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Mortgage Meltdown Charges; Romney Gets Key Tea Party Endorsement; McQueary Testifies; Gingrich Endorsement Shortage; Ron Paul's Remark On Iran; Tax Hike Looming For U.S. Workers; DEA: Hezbollah, U.S. Businesses Linked

Aired December 16, 2011 - 16:00   ET


WOLF BLITZER, HOST, CNN'S THE SITUATION ROOM: Happening now: a critical state and a powerful endorsement from Mitt Romney from a star of Tea Party, but will those anti-establishment voters back an establishment candidate?

Also, a very disturbing hearing in the Penn State child sex scandal. A assistant coach tells what he witnessed in the alleged 2002 assault involving Jerry Sandusky and a young boy.

Plus, former Fannie Mae and Freddie Mac executives charged with misrepresenting the mortgage meltdown that brought those companies to the brink.

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

Republican presidential hopeful Mitt Romney is picking up a very significant endorsement in South Carolina today, one that could help boost his standing with Tea Party Republicans who continue to question his conservative credentials. Romney now has the backing of Governor Nikki Haley, who herself was propelled into office with Tea Party support.

Can she convince those same Tea Party voters to back Mitt Romney?

CNN's Joe Johns is joining us now.

This is a huge get for Mitt Romney. Tell us what we know.

JOE JOHNS, CNN SENIOR CORRESPONDENT: Wolf, Mitt Romney continues to get a bunch of big endorsements. This one goes right up on the top shelf.

Republicans in South Carolina have been telling the Romney organization to make more of a play for voters in their state and stop acting like there's no way he can win there. The Nikki Haley endorsement suggests the Romney camp is responding.


JOHNS (voice-over): The nomination race in the early voting state of South Carolina, the first primary in the South, just got interesting. Republican Governor Nikki Haley, a hands-down Tea Party favorite, endorsing Mitt Romney for president. GOV. NIKKI HALEY (R), SOUTH CAROLINA: Today is the day that I'm throwing all of my support behind Mitt Romney for president.

JOHNS: Haley has even got robo-calls going already, making it look like she's all in for the former Massachusetts governor who polls show has got a big problem in her state.

HALEY: He is not a creature of Washington. He knows how the private economy works, how to fix it and most importantly how to solve the problem.

JOHNS: Taken at her word, Haley is supporting Romney because he isn't a Washington insider, unlike Newt Gingrich, who she didn't mention by name, but everybody knows he's about as inside as it gets, a former speaker of the House.

But here's the thing. Tea Partiers who helped sweep people like Haley into office aren't what you would call in love with Mitt Romney, at least not so far. Some Tea Partiers say they still don't have a favorite in the primary race.

AMY KREMER, CHAIR, TEA PARTY EXPRESS: I think that people are still all over the board on who they support and we have seen how volatile this race is, and it goes up and down. And nobody's really coalescing around anybody. So I can't say that one candidate has the Tea Party support more than anybody else.

JOHNS: And there's this. The latest CNN/ORC poll showed 53 percent support among Tea Partiers for Newt Gingrich in South Carolina and only 14 percent for Romney. So Governor Haley's endorsement would be an attempt to get some voters there to reconsider.

KEATING HOLLAND, CNN POLLING DIRECTOR: An endorsement from somebody like Nikki Haley, who's relatively popular with the Tea Party in her state, or at least she was when she was elected governor, could help at least have a few more South Carolina Tea Party advocates give Romney a second look.

JOHNS: Why? Gingrich still has electability problems for one thing. A recent NBC/Marist poll shows that in a reliably red state like South Carolina, Gingrich beats Romney hands down, 42 percent to 23 percent.

But the scary thing for South Carolina Republicans is that Barack Obama wins by 4 percent in an imaginary match-up with the former speaker and beats Romney, too, though it's slightly closer. The craziest thing of all about this poll is that it suggests President Obama, who's seen as the bane of Republican existence right now, has a substantially higher approval rating than Republican Governor South Carolina Nikki Haley herself.


JOHNS: On the inside, there's some recent political history at work here. Nikki Haley endorsed Mitt Romney during his last run for president, so that counts for something. But John McCain actually won the state's primary. When the shoe was on the other foot, Romney endorsed Haley when she ran for governor.

But now everything on the line as Romney looks to make his move in the Palmetto State.

BLITZER: That's a huge, huge development for him, even if she isn't necessarily all that popular in her state right now. With Tea Party supporters in South Carolina, in Iowa and elsewhere, she's got a lot of support out there. So it's going to presumably help Mitt Romney a lot.

Joe, thank you.

CNN's Tom Foreman is joining us now with more on the ups and downs of this race for the Republican presidential nomination.

I think it's fair to say over these many months, Tom, it's been a real roller-coaster.

TOM FOREMAN, CNN CORRESPONDENT: Boy, hasn't it, Wolf? It's been unbelievable.

