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Wall Street's Stunning Turnaround; War Games Lead to War Threats; Education "From the Cradle"; President Obama's First 50 Days

Aired March 10, 2009 - 17:00   ET

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


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

Happening now, new threats of war in one of the world's most dangerous places. As U.S. troops hold military drills with South Korean Allies -- the Communist North puts its massive army on combat alert.

And he bilked her out of millions then tried to sexually blackmail one of the world's richest women out of millions more. Now the so-called Swiss gigolo faces justice.

Plus, as the drug war bodies pile up, Mexican police make arrests like these in Tijuana.

Is the U.S. doing enough to stop the violence from moving north?

I'm Wolf Blitzer.

You're in THE SITUATION ROOM.

A stunning turnaround on Wall Street today -- so far it's just one day, but it's the biggest day of the year. The Dow Jones average up almost 380 points. The S&P 500 up more than 6 percent.

Let's go to our chief business correspondent, Ali Velshi.

He's looking at the story for us -- Ali, what happened?

ALI VELSHI, CNN CHIEF BUSINESS CORRESPONDENT: Well, a few things happened, Wolf.

You're right, it was a stunning day. Take a look at this chart. Look what happened today. And it was up -- the Dow was up right out of the gate and then strongly up by midday. And it just continued to edge higher and higher until it gained, in the end -- until it closed at 6926.

Here's the interesting thing, Wolf. You and I have talked about this before. It was on an up tick when it ended. That's always good news. It means the selling wasn't -- that the buying wasn't done.

Now, there are a couple of things that happened. One is Ben Bernanke, the chairman of the Federal Reserve, repeated something today that he had said a couple of weeks ago. He's talking about the fact that this economy could be coming back. He was giving a time frame for it.

Listen to what he said.

(BEGIN VIDEO CLIP)

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: But it depends critically on our ability to get the banking system and the financial system more broadly not necessarily back to 2005, but back to a situation where the markets are reasonably stable. If we can do that, then I think that there's a good chance that the recession will end later this year and that 2010 will be a period of growth.

(END VIDEO CLIP)

VELSHI: There's a good sense that the reces -- a good chance that the recession will end this year and that 2010 will be a year of growth. This is now the second time he's said that. There's a lot of ifs to that, Wolf. The ifs are that if everything the government has done actually works in the system. But a ray of hope.

BLITZER: Well, these are basically the assumptions that that the Obama budget was working on, that there would be a continued recession this year, but by next year they were projecting, what, 3 percent growth, 3.6 percent growth the following year. I guess Ben Bernanke is sort of backing that assumption up.

VELSHI: Yes. And the danger here is do we believe these assumptions?

Do we trust that things aren't going to get worse -- worse than even the government thinks?

But the bottom line is we're so desperate for some positive news -- there was another thing that happened today, Wolf -- another piece of positive news. Citigroup, so associated with the banks that have been so much a part of the problem. The CEO of Citigroup, Vikram Pandit, coming out and telling his employees that they think the first quarter of 2009 is -- actually, the first three months of 2009 is actually going to be profitable, that they look like they're making some inroads into getting back into business. So that was another thing.

These two events today really helped the markets out -- Wolf.

BLITZER: Ben Bernanke and Citigroup -- they did it. We'll see what happens tomorrow.

VELSHI: Yes.

BLITZER: Ali, thank you.

Chilling talk of war on the Korean Peninsula right now. Thousands of American and South Korean troops are holding annual military maneuvers. But North Korea is treating that like the real thing and has put its massive army on combat alert right now.

Let's go to CNN's Zain Verjee.

She's looking at this story for us. A lot of nervousness.

What's going on -- Zain?

ZAIN VERJEE, CNN STATE DEPARTMENT CORRESPONDENT: There really is, Wolf.

North Korea is really rattling the cage.

(BEGIN VIDEOTAPE)

VERJEE (voice-over): These war games are triggering the real war threats. North Korea is accusing the U.S. and South Korea of planning to invade.

UNIDENTIFIED MALE: The U.S./ROK exercises are not a threat to the North.

VERJEE: The official North Korean news agency calls the South "puppets in a frenzy" and says North Korea's one million man army is on alert. The military hotline to Seoul cut in protest. The border, at first shut, now open. The U.S. top diplomat has said North Korea is looking for an advantage.

HILLARY RODHAM CLINTON, SECRETARY OF STATE: It uses, you know, provocative words and threatened actions to try to get attention in order to, you know, make a deal in some way -- you know, food and fuel and other kinds of assets.

VERJEE: Some analysts say Kim Jong Il is angry the South Korean leader is not courting him, as others have in the past. So the North has ripped up nonaggression pacts and refused to guarantee the safety of South Korean airliners in the North's air space.

Fuelling the fire, North Korea's preparations for what it calls the satellite launch. The U.S. says that's a disguise for a test on a long-range missile that might have the ability to hit Alaska and the U.S. West Coast. North Korea warns any attempts to shoot it down will be an act of war.

