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THE SITUATION ROOM

Is U.S. at War With Iran?; Promotion Causes Security Scare

Aired January 31, 2007 - 17:00   ET

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


WOLF BLITZER, HOST: And to our viewers, you're in THE SITUATION ROOM.
Happening right now, is the U.S. already at war with Iran inside Iraq?

Speaking with CNN exclusively today, Iraq's prime minister calls on both sides, the U.S. and Iran, to settle their differences elsewhere.

Which side, though, is Nouri Al-Maliki on?

Baghdad boondoggle -- it was all supposed to go toward rebuilding Iraq. But an audit finds tens of millions of your tax dollars have simply gone down the drain.

And a promotion gone wrong -- an advertising campaign shuts down a big chunk of Boston in a security scare. The good news -- it's all clear right now. We're going to bring you the latest on a massive, massive misunderstanding.

I'm Wolf Blitzer.

You're in THE SITUATION ROOM.

From high tech weapons to highly sophisticated insurgent attacks that smack of outside help, are these the signs that Iran is already fighting it out with the United States in Iraq?

An ominous new turn in the Iraq War, and now Iraq's leader is weighing in with some harsh words for both sides.

(BEGIN VIDEO CLIP)

NOURI AL-MALIKI, IRAQI PRIME MINISTER: Iran is Shiite and we are Shiite, and we have many Shiites in Iraq. But this does not justify Iran interfering in Iraq. We respect this relationship. We will not allow such interference to exist.

Also, Iraq is an Arab country. The majority are Arabs. But this also will not justify for Arab countries to interfere in Iraq.

(END VIDEO CLIP)

BLITZER: And joining us now from Baghdad, our correspondent, Michael Ware -- Michael, you had an exclusive interview with the Iraqi prime minister, Nouri Al-Maliki, in which he basically was telling President Bush and the U.S. administration keep your so-called proxy war against Iran outside of Iraq.

What's his bottom line message?

MICHAEL WARE, CNN CORRESPONDENT: Well, essentially what he's trying to do is preserve the sovereignty of his government. Yet at the same time, to some degree, he's trying to keep two parties, equally powerful here in this country, arguably, two masters, happy.

His government only exists because of American intervention here in Iraq. They benefited from American supported elections. Yet the party of Prime Minister Al-Maliki, during opposition, long decades of opposition against Saddam, was supported by Iran. And, indeed, we see that many of the factions that have a stranglehold on this government continue to be supported, politically and militarily, according to American intelligence, by Iranian armed forces.

So Prime Minister Maliki is in a very precarious position.

However, what we see is that amidst this campaign of increasing American accusations against Iran with regard to its interference here in Iraq, we see the Iraqi prime minister siding with American intelligence. He says that, yes, Iran is working to kill American soldiers.

Nonetheless, he says take your rivalry and get it out of my country.

BLITZER: He also said in the interview with you that he thinks he's stronger than any of the militias in Iraq, including Muqtada al- Sadr's Mahdi Army.

Is he right?

WARE: Well, in the short answer, no, he's not. I mean this government which he heads is little more than an alliance or a coalition of armed militias, one of which, the Mahdi militia, the Mahdi Army, headed by anti-American rebel cleric Muqtada al-Sadr, is responsible for putting him into power.

Now, it has been argued by American commanders and others that the prime minister has shielded Muqtada himself and his militia and their strongholds from American operations. Indeed, we saw during the recent State of the Union Address, President Bush calling on the Iraqi government to lift these unnecessary limitations on military operations. That was obviously a message regarding Muqtada al-Sadr and his militia.

So this is a very, very difficult time and we're seeing a lot of factors coming into play in a very difficult crunch right now.

BLITZER: And he also told you, Michael, that he believes that he and the Iraqi government, the Iraqi military, can take over security operations, security responsibility for all of Iraq in three to six months. Now, that sounds very, very ambitious.

Is he right on that front?

WARE: Oh, that's beyond ambitious, Wolf. I mean whilst Washington is in a mood for withdrawal and this message would very much be welcomed, the prime minister matched this claim with a challenge to America. He said we can assume control in three to six months if America steps up the arming and training of our security forces.

Yet, these are security forces that are penetrated heavily by the Shia militias, which American intelligence says are linked to Iran.

At the same time, the prime minister says whilst he believes in the new strategy that has been devised between his government and the Bush administration, he nonetheless leaves the door ajar for the possibility that there may be a future need for an escalation, an increase in U.S. troops numbers. And that's something people in America certainly do not want to hear.

BLITZER: Good work today, Michael.

Good to have you back in Baghdad.

Michael in an exclusive interview with the prime minister of Iraq, Nouri Al-Maliki.

Thanks very much.