And these relationships down here and the developments, wow, this is something else. Look at some of the latest numbers here, though. This is interesting. If you are a fan of Newt Gingrich, you like this number. Look at that, 33.2 percent, some of the latest polls from RealClearPolitics. Mitt Romney behind him here, Ron Paul down here.

These are just some of the front-runners here, but here's an important thing you have to look at when you consider these numbers, not just the numbers right now, but the trend, because some people are saying if you follow the development of Newt Gingrich here, down at the bottom, down at the bottom, shooting up to the top, is this the sign of a sustainable growth of his campaign or is this the storm before the calm?

Let me explain what that is about. Let's compare this. This is Newt Gingrich since back in May. Here is Michele Bachmann and Ron Paul from back then. Michele Bachmann, you see she never got anywhere near that high, also very popular with some conservative voters. Ron Paul, popular with a different group. Also, he's had some ups and some downs, never really that high.

You can see Gingrich has a big advantage there. Let's move them back over here though and compare Newt Gingrich to some of the people who have performed a little bit more like him. Rick Perry, for one, he came along here. Same level as the others, then, suddenly, gigantic spike back here in late September, then he fell off a cliff and he has not recovered since.

Herman Cain, who has now suspended his race, same sort of behavior, down here bubbling along, all of a sudden, gigantic spike, back down to nothing.

Now, if I take those back, Wolf, I want to show you one last thing, and this is why what's happening in the Carolinas is so interesting. Here is Mitt Romney's performance through this. From back in May, look, he was higher than everyone. He basically stayed higher than everyone, except for those spike. And even though now he is below Newt Gingrich, the question is, is this one of those spikes that we saw with the other ones.

And is this ready to begin the crumbling of his campaign? Is this as high as he can go? That's why all of the people who are watching these races closely see what's happening there in South Carolina and they look at these numbers and they say, this is the one they're watching closely, closely, closely, to see if it holds or if the decay begins right away because it's one of those peaks that cannot be sustained.

We don't know. But we're going to find out. And certainly what happened with Nikki Haley may have a role -- Wolf.

BLITZER: But, Tom, I just want to point out these are national numbers that you're taking a look at.


BLITZER: And as important as they are, there's not a national vote coming up. The votes are going to be in Iowa, New Hampshire, South Carolina, Florida, but similar trends, the trends that you have seen nationally exist in those states as well.

FOREMAN: To some degree, that's right and each state will behave individually in its own way. But what's just as important, Wolf, as you know, when you look at all of this, when you look at those trend lines, those have a way of influencing how people see candidates and whether or not they think they are sustainable.

Certainly, if you're Newt Gingrich right now, having that big 33 percent, that's good. It makes people think I can produce big numbers. But if you can't hold on to it for a couple of weeks, then people start saying, you're just a peak and you're falling down. Mitt Romney, much more steady. We will see.

BLITZER: Tom Foreman, thank you.

By the way, Michele Bachmann joins us in the next hour here in THE SITUATION ROOM. We will talk about the heated exchanges she had with Newt Gingrich and Ron Paul in last night's debate, the state of her campaign, a whole lot more. Michele Bachmann coming up in THE SITUATION ROOM in the next hour.

Very disturbing new details today in the Penn State sex scandal centering around the former assistant football coach Jerry Sandusky. The state's star witness testified today at a hearing for two former university officials accused of lying in the case.

Our national correspondent, Susan Candiotti, is joining us now with the latest.

A lot of dramatic testimony today, Susan. Tell our viewers what happened.


Well, the star witness for the prosecution in this case, assistant coach Mike McQueary, had his day in court. He appeared calm and he appeared confident as he took to the witness stand and told his story in graphic detail. Here's what he said in part, that he went to a locker room in 2002 to retrieve some materials, some tapes, and when he was inside, he heard some slapping noises. And when he went to investigate, looking in the shower room he said that he saw Jerry Sandusky and a young boy in the shower room.

McQueary testified -- quote -- "The boy was up against the wall, facing the wall. Hands were shoulder-height. Jerry was close to him with his hands wrapped around his waist," McQueary said. "I believe Jerry was sexually molesting him."

Then he went on to say this. He looked away, and when he looked back, he said -- quote -- "They had turned their bodies, were both facing me, so that their bodies were both facing me. They looked directly in my eyes. Seeing that they were separated, I thought it was best I leave the locker room."

And in fact, it is then that McQueary testified he called his father. He said he didn't call police because, later on, nine days later, he was called into a meeting with the two officials that you described, the athletic director and a vice president, and told them, he said, more or less the same thing.

In his words, he said: "In my mind, I conveyed to them that I saw Jerry in the shower with a boy" -- quoting here -- "committing severe sexual acts. They were wrong and over line."

And so, at this point, there was testimony introduced between -- that was read to the grand jury from those two officials. And they told a completely different story. They maintain in this testimony that McQueary never mentioned anything of a sexual nature, only that he had seen allegedly Jerry Sandusky and a young boy just horsing around.