(END VIDEOTAPE)

VERJEE: The Chairman of the Joint Chiefs, Mike Mullen, says that there's been no decision on just what the U.S. may do if North Korea does launch that. The U.S. is hoping essentially, Wolf, that North Korea will stop being provocative and come back to nuclear negotiations and ultimately end its bomb making days -- Wolf.

BLITZER: Why is North Korea, according to the analysts you're speaking to, Zain, why is North Korea being so provocative right now?

VERJEE: It's such an elusive place, Wolf. It's really hard to know. But usually, the consensus among many experts, is when they talk like this, which is really not unusual, they want attention from the United States and they want something out of it -- Wolf. BLITZER: And they may be testing the new administration, just like China may be testing...

VERJEE: Right. Possibly. Yes.

BLITZER: ...the new administration, as well. Fifty days into this administration. Zain, thanks very much.

Let's go back to Jack Cafferty for "The Cafferty File."

This president -- when you look at all the stuff that's going on, Jack, it's -- it's mind-boggling.

JACK CAFFERTY, CNN ANCHOR: Yes, and Kim Jong Il is just -- what a delightful little creep he is. I mean he's been threatening to shoot down passenger planes and -- I mean nobody needs this guy. Nobody -- including the North Koreans.

President Obama may have started a bit of a sandstorm with his suggestion to reach out to moderate members of the Taliban in order to try to end the Afghan insurgency. In an interview with "The New York Times," the president suggested that just like the U.S. made peace agreements with the Sunni militias in Iraq, there could be similar opportunities in Afghanistan and Pakistan.

Mr. Obama did acknowledge the situation could be considerably more complex, though, than it was in Iraq.

Afghan President Hamid Karzai welcomed the idea and said some Western politicians and military officials say that the war cannot be won strictly by military means alone and that some kind of reconciliation is going to ultimately be necessary to get things calmed down over there.

Others are more skeptical. One expert says: "Moderate Taliban is like moderate killer. Is there such a thing?"

CNN national security analyst Peter Bergen says doing deals with the Taliban could further destabilize Afghanistan. He says it will always be possible to bribe some Taliban, pointing out that the Afghan government has had an amnesty program for Taliban fighters for four years now and that thousands of them have already agreed to it. But Bergen says these kinds of deals are more in the realm of fantasy than sustainable policy. That's a quote.

For starters, he says the Afghan government is too weak to negotiate with the Taliban. And he says the Taliban think they might be winning in Afghanistan anyway, so they probably don't see a real need to sit down and talk. Bergen says the Taliban and Al Qaeda have grown much closer since 9/11.

You know, while we were busy fighting George Bush's war over there in Iraq, these guys have gotten back together. And so now it will likely be more difficult to separate them.

Here's the question -- is talking to the Taliban a good idea? Go to CNN.com/caffertyfile and you can post a comment on my blog or not -- Wolf.

BLITZER: A lot of people will be posting those comments, Jack.

Thank you.

They always do, every single day.

One heiress paid him millions of dollars. This man allegedly tried to sexually blackmail some of the world's richest women. But now the so-called Swiss gigolo faces justice. Guess what, no more alleged.

And he wants to pay the best teachers more and fire those who don't measure up. We're talking about President Obama taking the wraps off his education plan.

Stay with us.

You're in THE SITUATION ROOM.

(COMMERCIAL)

BLITZER: He wants schools open almost year round and he wants to fire teachers who don't meet standards. President Obama today unveiled another ambitious and very controversial blueprint. This one would overhaul the nation's educational system.

And joining us now, the Education secretary, Arnie Duncan.

Mr. Secretary, thanks for coming in.

ARNE DUNCAN, EDUCATION SECRETARY: Thanks so much for having me.

I appreciate the opportunity.

BLITZER: The president has drawn a line in the sand with a traditional ally of the Democrats, teacher unions, right now. They don't like several parts of what the president is proposing, do they?

DUNCAN: Well, I actually disagree. I've talked to Dennis Van Roekel, from the president of the NEA today. Randi Weingarten is actually in Angola, but we talked to her. They actually were thrilled with his speech and...

BLITZER: Thrilled about the fact that teachers could be fired for merit?

DUNCAN: I think they realize the president is not some wild ideologue, that he cares passionately about children. He wants us to get dramatically better and that we all have to work differently, so.

BLITZER: Haven't they always opposed merit pay, for example?

DUNCAN: Well, we worked in Chicago with the union, with great teachers to create a merit pay proposal. But you have to do things that make sense. You have to do it with teachers, not to teachers, which is a very important distinction.

But people know collectively that we have to get better. And I think they sense, more than anything, the president's passion and his extraordinary commitment to getting better.

BLITZER: Who determines when a teacher should be fired?

DUNCAN: I think ultimately the principal needs to.

BLITZER: The principal of the local -- of the elementary school or middle school or of the high school?

DUNCAN: Sure.

BLITZER: And the labor union should have no say in that?

