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THE SITUATION ROOM

Pumping Up Terror? Justice Watchdog Faults Numbers; Into al Qaeda's Lair; Power Trial: CIA Leak Closure?

Aired February 20, 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: Jacki, thanks for that.
And to our viewers, you're in THE SITUATION ROOM.

Happening now, a shattering explosion and a deadly cloud of poison gas -- have Iraq's insurgents found a frightening new weapon?

They laid their lives on the line and returned with shattered bodies. Now, are America's war wounded being left to suffer the tender mercies of military bureaucracy?

This is a shocking story.

And from war games to war -- what's behind Iran's in your face attitude, as some are calling it, and its actions in the Persian Gulf right now?

I'm Wolf Blitzer.

You're in THE SITUATION ROOM.

Iraq's insurgents unveiled a deadly and terrifying new tactic today. Police say they rigged a chemical tanker with explosives, resulting in a cloud of poison gas. That was just one of the bloody bombings that hammered the Baghdad area once again today.

CNN's Arwa Damon is in the Iraqi capital -- Arwa.

ARWA DAMON, CNN INTERNATIONAL CORRESPONDENT: Wolf, the attacks across Iraq that left more than 20 Iraqis dead really underscoring the various ways that the insurgency here has developed to carry out its attacks.

North of the capital, Baghdad, in Taghi, a bomb placed inside a tanker carrying chlorine gas exploded outside of a restaurant, killing at least six Iraqis. Another 105 were either wounded in that attack or suffered symptoms of poisoning from that chlorine gas.

And in Baghdad, a car bomb exploded outside of a fuel station, killing at least five Iraqis. And in the evening, a suicide bomber exploded inside of a funeral tent, also killing five Iraqis and wounding another 15 in that attack.

This violence coming as the Iraqi government, its security forces and the U.S. military are carrying out their crackdown on the capital. But really serving to underscore the reality that there may be a crackdown going on, but this in no ways means an end to the violence any time soon -- Wolf.

BLITZER: Arwa Damon in Baghdad.

Thank you.

Could Iran's war games, underway right now, lead to an actual war?

The top U.S. military commander says Iran is pushing the limits even as America builds up its own military might in the Persian Gulf region.

Let's go to our Pentagon correspondent, Barbara Starr.

She's been working her sources -- Barbara, you reported on this to a certain degree yesterday. You're getting additional information today.

BARBARA STARR, PENTAGON CORRESPONDENT: Wolf, there is a turn of events on this entire story now.

You know, for some time, for some days, the Bush administration has been trying to ratchet down tensions with Iran. Top officials day after day saying there is no intention, no plan to go to war against Iran.

But now, a top U.S. Navy commander in the Persian Gulf may be on a different page than his civilian bosses.

Vice Admiral Patrick Walsh, the top commander in the Persian Gulf for the U.S. Navy, met with reporters yesterday at his headquarters in Bahrain. And, of course, he was asked all about these latest Iranian war games at sea and what it all means.

Admiral Walsh's response was fairly startling.

Listen to what he first had to say: "Specifically, the concern with Iran is the combination of the rhetoric and the exercises have taken on a very bellicose and pugnacious tone. The exercises themselves, the ones that focus on the Strait of Hormuz, are the ones that are my greatest concern."

Admiral Walsh also going on to talk about the message that he believes Iran is sending with these war games around the Strait of Hormuz. He said: "It's one that I think is provocative and intimidating."

Very salty language from a top Navy official. Admiral Walsh saying he is concerned the Iranians are trying to show they could shut down the Strait of Hormuz -- Wolf.

BLITZER: I remember when I was briefed by commanders from the 5th Fleet when I was there almost a couple of years ago. They said sure, there are some cat and mouse games going on with Iranian vessels, especially in the northern part of the Persian Gulf. But they suggested the Iranian's were pretty well behaved, they knew the limits. They knew what was going on.

But what this commander, this commander of the 5th Fleet in the Persian Gulf is now suggesting is that there may be a whole new situation unfolding right now.

STARR: That does seem to be what Admiral Walsh is suggesting. His language is very specific. He went on to say that he's not trying to raise tensions with Iran, but he did say that the U.S. Navy is very concerned about what they call miscalculation. U.S. Navy ships operating at sea, Iranian ships operating at sea, all in very close proximity and if there is a misunderstanding, very significant concern that some sort of shooting war that nobody wants could suddenly break out -- Wolf.

BLITZER: And very briefly, Barbara, are there two or three U.S. aircraft carrier battle groups in the Persian Gulf region right now?

STARR: Tonight, Wolf, as we speak, there are two U.S. Navy aircraft carrier groups; actually, in the North Arabian Sea, within striking distance, but not off the coast of Iran.

BLITZER: Thank you very much.

Barbara Starr watching this important story for us.

