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'Unholy Alliance' Between Al Qaeda in Yemen and Somalia; Ex-IMF Chief Freed From House Arrest; 'Obsessed' With New Economy Jobs; U.S. Stake in Afghan Bank Scandal

Aired July 1, 2011 - 17:00   ET


WOLF BLITZER, HOST: Brooke, thanks very much.

Happening now: A terrorist merger, we are learning about dangerous new moves by al Qaeda forces looking to expand and protect their turf and their deadly war against the West. Stand by for our exclusive report.

Plus, the international financer charged with sexual assault, he is now freed from house arrest in New York City. The case against the former IMF Chief Dominique Strauss-Kahn may be falling apart right now because of very serious questions about his accuser's credibility.

And how the idea of FOX News may have been hatched in the Republican White House. The secret blueprint dug up now from the Nixon Library archives.

I'm Wolf Blitzer you are in THE SITUATION ROOM.

Exactly two months after Osama bin Laden was killed, elements of his al Qaeda network are now joining forces to keep his campaign of terror alive. We're learning about a merger of sorts between al Qaeda militants in Yemen and those in neighboring Somalia.

Our Pentagon Correspondent Barbara Starr has some exclusive details.

Barbara, tell us what you know.

BARBARA STARR, CNN PENTAGON CORRESPONDENT: Wolf, we've been digging for the last several days and now several U.S. officials tell us that indeed they have intelligence that convinces them that al Qaeda in Yemen and the al Qaeda-related group in next-door Somalia are joining forces to try and plan attacks against Europe and the United States

And you need to look front and center here in the Pentagon, the new Secretary of Defense Leon Panetta and David Petraeus, when he gets to the CIA in a few weeks, they will make this top on the agenda. We are told there will be counterattacks. There already have been, in fact, continuing secret wars, if you will, in both countries Drone attacks, special operations, covert missions, look for all of it to continue.

I want to show everyone the map so we get a clear picture here of what we are talking about. These two countries, Somalia and Yemen, next door to each other, two of the most unstable countries in the world. The al Qaeda in Yemen group expanding its efforts along with al Qaeda in Somalia. We are told what they're looking at is expanding their ability for training camps, resourcing, planning, financing, all of it, aiming at attacking the West. Moving beyond just, Wolf, having the ideas and aspirations, but trying to do it. We already see a lot of unrest in both of these countries.

Now Leon Panetta, his first day on the job here at the Pentagon. But he has already talked to Congress about both these countries and his concerns. Regarding Somalia, just a few weeks ago, he told Congress the al Qaeda movement in Somalia, quote, "is significant and on the rise in the threat -- their threat being posed to the United States."

And next door in Yemen, he talked about that al Qaeda group as well. Saying, quote, "that group has made tactical gains in tribal areas, in several cases, seizing and holding territory outside the Republic of Yemen government control.

So again, Wolf, we're talking about two countries, al Qaeda on the rise, no government ability to really control it, looking for the United States to continue its secret wars in these countries to try and contain al Qaeda, Wolf.

BLITZER: A whole new chapter unfolding now. Barbara, thank you.

The outgoing national director of counterterrorism is warning that al Qaeda terrorists in Yemen and Somalia are active and they are plotting right now against the United States. In an exclusive interview Michael Leiter says, overall the bin Laden network is weaker than it has ever been before-but-and it is an important but.

He tells our own CNN correspondent Jeanne Meserve, the enemy is still out there and America is not yet safe.


MICHAEL LEITER, FORMER DIRECTOR, NATIONAL COUNTERTERRORISM CENTER: The most active, direct affiliate of al Qaeda today is in Yemen.

JEANNE MESERVE, CNN HOMELAND SECURITY CORRESPONDENT (On camera): And with the collapse of the government there, what does that mean?

LEITER: Any area where there is not a strong level of government authority absolutely does make it more susceptible to terrorist plotting. In that respect, although the government of Yemen is still a good partner in many ways, they are obviously focused on many issues right now. And we have been more concerned about al Qaeda in the Arabian Peninsula because of that.

MESERVE: Do you see the safe haven there expanding?

LEITER: I think al Qaeda has taken advantage of some of the disruption. Especially in the south of the country and that is a real concern for us.


BLITZER: Let's talk about the state of al Qaeda right now and America's war on terror with our national security contributor, Fran Townsend. She's is the former Bush Homeland Security advisor. She is also on the external advisory boards at both the CIA and Department of Homeland Security.

Fran, this alliance between al Qaeda in Yemen and Somalia, how much of a security threat to the United States is it?

FRANCES FRAGOS TOWNSEND, CNN NATIONAL SECURITY CONTRIBUTOR: Well, Wolf, remember we heard a good deal from the FBI about their concerns about Somalia being a sort of a magnet, attracting Americans to Somalia to the fight. Now

the FBI is also quick to say they haven't seen them come back. But they are fighting in Somalia, and because of the proximity, that Barbara Starr points out, between Yemen and Somalia, it's easy for them to transit in boats called dows (ph), little local boats that can crossover that short water distance, to Yemen. Where they can collaborate, they can plan, they can train. And they can exchange fighters to assist each other and back each other up.