DUNCAN: Well, you have different situations in different places. You have some places where there's peer review. And guess what, we have strong peer review programs. Those other teachers -- those union teachers have a very high bar. And sometimes they're much tougher than a principal on...

BLITZER: Do these teacher unions like the fact that a good teacher, an excellent teacher, would be allowed to get more money, surpassing the money, for example, of a more veteran teacher?

DUNCAN: Yes. We have to reward excellence. You have...

BLITZER: But do the unions like that?

DUNCAN: I think, again, you have variations there. And I can't speak for the unions, but you have, again, great, great teachers throughout the country who go way beyond the call of duty every single day. We can't do enough to award excellence, incent it, put a spotlight on it and let the country know how much great teaching matters. The president talks about that all the time. There's nothing more important than getting great teachers in every classroom.

BLITZER: And should the principal be responsible, primarily, for who determines a good teacher versus a bad teacher?

DUNCAN: No. I think there are different ways to do that. Again, you -- a principal can be part of that. I think we need to look at how students are performing. We need to look at student results to see who's really making a great difference in students' lives.

BLITZER: The unions traditionally -- the teachers unions didn't like charter schools because they were afraid it would take money away from regular public schools.

Are they on board with you now on the whole charter school proposal?

DUNCAN: Well, let me be clear, charter schools are our schools, they're our children, our tax dollars.

What people may forget, do you know who started talking about charter schools originally?

Albert Shanker.

(LAUGHTER)

DUNCAN: Charter schools...

BLITZER: He was one of the leaders of the teachers' union.

DUNCAN: He came out of the AFT.

BLITZER: Yes.

DUNCAN: And, you know, you have great teachers who are leading -- great unions who are actually running charter schools. In New York, Randi Weingarten, the now head of the AFT nationally, had a series of charter schools that he was running.

So this is really time to get past sort of the old ideologies, the old status quo where, frankly, we weren't doing enough for children. We have to behave dramatically different. And if innovation is working, we need to do more of it.

BLITZER: I didn't hear the president say much, if anything, about vouchers if there is a crummy school and the kids there have an opportunity, let's say, to go to a good Catholic school, they would get a voucher to help pay for private school education.

Is that something the president is in favor of?

DUNCAN: Well, I can't really, you know, speak for the president on that. I will tell you what I personally believe is that we need to fix the public school system, that we should not be satisfied. Vouchers, to me, aren't the answer. We shouldn't be satisfied with getting, you know, 1 percent of kids, say, 2 percent. We need to change entire systems and get dramatically better and help 100 percent of children. And we have to have the commitment to challenge the status quo to do that so that every child has a chance to a great public education, not just a handful. That's not good enough.

BLITZER: But what if, in the short-term, there's -- that's not going to be possible.

Should the kids have a voucher?

Because there have been some experiments around the country with vouchers and many of those experiments have turned out to be pretty good.

DUNCAN: Actually, the results have been pretty mixed. And, ultimately, again, I think we have to be more ambitious than that. I -- again, I'm just speaking for myself personally, I don't think that's the answer. The answer is to really dramatically change what's going on in public education so that every child -- not just a few, not a handful, every child has a chance to get a great education.

BLITZER: The president was intriguing, also, in speaking about an all year round school system...

DUNCAN: Yes.

BLITZER: ...and longer hours to compete with kids elsewhere around the world, whether in India or China or Japan or elsewhere.

What do you believe?

Should there be school for kids all year round, no summer vacations?

DUNCAN: Well, there were a couple of huge themes in his speech. One, he talked a lot about talent and that talent matters tremendously. Getting great teachers, great principals into our schools and into the schools that have historically been under served is hugely important. So talent matters tremendously.

Secondly, guess what?

So does time. And he talked a lot about our academic calendar is based upon the agrarian economy. Most places around the country today, children are not working in the fields in the summer. And relative to other countries, we're in school 25, 30 percent less. You know, a huge (INAUDIBLE)...

BLITZER: So how long of a school year do you think would be good for public school in the United States?

DUNCAN: Well, I think we need to be much more creative in the use of time. And let me sort of walk you through, because it can be a little bit complex there.

I think our schools should be open long hours after school. They should be open until 8:00, 9:00, so it's not just the school day but...

BLITZER: For extracurricular activities.

DUNCAN: Extracurricular, drama, art, academic enrichment, sports...

BLITZER: What about -- how many months out of the year?

DUNCAN: I think our schools should be open 11 or 12 months out of the year.

And what we need to do in the summer is give poor children the chance to have all the enrichment that middle class children do. So I would love to see all of our children have a chance to go visit a college campus. I would love to see them do academic enrichment. I would love to see them do outdoors programs.

I'd love to see them develop their skills and interests. If they need more help in reading and math, get that.

So it's not just extending the traditional school day, it's really being creative in the use of time. And why this is so important is that we see all the time across the country, we see poor children who aren't lucky enough to be read to every night at home, who get to a certain point in June, they progress throughout the year and they come back in September and guess what?