Meanwhile, the Iranian president, Mahmoud Ahmadinejad, says he's ready to stop his country's uranium enrichment program, but only if Western nations do the same thing. He and his top nuclear negotiator sounded more moderate, at least in terms of their tones today, calling for new negotiations over Iran's controversial nuclear program.

The country is facing a United Nations deadline tomorrow to halt enrichment or possibly face further sanctions.

Is America letting down its wounded troops?

They've risked their lives on the battlefield and they've returned with shattered bodies, so many of them.

Now, do they face neglect and even worse at a top U.S. military medical facility?

Let's go live to our senior Pentagon correspondent, Jamie McIntyre.

He's got some exclusive reaction from the Army brass.

First of all -- Jamie, tell our viewers where you are right now.

JAMIE MCINTYRE, CNN SENIOR PENTAGON CORRESPONDENT: Well, Wolf, behind me is Building 18. It's an outpatient facility at Walter Reed Army Medical Center. It's the latest symbol of bureaucratic ineptitude.

Today, a parade of VIPs marched in and out of this building and all professed to be unaware of the substandard conditions faced by wounded veterans from Iraq and Afghanistan.

(BEGIN VIDEO TAPE)

MCINTYRE (voice-over): Walter Reed Army Medical Center is considered one of the best medical facilities in the world for treating soldiers wounded in combat. But this is another part of Walter Reed, a part many people don't often see -- Building 18. It's a rundown hotel now used to house wounded veterans who are well enough to leave the main hospital, but still too sick to go home.

(on camera): This is the inside of Building 18. It's become a symbol for a bureaucracy that's not working.

(voice-over): As revealed in a story first reported by the "Washington Post," Building 18 has serious problems, including pest infestations, mold and faulty plumbing. CNN got a firsthand look.

(on camera): So this is the day room. They have pool tables. They've got a flat screen TV. But even here, you can see on the roof they've got water damage.

(voice-over): Top Army leaders said they were unaware of the problems until they read about them in the paper. They were shocked and after a tour, told CNN in an exclusive interview there would be quick action.

GEN. RICHARD CODY, VICE CHIEF OF STAFF, U.S. ARMY: I have never come to this place. I wish I had. I'm somewhat disappointed in myself not understanding. I was briefed that it was in pretty good condition. It's getting better today.

FRANCIS HARVEY, SECRETARY OF THE ARMY: It's all about leadership. It's all about seeing a problem, getting an action plan together and then following up to ensure that the actions are taken.

(END VIDEO TAPE)

MCINTYRE: And, Wolf, in that exclusive interview with CNN, the Army secretary, Francis Harvey, said they're going to take action not just at this building, but at buildings all across the country. In fact, while this report was airing, a soldier drove by and yelled out the window, "Look at Building 11!," another one of the buildings in this complex.

So they're going to look at all of them -- Wolf.

BLITZER: As well they should. It's really shocking what's going on.

Jamie, thanks very much for that.

Let's go to the White House.

Our correspondent, Suzanne Malveaux, is over there.

I suspect the political reaction from top White House officials is going to be one of anger.

SUZANNE MALVEAUX, CNN WHITE HOUSE CORRESPONDENT: Well, you're absolutely right, Wolf.

And while the Pentagon is expressing some resolve in dealing with this problem, this certainly presents a potential public relations problem for this White House, for this president. All of them, of course, using Walter Reed as really a symbol, not only of sacrifice, but also success.

(BEGIN VIDEO TAPE)

MALVEAUX (voice-over): President Bush uses his frequent visits to Walter Reed Army Medical Center to turn stories of pain and despair into recovery and hope.

GEORGE BUSH, PRESIDENT OF THE UNITED STATES: Every time I come to Walter Reed, I am moved by the courage and bravery of the people I meet.

MALVEAUX: His meetings with the soldiers are private. The pictures are few. But he uses these occasions to deliver powerful stories of war resolve, not only from the wounded, but from the hospital staff, as well.

BUSH: You're saving the lives of liberators. You're helping the defenders of our country. You're comforting the champions of freedom.

MALVEAUX: But reports now of alleged neglect, despair and mismanagement at this top medical facility have left the White House with little to say.

TONY SNOW, WHITE HOUSE PRESS SECRETARY: I would refer you, Bill, to the Department of the Army, which runs the Walter Reed Army Medical Center. This is something that's an action item over at the Department of Defense and the people who are responsible for getting to the bottom of it work on the other side of the river.

MALVEAUX: So while those on the other side of the river investigate what kind of care our wounded soldiers are really getting, President Bush's commitment to them is now put to the test.

BUSH: We owe them all we can give them, not only for when they're in harm's way, but when they come home, to help them adjust if they have wounds or help them adjust after their time in service.

(END VIDEO TAPE)

MALVEAUX: So, Wolf, this controversy is really just another embarrassment to this White House, a White House that is trying to convince the American people that this war is worth it -- Wolf.

BLITZER: All right, thank you very much for that.

Suzanne Malveaux over at the White House.

Jack Cafferty is off today.