No question that al Qaeda in the Arabian Peninsula, the Yemen group, is the greatest threat to the United States. Those are the bomb makers that were responsible for the Christmas Day attempted bombing and the computer cartridges attempt. So this is a very active group with great capability.

BLITZER: We're going into a July Fourth holiday weekend. How concerned should Americans be? How alert should they be as a possible, in this post-bin laden world, a possible attempt at terror against Americans?

TOWNSEND: Look, Wolf, nobody in the U.S. government has been talking about any specific threat tied to the Fourth of the July. But of course, large public gathering are always an attractive target for terrorists. So what I should say to Americans is you've always got to be alert. It's the old, as you say in New York, "if you see it, say it." If you see something suspicious, tell someone, tell a policeman or someone in authority so they can investigate it.

BLITZER: Is there a throwing trend now in this post-bin Laden world of cooperation among these various groups, these al Qaeda groups, whether in Yemen, Somalia or elsewhere? I suspect there are a lot more al Qaeda operatives in Yemen and Somalia, right now, than there are in all of Afghanistan.

TOWNSEND: You they very well be right about the numbers. You know, we have seen affiliations, al Qaeda and the Islamic Magrab (ph), that is North Africa, had formal affiliation with the al Qaeda core in the tribal areas. These groups have always seen some strength in the alliances. But instability is the key here, Wolf. Where you see instability in places like Libya and Yemen and Syria, you worry about al Qaeda and its affiliates. Because in chaos they can take advantage of that situation, those ungoverned spaces to recruit, train and plan. So all of these governments in chaos represent a threat for us.

BLITZER: There's a new head of the National Counterterrorism Center. The president today nominated Matthew Olsen. What do you know about him?

TOWNSEND: Matt Olsen is a career guy, Wolf. He's worked across multiple administrations. I, of course, had the opportunity to work with him during the Bush administration. He served both at the FBI then, and also later at the Justice Department and the National Security Division. Well respected by law enforcement, gained some national security and intelligence experience over at the Justice Department. Don't know about his relationship with the president. But that's less important in the Counterterrorism Center.

What is important is that he has credibility in the inter-agency and I think he has spent enough time in government, as a career official, so he'll have that. So he's probably a pretty good choice. I expect he won't have a problem getting confirmed.

BLITZER: We'll have more with Michael Leiter, his interview with Jeanne Meserve coming up later, here in THE SITUATION ROOM.

Thanks very much, Fran.

A follow-up now on a shocking breach of airline security. A man who managed to board a cross country flight without a valid boarding pass or even a valid ID, he appeared in federal court today. CNN's Sandra Endo is joining us from the courthouse in Los Angeles.

So, what happened there, Sandra?

SANDRA ENDO, CNN CORRESPONDENT: Well, I can tell you, federal prosecutors say that alleged stowaway Olajide Noibi, rather, should not be posted or granted bail because he is a flight risk. They say he has no ties to LA. He has family in Georgia and Michigan and also in his home country of Nigeria. They also argued that he's a possible risk to society and to the community, alleging that he stole people's boarding passes, their identities to try to get onboard airplanes.

The defense argues that he comes from a respectable family, that essentially he just stole a $500 flight and he is very embarrassed by all this. But the prosecution wasn't buying any of that. Despite not finding any terrorist threat, they say when it comes to security, it's a very serious matter.


THOM MROZEK, U.S. ATTORNEY'S OFFICE: We have a very significant system set up to try to ensure security at our airports, to try to secure security on planes that travel both here in the United States and internationally. Anytime there may be a breach, a perceived breach, something that may indicate that there is a problem, that makes it a serious matter.


ENDO: Now the Magistrate Judge Michael Wilner (ph) said that there is just not enough information about Noibi, saying they don't know enough about him. Where he's from? What he's about? What he's doing. And essentially did not set bail. There will be another hearing as early as next week, Wolf. And, of course, the judge making it very clear in the courtroom today that any conditions down the road would not allow him to board any planes, Wolf.

BLITZER: All right, Sandra, thanks very much. Sandra Endo in LA for us.

A high profile sexual assault case against the powerful global figure, now appears to be in shambles. So what happens? Now that prosecutors say Dominique Strauss-Kahn's accuser told lies. Also ahead --


BARACK OBAMA, PRESIDENT OF THE UNITED STATES: You'll still be able to ride on your corporate jet. You're just going to have to pay a little more.


BLITZER: It's the president's new line of attack against Republicans. He said it over and over again this week. We're having a fact check, a "Reality Check" on what he said.

Stay with us. You're in THE SITUATION ROOM


BLITZER: A stunning twist in the sexual assault case against a powerful international financier and politician. A New York judge today released Dominique Strauss-Kahn from house arrest because of evidence that his accuser lied about her background and facts of the case. The terms of his bail have been eased, but the indictment against the former International Monetary Fund chief still stands, at least for now.