WARE: Thank you, Wolf.

BLITZER: So was Iran behind that sneak attack that killed five U.S. troops in Karbala?

U.S. officials say it may just be the tip of the iceberg.

Let's turn to our senior Pentagon correspondent, Jamie McIntyre -- Jamie, do officials say they have actual proof?

JAMIE MCINTYRE, CNN SENIOR PENTAGON CORRESPONDENT: Well, Wolf, not at this point. But they say, you know, where there's smoke there's fire, and they say they have a lot more evidence that they've not yet revealed.

(BEGIN VIDEO TAPE)

MCINTYRE (voice-over): A brazen attack on this Iraqi government center in Karbala almost two weeks ago is the latest incident in which anonymous U.S. officials are pointing an accusing finger at Iran.

But Pentagon officials say it's only a suspicion, based on the sophistication of the attack and concede there's no direct evidence to corroborate Iranian involvement. Even as other U.S. officials claim a mountain of proof to support the more sweeping charge, that Iran is backing several militia groups in Iraq with money, weapons and expertise.

The evidence is said to include computer files seized during a raid in northern Iraq last month in which five Iranians were detained. The State Department promises once declassified, the evidence will be of smoking gun quality.

SEAN MCCORMACK, STATE DEPARTMENT SPOKESMAN: We're going to do it in such a way that it is -- it is properly presented, it is clear, and it is done in way that in presenting this information, that we don't in any way jeopardize our ability to further collect information about these -- about these networks.

MCINTYRE: The U.S. also wants to avoid an embarrassing repeat of Colin Powell's convincing but ultimately inaccurate WMD presentation to the U.N. back in 2003.

TRITA PARSI, IRANIAN-AMERICAN COUNCIL: I think the president is going to have a very, very tough case to make because of the past failures of his administration.

MCINTYRE: Most of the evidence cited so far by the U.S. military consists of weapons found in Iraq but made in Iran. The list includes shaped charges used to make armor-piercing IEDs, detonation wire, rocket propelled grenades, .82 millimeter mortars and Katusha rockets.

(END VIDEO TAPE)

MCINTYRE: So far, the evidence has produced -- the U.S. has produced publicly, while incriminating, is circumstantial. Still, the U.S. says it has more evidence and can produce it if Iran doesn't back off -- Wolf.

BLITZER: All right, thank you, Jamie, at the Pentagon.

Another story we're following, we're getting some new information on that story that was occurring in Boston, a series of bomb scares which we now know were part of a promotion gone very wrong.

Let's go straight to Deborah Feyerick.

She's in New York with the latest -- Deb.

DEBORAH FEYERICK, CNN CORRESPONDENT: Well, Wolf, we can tell you that this was part of an outdoor marketing campaign that was taking place in 10 cities across the country. The campaign was for adult -- the adult cartoon "Aqua Teen Hunger Force." That airs on CNN's sister company, Adult Swim.

Now, according to intelligence sources, the devices were basically circuit boards. And those circuit boards had authorities running all over Boston today. They're about 15 by 12 inches. They had an outline made out of lights of a particular cartoon character called the Mooninite Marauder. He is an outer space delinquent.

Now, Turner Broadcasting tells CNN that the marketing campaign was done by a third party, a company called Interference Marketing. They have no comment.

But Turner Broadcasting did issue this statement earlier. They say that: "the packages in question are magnetic lights that pose no danger. They are part of an outdoor marketing campaign in 10 cities in support of Adult Swim's animated television show, "Aqua Teen Hunger Force." They have been in place for two to three weeks in Boston, New York, Los Angeles, Chicago, Atlanta, Seattle, Portland, Austin, San Francisco and Philadelphia.

The parent company, Turner Broadcasting, is cooperating with local and federal law enforcement on the exact locations of the billboards. The company saying we regret that they were mistakenly thought to pose any danger.

So a lot of concern. All authorities were mobilized in this in the Boston area. A lot of different agencies working together until they could determine exactly what it was. The circuit boards had four batteries attached to them. So that was one thing that sort of sparked concern.

Once they detonated the first, they realized there were others and all of them similar. The cartoon character, apparently, holding up his finger, holding up his middle finger -- Wolf.

BLITZER: All right, thank you for that.

Deb Feyerick updating our viewers on that story.

Jack Cafferty is in New York with The Cafferty File -- Jack.

JACK CAFFERTY, CNN CORRESPONDENT: Another question before -- in a post-9/11 world, what kind of a moron would think that that's a good idea, to scatter stuff around in places like Boston and other big cities with batteries attached to it?

I mean you've got to have some stuff on order that's lost in transit.