Still ahead here in THE SITUATION ROOM, critical new developments in the trial of the former White House aide, Lewis "Scooter" Libby. We're going to take you live to the courthouse, where the case is now moving into its final phases. The jury expected to get to the trial tomorrow.

Also, "Scooter" Libby's old boss, Vice President Dick Cheney -- is he losing some of his clout in the White House?

And a key hearing in the battle over the body of Anna Nicole Smith. We're going to have details of a ruling that could determine where she is buried.

All that coming up right here in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Vice President Dick Cheney is in Asia right now for meetings with key allies in the war on terror. He'll speak with leaders in Japan and Australia, pay a visit to U.S. troops in Guam, as well.

But the trip comes as some are openly questioning whether the vice president has lost some of his clout inside the White House.

Joining us now from Boston to talk about it, David Gergen. He's advised both Democratic and Republican presidents.

David, always good to have you here in THE SITUATION ROOM.

DAVID GERGEN, FORMER PRESIDENTIAL ADVISER: Thank you, Wolf.

BLITZER: Well, what do you think?

You saw the stories in the "Washington Post" today, in the "New York Times" today, suggesting that his clout has been reduced.

What do you make of this?

GERGEN: I think they're on together. When Dick Cheney was in his heyday, I do not think President Bush would have signed onto this North Korean agreement. You know, this agreement has obviously brought howls of protest from the conservative movement and if Dick Cheney had the same clout he had before, I think that he would have been able to coalesce those people along with Don Rumsfeld, and stop Condi Rice from doing it.

But I think it's been an accumulation of things, Wolf, that have led to this diminished power, starting way back with the indictment of "Scooter" Libby more than a year ago; then the shooting incident; especially the fact that Iraq has turned so sour.

All of those, I think -- and the election '06 results -- all of this, I think, have served to put some distance between the vice president and the center of gravity within the administration. I'm not so sure that the vice president and the president disagree on very much. I think they probably disagree on North Korea. In his heart of hearts, I think Dick Cheney is probably very opposed to the North Korean agreement. It does -- it's very similar to what he always criticized about the Bill Clinton agreement with North Korea.

But I imagine on some other issues -- and I'd say one in particular, Iran, they're much closer together.

BLITZER: I suspect you're probably right on that. I know that John Bolton, the former U.N. ambassador to the U.N. he was here last week. He said this deal is absolutely, positively horrible, the deal with North Korea.

I want you to listen to what Frank Gaffney -- he's a former assistant secretary of defense during the Reagan administration, a well known think tanker here in Washington -- what he said to us today about the vice president and his clout.

(BEGIN VIDEO CLIP)

FRANK GAFFNEY, CENTER FOR SECURITY POLICY: Whenever a very capable individual who has worked closely with a principal like the vice president is taken out of the game, that's a setback.

(END VIDEO CLIP)

BLITZER: He was referring to his former chief of staff, Lewis "Scooter" Libby. As you know, and all of our viewers know, he's at a trial right now here in Washington.

How much of a setback for the vice president has the Libby trial, the Libby resignation, been?

GERGEN: Well, I think that the Frank Gaffney comment points to two things. First of all, the Libby trial has been a setback for the vice president. It's been an embarrassment. You know, when your chief of staff, someone who is a long time close associate is indicted on felony charges, that's an embarrassment. It just inevitably is.

And the fact that the vice president chose not to testify in the trial is indicative of the fact that they weren't anxious to put him up there and get him any closer to it than he already is.

But there's another point that Frank Gaffney implicitly was saying, and that is there has been a drain of people away. You know, there's been this sort of neo-conservative departure from the administration in all sorts of positions, not only the "Scooter" Libby, but Paul Wolfowitz, a number of positions over at the Defense Department and, indeed, at the State Department.

Condi Rice would have had a much harder time pulling off the North Korean deal if she had had the same team that Colin Powell had. If John Bolton had still been at the, you know, had still been at the State Department, Colin Powell couldn't have pulled this off. So there is that -- that disappearance and the departure of so many neo-cons, I think, has also served to weaken, if you would, that faction within the administration and has given Condi Rice, in some limited instances like North Korea, some running room that Colin Powell would have loved to have had, because I think he would have cut much the same deal that Condi Rice has.

But I keep coming back to this. On the essential issue of Iran, and, indeed, on Iraq, the Dick Cheney remains a very powerful influence within the administration. The kind of story you were reporting on earlier about the fear of stumbling into war through miscalculation, provocations on both sides, we're probably closer today to some potential conflict with Iran than we have ever been in a number of years. And the vice president is clearly on the side of be tough as nails with the Iranians.

BLITZER: We've got to leave it there.

GERGEN: OK.

BLITZER: Thanks very much, David Gergen.

Always good to have you here in THE SITUATION ROOM.

GERGEN: Good talking to you, Wolf.

Thank you.

BLITZER: And coming up, a key court ruling impact hundreds of men being held at Guantanamo Bay in Cuba.