Prosecutors acknowledge they have doubts about the allegation that Strauss-Kahn sexually attacked a maid in a luxury hotel back in May in New York. All the lawyers involved, they put their respective spin on what happened and what happens next.


CYRUS VANCE, JR., PROSECUTOR: After the indictment against the defendant was filed we continued, as an office, to investigate the case rigorously, as we do, and are obligated to do. That investigation raised concerns about the complaining witness' credibility. And we turned over to the defense the information that gave rise to those concerns, as we are ethically and legally obligated to do.

KENNETH THOMPSON, LAWYER FOR ALLEGED VICTIM: The victim, from day one has described a violent sexual assault that Dominique Strauss Kahn committed against her. She has described that sexual assault many times to the prosecutors and to me. And she has never once changed a single thing about that account.

BENJAMIN BRAFMAN, STRAUSS-KAHN'S ATTORNEY: At each appearance in the last six weeks, we asked you, and we asked the world, not to rush to judgment in this case, and now I think you can understand why. We believed from the beginning that this case was not what it appeared to be, and we are absolutely convinced that while today is a first giant step in the right direction, the next step will lead to a complete dismissal of the charges.


BLITZER: All right. Let's go to New York. CNN's Richard Roth has been covering the Strauss-Kahn case for us.

Richard, just tell our viewer, the inconsistency in the hotel maid's story.

RICHARD ROTH, CNN SENIOR U.N. CORRESPONDENT: In a court filing, the prosecution said there were untruths in the star witness's accounts and statement, that she lied when she initially claimed that she had been gang raped by soldiers in her native Guinea, in West Africa, that there were lies regarding her application for asylum to live here in the United States that she didn't tell the truth about a phone call with a prison inmate who was convicted of drug trafficking or drug dealing, where she asked him for vice on whether she should go after Dominique Strauss-Kahn. And she said she originally stayed in that hallway of the Hotel Sofitel in Times Square after the alleged attack, sexual attack. Instead, then, she reversed herself and said she actually went on, or maybe they had evidence to clean another room and then going back in to call her hotel supervisor.

There were several other reversals of what she said. Her attorney says a lot of it was because of fear -- Wolf.

BLITZER: Describe the atmosphere of what was on inside the courthouse today and outside.

ROTH: I think it's my fourth time here, the fourth hearing. You may remember last time, there was an organized demonstration of hotel maids, chamber maids here, yelling vociferously, "shame on you" as Dominique Strauss-Kahn entered. They were noticeably not here today.

Somebody maybe yelling "shame on you" with the prosecution's office, but they are going to insist they had to go with their witness. This was a witness, though, that they stated was very solid and they'd be eager to put her on the stand. This was shortly after everything what happened when they took Strauss-Kahn off that JFK Air France jet.

BLITZER: So, he's free now basically. He can do -- in the United States, he can't leave the country, but he can go anyplace he wants and do whatever he wants, is that right?

ROTH: Yes, the most smiles we've ever seen from Dominique Strauss-Kahn when he left this court and acknowledged who he knew, he didn't say anything. But he is now free to go anywhere in the U.S. As you mentioned, the court does have his passport, but all of those house arrest and other bail conditions, hotel monitoring, cameras, guards, that's not there.

I mean, he was portrayed almost as a mass murderer in the media and also how it was presented in court. That has now ended.

BLITZER: Yes. Some of the tabloids called him lepur (ph), as you remember. We're going to have a lot more on this part of the story later, Richard. Thanks very much.

The case is not yet over. We're going to dissect a lot more of what's going on with Jeffrey Toobin, our senior legal s analyst.

Meanwhile in France, Strauss-Kahn's allies sound optimistic he'll be completely vindicated and maybe -- get this -- maybe even return to politics. He was a frontrunner to become the next president of France before all of this episode exploded.

Our senior international correspondent Jim Bittermann is in Paris.


JIM BITTERMANN, CNN SENIOR INTERNATIONAL CORRESPONDENT: Some of the leading socialists here, the socialist party, of course, is Dominique Strauss-Kahn's party, they've been reacting after this brief court hearing this afternoon perhaps a little prematurely in some respects because of the fact that the charges against Strauss-Kahn are still out there. His passport has not been returned. The only thing that changed is his bail conditions.

But, nonetheless, some of the socialists here are taking this to mean that the charges will eventually be dropped against him. One said there's a lesson in all of this and the lesson is that we should not react on emotion but we should employ reason instead. And another one of the leading socialist here said, I think a page has been turned, the mud slide on behalf in the press, the endless comments and statements made about DSK, about us, meaning the socialist party, his entourage and criticism saying that we protected an alleged racist, all that has collapsed.