The numbers are staggering. According to the United Nations, 34,000 Iraqis were killed just last year. Another 3.7 million of them either fled the country or left for other parts of Iraq, left their homes. Fifty thousand Iraqis a month flee their homes just inside the country.

A lot of those people might like to come here, especially those folks who risked their lives helping the American forces fight that war. And you would think, since we were the ones who invaded their country and have caused a lot of their problems, that we would look a little more kindly on Iraqi refugees who wish to come here.

Now, before I give you the number that the United States has admitted, keep this in mind. We have an estimated 12 million illegal aliens from Mexico in the United States and they continue to enter the country at an estimated 3,000 a day.

OK? Ready? In the four years since the war in Iraq began, we have allowed a grand total of 466 Iraqi refugees to come to the United States.

Now, using that logic, maybe we should just invade Mexico because if you take the numbers for Iraq and apply it to Mexico, we could cut the invasion of illegal Mexican aliens from a million a year down to 100.

Here's the question -- what kind of an obligation does the United States have to help Iraqi refugees?

E-mail your thoughts on that to caffertyfile@cnn.com or go to cnn.com/caffertyfile -- Wolf.

BLITZER: It is pretty shocking. Only a few hundred Iraqis...

CAFFERTY: Isn't that?

BLITZER: ... have been allowed into this country over the past three-and-a-half years.

CAFFERTY: Roughly a hundred a year is all, since the war began. That's a...

BLITZER: Yes, that's a...

CAFFERTY: That's a startling small number.

BLITZER: ... pretty amazing number.

CAFFERTY: Yes.

BLITZER: All right, Jack, thank you for that.

CAFFERTY: Sure.

BLITZER: Up ahead, Madeline Albright, the former secretary of state. She'll share why she's so worried the U.S. could face a war with Iran.

She's joining us in THE SITUATION ROOM.

Also, tens of millions of dollars, your tax dollars, wasted in Iraq. We're going to show you where some of it went and why there's little to show for it, if anything.

Plus, rescue dogs dying -- why their owners blame 911.

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

(COMMERCIAL BREAK)

BLITZER: Is there a proxy war going on right now in Iraq between the United States and Iran? And what happens next?

And joining us now, the former secretary of state during the Clinton administration, Madeleine Albright.

Madam Secretary, thanks very much for coming in.

MADELEINE ALBRIGHT, FORMER SECRETARY OF STATE: Good to see you, Wolf.

BLITZER: If it's proven that Iranian agents were involved in killing American soldiers at Karbala or anyplace else, what should the United States do?

ALBRIGHT: Well, I think that it clearly compounds the difficulties of the situation. But what I'm concerned about is that, it is very unclear to me what the administration's policy on Iran is.

We clearly cannot afford to have our people captured by -- or killed by Iranians. On the other hand, when I testified today before the Senate Foreign Relations Committee, I made very clear that we need some answers about generally where the administration is going with Iranian policy.

BLITZER: It seems to me what they're trying to do is squeeze the Iranians to get them into a position where they might be more malleable, not only in terms of Iraq, but on the nuclear issue, as well. And, at that point, engage them in a dialogue, once they feel the heat.

ALBRIGHT: Well, it's hard for me to tell because I think they say many different things. They have become much more bellicose and they have moved carriers into the Persian Gulf. Clearly, there are also a lot of things going on inside Iran. President Ahmadinejad has been -- kind of had his wrist tapped by the ayatollahs for getting involved in nuclear issues. There is some turmoil within Iran itself...

BLITZER: So you think maybe the pressure, not only from the United States, but from the Europeans and others, is beginning to have an effect?

ALBRIGHT: I think there's a combination of that. And what we have to learn how to figure out, Wolf, people talk about sticks and carrots, and you either use the sticks and then give them the carrots. The truth is, we should be able to try to combine a variety of these tools.

Something is going on in Iran and we have to be very careful not to give Ahmadinejad even more kind of credibility. And, at the same time, not get our fingerprints in a way that makes him -- makes it look as though we're undermining what's going in Iran.

BLITZER: How much credibility does the president of the United States have right now when it comes to Iran, when he says that the Iranians are doing X, Y and Z? Do you believe the president?

ALBRIGHT: Well, I think you have asked a very difficult question, because I think we all want to believe our president, any president. And I'm very skeptical, I have to tell you, based on...

BLITZER: Because of the intelligence barriers leading into the war with Iraq?

ALBRIGHT: Because of the decision failures leading to the war in Iraq, and, basically, that we were told a variety of things and something else was going on.

Now there may be all the terrible things going on in Iran that we are being told by the administration. But who is to say?

And I think that is exactly why the members of Congress has to begin oversight hearings on Iran.