Also, details of a very critical new report on the way the government tells you about the war on terror.

Stay with us.

You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

ANNOUNCER: This is CNN breaking news.

BLITZER: We're getting word in from London that Tony Blair, the British prime minister, is on the verge of announcing a major statement about troop withdrawals of British forces from Iraq.

Robin Oakley, our reporter in London, is joining us on the phone -- Robin, first of all, tell us what you're picking up.

ROBIN OAKLEY, CNN CORRESPONDENT: What we're hearing is that the "Sun" newspaper, Britain's biggest selling tabloid, will tomorrow be announcing that Tony Blair plans to announce the withdrawal of 1,500 troops, initially, over the next few weeks.

They won't be coming back to Britain immediately. They will be taken off the streets, put back into barracks, on airports and areas like that, in case of the situation turning worse.

But it will be the start of a phased withdrawal, which is expected to see around 3,000 British troops coming out of Iraq by Christmastime -- Wolf.

BLITZER: There are about 7,000 British troops altogether right now in Iraq. So maybe half would be gone by the end of this year? Is that what the BBC, the newspapers in Britain, are now reporting?

OAKLEY: Pretty nearly half, Wolf, would be out by the end of the year, yes. And this is the -- the argument is that Operation Sinbad, in the Basra area in the south of Iraq, has been much easier because things have been more peaceful there than in the Sunni Triangle around Baghdad, which is where American forces are.

But, obviously, this leaves President George W. Bush with less political cover at a time when he's sent 20,000 more troops to Iraq, here's his friend, Tony Blair, starting to pull back British troops from Iraq -- Wolf.

BLITZER: But if he was really serious about trying to help the U.S. right now, instead of withdrawing those British forces, he'd move those forces to the Baghdad area, where they're desperately needed right now to back up U.S. and Iraqi forces.

I take it that is politically totally unacceptable to the British prime minister. New elections coming up, as all of our viewers know, later this year.

OAKLEY: That would be politically impossible for Tony Blair, with a big round of local elections -- Scottish Parliament, Welsh Assembly and so on, coming up this year. And this very week we've seen new Labor -- Tony Blair's party -- with their worst opinion poll rating since they came to power 10 years ago, Wolf.

So, no, that is simply not going to happen. They're going to stick to the argument that there are different sectors in Iraq, that America deals with Baghdad and they deal with the Basra area and that because things have gone better there, they can start pulling British troops, as Margaret Beckett, the British foreign secretary, has been predicting for some time -- Wolf.

BLITZER: All right, thanks very much.

Robin Oakley joining us with breaking news.

I want to go back to David Gergen, a former adviser to various U.S. presidents.

David, give us a sense of what this means, because this is potential very, very significant not only, obviously, for Britain, but for the Bush administration, as well.

GERGEN: It's potentially very big news, Wolf. You're absolutely right. If these reports are true -- and they seem to be well-founded -- that sound we're hearing is the cracking of the alliance. It means that Britain is starting to go its own way now and will leave President Bush more isolated. It will increase the pressure on President Bush here in the United States to begin pulling back American troops, too, sooner rather than later.

It underscores how much the politics back home is beginning to affect Democratic Senator with regard to troop deployments on the ground in Iraq.

BLITZER: Tony Blair has been such a staunch friend and ally of President Bush. But I take it even that friendship and that alliance has not been able to withstand the domestic uproar within Britain.

GERGEN: Absolutely. They're -- no friendship in international affairs, I'm afraid, has infinite limits. It often, you know -- and we've seen this in the past in U.S.-British relations, even during World War II, there were times when we were not necessarily on the same page.

But I can't tell you how symbolically important this will be, even though, as we've just heard, most of these troops, most of these British troops are in the south, in Basra.

We just saw, yesterday, that American troops were vulnerable outside Baghdad because our forces are so thin in some places outside Baghdad, we're concentrating so much on -- on Baghdad, that we're leaving ourselves more violence.

As you just pointed out, Wolf, it would be enormously helpful to the president if some of those British troops would go and help reinforce American troops, not necessarily on the streets of Baghdad, but, hey, how about some of these other bases or how about out in Anbar?

There are a lot of things they could be helpful doing.

So to have -- to have -- if this -- if this, indeed, is true, and he were to announce this tomorrow, symbolically it's powerful news back here, because Tony Blair has been THE central ally for President Bush and throughout this war.

BLITZER: We're obviously checking to independently confirm these reports from the various British newspapers, the BBC, that Tony Blair will announce tomorrow an initial withdrawal of 1,500 of their 7,000 troops and another 1,500 by the end of the summer, maybe by the end of the year.

Clearly, at a time when the U.S. is surging, increasing, its troops, the British starting to reduce significantly its rather limited force in Iraq to begin with.

Obviously, David, a very, very significant development.

Here's what some military analysts have said to me over recent weeks and months. If the British pull out of the south, it won't take very long for a vacuum to be created there and the relative peace and stability that we see in Basra and Umm Qasr and some of the other places in the southern part of the country, that could explode even then, once the British are gone.