They're further behind in September than when they left. It's called summer reading loss. We have to combat that and we have to give our children a chance to continue to improve and compete with the children in China, in India. They are working harder, longer hours than we are and our children are at a competitive disadvantage.

BLITZER: Nothing is more important than the education of our young kids.

Mr. Secretary, you've got a huge challenge ahead of you. Good luck.

DUNCAN: This is an historic opportunity. And we think we can dramatically improve the quality of education around the country. It is a remarkable chance to do the right thing by our children.

BLITZER: Thanks for coming in.

DUNCAN: Thanks for having me.

BLITZER: We went back, by the way, and we took a closer look at where the president stand on vouchers -- giving kids an opportunity to go from bad public schools to a good private school.

He caused a stir about a year ago, in February of last year, when he told a newspaper editorial board in Milwaukee that he was open to the idea of vouchers if research showed they work. But later, in July of last year, he told the American Federation of Teachers, the union, he says: "We need to focus on fixing and improving our public schools, not throwing our hands up and walking away from them," suggesting he opposes vouchers -- a very, very sensitive issue.

They received billions of your tax dollars and now three banks are accused of sending billions of dollars overseas to places like Dubai.

And former secretary of State Colin Powell, the retired general, offers some tough love for students.

(BEGIN VIDEO CLIP)

COLIN POWELL, FORMER SECRETARY OF STATE: Pull your pants up. Straighten yourself up. Stand up tall. Mind your manners. Mind your teachers and apply yourself.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

BLITZER: Zain Verjee is monitoring some other important stories incoming into THE SITUATION ROOM right now -- Zain, what's going on? VERJEE: Wolf, a passionate speech today from the Dalai Lama, who says the Tibetan people are nearing extinction. He says China's crackdown on Tibet in the past year has been brutal. It's the 50th anniversary of the failed uprising against China's rule that forced him into exile. Tibet's spiritual leader says that his people live in constant fear and that the Chinese government is constantly suspicious. He insisted that any change should be peaceful.

Tensions are high in Nairobi, Kenya. More than 1,000 university students protested in the streets to demand the resignation of the police commissioner. Some protesters looted and damaged shops and others hurled stones at police and passing traffic. The demonstration was triggered by the recent shooting death of a student and two human rights activists who were researching suspected police death squads. The commissioner has denied that those squads even exist.

A collector thinks he may have stumbled on a rare photograph of President Abraham Lincoln. It turned up in a private album of General Ulysses S. Grant and was discovered by his great, great grandson. Look at this, Wolf. If this photograph is confirmed to be President Lincoln, it would be the only known photo of him in front of the White House. It could also be the very last image taken of him before his assassination in 1865.

And still on Lincoln, a 150-year-old myth surrounding his pocket watch is now an historical fact. Curators at the National Museum of American History confirm that there is a hidden Civil War message engraved in that time piece. A watchmaker carefully pried it open, Wolf, and found the message inside. It says, in part: "Fort Sumter was attacked by the rebels on April 13, 1861." And it goes on to say: "Thank God we have a government."

Pretty amazing. I'm sure President Obama would like to take a look at that, since he's such a big fan.

BLITZER: Yes. That was pretty -- he's a huge admirer and that's -- it's an amazing time. If you ever go back, Zain, if you haven't, go back and read some of those books on Lincoln and the Civil War. It's really amazing what was going on.

VERJEE: I will.

BLITZER: Thank you.

VERJEE: OK.

BLITZER: We've got an assignment for Zain.

He talked them out of millions, then tried for more by sexually blackmailing some of the world's richest women. Now this man dubbed the Swiss gigolo faces jail time. But some say it's not enough.

As the drug war bodies pile up, Mexican police make arrests like this one in Tijuana.

But is the U.S. doing enough to stop the violence from heading north?

And they received billions of your tax dollars, but are some banks investing bailout money abroad, in places like Dubai?

(COMMERCIAL BREAK)

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

Happening now, a fresh killing spree in Iraq -- dozens of people are killed today in a series of suicide bombings.

What does this new wave of violence mean for President Obama's withdrawal plans?

And movement in the case of accused Ponzi scamster Bernard Madoff. Lawyers say Madoff is preparing to answer for bilking investors out of billions -- billions of dollars.

I'm Wolf Blitzer.

You're in THE SITUATION ROOM.

President Obama has now been on the job for 50 days. Here are some of the snapshots of his time in office. From the day he started, he's been busy laying out and marketing his very ambitious agenda. And he's already checked some items off that long list.

Let's get a closer look at how the president is doing.

Our senior political correspondent, Candy Crowley, is watching, as all of us are.

It's almost breathtaking how much he's trying to accomplish.

CANDY CROWLEY, CNN SENIOR POLITICAL CORRESPONDENT: It really is. You know, Wolf, I'm not sure who it was that said 90 percent of life is showing up. But 100 percent of the time, each day of the 50 days, President Obama showed up.