The issues about Iraq and the surge are obviously very important. But I think that before we open up a new front in an area that is already very dangerous, I think we need to know exactly where we are.

And the truth is that when there are so many doubts about how we got into the war into Iraq and what the basic circumstances were, then, unfortunately, the president has put himself and the administration into a position where people are skeptical.

BLITZER: Well, you speak about a new front.

How worried are you that, when all is said and done, there will be a military confrontation between the United States and Iran?

ALBRIGHT: I would be very concerned about that.

BLITZER: Are you worried that it might happen?

ALBRIGHT: I don't know, that's the whole point here. I mean why all of the sudden -- not only have they rejected the fact that the Iraq Study Group suggested of having communication or dialogue with Iran, but they have stepped up our bellicose statements towards Iran.

Secretary Gates has indicated that Iran's behavior's unacceptable.

I'm willing to believe all that. But I do think that is very important for there to be just much more careful approach to this than what happened during Iraq. And we, as the public, are entitled to more.

BLITZER: As bad as the situation in Iraq is right now, and by all accounts it's very bad, you understand, certainly, that it could be a whole lot worse, and the fighting in Iraq could escalate. There could be a regional war, a battle between Shia and Sunni, for example. And that would make, potentially, what's happening in Iraq right now look like child's play.

ALBRIGHT: Well, I'm very concerned about that. And a lot of people have said that they're concerned about a Shia/Sunni battle, which is basically a Persian/Arab fight of great concern. This is a region that is in turmoil. It has been for a long time. The United States' role in it has changed. We -- it's very hard for us to be the guarantor of peace and security because our credibility is not great. And I am worried about this expanding.

And that is why I think it is so essential that we figure out a way to end what is happening in Iraq and be able to deal with the situation, and to do something about the Israeli/Palestinian talks.

BLITZER: Well explain that.

How is that going to affect what's happening in Iraq?

ALBRIGHT: Well, I am not one of the people who believes that dealing with Iraq and Israel is central to dealing with the war on terrorism. But I do believe that for its own sake, we need to deal with the Israeli-Palestinian issue. It would show American interests again, in the region; our ability to carry out a diplomatic mission; and, obviously, it would end a lot of the problems that are involved in that conflict.

But we need to be actively involved. We need a surge in diplomacy. That's what we need at this stage. And I do think, given what you said about a regional war, I think -- and others have recommended this -- that we need to have a very robust regional conference in order to get others to buy into what's going on. This is not just something that is in American national interests. This is an international problem and others need to be brought into it.

BLITZER: We've got to leave it there.

Madeleine Albright, the former secretary of state, thanks for coming in.

ALBRIGHT: Thanks, Wolf.

BLITZER: And coming up this hour, we'll get a different perspective from Republican Senator Lindsey Graham. He supports the president's proposals to send more U.S. troops in Iraq.

Also coming up, millions of aid dollars missing in Iraq, swallowed up by fraud and abuse. We're going to have details of a stunning new government audit.

Plus, one of Osama bin Laden's relatives killed. We're going to have details of that, as well.

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

(COMMERCIAL BREAK)

BLITZER: House Speaker Nancy Pelosi has just emerged from the West Wing of the White House.

She's met with the president with her fellow Democrats. She says there's been a productive meeting. REP. NANCY PELOSI (D-CA), SPEAKER OF THE HOUSE: ... the speaker, a leader in the Republican Party, Congressman Hobson, who is a leader on national security in the Congress, and the distinguished chairs, you know, of the committees of jurisdiction and on appropriation that joined with -- by Congressman Murtha and Congresswoman Lowey.

So we appreciated the opportunity to present our views to the president and thanked him for listening.

Mr. Hobson?

REP. DAVE HOBSON (R), OHIO: I think the Speaker perfectly characterized the meeting. The president was open to discussion. He asked a number of questions. He made a number of comments. It was all very positive.

We found a number of areas where we agree. There are some areas of discussion.

But I think, in the end, our goals are the same. We want to do what's best for the country and the world and to find a way that we can extradite ourselves from the situation as quickly and as positively as we can.

Thank you very much.

PELOSI: Thank you all very much.

UNIDENTIFIED FEMALE: Thank you.

BLITZER: Nancy Pelosi.

You saw Congressman John Murtha there, as well, one of the major critics of the president's Iraq strategy.

They were all over at the White House today. They've just returned from a visit to Iraq, Pakistan and Afghanistan. And we'll continue to follow up on this story.

Coming up, the Republican divide over more troops for Iraq. I'll talk about it with Senator Lindsey Graham and ask him how his position might impact his reelection campaign, among other subjects.

Plus, exposure at ground zero -- did it sicken, did it even kill people and animals? We're going to show you why some say yes.

Stay with us. We'll be right back.