Well, not all of that has collapsed, at least not yet, because the case hasn't been tried yet. But definitely, as one leading socialist said, there's enormous relief at the fact that the bail conditions have been changed somewhat. Now, it remains to be seen how it proceeds from here. There is still some here who expect that it could be possible for Straus-Kahn to come back and restore his political career and perhaps even run for president in the 2012 elections.

Jim Bittermann, CNN, Paris. (END VIDEOTAPE)

BLITZER: We'll have more on the story later here on THE SITUATION ROOM.

Meanwhile, an American ship sets off for Gaza to protest the Israeli blockade. But it's stopped within minutes. We're going to tell you who's detaining it and why.

And new fatigue rules designed to help traffic controllers stay awake on the job.

Our top stories coming up next, right here in THE SITUATION ROOM.


BLITZER: An American ship bound for Gaza stopped by the Greek coast guard.

Lisa Sylvester is monitoring that and some of the other top stories in THE SITUATION ROOM right now.

Lisa, what happened?


Well, Greek authorities are detaining the ship that was bound for Gaza. It was stopped just minutes after it set out from a Greek port today. The vessel was part of a 10-ship flotilla intended to challenge Israel's naval blockade of Gaza. A similar flotilla resulted in a clash with Israeli commandoes that killed nine people last year.

Greek authorities are warning that all ships heading to Gaza will be stopped.

And strong words on Syria today from Secretary of State Hillary Clinton. Clinton referenced the latest reports that government organized groups and security forces were attacking demonstrators. She had a warning for the country's leaders.


HILLARY CLINTON, SECRETARY OF STATE: It is absolutely clear that the Syrian government is running out of time. There isn't any question about that. They are either going to allow a serious political process that will include peaceful protests to take place throughout Syria and engage in a productive dialogue with members of the opposition and civil society, or they're going to continue to see increasingly organized resistance.


SYLVESTER: The Casey Anthony murder trial is done for today. The prosecution rested. Closing arguments are now set for Sunday. Earlier today, prosecutors tried to discredit testimony from Anthony's mother about who searched online for chloroform on the family's computer. Prosecutors say Anthony used chloroform to knock out her 2-year-old daughter before killing her.

And air traffic controller will now be allowed to listen to the radio and read while working overnight shifts. That's part of an argument between the FAA and air controllers for new fatigue recommendations. Controllers can also now request to take leave if they're too fatigued to work.

The new rules come in an aftermath of a series of incidents involving air traffic controllers who were sleeping on the job -- Wolf.

BLITZER: So, they can listen on the radio, and they read but they can't watch CNN, is that --

SYLVESTER: I don't know about the rules about watching TV, but presumably, it's to keep them awake.

BLITZER: That will keep them awake. Watch CNN. Yes.


President Obama is taking on Republicans by going after corporate jets and other tax breaks for their owners. We're looking at the facts. Stand by.

And can the president afford to lose his treasury secretary heading into an election year? Our strategy session is coming up.



Stories we're working on right now, we'll take an up close look at the Libyan leader, Moammar Gadhafi's, army of women. Could he be preparing to send them into combat?

Also, my interview with former President Bill Clinton. You'll hear his take on accusations that President Obama is engaging in so- called class warfare against the Republicans.

And huge crowds are turning out in Canada to get a glimpse of the royal newlyweds. We're going to show you the fanfare as William and Kate conduct their first official overseas trip.



BLITZER: This week, President Obama highlighted the issue of tax write-offs for owners of corporate jets, saying they should end. Critics say the president's comments are more about politics than cutting the deficit. Our White House correspondent Brianna Keilar is taking a closer look at the issue for us.

Brianna, I know you've been doing reporting. How much money are we really talking about in this entire corporate jet issue?

BRIANNA KEILAR, CNN WHITE HOUSE CORRESPONDENT: Wolf, this particular tax break, we're talking about $3 billion. And this is getting a whole lot of attention. But really, it's just a drop in the bucket when you're talking about trillions of dollars in the course of these debt talks that are going on.

But the White House and congressional Democrats are really zeroing in on this, what's maybe one of the more unsympathetic tax breaks as they try to stick it to the Republicans who are saying absolutely, they will not agree to any tax increases in these ongoing talks.


KEILAR (voice-over): Private jets are the stuff of music video decadence.


BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Good morning, everybody. Have a seat.

KEILAR: And presidential press conferences.

OBAMA: A tax break for corporate jet owners -- corporate jet owner. The tax break for corporate jets.

KEILAR: President Obama mentioned corporate jet owners and the tax break they enjoy six times during his press conference Wednesday.

OBAMA: You still be able to ride on your corporate jet. You'll just have to pay a little more.

KEILAR: As he sought to highlight tax increase that Republicans are resisting in debt talks. Corporate jet owners, mostly companies, not individuals, can write off the purchase of a plane on their taxes over five years. It's a slightly sweeter deal than commercial airlines get. They write off the purchase of a plane over seven years. The president and Democrats are proposing private jet owners get the same tax treatment as airlines.

So how much money would this bring in? About $3 billion over 10 years, according to Democratic and Republican sources. Compare that to the $2 trillion to $4 trillion Congress and the White House is aiming to save over the same time period.