(BEGIN VIDEOTAPE)

CROWLEY (voice-over): Out of a term that runs just under 1,500 days, say this for the first 50 -- there was a lot of activity.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Today, I wanted to come to Florida and I wanted to visit all of you in Fort Myers because you have seen hardship, as well. And the first time that I'm traveling outside of the White House to talk about the economy is back in Indiana.

CROWLEY: A plus for visibility -- a calculated strategy from a White House which understands that the best salesman for the president's plans is the president.

OBAMA: I called for action because the failure to do so would have cost more jobs and caused more hardship. CROWLEY: And more than a sales job, the White House understands that the picture of an on the job president, even at an event with no obvious impact, can help soothe the nerves of a country in economic shock.

OBAMA: We will rebuild. We will recover.

CROWLEY: By far, his biggest achievement was the nearly $800 billion stimulus plan the president got in less than a month, which passes for lightning speed in Congress. It was designed to jump-start the economy to, as he puts it, save or create three million plus jobs. Give that an incomplete.

MICHAEL SHEAR, "WASHINGTON POST": And there will be, at some point, a consensus about whether that stimulus plan worked, whether it was big enough, whether it included the right things or the wrong things. And all of that is going to be laid at his feet.

CROWLEY: Also, incomplete, dozens of senior level nominations -- gaping holes which sources say have slowed the development of plans. Particularly lonely, Treasury Secretary Timothy Geithner, with no deputies or assistant secretaries and very big jobs -- plural. None more critical than the bank bailout to loosen the credit market. Experts believe the lack of some details about that bank plan is crushing Wall Street. According to Bloomberg, the market's plunge -- around 20 percent since inauguration -- is the fastest drop under a newly elected president in 90 years.

Geithner was dispatched last night to hold some hands on Capitol Hill. And he found some friends.

REP. ELIJAH CUMMINGS (D), MARYLAND: Secretary Geithner has a very big job. He's treading and trying to swim in uncharted waters. And so I think we need to have some patience with him.

CROWLEY: Fifty days in office and the verdict is simple. The president has clearly signaled where he's headed. It's unclear whether he'll get there.

(END VIDEOTAPE)

CROWLEY: It may be that President Obama will look back on these first 50 as the good old days. One of the next tasks promises to be a huge test of his sway. He will have to get Congress to pass something that resembles his broad outline of a $3.7 trillion budget and his own party is ling up against some of the provisions. Some Democrats have complained about the cap on deductions the wealthy can take for charity contributions. The industrial manufacturing state Democrats are concerned an effort to cut pollution will hurt their economies, and in the farm states, they're less than enthused about a provision to stop federal subsidies for wealthy farmers. The headache, Wolf, is in the details.

BLITZER: No doubt that some of those powerful Democratic chairman are various committees, Democratic chairman, are like up taking pot shots against certain parts of that budget. Candy, thanks very much.

We have another story that's just coming in to THE SITUATION ROOM right now. Let's go to CNN's Ed Henry. He's standing by live -- Ed, what's going on?

ED HENRY, CNN CORRESPONDENT: We're learning tomorrow the president will sign yet another executive order. This will create what they are calling a White House women's council. Aides say will be overseen by senior adviser Valerie Jarrett and it's going to focus in on issues affecting women and girls. Aides saying issues such as a pay equity, the balance, the life balance for working mothers, things like that. You'll remember the president already signed an executive order to create a White House office of urban affairs. He's trying to target different areas, different groups to show he's on top of these issues. They may be running out of office space sooner or later as they continue to create all these offices.

BLITZER: You're also learning something else. How he's planning on spending his Wednesday morning.

HENRY: We already knew the president every Wednesday evening has been inviting Democratic and Republican members of Congress over here for little cocktail parties, receptions and what not. Get to know you sessions; try to help grease the skids for his agenda ahead in the months ahead. We're now learning that on Wednesday morning the president is planning semi regular meetings with Speaker Nancy Pelosi and Senator Majority Leader Harry Reid. Not going to be any other lawmakers of either party. Just those three principals in the room. The key is that what they want to do is try to have an open line of communication. You see what's happening in recent days. There have been some fissures, some cracks among Democratic ranks on Capitol Hill with some differences in opinion from the president on spending priorities, tax priorities. They want this open line of communication to try to deal with these issues head-on. They know there's some daunting challenges ahead, Wolf.

BLITZER: To put it mildly. Ed, thank you.

Let's discuss this and more with our Democratic strategist, the CNN political contributor Donna Brazile and Republican strategist Tony Blankley. He's a former spokesman for the one time house speaker, Newt Gingrich.

What do you think about that, Donna? He's going to bring in Harry Reid and Nancy Pelosi every Wednesday morning. They'll sit down in the oval office and they'll review. He's got some problems, as I pointed out, with a lot of these Democrats that don't like various aspects of his budget bill.

DONNA BRAZILE, DEMOCRATIC STRATEGIST: As you well know, Wolf, the Democrats in Congress were also elected on a mandate for change. And I think this is a great opportunity for the president to make sure that he listens to both the speaker and the majority leader so that the entire administration and the Democrats on the same page. It's a good move.