(COMMERCIAL BREAK)

BLITZER: To our viewers, thanks very much for joining us.

You're in THE SITUATION ROOM, where new pictures and information are arriving all the time.

Happening now, President Bush making a spur of the moment visit to the New York Stock Exchange, the first such trip by a sitting president in more than two decades. He greeted people on the trading floor and told our own Susan Lisovicz he was impressed and grateful for the warm reception.

Also, Senator Joe Biden joining the race for the White House, filing papers to open his presidential campaign. The Delaware Democrat saying on his Web site he's running, above all else, he says, because of what he calls President Bush's failures in Iraq.

And likely candidate Senator Hillary Rodham Clinton canceling much of her weekend trip to the key primary state of New Hampshire. Her campaign says it's because former President Bill Clinton's stepfather is sick and adds she looks forward to rescheduling her visit to the Granite State.

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

As we just saw, the president has met with House Speaker Nancy Pelosi and other Democratic leaders who are just back from Baghdad. Pelosi indicates there are some areas of agreement, but the Bush administration is still battling Congress over a new strategy for Iraq.

Can the United States count on Iraq, though, to hold up its end of the bargain?

And joining us now from Capitol Hill, Senator Lindsey Graham, Republican of South Carolina. He's been a firm supporter of the president's proposal to increase the number of troops going over to Iraq.

So much of this plan depends on Nouri Al-Maliki, the prime minister of Iraq.

Do you trust this guy?

SEN. LINDSEY GRAHAM (R), SOUTH CAROLINA: I think he's come to the conclusion that the best hope for the Shia population in Iraq is to live in peace with Sunnis and Kurds and not to be a puppet of Iran, so I trust him to pursue what he believes to be in the best interests of the Shia people in Iraq. And I think that is a political settlement with Sunnis and Kurds, under the rule of law, not the rule of guns, but I'm going to verify, just not trust.

BLITZER: Trust, but verify, in the words of a former U.S. president.

GRAHAM: Yes, right.

BLITZER: He told our Michael Ware, Nouri al-Maliki, in an exclusive interview in Baghdad earlier today, that he wants the United States and Iran to take their so-called proxy war out of Iraq. In effect, he was delivering what some would call moral equivalence, dictating to the United States and to the Iranians to simply get out of his country and fight their war someplace else.

What do you make of this?

GRAHAM: Well, I think I share his goal of getting Iran out of Iraq, to quit destabilizing his regime. He's living on a border that is very tense, now.

Here is what my take on things are. That in the next six months, they can't take over security without American help, but in the next six months they can have an agreement sharing the oil revenue with the Sunnis. They can have local and provincial elections that would empower Sunnis and Kurds, and they could do a great step forward, in terms of disarming the militia. And they could help us fight Iranian agents within Iraq.

But the truth is, if the Iranians are meddling in Iraq, not just so much to mess with us, but to make sure that no functioning democracy can emerge from the ashes of a dictatorship, Maliki needs to understand that the Iranian regime is no more supportive of him than they are of Bush.

BLITZER: He's got to get tough if this is to succeed with Muqtada al-Sadr, the anti-American radical Shiite cleric...

GRAHAM: Yes.

BLITZER: ... the guy who controls the so-called Mehdi Army, this militia. But his government, in effect, depends on the support from Muqtada al-Sadr.

How does he balance that?

GRAHAM: Well, the future of Iraq depends on the choice that you've just described. What is Sadr's vision for Iraq? It's an Iranian theocracy where the three groups can really not live in peace, that you would have a Sunni-controlled -- excuse me, a Shia-controlled theocracy in the place of a democracy. What he has to tell al-Sadr is that you can come inside the political tent and have your say, but if your goal is to create a theocracy outside of a democracy, that you're not going to be allowed to succeed.

Sadr is a demagogue. Every country has demagogues. The moderates need to stand up to the demagogues.

BLITZER: But let me interrupt, Senator, because he's not just a demagogue. U.S. officials, military officers, General Ricardo Sanchez, the first U.S. military commander -- he says this guy has American blood on his hands.

GRAHAM: Yes, he does.

BLITZER: He's killed a lot of American soldiers.

Why not simply go pick him up, arrest him?

GRAHAM: Well, it's a sovereign nation and we're hoping that -- we did deals with former Nazis to stabilize Germany and to counter the Soviet Union. I'm not suggesting that. Here's what I am suggesting -- that the 30 votes that Sadr provides to the Maliki government come at a heavy price. Form a newer coalition, deal him out politically. Let him know that there is no place under his control that the Iraqi army cannot go into.

We need to marginalize Sadr militarily, politically and economically. And if Maliki is not willing to do that, our chances of success in Iraq are limited. If he's willing to do that, Sadr will soon get the message.

