGIN VIDEOTAPE)

TODD (voice-over): With each airstrike, anti-Israeli protests in the Arab and Muslim world ratchet up. That pot being feverishly stirred from Tehran. The Iranian leadership calling for Muslims around the world to show their anger toward Israel and defend Palestinians in Gaza.

U.S. and Israeli officials tell CNN Hamas militants in Gaza have been supported by Iran in the past with weapons, cash and...

ISAAC HERZOG, ISRAELI SECURITY CABINET: We know of Hamas operatives, commanders and soldiers who were trained in Iran itself. We know that. So there is close cooperation and the exchange of know-how and activities.

TODD: Know-how, he says, like advice on how to make the Qassam rockets fired into Israel. Contacted by CNN, an Iranian official said there's no evidence to support those claims.

Officials and analysts we spoke with say whatever level of support Iran has given, it doesn't mean Iran is waging a full proxy war against Israel through Hamas now. They say Iran's ties to fellow Shia leaders of the group Hezbollah are much closer than they are to Hamas' Sunni leadership. Iran's support for Hamas is basically to counter U.S. backing of Israel. And, analysts say, the blockade of Gaza by Israel and Egypt makes it very tough for Tehran to get anything to Hamas.

But don't think Iran's not using this conflict to its advantage as it has in the past.

SHIBLEY TELHAMI, BROOKINGS INSTITUTION: Iran benefits in terms of Arab public opinion in this environment because the Arab public is very angry. They see the pictures, they blame Israel. They blame the U.S. for supporting Israel.

TODD: Another strategic success for Iran here? Diversion of the world's attention from its own nuclear program.

(END VIDEOTAPE)

TODD: The Israeli officials have been working for months to focus attention on Iran's nuclear program in a campaign to get the new Obama team to act quickly on it once it takes office. Now all eyes will be on Gaza and the concern over whether this conflict will escalate into the something bigger -- Suzanne.

MALVEAUX: And Brian, how do we expect that that's going to impact team Obama's approach to Iran in curbing its nuclear ambitions?

TODD: It all seems to tie in.

One analyst who does polling in the Middle East said, 80 percent of Arabs polled recently believe the U.S. is a greater security threat to them than Iran is. He says that will make it very difficult to rally public opinion in the Middle East around any effort to get Iran to give up its nuclear program. All these things seem to be tied in at this point.

MALVEAUX: Brian Todd, thank you.

Most of the rockets launched from Gaza are crude homemade weapons. The Kassam has a range of up to six miles. It has terrorized Israeli communities, but caused few casualties. The Soviet-era Katyusha rockets can reach about 14 miles and again hit the coastal city of Ashkelon today.

Israel says longer-range versions yesterday hit the Port of Ashdod. It's a distance of more than 20 miles.

Joining me now is former Defense Secretary and CNN world affairs analyst William Cohen.

Thanks so much for joining us...

(CROSSTALK)

MALVEAUX: ... here at THE SITUATION ROOM.

Obviously, the question is, President Bush, he's got 22 days left. Essentially, how does he approach this problem? Is there anything that he can do?

WILLIAM COHEN, CNN WORLD AFFAIRS ANALYST: There's not much that he can do.

I think that -- with the administration coming to an end, he doesn't have much leverage in dealing with the Israelis or the Palestinians at this point. And, so, I think what he can do is try to call for a cease-fire. A cease-fire will buy some time. It will not buy a peace. And, so, that will just be a bridging point for the new administration to come in. In the meantime, president-elect Barack Obama should be using this time, I think, to decide what is going to be the policy on the part of his administration.

And I think he should look back and -- and look at all of the work that's been done. President Clinton tried to achieve a peace agreement during his final year. Look at what President Mubarak of Egypt did in Taba, and then take the Saudi plan. Look at all of those and say, what is going to be the U.S. plan?

We know that Israel needs security. We also need -- know the Palestinians need a homeland. And, so, the Palestinians can't get a homeland as long as rockets are falling on Israel. Israel can't have security as long as they don't have a peace agreement with the Palestinians.

So, we know, I think, what the outlines of a plan should be, not incremental, not step by step, not confidence-building measures, but set, for once and for all, what would be the peace plan that the U.S. can support. Then go to the Israelis, go to the Egyptians, the Saudis, the Palestinians, and say, here's the plan, and this is the plan that we think we can support and you need to support.