BLITZER: Maybe he'll think they'll listen to him more than he'll have to listen to them.

TONY BLANKLEY, REPUBLICAN STRATEGIST: There's nothing wrong with that. But it will have to be well staffed. Otherwise there will be misunderstandings between the various leaders. We've all gone through these drills. You have to be very carol that the members are ready for what they expect to hear from the other leader. As long as they properly staff it can be useful.

BLITZER: You wrote this in the "Washington Times" the other day. The headline was Obama lied, the economy died. Obama lied, the economy died. Big government is really his bag, but he doesn't own up to it. All right. Explain what you mean by those provocative words because that phrase is similar though what we used to hear during the Bush administration.

BLANKLEY: In my lead I said I'm borrowing it explicitly from what the Democrats said about Bush in Iraq. That Bush lied, people died. And that itself was to respond to the fact that when Clinton lied, nobody died. So there's a long history to that phrase. I was having a lot of fun with it.

But the fact is that Obama made two statements in his joint session speech that were materially wrong and controversial. So one was that he said they had gone through the line -- items line by line in the budget and had found savings of $2 trillion. Two days later "The Washington Post" reported senior White House official admitted they hadn't found $2 trillion of savings. Almost a trillion of that was taxes. Another was assuming the Iraq surge was going to go on for ten years, although it's already and then he said it's not going to go on and called that a savings.

BLITZER: Is that a material misrepresentation is one way are saying it.

BLANKLEY: I could have said material misrepresentation.

BRAZILE: Christina Roma said that she went through the budget. She --

BLITZER: She's the president's top economic adviser.

BLANKLEY: The White House already admitted that wasn't true.

BRAZILE: But White House -- several White House officials, because I talked to many of them. They've gone through the budget.

BLANKLEY: But they did not find -- the White House admitted, "The Washington Post" said the White House admitted they did not find $2 trillion in savings. This is the bigger one of those. He said he's not for big government. He's proposed a budget that's going to be 28 percent of the GDP. This is the largest percentage since World War II. He proposes 10 years out for it to be 22 percent, which is higher --

BLITZER: Let's take a look. Is he in favor of big government? Because all of us remember former President Clinton said the era of big government is over.

BRAZILE: But we can't compare one era to another era. When the president has inherited a recession and massive job losses and a huge national deficit. And so what he's doing right now is he's investing in the economy to help get people back to work. So I don't think there's a comparison. What he has said is that he wants smart government, he wants efficient government, he wants accountability, he wants responsibility. And you know, what you consider a lie and what you should have considered a lie, Tony, was the fact for the last eight years, we did not put the cost of fighting in Iraq in our budget. We --

BLANKLEY: That was a budget procedure. It was a supplemental appropriation.

BRAZILE: But it should not have been part of the budget and because we never saw the real picture of the debt. So what the president has done in this budget is he's --

BLITZER: Very quickly.

BLANKLEY: I think the fact "The New York Times" asked President Obama few days ago, are you a socialist, suggests that the idea that he's for big government is obvious. The question is how big is it?

BLITZER: And he later called them back and said he's not a socialist.

BLANKLEY: They didn't like his answer and called back to clarify.

BRAZILE: I think at the end of the day the American people want to know if he's effective and will he lead us out of this.

BLITZER: Remember, it's only 50 days. Very limited amount of time. He's done a lot in 50 days and he's got certainly a huge agenda ahead of him. Guys, thanks.

He's been in office, as I say, for 50 days. What grade do you give, you, President Obama. What grade do you give the new president? How is he doing on the economy, the wars in Iraq and Afghanistan? How do you like his leadership? Submit your video I-report. Go to ireport.com/situationroom and then watch tomorrow's show to see if your video makes the cut. We're anxious to hear your thoughts and see them as well.

Tough love from Colin Powell. The retired U.S. army general and former secretary of state tells us his rather blunt advice for America's students.

And this suspect arrested by Mexican police in a drug war crackdown. But as the death toll mounts, can U.S. authorities keep the violence from moving north?

(BEGIN VIDEO CLIP) UNIDENTIFIED MALE: I think we're conveniently hiding our head in the sands of Cancun Beach, and we're not seeing what the real problem is. And it's a real problem for the United States of America.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

BLITZER: They received billions of your tax dollars. Now these three banks are accused of sending billions of dollars overseas, including to places like Dubai. That's left one U.S. Congressman furious. Let's go to Abbie Boudreau of the special investigations unit. What are your findings?

ABBIE BOUDREAU, CNN SPECIAL INVESTIGATIONS CORRESPONDENT: This will all be the subject of a Congressional hearing tomorrow where lawmakers will question whether the Treasury Department is doing enough to oversee the bank bailout.

(BEGIN VIDEOTAPE)

BOUDREAU (voice-over): Congressman Dennis Kucinich says he wants answers from the Treasury Department about why it didn't follow the money. He says his subcommittee found $16 billion in what he calls questionable transactions from three major banks, including Citigroup, which made an $8 billion loan to Dubai in December. Bank of America, which invested $7 billion in China construction Bank Corporation. And J.P. Morgan Chase, $1 billion to India to expand the bank's global footprint.