So that, of course, is the basis for these perjury charges. It's also the basis, the state says, that these two officials failed to report this incident to police. In the end, in the end, it was decided, Wolf, by the judge that there was enough evidence at this preliminary hearing to move forward with a trial -- Wolf.

BLITZER: Pretty shocking stuff, and probably just the beginning of this kind of testimony.

What is next, like in the immediate days, Susan?

CANDIOTTI: Well, first of all, we heard briefly from the lawyers representing Mr. Curley and Mr. Schultz. And they maintain that, in Mr. Schultz's case, that he is an honest man and that he absolutely did not ever hear the word rape.

And McQueary had also testified, by the way, on the stand that he told Joe Paterno that something of a sexual nature had gone on and he made it clear to the coach that something inappropriate had happened.

So, in the coming weeks and months, both sides will get together in pretrial conferences. They will determine what kind of evidence and who will be able to testify, but, eventually, a trial date will be set very likely in the next month or so.

BLITZER: Shocking testimony, indeed.

All right, thanks very much, Susan Candiotti on the scene for us.

Mitt Romney is picking up a big-name endorsement today, but where are the prominent Republicans for the front-runner, Newt Gingrich? We will talk about that and much more. Paul Begala and Ari Fleischer, they are in our "Strategy Session." That's coming up.

Also, why a militant accused in the murders of five American soldiers in Iraq could now go free.

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


BLITZER: There's outrage at the news that a militant accused of murdering five American soldiers in Iraq may soon walk free. The United States handed him back to the Iraqis earlier this morning.

We're going live -- we're going to go live to Baghdad in just a moment for reaction. Arwa Damon is standing by.

But first, Brian Todd -- give us some Baghdad on the case of Ali Moussa Daqduq (ph).


BRIAN TODD, CNN CORRESPONDENT (voice-over): A somber wreath- laying to honor America's fallen soldiers in Iraq. Behind the ceremony, the murders of five of those troops is a source of real tension now between President Obama, Iraqi Prime Minister Nouri al- Maliki and their governments.

Those soldiers were killed, U.S. officials say, in an attack planned by this man, Ali Moussa Daqduq, the last detainee held by U.S. forces in Iraq.

SEN. CHARLES GRASSLEY (R), JUDICIARY COMMITTEE: This guy is a very, very bad guy. He's involved with killing five American soldiers. He's an enemy combatant.

TODD: Daqduq, the U.S. government insists is a longtime government operative for Hezbollah, the terrorist group with ties to Iran. U.S. intelligence officials say he admitted to working with Iran's notorious Quds force, which sponsors attacks against Western targets.

In January 2007, U.S. officials say Daqduq planned a daring kidnapping mission at a U.S. base in Karbala, Iraq, which led to the murders of the five Americans.

Analyst Douglas Olivant, a U.S. officer in Iraq at that time, says when Americans captured Daqduq later, he proved not only dangerous, but cunning.

LT. COL. DOUGLAS OLLIVANT (RET.), NEW AMERICA FOUNDATION: That he pretended for a long time that he was mute, because he knew his Lebanese accent would give him away. So, he pretended he was mute and mentally-disabled for a long while to convince us he wasn't somebody we should be interested in.

TODD: Senator Grassley and other Republicans have been pressuring the Obama administration to keep Daqduq in U.S. custody and take him to Guantanamo for a military trial. But that would undermine Iraq's sovereignty and potentially undercut the U.S. relationship with Iraq at a crucial time.

Brian Todd, CNN, Washington.


BLITZER: Let's go to Baghdad right now. Arwa Damon is standing by.

What are they saying in Baghdad, the Iraqi government? What are they going to do with Daqduq now that the U.S. is handing him over to them?

ARWA DAMON, CNN INTERNATIONAL CORRESPONDENT: Well, according to what we're hearing coming out actually from the U.S. administration, the Iraqi government has pledged that Daqduq will be seeing an inside of an Iraqi court, that he will be standing trial for those alleged crimes -- again, the killing of five American soldiers.

That being said, Wolf, there have been other individuals who are also implicated in this very same attack. The Kazaali brothers, who were in U.S. custody, they were released over to the Iraqis. The Iraqis had them in their custody, and then they were set free. Both of them under this umbrella of reconciliation that saw the Iraqis releasing many detainees -- among them, these Kazaali brothers.

And that is why the Americans are so concerned. They worry that Daqduq could also end up walking free and potentially carrying out even more attacks, and even if he were to see the inside of a courtroom here, Wolf, there's no guarantees because the judicial system is quite simply so fraught with so many problems.

BLITZER: The great fear that so many Americans have right now, this guy, he's a Lebanese member of Hezbollah. Very close to the Iranian. That given the nature of their relationship that the government in Baghdad, the government of Prime Minister Nouri al- Maliki has with the Iranian regime of Mahmoud Ahmadinejad, not only might he be set free but they would let him go over to Iran. Certainly, the Iranian would let him go back to Lebanon or whatever. He would be a free guy to do whatever he wants.