Barring that, we're going to see...

(CROSSTALK)

MALVEAUX: How would Barack Obama's plan be any different than President Bush? What would you specifically advise him to do that's differently than what we have seen from the Bush administration? Because, obviously, they have not solved this problem.

COHEN: Well, I think the Bush -- the Bush plan has built upon those that have gone before, but there has been no will to implement it as such.

But I think what would be helpful for the -- the new administration coming in is, talk to the former secretaries of state who have dealt with this issue. Look to see what points they would push forward, where there were weaknesses, what needs to be done to actually move the process forward, but not just a process.

I would say outline the totality of the plan and then say, this is what needs to be done. We need Arab support for this. We need Saudi, Egyptian, Palestinian. We need everybody supporting this plan, and especially the Israelis.

MALVEAUX: Is Barack Obama in a position of strength here, because he comes with a certain credibility that President Bush doesn't have now, or is he just basically an open slate, a blank?

(CROSSTALK)

COHEN: I think, at this point, we -- we don't know what his policy is going to be. He has indicated he feels very strongly that the Israelis need to have security, obviously. But I think it's yet to be determined what sort of a plan he would put forward, how it -- at all it would differ from the Bush administration's plan.

I think it's going to be one of personality, of pushing it, of saying, we intend to move forward, and here are the outlines of the plan. This is what needs to be done, and then use the force of his own new administration, his popularity. Also, he might consider some sort of emissary going there on a day-by-day basis.

But, unless the United States really takes an active and engaged role in this, we're going to continue to see what we're seeing take place now.

MALVEAUX: And real quick, all the hot spots in the world that he has to deal with -- we're talking about India, Pakistan, Afghanistan, Iraq, North Korea, Russia, just to name a few -- what is the most pressing issue? What is the most pressing problem? Which area does he need to address first?

COHEN: Well, today, obviously, with the killing that is going on, he will have to address that.

But India-Pakistan presents a serious problem, two nuclear powers possibly getting in -- into another conflict. So, there's no shortage of what he will have to -- to -- to face up to. And we have got three weeks to go. World events will determine what the priority is going to be once he gets the oath of office.

MALVEAUX: OK, thank you so much, William Cohen.

COHEN: Thank you.

MALVEAUX: Appreciate it.

The Illinois governor's lawyer is going to new lengths now to try to defend his client against impeachment.

(BEGIN VIDEO CLIP)

EDWARD GENSON, ATTORNEY FOR BLAGOJEVICH: There's nothing in that tape that shows that people were asked to -- to give money or -- or campaign contributions or anything. It's just talk.

(END VIDEO CLIP)

MALVEAUX: Ahead, the governor's fight against corruption allegations and a new prediction that he will be out of office soon.

Plus, a candidate to lead the Republican Party releases a shocking C.D. insulting Barack Obama. In our "Strategy Session": Does it show that the GOP is racially insensitive, or worse?

And, later, the president-elect shows he is fit to lead. Will that help convince Americans, well, to follow his example and get in shape?

(COMMERCIAL BREAK)

MALVEAUX: New developments now in the corruption case against the governor of Illinois.

As you may remember, the prosecutor said the allegations against Blagojevich would make Abraham Lincoln roll over in his grave. Well, now the state's second in command is predicting that the governor is going to be out of office by Lincoln's birthday.

Let's go to CNN's Ed Lavandera. Ed, a lot of legal wrangling over these efforts to impeach the governor. What is this all about?

ED LAVANDERA, CNN CORRESPONDENT: Well, it's about the future of the governor in Illinois. And anyone who thought the governor was going to go quietly after three hours of what happened in Springfield, Illinois, today would be clearly mistaken. This governor isn't going quietly at all.

(BEGIN VIDEOTAPE)

LAVANDERA (voice-over): Verbal swords slash away in Illinois...

UNIDENTIFIED FEMALE: Perhaps we have different sets of ears.

LAVANDERA: ... between the committee of state lawmakers deciding whether Rod Blagojevich should be impeached and the governor's attorney.

GENSON: But the fact of the matter is -- and I said this to Mr. Lang -- offering is a crime. Where does it say he offered anything?

UNIDENTIFIED MALE: I just respectfully would suggest that the reading comprehension classes I took are much different than the ones you had. Thank you.