REP. DENNIS KUCINICH (D), OHIO: We have auto plants closing, steel mills closing, factories everywhere going out. We have people are losing their homes, their jobs, their health care. We have people living in tents. And U.S. taxpayers' money is being shipped overseas.

BOUDREAU: Kucinich says he believes the money used for these investments was emergency federal money. Though Citigroup specifically denies it. Saying T.A.R.P. capital is being used only for lending and credit flow in the United States. Bank of America tells CNN it had a pre-existing option to buy China Construction Bank shares, which we had always planned to exercise. And J.P. Morgan Chase tells us they have no comment.

(END VIDEOTAPE)

BOUDREAU: Wolf, regulators may find it tough to differentiate between how a bank spends its bailout money and how a bank invests its money in the global market as a way to compete and expand business. They've imposed new regulations that will require banks to explain how they will use the money. Treasury officials also say there will be strong oversight from the inspector general and they tell us that a Congressional panel is now in place. Wolf?

BLITZER: Abbie Boudreau, investigating reporter for us.

There are also new fears about violence spreading across the U.S. border inspect the first two months of this year, 1,000 people have died in drug war killings from the spiraling violence in Mexico. Our homeland security correspondent Jeanne Meserve is taking a closer look at the story for us.

All right. Jeanne, what's going on?

JEANNE MESERVE, CNN HOMELAND SECURITY CORRESPONDENT: Top U.S. border officials got verbally roughed up on Capitol Hill today by exasperated members of Congress. The subject was Mexico.

(BEGIN VIDEOTAPE)

MESERVE (voice-over): Assassinations, beheadings, kidnappings. The grisly trademarks of Mexico's drug cartels. Is the U.S. doing enough to stop the violence and drugs from coming north to the U.S.? In a hearing with top border officials, a member of Congress made his opinion very clear.

REP. HAL ROGERS (R), KENTUCKY: I think we're conveniently hiding our head in the sands of Cancun beach, and we're not seeing what the real problem is. And it's a real problem for the United States of America. Every major city in this country has legs of the Mexican drug cartel. Do they not? Anyone want to dispute that? Didn't think so. And yet, I do not see the U.S. taking this thing as seriously as they need to take it.

MESERVE: But Rogers wasn't the only member of Congress finding fault. Others wanted to know what officials are doing to stop the flow of money and guns southward from the U.S. into Mexico.

REP. SAM FARR (D), CALIFORNIA: I think a lot of people, at least in my state, or my district, would argue those guns killed a hell of a lot more people than marijuana that was smuggled into this country.

MESERVE: What if the violence in Mexico gets so bad it sparks a mass exodus? What then members asked?

REP. JOHN CARTER (R), TEXAS: Do we have any contingency plan to deal with the possible reality that Mexico blows up and people start walking across the border saying I want to be saved from this violence down here by the millions.

JAYSON AHERN, U.S. CUSTOMS & BORDER: We've actually put those plans in place and they are very detailed.

(END VIDEOTAPE)

MESERVE: U.S. officials insist they do understand the threats drug cartels pose to both Mexico and the United States. They say agencies are working with one another and with the Mexican government to stem the viol but, clearly, Wolf, they have a lot of work to do.

BLITZER: This problem is not going away. It's escalating. Thanks, Jeanne.

Sex scams, blackmail and millions and millions of dollars. A world class gigolo says he did it all. Today, payback time.

Also, Colin Powell's no holds barred approach to education. He may have learned it from his own parents. We'll be hearing from him right here in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: President Obama today spelled out his vision for education in a speech here in Washington. Another powerful advocate for education challenges students to be equally accountable.

Joining us, our special correspondent, Soledad O'Brien. Soledad, you're here in Washington. You just came back from a really powerful interview with former secretary of state Colin Powell. I want to play this little clip when he speaks about the importance of education.

COLIN POWELL, FORMER SECRETARY OF STATE: Youngsters have a responsibility, too. And that responsibility is to show up every day to school to learn. Stand up tall, mind your manners, mind your teachers, and apply yourself. Now, where do youngsters get that kind of spirit from? They get it from the home. They get it from the community. All of us have had some difficulty in life, in the early parts of life, in our educational system. I did. I had trouble in elementary school.

But the caregivers that I had, in this case my parents and aunts and uncles say we have expectations of you. Don't tell us you're not going to meet our expectations of you. We didn't come to this country as immigrants so you could put something up your nose or so you could fail to get an education or that you can shame us. So mind your manners. Mind your teachers. And go get an education. Graduate from high school. And then you're going to college, whether you like it or not. And we spent you to graduate from college and then get a job.

BLITZER: Those are pretty strong words. He almost sounds like an army drill sergeant.