How realistic given past experience with the Iraqis on the release on these kinds of guys, how realistic is that fear?

DAMON: Well, this is going to be the real test, Wolf. Are the Iraqis going to stand by their pledge that they made to the Americans, that he would be seeing justice? That he would be seeing the inside of a courtroom? Or are they going to potentially succumb to Iranian pressure to release him over to Iran and then, yes, as you mentioned, he could end up in Lebanon, he could end up orchestrating even more attacks.

This is why it's been such an issue of contention between the U.S. and Iraqis. The talks revolving Daqduq took place at the highest level imaginable. The concerns are real, Wolf, because of Iran's footprint here and because of some of the decisions we've been seeing the Iraqi government taking, because right now, this is a government that is deliberately calculating that it is not no Iraq's national interest to aggravate it's neighbor Iran.

BLITZER: And we see that in the way it's behaving towards Syria, for example. It's basically supporting -- going against the rest of the Arab world in supporting Bashar al-Assad, refusing to impose sanctions or go along with Arab League resolutions. And that's largely the result of irritating the Iranian, who are very close to the Iranian.

Is that your assessment?

DAMON: Well, the Iraqi government justified that decision by saying first of all that sanctions have never forced a dictator to step down, bearing in mind that Iraq also suffered greatly under the sanctions imposed under the rule of Saddam Hussein. And they also say that should those types of sanctions be imposed on Syria, because of the economic ties between Syria and Iraq, that could potentially have a devastating impact on the Iraqi economy, and that is how the Iraqi government is justifying its decision. It's continuing to state that this has nothing to do with its relationship with Iran and that this is a decision of a sovereign Iraqi nation, but there's still a lot of questions, Wolf.

BLITZER: Arwa, thanks very much. Arwa Damon is on the scene for us in Baghdad as she's been virtually from day one of the war.

A lights out for the old fashion light bulb? Not so fast. Details of what lawmakers slipped into a spending bill that's impacting potentially at least all of us.

And will Barry Bonds go to jail or not? It's sentencing day for the disgraced former Major League star.


BLITZER: Mary Snow's monitoring some of the other top stories in THE SITUATION ROOM right now, including another roller coaster week on Wall Street.

MARY SNOW, CNN CORRESPONDENT: It really was. And good to see you here in New York, Wolf.

Investors were taking a breather today after a tumultuous week. Early gains slipped on news that seven Europeans countries were put on negative credit watch. But France keeps its AAA rating for now. That helped prevent investor panic.

The Dow closed down only about two points. The Nasdaq and S&P posted slight gains.

Good news if you like using traditional light bulbs in your house. A provision in the spending bill that Congress is likely to pass prevents the government from enforcing light bulb efficiency standards until September of 2012. Now, those new rules will gradually phase out old bulbs for more efficient compact fluorescent light bulb, also known as CFLs.

Baseball legend Barry Bonds faced a federal judge today not far from where he broke the Major League home run record. The former slugger was sentenced to two years probation and required to pay a $4,000 fine for obstructing justice during his testimony about the Balco steroid scandal back in April.

Prosecutors have wanted to send Bonds to prison for 15 months, in addition to the fine.

And it's a sad day of the literary world as author Christopher Hitchens has died from complications of esophageal cancer. Hitchens was well-known for his provocative columns in "Vanity Fair" magazine. An outspoken atheist, he had a very public battle with cancer, frequently writing about his illness, as well as discussing it on television. Hitchens was 62 years old.

BLITZER: He was a real talent. Our deepest condolences to his family. He will be missed. Whether you agreed with him or disagreed with him, he was always a fascinating read.

SNOW: He really was.

BLITZER: A powerful literary figure indeed. Thanks very much, Mary, for that.

Rick Perry and Herman Cain rose to the frontrunner status only to fall from the top. Can the new man on the top, Newt Gingrich, maintain his lead with only days left before the Iowa caucuses? We're going to talk about that, and much more.

Paul Begala and Ari Fleischer, they're standing by live for our strategy session.

Plus, why is Michele Bachmann calling Newt Gingrich condescending and insulting? My interview with Michele Bachmann, that's coming up in our next hour.


BLITZER: A lot to discuss in our strategy session, joining us now, the Democratic strategist and CNN contributor Paul Begala, and this CNN contributor Ari Fleischer, the former White House press secretary of President George W. Bush.

Guys, thanks very much for coming in.

Mitt Romney, as you know, received some important endorsements. Some more important than others. Nikki Haley, the governor of South Carolina, very important. Christine O'Donnell, the not so successful senator from Delaware, not all that important.

But in the Tea Party movement and the manner of the Tea Party world out there, how significant, Ari, are these endorsements, Nikki Haley, Christine O'Donnell?