This could potentially be a significant problem for the U.S. and its Iraqi allies.

GERGEN: It could be a -- it could be a problem -- not only a problem politically for George W. Bush in Washington, because it will increase the -- the sense of his own isolation and the Congress will be even more rebellious, but on the ground, as you suggest, we've seen instances in the past when the British have pulled out of some places in the south, and when they pulled back, what we have often seen is an outbreak of Shia upon Shia fighting. And the factions that are necessary to hold together the national government, if they start going at each other in some of these areas, that could be very, very dangerous.

You know, the fear all along has been that we would have this surge on the U.S. troop part and we would keep the Brits in there, but that -- and everything -- we could get the relative quiet. But as soon as we started pulling back, they would -- they would be at each other's throats again. And if we see that starting to happen in the south, if the British -- as the British pull, if that's what they do, if we start to see that, it is going to reinforce the sense that even with a surge bringing some quiet in Baghdad, that is no guarantee that the moment we start to leave, we won't see a slaughter.

BLITZER: David Gergen joining us from Boston.

David, thanks very much.

GERGEN: Thanks very much, Wolf.

BLITZER: All right.

GERGEN: Take care.

BLITZER: We're going to stay on top of this story.

Tony Blair, according to reports in Britain right now, the BBC, various newspapers, expected to announce as early as tomorrow that Britain will start withdrawing at least 1,500 of its 7,000 troops in Iraq, and more withdrawals scheduled for later in the year.

We'll stay on top of this story and update you as new information comes here, into THE SITUATION ROOM.

Also coming up, the security crackdown in Baghdad -- is it helping insurgents gain ground in other parts of Iraq?

We're going to show you what's happening right now in one province that's raising huge concern.

Plus, the trial of former White House aide Louis "Scooter" Libby entering a critical new phase. Our senior legal analyst, Jeff Toobin, he's standing by to show us what's at stake for both sides.

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

(COMMERCIAL BREAK)

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

Happening now, insurgents in Iraq taking their campaign of terror to a frightening new level and unveiling a new tactic. Police say they rigged a chemical tanker with explosives, resulting in a cloud of poison chlorine gas.

Also, a top U.S. naval commander calls war games that Iran is conducting right now -- and I'm quoting him -- "provocative and intimidating." The 5th fleet commander, Vice Admiral Patrick Walsh, says the military exercise, combined with the tough talk from Tehran, are taking on what he calls -- and I'm quoting once again -- "a very bellicose and pugnacious tone."

And the Army secretary vowing action on poor conditions at a building housing wounded war veterans. Secretary Francis Harvey says he wasn't aware of the dilapidated situation at the facility which is part of the Walter Reed Army Medical Center right here in Washington until he read about it all in "The Washington Post." Harvey blames -- and I'm quoting now -- "... a leadership problem."

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

Is the Bush administration using pumped-up numbers to trumpet its war on terrorism? America's crime-fighting agencies are accused of sloppy statistics when it comes to the war on terror. And that accusation comes from inside, inside the Justice Department itself.

Let's turn to our justice correspondent, Kelli Arena -- Kelli.

KELLI ARENA, CNN JUSTICE CORRESPONDENT: Wolf, the war on terror is definitely on. But the numbers may be off.

(BEGIN VIDEOTAPE)

ARENA (voice over): If you want to know how the Bush administration is doing in the war on terror, good luck. The top watchdog at the Justice Department waded deep into the reporting of terrorism-related cases and found the government significantly overstated and at other times understated its successes in the war on terror. Bottom line, the inspector general says for the most part, the Justice Department was just flat-out wrong.

DAVID BURNHAM, SYRACUSE UNIVERSITY: If they can't keep track, how can you hold the government accountable? How can democracy work without a good understanding? This is very important. This is a life-threatening world.

ARENA: The statistics matter because they're one of the only ways to accurately gauge progress in battling terrorists and are used to determine where resources should go. The report charges the Department of Justice lacks adequate internal controls and that its reporting is haphazard. For example, prosecutors identify crimes such as marriage fraud and drug trafficking as terrorist activity with no justification to back that up.

BURNHAM: What it suggests is the government is trying to inflate its impact by pushing the numbers up, which is done over and over again.

ARENA: The Justice Department flatly rejects that accusation. What's more, it says it has already fixed its reporting practice.

(END VIDEOTAPE)

ARENA: But Wolf, this critical report is likely to reverberate. Lawmakers already calling it a breach of confidence.

BLITZER: Thank you for that, Kelli.

Kelli Arena, reporting for us.

Meanwhile, a massive show of force is aimed at keeping the lid on the violence in Baghdad, but Iraq's insurgents are having their way elsewhere.

CNN's Arwa Damon ventured into al Qaeda's stronghold of Baquba, which may now be even more dangerous than Baghdad -- Arwa.