ED BOLEN, NATIONAL BUSINESS AVIATION ASSOCIATION: The president basically outlined the equivalent of a $100 problem, and yet his solution would raise less than a penny. KEILAR: Ed Bolen represents companies that own private airplanes. He says they're being unjustly vilified, that corporations use private jets to do business in hard to get to cities, and that dissuading companies from purchasing the planes will cost jobs.

BOLEN: These are products that are manufactured in the United States, maintained in the United States, and as any small town mayor will tell you, are critical to the future of a lot of our small towns and rural communities without good airline service.


KEILAR: The president also wants to eliminate breaks for hedge fund operators and for oil and gas companies. That would bring in, experts say, about $100 billion to $159 billion. But there's another tax break the president would really like to see, and this is limiting deductions that wealthier Americans can take.

Wolf, you heard the president refer to this on Wednesday, the tax break that benefits millionaires and billionaires. The fact check on that is this -- it actually would target Americans making $250,000 or more. Arguably, yes, a lot of money, but a lot of those folks are not millionaires or billionaires -- Wolf.

BLITZER: Yes, their tax rate, if the president has his way, would go from 35 percent, which it is right now, the federal income tax rate, up to 39.6 percent, which is what it was during the Clinton administration.

Brianna, thanks very much.

Let's discuss what's going on in our "Strategy Session."

Joining us now, the former deputy White House press secretary, Bill Burton. He's now with the political action committee Priorities USA Action. And Republican strategist and former press secretary for Newt Gingrich, Tony Blankley. He's with Edelman PR.

Guys, thanks very much for coming in.

Three billion dollars on these corporate jet write-offs over 10 years, Brianna's right, in the scheme of things it's small potatoes.

BILL BURTON, SR. STRATEGIST, PRIORITIES USA ACTION: You know, I have to agree. It's a small piece of this. But that makes it so much more strange, that Republicans won't just let it go.

And as we go through these talks, what you see are Republicans saying that, OK, everybody's got to make a sacrifice, except for the very wealthy. Poor folks, middle class folks, seniors, Medicare is going to get cut. But corporate jet owners, you're OK.

BLITZER: Because, you know, a billion here, and a billion there, after a while, as they say here in Washington, you're talking real money though. TONY BLANKLEY, REPUBLICAN STRATEGIST: Of course, the irony is that this was a provision that was reauthorized by the Democratic Congress in 2009 and signed by President Obama as part of a stimulus package, and it was intended to protect the workers. We were losing 11,000 workers in the first months of 2009. And now he's using the bill that he himself enacted into law to be symbolic of something that it's not.

But the president is entitled to pick his fights. The question is whether this is the right time and place to pick this fight, because the -- all the various special tax provisions, I think everybody in town believes, would be -- the context which we're going to solve that is when we do the overall business tax relief. We're lowering the rates and getting rid of some of the small deductions. Not to do it in that context, I think, is to undermine what most serious people in town think is the way to do it.

BLITZER: What do you think about that, Bill?

BURTON: Well, I think that there does need to be a comprehensive fix, but you haven't see a real willingness from the Republicans to sit down at the table and actually get something done.

BLITZER: On a lot of the stuff there was, until the talks collapsed when it came to taxes. But they were making some significant progress -- Biden meeting with Eric Cantor and the others. They were achieving something.

I want to continue this, but listen to what the vice president, Joe Biden, said about this very issue, millionaires and billionaires. Listen to this.


JOSEPH BIDEN, VICE PRESIDENT OF THE UNITED STATES: I hope you know me well enough to know I'm straight with you. Ladies and Gentlemen -- as a matter of fact, I'm a little too straight.

These guys are asking senior citizen citizens to eventually pay $6,000 a year more for the same Medicare they get now. Now, guess what? They're doing it because they have to have the money to continue to allow the average millionaire to get an additional -- beyond his already tax -- an additional $200,000 a year in a tax cut.


BLITZER: What he's suggesting is, if the tax rates were to go back up to 39.6 percent, and somebody is making $1 million, you wind up having to pay the government a couple hundred thousand more in tax.

BLANKLEY: Well, this is Joe Biden being Joe Biden. But particularly on the $6,000 on Medicare, it's ironic, because part of the Ryan proposal is to increase the subsidy for the poorer Medicare beneficiaries and raise the taxes on the wealthier Medicare beneficiaries in order to sustain a program, which, by the way, the Congressional Budget Office says is going to become insolvent in 2020. That's nine years from now. So you can't really compare the Republican proposal with the status quo, because the status quo is going to be gone.

BLITZER: Everybody agrees something is going to have to be done with these entitlements, Medicare, Medicaid, maybe even down the road Social Security.

You agree, right?

BURTON: That's absolutely right. And that's why the president has called for finding savings and finding ways to make Medicare more solvent.