LAVANDERA: The impeachment committee is one step closer to hearing selected portions of the wiretapped recordings, now that federal prosecutors are asking a judge to release four of the taped conversations. But, until that happens, both sides are arguing over what the tapes will reveal.

GENSON: There's nothing in that tape that shows that people were asked to -- to give money or -- or campaign contributions or anything. It's just talk. That's what it is, unfortunate talk, talk that -- that was -- was -- shouldn't have been made perhaps, but not action -- but not actions.

UNIDENTIFIED MALE: Well, the fact is that it's a crime in the state of Illinois to offer to do a public act for value. Whether somebody takes you up on that offer is irrelevant.

LAVANDERA: Ed Genson says the impeachment hearings are unfair to the governor and that there's not enough evidence to justify pushing Blagojevich out of office.

GENSON: The fact is, we're fighting shadows here. We're fighting unnamed people. We're fighting witnesses that aren't available. We're fighting people that are -- haven't been indicted.

LAVANDERA: But the governor is facing an unconvinced audience, skeptical of his claims that he did not seek to profit from appointing someone to fill Barack Obama's Senate seat.

The committee is also considering unrelated allegations regarding his administration and fund-raising practices.

GENSON: Is anyone here to going to stick up for the governor?

LAVANDERA: It's clear Blagojevich is digging in for a long fight, but Illinois's lieutenant governor predicts Blagojevich will be out of office by mid-February.

LT. GOV. PAT QUINN (D), ILLINOIS: You know, the 200th anniversary of Abraham Lincoln's birth is February 12 of next year. And I don't think Governor Blagojevich will be governor at that time.

(END VIDEOTAPE)

LAVANDERA: As for the governor, he continues to go into his office in Chicago doing the state's business. He clearly can -- and still continues and maintains that he did nothing wrong, Suzanne. So, he continues to go on as if everything is normal and he's just going about his daily business -- Suzanne.

MALVEAUX: OK. Thank you, Ed.

Another developing story has the political world enthralled right now. That would be the prospect of Caroline Kennedy filling Hillary Clinton's U.S. Senate seat.

Well, we have new poll numbers on Kennedy and whether Americans think that she is qualified for the office.

Our CNN deputy political director, Paul Steinhauser, joining us from Boston.

And, Paul, what do the new poll numbers show?

PAUL STEINHAUSER, CNN DEPUTY POLITICAL DIRECTOR: Well, Suzanne, our brand new CNN/Opinion Research Corporation poll out today suggests there is a gender gap. Men and women definitely don't see eye to eye on whether Caroline Kennedy is qualified to serve as a senator.

Take a look at this. Overall, though, a majority, 52 percent, say that they think Caroline Kennedy is qualified to serve as a senator. But, when you break it down between the sexes, men are basically split, 47 percent saying she is qualified to serve, 46 percent saying she isn't. But look at this, very different for women. By 20 points, women say -- by 20 points more, women say she is qualified, rather than she isn't, so a big difference there between the sexes.

And what about a comparison so Hillary Clinton? Back in 1999, when then first lady Hillary Clinton was thinking about running for the U.S. Senate seat, 62 percent said she was qualified to serve as a senator. That's 10 points higher right now than Caroline Kennedy -- Suzanne.

MALVEAUX: And, Paul, what does Caroline Kennedy herself say about her experience?

STEINHAUSER: Well, she is saying a lot.

You know, there was criticism at first that she wasn't speaking out to the media. Well, over this weekend, past weekend, she spoke out to the big three New York newspapers and also to our affiliate New York One.

Here's what she had to say about public service. Take a listen.

(BEGIN VIDEO CLIP)

CAROLINE KENNEDY, DAUGHTER OF PRESIDENT JOHN F. KENNEDY: I would be an unconventional choice. I haven't followed the traditional path. But I think I bring a lifetime of experience to this. in my family, you know, public service is really, you know, the greatest honor that anyone can have.

(END VIDEO CLIP)

STEINHAUSER: It's going to be a couple weeks until we find out. Governor Paterson, who makes the pick, says he won't decide until Hillary Clinton steps down. That's at least three weeks away -- Suzanne.

MALVEAUX: OK. Thanks, Paul. We will be waiting.

In the "Strategy Session": the controversy that's exposed the GOP's Achilles' heel.