DAMON: Wolf, while the Iraqi government and U.S. military are focusing on cracking down on the capital, Baghdad, at to the west, in Al Anbar Province, the insurgency is merely moving to other parts of the country.

(BEGIN VIDEOTAPE)

DAMON (voice over): Baquba is the capital of Diyala Province, a microcosm of Iraq, with its ethnic breakdown of Sunnis, Shia and Kurds. And while the Iraqi government and U.S. military focuses on securing Baghdad, Baquba is falling apart.

From the insurgency's infancy, this city has been plagued by violence. An ideal atmosphere for groups like al Qaeda to gain a foothold.

(on camera): Most of the Iraqi policemen here at the Diyala police headquarters will not appear on camera for fear of their lives. But there is one recurring theme. Over the last four months, security here has deteriorated drastically, and they all blame one organization for that -- al Qaeda in Iraq.

(voice over): Late last December, al Qaeda claimed the neighborhood of Tarir (ph) in southeast Baquba as part of what it calls the Islamic State of Iraq. While U.S. and Iraqi troops still patrol, these images instill a fear stronger than any sense of security the troops can provide.

Also late last year, this footage documented al Qaeda efforts to stir up crowds after an attack that many here blamed on a U.S. air strike. An air strike the U.S. military says never happened.

True or false, blaming the Americans and the weak Iraqi government for the violence is one strategy the insurgency uses to increase its power. Another, according to this security official who won't show his face on camera, is purely through fear.

UNIDENTIFIED MALE (through translator): First, terrorists are killing civilians in public and committing massacres. The other thing is they're taking advantage of the government's mistakes.

DAMON: Both the national and the local governments are perceived here as having a Shia agenda, leaving Sunnis feeling like they have no one to turn to other than al Qaeda.

COL. DAVID W. SUTHERLAND, U.S. ARMY: It's a fear and a perception of inequality. It's different Sunni extremist groups, it's different Shia extremist groups, it's Shia domination throughout the area. All that plays into the empowerment of the -- of the terrorists.

DAMON: And in Baquba right now, the most powerful group of all, al Qaeda.

(END VIDEOTAPE)

DAMON: Fully defeating al Qaeda in Iraq is not going to come by pure use of military force. It is also going to take the Iraqi government proving to Iraq's Sunni population that it is not sectarian. And it is also going to take the Iraqi security forces proving to the people that they can keep them safe -- Wolf.

BLITZER: Arwa Damon reporting for us, risking her life in the process to bring you that report.

Thank you very much, Arwa.

Up ahead, breaking news. We're getting reaction from the White House to British reports Tony Blair planning to announce tomorrow a withdrawal, a significant withdrawal of British troops from Iraq.

Also, closing arguments in the trial of former White House aide Lewis "Scooter" Libby. What comes next in this closely-watched case?

And there was a emotional testimony today from Anna Nicole Smith's long-time companion. We'll update you on what happened.

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

(COMMERCIAL BREAK)

BLITZER: The prosecution's case against Vice President Dick Cheney's former top aide appears headed to a jury here in Washington tomorrow. This has been a day of heated closing arguments in the CIA leak trial of Lewis "Scooter" Libby.

Let's go to the courthouse here in Washington. CNN's Brian Todd has the latest -- Brian.

BRIAN TODD, CNN CORRESPONDENT: Wolf, just moments ago, prosecutor Patrick Fitzgerald wrapped up his closing argument by telling the jury Scooter Libby made up his story and he stuck to it. The defense claimed earlier that there are no smoking guns to prove that Libby intentionally lied to investigators. It was the end of a long and intense tug-of-war today in the courtroom.

(BEGIN VIDEOTAPE)

TODD (voice over): The prosecution leads off with a blistering account of a vice president and his chief aide on a mission, a mission to blast back at criticism of the administration's case for war from former ambassador Joe Wilson. Prosecutor Peter Zeidenberg tells the jury Scooter Libby is here because "He decided to lie to the FBI and the grand jury."

Zeidenberg ticks through several conversations he says Libby had with eight different people about the covert CIA identity of Wilson's wife. Some of those conversations with reporters. Most of which Libby told investigators he didn't remember.

The prosecutions strategy, according to one expert...

RICHARD SMITH, FMR. FEDERAL PROSECUTOR: To get the jurors to understand, how can you claim you forgot something when it was your task to try to deal with a political crisis and you're the key person to try to discredit the key critic of this?

TODD: The defense counters, attacking the credibility of the reporters who testified against Libby.

Lead defense attorney Ted Wells spends an hour trying to tear down star prosecution witness NBC's Tim Russert, who rebutted Libby's claim that Libby first heard about the CIA officer from Russert. With charts, TV clips and picture after picture of Russert, Wells seeks to portray a famous newsman with a bad memory and a bias against Libby, dramatically telling the jury, "You cannot convict Mr. Libby solely on the word of this man. It would just be fundamentally wrong."