But this is why we called our group what we did, Priorities USA, because if you don't have the priority in the right place, then you send this country on the wrong track. And putting the priority on making sure that millionaires get tax cuts, as opposed to essentially ending Medicare, as "The Wall Street Journal" says, is a different priority.

BLANKLEY: It's a slogan, but the reality is we're nine years away from insolvency, and the president hasn't put a single proposal about how to deal with that crisis --

BURTON: That's not true.

BLANKLEY: Of course it is.

BURTON: In health care reform, there were savings that Democrats all over the country were attacked for over the course of the last election cycle.

BLANKLEY: Yes, the $500 billion that was going to be saved from Medicare to be spent on Obamacare. And only a fraction of that was going to go to Medicare beneficiaries.

BURTON: That was one piece of it. And he's also got more savings and more ways that we can save money in Medicare and make sure it's safe for future generations.

BLITZER: Is it possible that Timothy Geithner, even at this late stage in the first term, might decide to leave the Treasury Department?

BURTON: I think those news reports seem like they were a little ahead of where Secretary Geithner is, but I can tell you that if he were to step down, that it would be hard for even a guy like Phil Graham to pass through the Senate, because it's so hard --

BLITZER: The confirmation process.

BURTON: Yes, the confirmation process, because it's so hard for the president to try to make progress on the economy, because Republicans are fighting so hard to paralyze everything that he tries to do. BLITZER: Although there are some Democrats the president could pick, I suspect, who would sail through confirmation.

BLANKLEY: Probably, the president should make his nomination Labor Day and get it solved by Thanksgiving. If he picked someone like Jamie Dimon, the CEO of JPMorgan Chase, that would get, I would guess, 35 to 40 Republican Senate votes, plus almost all the Democrats. If, on the other hand, he goes for a more liberal academic, then he's going to have trouble on both sides of the aisle because you have got a lot of Democratic senators up for reelection.

BLITZER: What if you pick Bill Daley, the White House chief of staff?

BLANKLEY: I don't think he's a man who the industry -- they like him, but --

BLITZER: He comes from the business world.

BLANKLEY: He does, but the treasury secretary, at this point, with all the problems, I think has got to be seen as a real master of the universe.

BLITZER: In the meantime, Timothy Geithner is not leaving. He says for the foreseeable future, he will be the Treasury secretary. He flew back last night on the same flight from Chicago back to Washington. It seemed like the secretary of the Treasury at the time suggested he was staying put for now.

Bill Burton, thanks for coming in.

BURTON: Thank you.

BLITZER: Tony Blankley, always a pleasure as well.

BLANKLEY: Thank you. Enjoyed it.

BLITZER: A state government shutdown is happening right now. We're going to tell you where and why and who's suffering.

And the husband of Congresswoman Gabrielle Giffords talks about the other love of his life.


BLITZER: A new state budget crisis and government shutdown. This one in Minnesota.

State parks and even rest stops are closed for this busy Fourth of July holiday weekend. Many social service agencies are losing their funding. Twenty-three thousand state workers are scheduled to be laid off, leaving only limited government services in all of Minnesota.

All of this because state lawmakers are deadlocked on how to close a $3.6 billion budget shortfall when the new fiscal year began at midnight. It's a story we're watching in Minnesota.

Let's talk about another state right now that's in financial pain. We're talking about Michigan.

I caught up with the former Democratic governor, Jennifer Granholm, in Chicago. She was at the Clinton Global Initiative America Conference.


BLITZER: When I think of Michigan, especially Detroit, let's say, I think of my hometown, Buffalo, New York.


BLITZER: In the last 230 30, 40 years in Buffalo, we've lost half of our population --

GRANHOLM: Exactly.

BLITZER: -- in the city. Detroit used to have a huge population, and they've probably lost half of their population.

GRANHOLM: Right. But what kills me, Wolf, about this is that as a nation, we have not had a manufacturing policy to keep manufacturing jobs in America. And we've seen all of these jobs leave not just -- I mean, it's been to low-wage countries, so you've seen what is known as the labor arbitrage. But they've also gone to countries where the policies work for business to make them more competitive.

BLITZER: Let's talk a lit bit more about what needs to be done now. Because in Michigan, for example, you're creating jobs. How are you doing that?

GRANHOLM: Well, let me tell you one thing that we've really focused on was clean energy. That was one of the sectors we identified.

BLITZER: Batteries.

GRANHOLM: Batteries for the electric vehicle. In the space of a year and a half, we got 18 companies to come to Michigan who are projected to create 63,000 jobs. Michigan will now produce 20 percent of the globe's batteries.

BLITZER: These aren't just American companies who invested in Michigan, these are international.

GRANHOLM: No. In fact, Wolf, I identified the holes in the supply chain, and we went internationally to get them, to come to Michigan.

I went to Japan and I got TODA (ph) to come, because they provided one component. I went to Korea. I got LG Chem to come to Michigan.

So it's very exciting. There's a whole industry that we have created because we have the right policy in place.

BLITZER: Now, correct me if I'm wrong, you were just in China.