ARI FLEISCHER, CNN CONTRIBUTOR: A teeny tiny, teeny tiny bit. Wolf, I'm of a school that endorsements don't really matter that much in politics. People make their own minds up and they have for decades, frankly. I think endorsements are just a relic from old way of politics.

Mitt Romney needs to show that he's got credentials in the Tea Party. It sort of helps him if they were all coming up for somebody else, it could hurt him. But at the end of the day, this is on Mitt Romney's shoulders for him to deliver for voters. Endorsers cannot do it for you.

BLITZER: They may not be all that significant, Paul. I don't know if you agree or disagree with Ari on the value of endorsements.

My own sense is Nikki Hailey is a significant endorsement, not so much in South Carolina, although I think it's important there, but around the country, she's very popular in that whole Tea Party Movement.

PAUL BEGALA, CNN POLITICAL CONTRIBUTOR: I think she is, but I'm more with Fleischer, God forbid me, help.

FLEISCHER: I changed my mind.

BEGALA: He's exactly right about this. It's why I've been copying his hair style as well. But I think South Carolina actually matters more, Wolf and here's why. She now has not just committed to Mitt Romney. She has to deliver her state to him.

That South Carolina primary is a killer and that is, that's where Republican presidential candidates are made or lost. And I mean, back when I was working for Bill Clinton, when Zell Miller, the governor of Georgia at that time endorsed Bill Clinton, he committed himself to delivering his state for Bill Clinton and he did it.

That's what saved our campaign. So, generally, I don't believe in endorsements as very important at all, but when a governor of an early primary state commits to you, she now has to deliver that state.

So her rear end may not be on the ballot, but it's on the line just as much Mitt's is when they go to South Carolina primaries. So in that sense -- FLEISCHER: Here's where I'll break with Paul. People really can't deliver anything this politics anymore. The notion that a governor or senator can deliver their state implies they have some type of machinery that can be picked up and put in place of somebody else. The burden in politics is for the candidates themselves. All these third parties are marginal at best.

BLITZER: I haven't seen a whole lot of major, huge endorsements, Paul, for Newt Gingrich. Is that a big deal or a little deal?

BEGALA: It's because people who know him hate him and the reason voters, a lot of voters are for him is they haven't gotten to know him yet. But if I were Newt, and this is serious advice, I'm not being flip.

I would celebrate the fact that he doesn't have endorsements because he can say, you know, like to paraphrase St. Paul, who said be in the world, not of the world. Newt could say, well, I was in Washington, but I was not of Washington.

And the establishment is going with Mitt Romney. I am the insurgent. I would celebrate the fact that he has no endorsements because he may as well use that to burnish his outsider credentials.

It's amazing that a 68-year-old man, who first ran for congressman, Nixon was president, can now pose himself as the outsider, but I think he can. And he should celebrate his lack of endorsements.

BLITZER: Ari, throughout this entire Republican political season, we've seen a lot of these candidates go up and then go down. Cain, Bachmann, Perry, we've seen a lot of this going on.

Gingrich is doing well now, though the last few days. I think his numbers have decreased a little bit. Does he have the self- discipline and you know him. You've worked with him in the House of Representatives.

Does he have the self-discipline to maintain that above the fray manner that he's trying to do in the face of these bitter attacks he's receiving?

FLEISCHER: The Newt that I know, the answer is no. That has never been Newt's hallmark. Newt has always been material. Newt has always been bombastic.

And Newt has used that as Paul indicated previously, to give himself the real outsider credential. A man who wants to change things, a man who's not content with the way it's been and it is remarkable that somebody has been of Washington for so long as the role of outsider against Mitt Romney.

Mitt Romney who has really not of Washington has the role of being the establishment. They have done a switch position, which is not based on their resumes. But Newt's, this is the greatest test of all in the Republican primary now.

Does Newt have the ability to be the serious type of candidate people can trust in the oval office? The beauty for Republicans who have questions and doubts about Newt is the process will provide the answer.

If this turns into a long primary goes into spring and Newt never blows himself up. He beats Mitt Romney because he proved that he was a steady, able candidate and people think he can continue that in the fall election, he'll win. There's a plan B and that's Mitt Romney.

BLITZER: Paul, when you worked in the White House in the '90s in the Clinton administration, lot of your colleagues used to say to me, maybe you said at one point, too. There were two Newt Gingriches.

There was the disciplined, effective Newt Gingrich who worked with President Clinton, trying to balance the budget, welfare reform, and other key issues.

And then the not so disciplined Newt Gingrich who helped the government shut down as you remember a couple of times. Does he have a discipline based on your personal experience to stay above the fray, shall we say?

BEGALA: No, and not even just stay above the fray. You know, I've said this before. Every Gingrich story ultimately ends with Newt and a can of gasoline and a lighter. And he's going to (inaudible0) himself and self emulate. Now maybe he won't. He says he's changed.