Sadr is now understanding you can't boycott democracy if Maliki is serious about marginalizing his militia.

BLITZER: I spoke with Republican Senator Arlen Specter yesterday. He was here in THE SITUATION ROOM and he said he's never seen such emotion that we evident yesterday in that meeting of Republican senators with Vice President Cheney. Given the confusion, the differences that so many in the Republican caucus have right now, take us into that room.

What was going on?

GRAHAM: Well, it was emotional in this regard. If the resolutions are non binding, then that means the troops are going to leave. If you really believe this is a lost war and we shouldn't send anybody else to Iraq to get injured or to get killed, then you have the power as a senator or congressman to stop the deployment by cutting off funding.

If they do leave, any vote in a non-binding fashion -- that is, a vote of no confidence in General Petraeus -- not only weakens the mission, it emboldens the enemy in my opinion. And if they vote of no confidence in a man that I have confidence in -- and I respect my colleagues. We've screwed up Iraq a thousand different ways.

This surge is just not military power. It's a surge on all fronts. It didn't come from President Bush. General Petraeus is the architect of this. I believe in him, so I will argue with my colleagues that the worst thing you could do is allow this commander to go off to a new fight with a new mission and make a political statement you think he's going to lose.

I will not stand for that. That is to me, has no higher purpose. It undercuts our ability to be successful, emboldens our enemy, so there's a lot of emotion. We paid a heavy price for our mistakes. I'm trying not to compound them.

BLITZER: Senator Graham, thanks very much for coming in.

GRAHAM: Thank you.

(END VIDEOTAPE)

BLITZER: Let's check in with CNN's Fredricka Whitfield. She's keeping an eye on stories coming in from around the world. (NEWSBREAK)

BLITZER: Still ahead, Senator Barack Obama has just issued a new statement reacting to what Senator Joe Biden said earlier. Did Senator Biden touch a raw nerve on the issue of race?

We're going to bring you Senator Barack Obama's latest statement.

Also, Iraq. Where did millions of dollars in U.S. aid to Iraq actually go?

We're going to have details of that audit that's raising serious concerns about fraud and abuse.

Plus, canine heroes, dead and dying. Are they new casualties of 9/11?

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

(COMMERCIAL BREAK)

BLITZER: You an bet this is not the way Senator Joe Biden wanted to get his presidential campaign off the ground. Were his controversial comments about fellow White House hopeful Barack Obama a case of loose lips or worse?

Let's get the latest. We're getting some reaction now.

Mary Snow is in New York following this story -- Mary.

MARY SNOW, CNN CORRESPONDENT: Well, Wolf, Democratic presidential hopeful Senator Barack Obama has more to say this hour about comments that Joseph Biden made that have caused controversy. Now, on the same day Senator Biden launched his presidential campaign, he was quoted in "The New York Observer."

This is what he had to say.

(BEGIN AUDIO CLIP)

SEN. JOE BIDEN (D), DELAWARE: I mean, you got the first mainstream African-American who is articulate and bright and clean and a nice-looking guy... I mean, that's a storybook, man.

(END AUDIO CLIP)

SNOW: Now, Senator Barack Obama told CNN earlier today that Senator Biden had called him. He said he felt that it was unnecessary and that he didn't believe that Senator Biden meant to offend anyone.

Then a follow-up a short time ago. Senator Obama's office sent out a new statement which has more reaction, saying, "I didn't take Senator Biden's comments personally, but obviously they were historically inaccurate. African-American presidential candidates like Jesse Jackson, Shirley Chisholm, Carol Moseley-Braun and Al Sharpton gave a voice to many important issues through their campaigns, and no one would call them inarticulate."

Now, earlier today we did also speak with Reverend Jesse Jackson, who did run against Senator Biden for the Democratic nomination in 1988. He told us that he did not think that Biden meant to say anything that was intentional, that was off color, but he said it certainly was suggestive -- Wolf.

BLITZER: All right, Mary. Thank you for that.

Mary Snow in New York.

Tens of millions of dollars in reconstruction aid for Iraq squandered. That according to a new government report.

CNN's Joe Johns is following this story.

It seems like an outrageous development. Our tax dollars simply being wasted in Iraq.

Joe, what have you learned.

JOE JOHNS, CNN CORRESPONDENT: Wolf, it is quite a yarn. All along, one of priorities, of course, has been to stand up the police security forces in Iraq in order to bring some semblance of law and order to the hotspots. But this report that's just come out by the inspector-general for Iraq reconstruction suggests that part of the plan, anyway, that involves bricks and mortar is sort of falling apart.