(BEGIN VIDEO CLIP)

JON AVALON, INDEPENDENT POLITICAL ANALYST: And that's how they have gotten in the larger problem they now face, preaching to an ever smaller choir and looking for votes only in a group that is increasingly old, white and rural.

(END VIDEO CLIP)

MALVEAUX: Does the controversy shine new light on the Republicans' problems with expanding their base?

And, for the first time, we hear from a British man whose beach party went a bit too far and caused an international incident.

(COMMERCIAL BREAK)

MALVEAUX: A candidate who could potentially take over as leader of the Republican Party has released a C.D. that, in a word, is insulting of president-elect Barack Obama.

CNN's Jim Acosta joins us again with a look at this political controversy. Jim, what is at the center of this?

JIM ACOSTA, CNN CORRESPONDENT: Well, at the center of this is this C.D. that is very controversial. The release of this C.D. sounds like a rookie mistake.

But Chip Saltsman is far from a newcomer on the national political stage.

(BEGIN VIDEOTAPE)

CHIP SALTSMAN, REPUBLICAN NATIONAL COMMITTEE CHAIR CANDIDATE: We have already got a big crowd here for Governor Huckabee.

ACOSTA (voice-over): Chip Saltsman made a name for himself as national campaign manager of Mike Huckabee's upstart bid for the White House.

SALTSMAN: I'm officially announcing my candidate -- candidacy for Republican National Committee chairman.

ACOSTA: Now a candidate for chairman of the Republican National Committee, Saltsman is doing damage control after mailing RNC members a controversial C.D. loaded with racially-tinged songs, one of the tunes aimed at the next president.

UNIDENTIFIED MALE (singing): Barack, the magic Negro.

ACOSTA: A crude parody of the children's classic "Puff the Magic Dragon," the song first touched off a brief firestorm when it aired on Rush Limbaugh during the campaign. Limbaugh blamed the media for stoking the controversy.

(BEGIN AUDIO CLIP, "THE RUSH LIMBAUGH SHOW")

RUSH LIMBAUGH, RADIO TALK SHOW HOST: Every one of you out there that think you have got something here on "Barack the Magic Negro," I'm going to try to help you and save you.

(END VIDEO CLIP)

ACOSTA: Saltsman defends the C.D., telling CNN: "I think most people recognize political satire when they see it. I think RNC members understand that."

But current RNC chairman Mike Duncan says he's appalled in a statement to CNN. "The 2008 election was a wakeup call for Republicans to reach out and bring more people into our party."

JOHN AVALON, INDEPENDENT POLITICAL ANALYST: There's a crowd of conservatives that takes a special pride in being anti-P.C. What I don't think they fully appreciate it is, it comes across somewhere between being indifferent to hostile. And that's how they have gotten in the larger problem they now face, preaching to an ever smaller choir and looking for votes only in a group that is increasingly old, white and rural. ACOSTA: A concern echoed by Colin Powell, who recently singled out Limbaugh as part of the party's problem.

COLIN POWELL, FORMER U.S. SECRETARY OF STATE: Is this really the kind of party that we want to be?

ACOSTA: Liberal media critics say the issue is bigger than Limbaugh.

KARL FRISCH, MEDIA MATTERS FOR AMERICA: It's unfortunate, but it's not surprising. This -- this type of rhetoric, this type of hate speech and fear-mongering happens every day on conservative talk radio.

(END VIDEOTAPE)

ACOSTA: One Republican who is coming to Chip Saltsman's chief is Ken Blackwell, the former Ohio secretary of state and an African-American, who's also running for the top job at the RNC.

Blackwell blamed the media, telling CNN -- quote -- "Unfortunately, there is a hypersensitivity," as he put it, "in the press regarding matters of race."

And, as you were saying at the top of this piece, Suzanne, Chip Saltsman may have a tough time landing this spot. He is in the running, but perhaps not much longer -- Suzanne.

MALVEAUX: OK, thanks, Jim.

We're going to explore that a little bit more. Whatever you might call it, political faux pas or political satire, does this unflattering C.D. add credence to the stereotype that the Republican Party is racially insensitive?

Well, joining me for today's "Strategy Session" are Karen Finney, communications director for the Democratic National Committee, and Leslie Sanchez, Republican strategist and CNN political contributor.

So, I'm...