BLITZER: What did you learn there?

GRANHOLM: Oh, my gosh. So I went with a group Securing America's Future Energy. And the hope is to be able to become energy- independent by creating the right policies here.

So, in China, they have very aggressive policies to create jobs for their citizens, particularly in energy. And so we met with a lot of Chinese officials. And one of the officials comes up to me during a meeting and says, "So when is the United States going to get a national energy policy?"

And I said, "You know partisanship in Washington. I don't know." And this is what he did. He goes like this -- he goes, "Take your time."

Why? Because China has leapfrogged over the U.S. in attracting private sector investment in clean energy. They have pulled a huge number of factories away from the United States because their policy is right.

It's not just about wages. It is about policy.

And so the frustration for us and for those of us who want to see a manufacturing sector in America is every day we wait and don't have national policy that says we as a nation are going to get 20 percent of our energy from renewable resources, every day we wait, those businesses are making decisions about where to locate. And every day we delay, we're losing this opportunity.

BLITZER: If it's Mitt Romney as the Republican nominee versus Barack Obama, who carries Michigan?

GRANHOLM: Do you know that Mitt Romney penned an op-ed in "The New York Times" with the heading of "Let Detroit Go Bankrupt." That's not going to win the day in Michigan.

BLITZER: So you think the president would --


GRANHOLM: The president saved the auto industry. And Mitt Romney has got a problem.

BLITZER: Even though Mitt Romney -- I think he was born in Michigan.

GRANHOLM: He was. Oh, absolutely. But he turned his back on his home state at the moment when the state was most in trouble.

(END VIDEOTAPE) BLITZER: Former governor Jennifer Granholm speaking with me in Chicago yesterday.

The man accused of shooting Congresswoman Gabrielle Giffords could be too mentally ill to ever stand trial. But what happens to those who are declared criminally insane?

And a man accused in a bank scandal that nearly crushed Afghanistan's financial system has fled here to the United States. Our Pentagon correspondent, Chris Lawrence, caught up with him.


BLITZER: The former head of Afghanistan's version of the Federal Reserve is right here in the United States. But back home, he's a wanted man in the alleged swindle of millions of dollars.

Our Pentagon correspondent, Chris Lawrence, is following the money for us.

Chris, what have you learned?

CHRIS LAWRENCE, CNN PENTAGON CORRESPONDENT: Yes, Wolf, we're talking about nearly $1 billion in bad loans right now. You know, this was Afghanistan's biggest private bank, and the crisis has made donors have to cut back on come some of their contributions, all at a time as the U.S. is beginning a massive transition out of the country.


LAWRENCE (voice-over): Just this week, Afghan police arrested two top executives for mismanaging Kabul Bank, a private bank which lost $1 billion and nearly collapsed last year. And now they're on the hunt for this man -- a whistleblower who we found right here in Washington.

(on camera): You know the Afghan government has put an arrest warrant out for you now.


LAWRENCE (voice-over): Abdul Qadir Fitrat was the Ben Bernanke of Afghanistan and ran the country's central bank. The Afghan government accused him of contributing to Kabul Bank's meltdown because Fitrat failed to provide oversight.

FITRAT: They just want to blame me and shift all the blame on me because they want to divert attention from their own allegedly corrupt -- from the crimes that they allegedly committed.

LAWRENCE: The central bank reported that President Hamid Karzai's brother took a $6 million loan for a townhouse in Dubai. The vice president's brother got nearly $20 million for a cement factory. Even the Kabul Bank's CEO got a loan, nearly $18 million, to invest in apartment buildings.

Some look good on paper, but more than 90 percent of Kabul Bank's loans were found to be fraudulent.

(on camera): The terms are unbelievable -- no collateral, no interest, and no repayment plan. I mean, what kind of loan is that?

FITRAT: Chris, it is unbelievable that corruption is happening at the highest level in the government of Afghanistan. And I want the international community to put more pressure on high political authorities.

LAWRENCE (voice-over): U.S. senators do, too, and they are pushing the new head of U.S. military operations in Afghanistan to keep an eye on the money.

SEN. LINDSEY GRAHAM (R), ARMED SERVICES COMMITTEE: The Karzai government and other people in Afghanistan are trying to cover up the extent of the fraud and manipulation in this bank.

LAWRENCE: The scandal forced the International Monetary Fund to cut off its credit line to Afghanistan, so the country is losing a valuable source of funding just as the U.S. and its allies begin a huge transition process to pull out.

FITRAT: There were some American funds flowing through Kabul Bank to their contractors in many provinces of Afghanistan, including Helmand and Kandahar.


LAWRENCE: Well, the part of the Kabul Bank that pays Afghan police salaries, that's been split off from the loan department. And that part that pays police is still functioning. But the IMF has still not restarted its donor program because there are still concerns there, and now we hear there is a second bank, another bank that is now coming under scrutiny. A lot of financial problems there in Afghanistan -- Wolf.