(BEGIN VIDEOTAPE)

JOHNS (voice over): The new report by the inspector-general for Iraq reconstruction suggests waste, fraud and abuse in U.S. contracting is bungling the efforts to build facilities to help train and support the police in Iraq. The reaction to the report across Washington was, in a word, grim.

LEE HAMILTON, IRAQ STUDY GROUP CO-CHAIRMAN: When you have this incompetence, when you have unauthorized work, when you have shoddy facilities, when you have money that is squandered, there are very, very few things that hurt our effort more in trying to succeed in Iraq than that kind of performance.

JOHNS: Here's the story in a nutshell. Tens of millions of dollars of your money wasted or so far unaccounted for. Pictures are included of apparently shoddy plumbing and what was called poor quality and nonstandard construction methods on a police college built in Baghdad, and then there's the $51 million for a training facility and residential camp for the Iraqi police.

In September of 2004, the contract went to a non-U.S. firm to manufacturer trailers for the project. But shortly after the trailers were built, the government canceled the camp.

(END VIDEOTAPE) JOHNS: And there's even more. There's also evidence that another $36.4 million has been spent on equipment that can't be accounted for. The inspector-general said, for his part, he's found what looked like signs of fraud, and that has been turned over to authorities to investigate -- Wolf.

BLITZER: I know they're looking into a lot of other similar kinds of situations. I fear that these kind of reports are only just beginning.

Joe, thanks for bringing this to us.

Let's get some more now on what the inspector-general has to say about the pace of Iraqi reconstruction. We'll turn to our Internet reporter, Jacki Schechner -- Jacki.

JACKI SCHECHNER, CNN INTERNET REPORTER: Wolf, that's right, the full report is available online. You can read it for yourself. And it doesn't paint a very good picture.

For example, it talks about how 23 percent of Iraq reconstruction funds are being spent on electricity, but at the same time, it says that Baghdad gets an average of less than 10 hours of power a day. It talks about oil production in Iraq, and it gives you a map detailing where all the oilfields and pipelines are, but at the same time, it estimates that $16 billion of revenue was lost over the past three years due to things like poor infrastructure and criminal activity.

It talks about displaced persons and refugees in Iraq. And while it talks about millions on of Iraqis who are displaced or who are refugees, it talks about some 300,000-plus Iranians who are moving into Iraq.

There is an easy link for you we've posted online, cnn.com/situationroomblog, and that will link you directly to that report -- Wolf.

BLITZER: All right. I suspect a lot of people are going to want to read it.

Thank you.

Just ahead, what kind of obligation does the United States have to help Iraqi refugees? Jack Cafferty will be back with your e-mail in just a few minutes.

Also, the rescue dogs of 9/11, are they getting sick as a result of their heroic work? We've got a report. Carol Costello has been watching this closely.

We'll be right back.

(COMMERCIAL BREAK)

BLITZER: Let's check in with Lou Dobbs to see what's coming up in 10 minutes, right at the top of the hour -- Lou. LOU DOBBS, HOST, "LOU DOBBS TONIGHT": Wolf, thank you.

We'll be reporting on the Bush administration's refusal to take action to end three decades a of trade deficit that have cost millions of Americans their jobs and about $5 trillion in debt.

And one of the Senate's most powerful Democrats joins us here tonight, Senator Chuck Schumer. He's written a new book. He has a plan for the country's middle class.

Also, new pressure tonight on the president to pardon two Border Patrol agents who shot a Mexican drug smuggler in this country illegally, then given immunity by the Justice Department to testify against the Border Patrol agents.

We'll have that story.

And Venezuela's anti-American president, Hugo Chavez, has turned his country into a dictatorship.

We'll have the latest developments there.

And three of the country's smartest political minds join us to talk about the president's rising political isolation conflict within his own party and conflict with the Democrats.

All of that and more coming up at the top of the hour. Please join us.

Wolf, back to you.

BLITZER: Thank you, Lou. We'll be watching.

Protesters, meanwhile, over at Ground Zero this morning as President Bush gave an economic speech nearby. Mr. Bush later met with one of them, the son of a Ground Zero worker who died last week of lung disease.

Caesar Borja Jr. (ph) is calling for more money for those who say they're sick from exposure to the rubble over at the World Trade Center site. The president has already pledged an additional $25 million for healthcare programs for first responders. Borja (ph) says he told the president funding should be expanded to everyone.

And it's not just people believed to be affected. There's concern about rescue dogs as well.

CNN's Carol Costello has that part of the story.

(BEGIN VIDEOTAPE)

CAROL COSTELLO, CNN CORRESPONDENT (voice over): They came from all over the country, 300 dogs sniffing out life and death in the ruins of the World Trade Center.