He had a bit of a rough patch in the debate last night, but then recovered very strongly. What he does that I greatly admire, I don't like the guy, to be honest, but what I greatly admire is he's got perseverance. He has toughness. He has endured attacks in this campaign.

Wolf, we've seen it. Not only just about his public career and his work, but about his private life that would have sent 99 percent of us under the table into the fetal position.

He's got a toughness that I admire so maybe he will be able to power through this. I'm kind of with Ari that I'm skeptical because he's so self-destructive, but I do admire that perseverance. It makes him very formidable.

BLITZER: Guys, standby. Hold on. I want to continue this, but take a breath for a moment because we have a lot more to discuss in the world of politics, certainly a political reality. Up one day, down the next.

What's going on in the Republican presidential race? Ron Paul has faring well in Iowa, but did he blow it with his recent comments on Iran? Our "Strategy Session" will continue. Ari and Paul standing by.

Also, new fallout from the subprime mortgage disaster. New information coming up. (COMMERCIAL BREAK)

BLITZER: A comment can make or break a candidate's standing in the polls. Ron Paul has been fairing very well in Iowa, but let's listen to this exchange he had last night.


RON PAUL (R), PRESIDENTIAL CANDIDATE: The greatest danger is that we will have a president that will overreact and we will soon bomb Iran. I would say that the greatest danger is overreacting.

MICHELE BACHMANN (R), PRESIDENTIAL CANDIDATE: With all due respect to Ron Paul, I think I have never heard a more dangerous answer for American security than the one we just heard from Ron Paul.


BLITZER: But did Ron Paul jeopardize his chances of winning in Iowa? Let's continue our "Strategy Session" with Ari Fleischer, the former White House press secretary to President George W. Bush and our Democratic strategist, Paul Begala.

Ari, what do you think? A lot of pundits out there including me have suggested he could surprise a lot of people and win in Iowa on January 3rd.

FLEISCHER: Here's what you always have to understand with Ron Paul. First and foremost, I disagree with everything he says about foreign policy. I do find him dangerous isolationist.

Having said that, what Ron Paul does is rev up his base in a way that nobody else can do. His base is capped and that's his problem. I don't think he's going to do anywhere above 20, 25 percent Iowa, which would be very, very strong.

He only got it 10 percent four years ago, but he has that ceiling. He can get above it. But he can get to that number because there is a group of people who feel the way he feels and he has energized them. So within that limited group, he is a powerful force.

BLITZER: He does have an excellent organization, a lot of committed supporters in Iowa, probably a lot better than Newt Gingrich and Mitt Romney, Paul and that matters in Iowa.

BEGALA: It does. He's been at this a long time. He has been consistent, which a few of the rest have been. He'd been very principled. That libertarian strain in the Republican Party is I think powerful strong and growing. He speaks to that. On this question of Iran, I don't think it hurts Congressman Paul as much.

There is a sister soldier moment here, a chance for Republicans to stand up and be strong in Iran and take on part of the Republican establishment and that is on this, these stories we've seen of Koch Industries allegedly doing business in Iran.

I think they've stopped, but I've seen reports that they have gotten around the sanctions maybe through cooperation with foreign companies or foreign companies and have done business. Koch Industries is owned by the Koch brothers, some of the biggest financiers of right wing and Republican causes.

For that matter, Dick Cheney, when he ran Halliburton, Halliburton was doing business in Iran. So somebody should stand up in the Republican Party and say look, I'm a strong Republican, but it's wrong when corporate interests are doing business in Iran.

And even though they may not be breaking the law, they're hurting America's interest by enriching the terrorist dictatorship in Tehran. And I think that would be a huge winner for the Republicans if someone would have the courage to stand up to those guys.


FLEISCHER: It's a side show. That has nothing to do with the greatest threat we face and the decisions of the president of the United States vis-a-vis Iran. And the worst thing the president did when it comes to foreign policy is he sat silent when the Iranian demonstrators took to the streets two years ago.

Can you imagine what it would -- if the president has spoken out on the side of those protesters? That's how you influence foreign policy. The Democrats have long just gone after Republican contributors.

As Paul said, he doesn't even know if what he's saying is true. I don't think anybody should do business with Iran. I'm probably as hawkish and tough as you can get. That's fine with me, but really has nothing to do with the fundamental substance of how you handle Iran.

BEGALA: Bloomberg, which is a very reputable news organization. It focuses on business did a long piece on this. I was surprised that no Republican picked it up. I think it's very important and to say that's a side show, I think it's an enormous issue.

The Iranian regime is evil. They are bent on opposing America. They're bent on the destruction of Israel and we've got to stand up to them, but that means across the board. These people who are threatening to launch missiles won't even speak out against the Koch brothers. Believe if there was liberals, if George Soros was doing business with Tehran, believe me the Republicans would all be speaking out about it.

BLITZER: Guys, we got to --

FLEISCHER: Republicans run against the president.