BLITZER: Certainly is. Good report. Thanks, Chris, very much.

President Obama, accused of using class warfare against Republicans. I asked former president Bill Clinton for his take on the politics of rich and poor right now.

And the astronaut Mark Kelly admits Congresswoman Gabrielle Giffords isn't the only love in his life.


BLITZER: The astronaut Mark Kelly is promising that his wife, Congresswoman Gabrielle Giffords, will continue to be the only politician in the family. He spoke today about his future and NASA's just a week before the final shuttle launch. Kelly says his main focus is now on making sure his wife recovers from the attempt to assassinate her.

(BEGIN VIDEO CLIP) MARK KELLY, ASTRONAUT: Many of you have been following the recovery of my wife, Gabby. She is doing very well. She's sorry she couldn't be here today.

We both are so appreciative of the outpouring of support. The hopes and prayers of so many people are a tremendous source of strength to her, but also to me, our family, her friends and her staff. I love her very much.


BLITZER: A federal judge has ruled that the man accused of shooting Congresswoman Gabrielle Giffords can be forcibly medicated as a part of efforts to treat schizophrenia and make him mentally fit to stand trial. But what if the treatment doesn't work?

It raises a specter that has long troubled many Americans, the idea that an insanity defense can easily be used to get violent criminals off the hook. But is that true?

CNN's Jim Acosta picks up the story.


JIM ACOSTA, CNN CORRESPONDENT: Wolf, the case against Jared Lee Loughner has reopened an old debate in the U.S. justice system over what to do with accused criminals who are deemed not competent to stand trial. To many Americans, putting Loughner in a mental hospital instead of prison hardly sounds like justice.

To understand what happens to the criminally insane, we talked to two filmmakers who got unprecedented access to one of the country's most well-known mental institutions.


ACOSTA (voice-over): You are entering a world few will ever see in person, the inside of a mental institution that houses criminally insane patients. This is St. Elizabeth's Hospital in Washington, D.C., as captured in a remarkable movie shot last year by the patients themselves.

One of them is Lewis Ekker (ph), who raped, beat, and strangled to death a U.S. senator's aide more than four decades ago.

LEWIS EKKER, PATIENT: I came in, in 1967. That's like 43 years that this was my home.

ACOSTA: The movie's two young filmmakers, Joy Haynes and Ellie Walton, got the hospital's permission to put cameras in the hands of a few select patients. This unprecedented access was granted to give the public a better understanding of what happens to a person who is found not guilty by reason of insanity.

ELLIE WALTON, FILMMAKER: It's unfiltered because it's told through them, through their eyes. ACOSTA (on camera): And what did you learn about them? What did you learn about mental illness?

WALTON: For me, I learned the capacity for healing and the capacity for change. And they talk about that a lot, that they really wanted to communicate how much over these past decades they themselves have transformed.

JOY HAYNES, FILMMAKER: But I think that's what is so great, is that we do get to peek inside. So we don't have to imagine what it's like in there anymore. We actually know.

ACOSTA (voice-over): Five featured men were involved in murder, sex crimes, assault. But even if the filmmakers present them as aging patients who are not as dangerous as they once were, at George Washington University legal expert Jonathan Turley knows the public is not nearly so understanding, especially in high-profile cases like the shooting of Congresswoman Gabrielle Giffords. Her attacker, Jared Lee Loughner, was recently found mentally unfit to stand trial.

JONATHAN TURLEY, GEORGE WASHINGTON "UNIVERSITY LAW SCHOOL: The fact is that the insanity defense is almost never used in the United States.

ACOSTA: By the 1920s, many courts had agreed that sometimes people were seized by irresistible urges to be violent. Proving insanity was still hard, but then, 30 years ago, legal experts say one shooting made it almost impossible.

The 1981 attack on President Reagan and his party by John Hinckley shocked the nation, and so did the court's finding that Hinckley, who had a fixation on actress Jodie Foster, was not guilty by reason of insanity. The backlash was immediate. Congress tightened the federal rules for insanity defenses and 30 states did the same.

TURLEY: You have to be virtually chewing the carpet in the courtroom to qualify for the insanity defense. You have to be so insane, you can't tell the difference of right and wrong.

ACOSTA: For a person who is not mentally ill, prison is generally a better deal. After all, in the mental institution, only the doctors can determine when the patient is finally released.

TURLEY: It's more likely the person will spend more time in a mental institution than they will in a prison. Many of these people will get 20 to life, and they will be out before 20 years. If you go to a mental institution for murder, you will likely spend the rest of your life there.

ACOSTA: All of the patients in the St. Elizabeth's film believe some day, some way, they will be released. But many of them have said that for years.

UNIDENTIFIED MALE (singing): There's a song for us.


ACOSTA: This week, a federal judge sided with prosecutors who want to forcibly medicate Loughner so he can someday stand trial. Experts believe lawyers on both sides of this case will know whether that treatment is successful later this year -- Wolf.

BLITZER: Jim Acosta, thanks.