DAVID VITALLI, DOG HANDLER: Hell. Just hell. The dogs were breathing in things that they shouldn't have been breathing in. They were having a hard time. They were coughing, they were sneezing.

COSTELLO: The conditions at Ground Zero were so intense that many of these dogs have been able to perform another search and rescue. Some have died like David's dog Jimmy an Scott's dog Bear.

Saul Aponte is worried about the lumps on Shannon's chest and stomach.

SAUL APONTE, DOG HANDLER: She already had an infection in her lungs when -- you know, when we got back. So, she could have died. You know, I'm pretty sure she would have died.

COSTELLO: Aponte's certainty comes in part because he is now sick himself.

APONTE: This is for my lungs.

COSTELLO: Those medicines were provided to Aponte free of charge after doctors determined his breathing and anxiety problems are related to his work at Ground Zero.

Nearly a third of the 300 dogs at Ground Zero have died since September 11th. The question is, why?

Dr. Cynthia Otto, a veterinarian, conducted a major study on 9/11 dogs and found no evidence Ground Zero made the dogs sick.

DR. CYNTHIA OTTO, VETERINARIAN: We surveyed 97 of the handlers, 61 that were at the World Trade Center, and of those, we only had, I believe, eight dogs that had any evidence of respiratory problem.

VITALLI: And everybody that was working down there has some sort of illness. So, to make a statement that the dogs didn't get sick and the people did, that's totally just a ludicrous statement to make.

COSTELLO: Dr. Otto disagrees. She says it's challenging to determine exactly what killed the dogs.

APONTE: I'm not sure how long she's going to live, but she's a special dog to me. You know, we have been through a lot. We went through a life experience that nobody could, you know, repeat or take away from us.

COSTELLO (on camera): And that's what he tries to dwell on. Not the pain, or the loss of Shannon, but the bond they created trying to save lives in those terrible days.

Carol Costello, CNN, New York.

(END VIDEOTAPE)

BLITZER: And the study Carol just mentioned in her report is not over. It's now received private funding for a sixth year. There's more information, by the way, on its Web site, 911dogs.org, as well as a memorial page for dogs who were part of the study. Up next, Jack Cafferty wants to know what kind of obligation does the United States have to help Iraqi refugees? Jack's standing by with "The Cafferty File."

And you're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: A nice shot of the U.S. Capitol on this day.

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

JACK CAFFERTY, CNN ANCHOR: Wolf, in the four years since the United States invaded Iraq, this country has allowed a total of 466 Iraqi refugees to come to the United States. This, as 3,000 illegal aliens a day continue to stream across the Mexican border.

The question we asked is: What sort of an obligation does the U.S. have to help Iraqi refugees?

Jon writes from Owings Mills, Maryland, "Jack, we marched into Iraq for what turns out to be no reason. It's only fair that we give back to the innocent people that we are harming and allow them to come into our country. I think it's about time we stopped being nice to the Mexicans for defeating them 160 years ago and time we started helping out the Iraqis."

Dee in Washington, "We have no obligation to Iraqi refugees. I mean none. We can't even help our own Hurricane Katrina refugees."

Jeanette writes, "We owe them at least as much financial support as we give the Iraqi government. But isn't the question of what we owe them irrelevant? Squat is what they've gotten with this administration and squat is what they'll continue to get. We owe them refuge and safe haven, we owe them open arms and apologies for decimating what was left of their country."

Sam in Boston weighs in with, "My believe is we made the country better now than it was before when Saddam was in power. It would be dangerous to let too many or even any Iraqi refugees into this country because any number of them could be terrorists wanting to harm the United States."

Teresa from Albuquerque, New Mexico, "Our government made a decision that has resulted in Iraqis not being safe in their own country. We are not only responsible for that result, we are obligated to do whatever we can to help them. I am appalled that we aren't doing more. I had no idea."

And A.J. from Ivyland, Pennsylvania, "Jack, it doesn't matter whether you're for or against the Iraq war. The fact is, we're in Iraq. There are a lot of innocent Iraqis who are being caught in the crossfire. The least we can do is allow them to flee here instead of allowing them to be slaughtered in Iraq."

Fifty thousand Iraqis a month leave their homes in that country. If you didn't see your e-mail here, you can go to cnn.com/caffertyfile, where you read more of these online -- Wolf.

BLITZER: It's just a heartbreaking situation. So many Iraqis originally had such great hopes, but unfortunately a lot of them have simply fled for their own lives, or even worse, they've been killed.

Jack, see you back here in an hour.

We're in THE SITUATION ROOM weekday afternoons from 4:00 to 6:00 p.m. Eastern, back at 7:00 p.m. Eastern.

Until then, thanks very much for watching.

Let's go to Lou in New York.

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