BEGALA: But you can't speak out against it.

BLITZER: All right, we're going to do some checking.

BEGALA: Check the Bloomberg story. BLITZER: We'll check it all out. Guys, thanks very much. Lots of politics going on, but there's other important news we're following as well.

Former executives of Fannie Mae and Freddie Mac are now charged with securities fraud. Government regulators say they were major players in the subprime mortgage fiasco and misrepresented the risky investments. Chris Knowles is working the story for us. Chris, what's going on here?

CHRIS KNOWLES, CNN CORRESPONDENT: After a two-year investigation, now we can call it one of the biggest actions taken against top executives at the center of the housing and financial crisis of 2008.

The Securities and Exchange Commission is going after six former executives of Fannie Mae and Freddie Mac. Their named in a civil suit charged with misrepresenting just how much of their holdings were made up of subprime or high risk mortgage loans.

The SEC claims the execs knowingly approved statements that down played the percentage of those loans and falsely claimed the risk was minimal and manageable. All this is alleged to have happened in the run-up to the financial crisis.

The government and therefore taxpayers ended up bailing out Fannie and Freddie to $168 billion so far with another $51 billion possibly on the way. Now according to the SEC, the government also took over Fannie Mae and Freddie Mac's home loans.

They were valued at the time at $5 trillion. Additionally, these executives and others at the two mortgage giants had pulled in around $100 million in pay.

The director of SEC's Enforcement Division saying, quote, "All individuals regardless of rank or position will be held accountable for perpetuating half truths or misrepresentation about matters materially important to the interest of our country's investors."

The SEC is looking for unspecified financial penalties. The agency settled a similar suit with the former boss at Countrywide Financial.

BLITZER: A major, major development. Chris, thanks very much. Chris Knowles reporting.

The clock is ticking. Congress is still work on a new spending bill. Will you get to keep your payroll tax cut? That's coming up.

And in our next hour, no holding back. Why Michele Bachmann feels insulted by her fellow Republican candidate, Newt Gingrich?


BLITZER: Good news. Congress appears to have dodged a government shutdown with an agreement on a new spending bill, but one major item still on lawmaker's agenda right now, extending the payroll tax cut for about 160 million Americans.

Our congressional correspondent, Kate Bolduan, is up on Capitol Hill. Kate, where do negotiations stand at this minute on the payroll tax cut keeping it at least for another year?

KATE BOLDUAN, CNN CONGRESSIONAL CORRESPONDENT: I tell you, Wolf, congressional leaders and top aides, they're still talking. They are still negotiating and what they've been talking about generally in terms of what they're negotiating all along is the following.

We've talked about, of course, extending the payroll tax cut, but also extending unemployment assistance. How long they would extend unemployment assistance may be one point of contention, but also how to prevent a scheduled cut in the reimbursement rate that doctors receive for treating Medicare patients.

One outstanding issue I'm told that they're talking about amongst other things is how to pay for such a deal. No matter how they would kind of figure out the degree of the detail. Be paying for it, of course, has been a major issue.

And as you know, Democrats dropped their demand recently that the millionaire's surtax be part of the deal to cover the cost of the package. So that is one issue they're dealing with.

While the top Democrats in the Senate and the top Republican in the Senate were quite optimistic that they'd be working towards a bipartisan deal earlier this morning on the floor, still today, no deal quite yet -- Wolf.

BLITZER: What about the proposed Keystone oil pipeline from Canada through Texas? It's been a huge vote of contention between both parties in the Republicans passed legislation in the House as you know, saying it should go forward. The president saying he would veto that. What's the latest on that?

BOLDUAN: It still is an issue and Republicans, they remain insistent that the Keystone pipeline provision, that project, approval, be part of any final deal. Just listen here to the top Republican in the Senate, Mitch McConnell from just earlier today.


SENATOR MITCH MCCONNELL (R), MINORITY LEADER: Frankly, I will not be able to support a package that doesn't include the pipeline. I think this is something we could all be proud of here at the end of year.

By demonstrating to the American people that we can work together, not only to help those who are struggling through a continuation of the payroll tax holiday and unemployment benefits package.

But also, create jobs at the same time in the private sector without a penny of the federal government's money and by moving the pipeline along.


BOLDUAN: But many Democrats and the president as you well noted, they have stood opposed to including the Keystone in the final deal. They've stood opposed to it all along. That they don't think it should be part of the deal to extend the tax cut as the president held off on approval for further environmental study.

And of course, I will stress that there is no final deal quite yet. I should say that there's a school of thought up here, Wolf, that Democrats could possibly agree to including Keystone in a final deal and here's why because Republicans had been pushing a proposal, that while it would speed up approval of this pipeline project, it would offer the president a significant amount of leeway in his decision.

If that were the case, it would be a win for Republicans. They would get the Keystone project and in return, Democrats would win by getting two key things that many Republicans have been opposed to all along.