SMITH: Any chink in Mr. Russert's armor helps the defense. So what they are doing is trying to take the government's case piece by piece and attack those points that are the most damning to the defendant in this case.

(END VIDEOTAPE)

TODD: Another big confrontation in these arguments, Libby's attorney, Ted Wells, repeatedly claiming that Libby was scapegoated by the Bush White House to protect political adviser Karl Rove. Prosecutors telling the jury there was no evidence of that. Scooter Libby's fate in the hands of the jury tomorrow -- Wolf.

BLITZER: All right. Thank you, Brian.

has been covering this trial for us. So have the prosecution and the defense effectively made their respective cases?

Let's bring in our senior legal analyst, Jeff Toobin. He's been joining us with some insight. This has been a very closely-watched trial.

What's your gut say? I know you have been following it closely right now. It's going to be up to these 12 men and women in the jury.

JEFFREY TOOBIN, CNN SR. LEGAL ANALYST: You know, I think this was a classic white-collar crime summation from both sides. The prosecution was saying, look, this case is simple -- Libby testified in the grand jury that Tim Russert told him about Valerie Wilson. Russert denies it and eight other witnesses in nine other conversations denies it. That's all you need to know.

The defense says, no, no, no, it's not simple. It's complicated. All of these witnesses have told multiple stories, have different agendas. And I think given the number of witnesses and the -- how quickly the case went, I think the prosecution really has done better, certainly than I expected, in what I thought would be a more complicated and longer case.

BLITZER: Well, what's the burden of proof? You have to show intent, criminal intent, I take it, in these perjury, obstruction of justice charges.

Has the prosecution effectively shown that?

TOOBIN: The whole defense here is an intent defense, as you point out. It is no crime to be mistaken in front of the grand jury. It's no crime to have a faulty memory in front of the grand jury.

The only crime is intentionally lying. And a big part of the defense has been saying, look how busy Scooter Libby was, look how many different responsibilities he had. Perhaps Russert's testimony is accurate. Perhaps these journalists did have these conversations with him. But, he simply didn't remember it the way they did.

The problem with that -- and I think this was very effective in Patrick Fitzgerald's rebuttal summation -- is when he said, look, this wasn't just any old issue. You have the vice president of the United States writing out talking points. You have the president of the United States declassifying evidence on the fly for the first time in the administration.

This wasn't some thing that just passed like a million other things across his desk. This was a big deal. So you bet he would remember.

That, I think, is going to be a powerful argument.

BLITZER: What about the fact that neither the vice president nor Scooter Libby testified during this trial? What, if anything, will that say to these 12 men and women of the jury? TOOBIN: See, I think those two things are somewhat different. I think it was clearly a smart decision by the defense to keep the vice president off the stand.

He couldn't say what Libby remembered or not. He couldn't say that he authorized Libby to lie to the grand jury, because, of course, he has no legal authority to do that. So I think that was clearly the right decision.

The tougher call was keeping the defendant off the stand, because it's one thing to tell the jury in the abstract that someone didn't remember. But in that kind of defense, almost always you want the defendant himself saying, look, I was busy. I was wracking my brain. I tried to remember this and maybe other people saw it in good faith differently.

I think it shows how many witnesses they had lined up against Libby, why he didn't take the case, because he would have been confronted with witness after witness who had a different memory, and that would have been very tough for him to answer.

BLITZER: We'll be watching the deliberation. We'll see how long this jury decides before they come out and make us all aware of what they decided.

Thanks very much, Jeff, for that.

Jeff Toobin, our senior legal analyst.

Lou Dobbs getting ready for his program that begins right at the top of the hour.

Lou, what are you working on?

LOU DOBBS, HOST, "LOU DOBBS TONIGHT": Wolf, thank you.

Tonight we're reporting on the fastest-growing type of substance abuse in this country, prescription drugs in your own home, as addictive and dangerous as illegal street drugs. We'll have that special report, "The War Within."

And tonight, new hopes for justice for two former Border Patrol agents sent to prison for shooting and wounding a Mexican illegal alien drug smuggler. Did the prosecutors withhold key evidence in that trial? Will there be a new trial?

We'll have that report.

And President Bush demanding a new mandate to negotiate so-called free trade deals without congressional oversight. The chairman of the House Financial Services Committee, Congressman Barney Frank, says those deals threaten the future of our middle class. He's among our guests here tonight.

Also joining us, three of the country's top radio talk show hosts. They'll be talking about what America's talking about. Please join us for all of that and more.

Wolf, back to you.

BLITZER: Thanks, Lou, very much. We'll be watching.

And still to come here in THE SITUATION ROOM, Prime Minister Tony Blair's poised to withdraw British troops from Iraq. Is this a crack in the coalition?

We're going to get White House reaction.

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

(COMMERCIAL BREAK)

BLITZER: Let's go to the White House now for some more developments in this breaking news story we have been following about Tony Blair, a timetable for a British troop withdrawal from Iraq.