(LAUGHTER)

MALVEAUX: I have got to toss this one to you, Leslie, because...

(CROSSTALK)

MALVEAUX: ... do you -- do you defend the C.D.? Do you defend the remarks?

LESLIE SANCHEZ, CNN POLITICAL CONTRIBUTOR: Not at all.

And I have talked to many former Republicans at the Republican National Committee -- they're still Republicans, but former party members -- and party chairmen, as well, who believe it was an unbelievably dumb comment. I mean, and there's a distinction between political parody and Rush Limbaugh, an entertainer, who talks about the idiocy of a lot of the policies on the left -- and many kudos to that -- but this is a distinctly different role if you're running for chairman of the party.

It's a party that has to face a false stereotype that we are not inclusive, that we don't care about communities of color. And if you look where we're going to grow in the future, it is definitely around ethnic minorities.

KAREN FINNEY, COMMUNICATIONS DIRECTOR, DEMOCRATIC NATIONAL COMMITTEE: You know, I think it's actually not just a false stereotype about communities of color.

I mean, I think the -- the question is, is the Republican Party going to be continue to be beholden to the far-right wing and let the likes of Rush Limbaugh set the agenda? You didn't just lose among African- Americans and Hispanics. You lost among young voters. We saw more moderates and independents coming towards Democrats because they said they didn't feel that the message of the Republican Party really spoke to them anymore. And I think that's the danger for the Republican Party.

MALVEAUX: Is it just a stereotype, Leslie? Because you have got out of the members of the RNC, two who are African-American, and that's a pretty low number there. Is there any kind of representation that they have, where they have got some credibility to say, look, that's just the minority in our bunch; we don't believe this; we don't think this way?

SANCHEZ: No, I think there are many of us who agree with that sentiment exactly.

I mean, the -- the Republican Party is a broad, vast coalition of -- of different voices. And we believe in a certain set of principles, and we believe there's a tremendous amount that needs to be done to guide this country, put it back on track.

That being said, I don't think -- look at the -- the hypocrisy, though. I mean, there are comments that have been made about house Mexican -- and we don't even want to go down the line -- about everybody from former Attorney General Alberto Gonzales, to Secretary Rice, to the former U.S. Treasurer Rosario Marin.

I mean, we have seen it on both sides. And you don't hear eve, you know, a blip on a blog when it comes from the left. But, when it comes from the right, I think people will overblow this. This is one example of one person who is not reflective of the entire party.

FINNEY: Well, again, I think that, given that the Republican Party is really at a crossroads, the question is, is this reflective of the Republican Party?

This is clearly somebody who is running to be chair of your party. It may be a perspective that is shared by some in your party. You know, I found it very distressing that, during the Republican primary, none of the presidential candidates went in front of communities of color, either African-American or Hispanic.

And they didn't even go see the College Republicans. And, again, those are groups where the Republican Party did not do well.

(CROSSTALK)

SANCHEZ: That's not correct. I mean, I think you saw our candidates go out among an inclusive audience.

(CROSSTALK)

SANCHEZ: You know, I think -- no, not at all. And we can go down a list, National Council of La Raza. There were a lot of different ones.

And, also, I think a lot of people were offended when Joe Biden came out there and made these ridiculous statements about articulation and about 7/Elevens and Indian Americans. I mean, it goes on both sides. This is not endemic...

(CROSSTALK)

FINNEY: ... called him on it.

SANCHEZ: Yes, this is not endemic to Republicans.

MALVEAUX: Let me ask you this. If you were advising Chip Saltsman, what would you say to him? Should he continue to run as the chair, or do you think he should step aside? Do you think it's damaged his credibility?

SANCHEZ: I think, at this point, yes, he's done a tremendous amount for the party, but I do not think he's -- I think he's shown he has a tin ear on this issue. This is not the direction the party is moving in, in the future.

I think there's better leadership that's going to surface, especially as a result of this.

MALVEAUX: Ken Blackwell, as was mentioned before, obviously a prominent African-American within the party who is also running for chair -- we know that Michael Steele, the former lieutenant governor of Maryland, running for the chair of the party -- he said he thought this was a case of hypersensitivity here, and he blamed the media.

Is there -- is there a sense that you can't discuss race and there can't be some room for parody and satire because of the climate that we're in?