Extending unemployment assistance as well as extending the payroll tax cut. Of course, there's no final bill yet. There are a lot of people talking up here though and you never know. A funny thing might be happening on Capitol Hill, Wolf. They might just be compromising.

BLITZER: Wouldn't be the first time. It would be good news for a lot of folks out there. Thanks very much. It's amazing how that deadline, Christmas, New Year's, vacation, begins to have an effect on lawmakers. Kate, thanks very much.

Let's dig a little bit deeper right now with CNN's Erin Burnett. Erin, there's one idea out there. Democrats have been saying you know what?

They can't reach an agreement right now in extending the payroll tax cut for another year. Maybe just do it for two months. Keep it going. That will give them some more time to finesse it to come up with some sort of compromise.

ERIN BURNETT, HOST, CNN'S "ERIN BURNETT OUT FRONT": Yes, they've been talking about doing that. They say we'll deal with it again in 60 days. Obviously, this is something that adds to the frustration people feel with Washington, right?

Everything is always running down to the wire and then little kicking the can down the road a little bit so it's not something that really makes a lot of sense. For most people, that's an extra $160.

So it isn't something that's going to dramatically move the needle for people in a way that they can plan ahead and for companies that hire based on this tax cut, they need it to be guaranteed for a year.

OK, I'll go hire Wolf Blitzer. I know what my taxes are going to be, I'll make the hiring. So the whole point of this payroll tax cut is put more money in people's pockets and to get more hiring. Doing it two months at a time, every time being a countdown and a battle, really takes these things off the table.

BLITZER: And it also underscores the sort of dysfunctional Washington that's out there. Potentially, the credit rating agencies, they could be taking a look. Once again, they may say, you know what, we're going to downgrade America's credit worthiness. Is that an issue out there?

BURNETT: Well, that's obviously why we were downgraded the first time because Washington was categorically unable to get anything done. So that has only been underscored through this, but I think it's safe to say everything has to be paid for whether you do it for tax increases or spending.

Without having further ratings implications and that's clear from the market. But you could look out there on this payroll tax cut, giving it to the people that make under $75,000. You could pay for it easily, Wolf, with things that both Democrats and Republicans and Democrats have said they agree on.

The great irony of the situation is they both like the tax cuts. There are ways they agree on to pay for it and they still haven't reached a compromise.

BLITZER: You're doing your homework. You got a lot of stuff over here and reading a lot.

BURNETT: This is the Keystone pipeline. I have John Thune on the show tonight to talk about it. Obviously, he's pro. It's goes right through his state. I've seen numbers, Wolf, 5,000 jobs would be created to jobs would be lost because farmland would be hurt to 553,000 jobs would be created. So trying to get to the bottom of that.

BLITZER: We'll be watching, 7:00 p.m. Eastern, "ERIN BURNETT OUT FRONT." Thank you. Good to see you in person.

A major accusation against dozens of U.S. businesses. The feds say they help fund terrorists. We have new details.


BLITZER: Dozens of American businesses accused of links to a terrorist group. Brian Todd is digging into that -- Brian.

BRIAN TODD, CNN CORRESPONDENT: Wolf, this other shoe dropping is significant because it ties profits from U.S. based businesses to Hezbollah. The businesses are unlikely channels for the group to get its money from, but U.S. law enforcement officials say they are part of a very sophisticated network.


TODD: Non descript used car dealerships and export companies in the U.S., maybe not the fist places you'd like for connections to terrorism. But in a new complaint, U.S. law enforcement officials say about 30 American companies are avenues for hundreds of millions of dollars funnelled to Hezbollah, a group that has attacked American targets for decades.

(on camera): The real significance of this action is that it ties American businesses to Hezbollah, right?

DEREK MALTZ, DEA SPECIAL OPERATIONS DIVISION: Yes, you have millions of dollars going through businesses in the United States in about 10 states. We've identified about 30 businesses that are buying used cars in the United States, shipping those cars to Africa for resale.

TODD (voice-over): Derek Maltz is a DEA special agent who helped coordinate an investigation going back about six years. According to Maltz and other law enforcement officials, cocaine was shipped from South America to Africa.

Sold in Africa, Europe and the Middle East. The cash was then brought to Beirut and placed in money exchange houses. Then through the Lebanese Canadian bank, the money was sent to buy used cars from companies in the U.S. The cars were sent to Africa for resale. Much of those profits according to official, went to Hezbollah.

(on camera): The owners of two car export businesses in the U.S. whom we contacted said they knew nothing about any allegations that their profits went to Hezbollah and they denied any link to the group. U.S. officials say they don't have evidence at the moment to charge the owners of those businesses.

(voice-over): It was all part of a drug and money laundering network U.S. officials say was spearheaded by a Lebanese national, now under indictment in America. Contacted by CNN, the chairman of the Lebanese Canadian bank denied any connection with Hezbollah. Experts say Hezbollah is relying more and more on criminal enterprises for its funding.