SOLEDAD O'BRIEN, CNN SPECIAL CORRESPONDENT: Of course, Colin Powell, the founder of America's promise. These days he really does a lot of talking about the organization, which focuses on education. And educational disparity. So in addition to his work, you know, as sort of the post-leaving of position of secretary of state, he's also really passionate about education. Talking about the president's speech today, you look at some of the issues that the president raised. Personal responsibility that Colin Powell was talking about, clearly important. But, and there's a big but, which is inner city issues. Go hand in hand with inner city graduation rates. Blacks and Latinos 50 percent coin toss whether a kid is going to graduate or not. So something has to be done. Because I think the message is, we're all in this boat together. The inner cities can't fail and suburban America says, well, you know, not our issue.

BLITZER: As much as diplomacy has been his issue, as much as the military and national security has been his issue, I sense his real passion, though, is educating the youth. O'BRIEN: What's really interesting, I was telling him about who we're profiling in Black America 2. And the principal runs around the school, Dr. Steve Perry, minority school, dire statistics, but not his school. Dr. Perry's school has 100 percent of their kids who graduate go on to college, 100 percent. Dr. Perry is a drill sergeant. Pull up your pants, what are you doing in the hall. It's time for you to go. Colin Powell said exactly, it requires a drill sergeant. There is a metaphor for having someone who is in charge. And sometimes inner city problems, socioeconomic problems mean that the home is not what it should be.

BLITZER: Let's remind our viewers never too early to start reminding them, July 22nd, July 23rd, Black in America 2 will air only here on CNN. Soledad, thanks very much.

O'BRIEN: My pleasure. Thanks, Wolf.

BLITZER: Right back to Jack Cafferty for "The Cafferty File."

CAFFERTY: The question this hour, is talking to the Taliban a good idea?

Mark in Pennsylvania says: "Not a good idea at all. Quite the opposite. The Taliban is unlike the Sunnis in Iraq, who are a political party tossed out of power. Working with them made some sense. The Taliban is a terrorist group made up of religious fanatics. They have proven they will not agree to anything the western world wants. An agreement with them is not worth the paper it's written on."

Mack in Michigan: "I doubt it, Jack. It's probably futile to talk to any group who believes they are representing the will of god as they interpret it, like the far right wing of the Republican Party. We should just drive them back into their caves and let them preach their twisted dog ma to each other to their heart's content."

Tim in Texas writes: "Jack, it was actually General Petraeus who said we could perhaps peel away some of the more moderate Taliban. I don't see any merit in talking with our enemies is a bad idea. If it doesn't work, it doesn't work. So what? We don't lose anything by trying."

Darryl writes: "It's absolutely not a good idea to talk to the Taliban. The idea that any of them are moderate is preposterous. Moderates don't join terrorist organizations, period."

Kingsley in Texas says: "The more you antagonize and isolate them the more hardened and brutish they become. It will be viewed as a sign of respect which is what the Muslim cherishes and it will yield positive results."

Pete in New York says: "Isn't moderate Taliban an oxymoron? Does that mean they only cut off half your head? Or could they -- do they just do it more slowly?

If you didn't see your email here, you can go to my blog at CNN.com/CaffertyFile and look for yours there among hundreds of others -- Wolf?

BLITZER: Jack, thank you.

He seduced an heiress, scammed her and took her millions. Now the so-called Swiss gigolo is getting his come upends.

(COMMERCIAL BREAK)

BLITZER: The so-called called Swiss gigolo on every newspaper across Germany. CNN's Fred Pleitgen has the latest chapter in this sordid story.

(BEGIN VIDEOTAPE)

FRED PLEITGEN, CNN CORRESPONDENT: When the man dubbed the Swiss gigolo entered the courtroom, he was smiling. Asked what he expected, he said, I have no idea. Will Scarby soon found out. Six years in prison for cheating and blackmailing some of Europe's richest women, after having affairs with them. The court reduced his sentence because he had confessed. The state prosecutors had wanted him behind bars for nine years.

The confession was very important, so that the victims didn't have to appear here in court. But then the defense practically recalled the confession by saying that everything is the victims' own fault, he says.

Among Scarby's victims, Suzanne Clatton, by some estimates the richest woman in Germany. Her family owns a large stake in German carmaker BMW. Her spokesperson said the married mother of three had an affair with Scarby. Then he started asking for money. She paid several million at first, but then Scarby asked for more. Nearly $60 million. When Clatton refused, the Swiss threatened to send compromising video to her husband and media. Clatton went to the police. In the written statement to the report, Scarby claimed he was sorry for what had happened. His lawyer was less diplomatic. Yes, he did cheat her, he says. But only in a minor waive. He was just playing around, really.

But many questions remain unanswered. Where are the seven million euros he managed to get? What happened to the compromising videos he claims he has? And did Scarby have an accomplice? The defendant refused to answer. That's why the prosecution believes the sentence is too weak. We might enter an appeal, he says, but that is something we will decide later. Most important for now, the prosecution says, is that Scarby is behind bars and his victims were spared the humilation of having to testify in a public hearing

Fred Pleitgen, CNN, Berlin