(CROSSTALK)

FINNEY: I think there's absolutely room for parody and satire. And I think people will kind of -- looked at this and have to decide for themselves if they're offended or insulted or not.

Again, I think the larger question for the Republican Party is, is that the image you want to portray to the American people at a time when the base of your party is shrinking? I think that's the question.

SANCHEZ: You know, I think, overall, it's one person, one message. I think it was an unbelievably dumb move, what we called it before.

But there are many leaders who are surfacing. There's many candidates who are surfacing. And one point that -- it is correct. You have a lot of candidates in Florida. I have been talking to candidates in Texas and even in California that are looking at running on the Republican ticket, and they have a really difficult time with these kind of messages. It's not what we believe in.

MALVEAUX: OK, thank you very much. We will leave it there.

Leslie Sanchez, Karen Finney, thanks for joining us in THE SITUATION ROOM.

A desperate search in the mountains of British Columbia -- eight people missing in the wake of a huge avalanche. Can rescuers find them in time?

And next: President-elect Barack Obama, well, is he fit to lead? He's apparently much fitter than one buff governor thinks.

(BEGIN VIDEO CLIP)

GOV. ARNOLD SCHWARZENEGGER (R), CALIFORNIA: We're going to give -- make him do some squats.

(LAUGHTER)

SCHWARZENEGGER: And then we're going to go and given him some biceps curls to build up those scrawny little arms.

(LAUGHTER)

(CHEERING AND APPLAUSE)

(END VIDEO CLIP)

(COMMERCIAL BREAK)

MALVEAUX: Barack Obama has yet to prove himself as president, but he has shown the public that he's physically fit. Well, now the famous shirtless photo revealing a lot more about his penchant for working out.

Our senior White House correspondent, Ed Henry, has been working on this story.

(BEGIN VIDEOTAPE)

ED HENRY, CNN WHITE HOUSE CORRESPONDENT: Suzanne, everyone's looking for a New Year's resolution. So, after those paparazzi photos here in Hawaii, I thought I would try to figure out what it takes to be like Barack.

(voice-over): Meet personal trainer Mike Sapp, who worked with California Governor Arnold Schwarzenegger in his bodybuilding days and has been reading up on president-elect Barack Obama's routine.

I have got the paparazzi photo that's been seen all around the world. How do I get from here to there?

MIKE SAPP, PERSONAL TRAINER: OK. We're going to...

(CROSSTALK)

HENRY: Is there any hope?

(CROSSTALK)

SAPP: There is. I mean, he's in pretty good shape. So, we're going to have to -- we're going to have our work cut out for us.

HENRY (voice-over): A combo of cardio and strength training, just like the president-elect, who is religious about working out six days a week.

SAPP: Thirteen, 14, and -- good job. Thataway.

HENRY: I have got a long way to go. But, just a couple months ago, Governor Schwarzenegger mocked candidate Obama's physique.

GOV. ARNOLD SCHWARZENEGGER (R), CALIFORNIA: And then we're going to go and given him some biceps curls to build up those scrawny little arms.

(LAUGHTER)

(CHEERING AND APPLAUSE)

HENRY: The Governator has since walked that joke back. And it's easy to see why. Mr. Obama is clearly in better shape now than he was at the beginning of the campaign.

On this Hawaiian holiday, he started every single morning, except for Christmas, at the workout facility of a local Marine base dubbed "Semper Fit." That can be an inspiration to millions of Americans trying to get fit.

SAPP: It's going to kill the, you know, "I don't have time" theory, right? I mean, so -- I mean, if he can make the time, and he makes the commitment, then I think, you know, you owe it to yourself to -- to try to get in shape, also.

HENRY (on camera): So, Mike, how did I do?

SAPP: Arnold would be proud.

HENRY: Really? Not too shabby. Puts new meaning into the term fit for office -- Suzanne? (END VIDEOTAPE)

MALVEAUX: Thanks, Ed.

(LAUGHTER)

MALVEAUX: You're in THE SITUATION ROOM.

Happening now, breaking news: Punishing airstrikes reduce parts of Gaza to rubble. The death toll tops 300 in what Israel calls a war to the bitter end against Hamas, but no letup from the Palestinian militant group, firing more deadly rockets into Israel.

This latest crisis hits just weeks before Barack Obama's inauguration. Can he succeed in the Middle East where others have failed? I will ask analysts James Carville and William Bennett.