Suzanne Malveaux is over at the White House.

Suzanne, the United States, the Bush administration sending thousands of additional troops to Iraq at a time now we expect to hear from Tony Blair tomorrow that the British are going to start withdrawing thousands of its troops from Iraq.

What's the White House reaction?

MALVEAUX: Well, you're absolutely right, Wolf.

I just got off the phone with NSC spokesperson Gordon Johndroe, who said that President Bush and British Prime Minister Tony Blair spoke this morning about this. They routinely talk.

It is not a surprise to the White House, of course. That announcement coming tomorrow. But it's been leaked, so they decided to go ahead and respond.

The official response, of course Johndroe saying that, "The president is grateful for the support of the British forces in the past and into the future. While the United Kingdom is maintaining a robust force in southern Iraq, we're pleased that conditions in Basra have improved sufficiently that they're able to transition more control to the Iraqis. The United States shares the same goal of turning responsibility over to the Iraqi security forces and reducing the number of American troops in Iraq."

The bottom line is here is that they are trying to portray this as something that this is good, that is a success. I pushed Johndroe, saying, "Look, this is not going to cripple our own efforts, our own military in going after al Qaeda, as well as the insurgents." He says, "No, there's still 5,500, a robust group that is going to remain there." But he says the conditions on the ground have sufficiently changed there. And of course, Wolf, the big question -- this put pressure on President Bush -- when is it going to be time for American forces to be able to go home? Johndroe saying that's not going to happen until the conditions in Baghdad improve -- Wolf.

BLITZER: And some are already calling it a serious crack in the U.S.-British alliance.

Suzanne, thanks very much.

Just a month ago, the British prime minister said a timetable for withdrawal would be, in his words -- he said, "disastrous".

Let's bring in Abbi Tatton. She has some more now on Tony Blair and his own words -- Abbi.

ABBI TATTON, CNN INTERNET REPORTER: Wolf, we're going back to January 24th, to the prime minister's question time. This is Tony Blair answering questions about an Iraq troop withdrawal just a month ago.

(BEGIN VIDEO CLIP)

TONY BLAIR, BRITISH PRIME MINISTER: Let me just tell him this -- for us to set an arbitrary timetable -- and that is what it is, it's arbitrary. It's not attached to the conditions in Iraq. It's simply saying that we will pull British troops out in October come what May. That would send the most disastrous signal to the people that we are fighting in Iraq.

(END VIDEO CLIP)

TATTON: That just a month or so ago there from Tony Blair on the prime minister's Web site. That was in response to a proposal by the opposition liberal democrat party. Now hearing reports that Britain will begin withdrawing troops from Iraq -- Wolf.

BLITZER: Fifteen hundred -- beginning a withdraw of 1,500, then another 1,500. There are now some 7,000 troops, Abbi, as you know, British troops in Iraq. Almost half of them probably will be out if the prime minister gets his way by the end of this year.

We're watching this story. A lot more coming up 7:00 p.m. Eastern right here in THE SITUATION ROOM.

Up next, the battle over the body of Anna Nicole Smith. We're going to have details of some emotionally-charged testimony today at a court hearing in Florida.

We'll be right back.

(COMMERCIAL BREAK)

BLITZER: The battle over the body of Anna Nicole Smith back in court today, with her long-time companion fighting to have her buried in the Bahamas. Our national correspondent, Susan Candiotti, is joining us now from Fort Lauderdale with the latest.

This was a long day in court today. Lots of drama, lots of emotion. And, shall we say, an extraordinary and unusual judge.

SUSAN CANDIOTTI, CNN NATIONAL CORRESPONDENT: A very unusual judge. He tends to digress a bit. But eventually things are slowly moving along a certain track right now, Wolf.

But we had two key players in court this day. Not only the ex- boyfriend, who claims to be the natural father of Anna Nicole's baby, but also her long-time partner, Howard K. Stern. He is the one that mainly was on the witness stand this day. And he's trying to the prove to the court that he speaks for Anna Nicole Smith as executor of her will and based on what she said to him.

One of the things he said was that, when her son Daniel died, he said she pretty much died as well. And he went on to tell the court that as proof she wanted to buried in the Bahamas, he showed papers, documents, that she purchased a double burial plot in the Bahamas, where he is buried, her son Daniel. And he said that she wants to be buried next to him.

(BEGIN VIDEO CLIP)

HOWARD K. STERN, ANNA NICOLE'S COMPANION: I had pictures that I showed her, so she picked out two double plots side by side that Daniel is currently resting in and where she wants to be as well.

(END VIDEO CLIP)

CANDIOTTI: Now, also in court this day, Virgie Arthur of Texas. She is Anna Nicole Smith's mother. She didn't have much time on the witness stand this day, although she did say that she didn't have much contact with her daughter over the years, especially starting after her daughter started taking drugs.

So, we still have no decision on who will get Anna Nicole Smith's remains. The testimony will continue tomorrow. Stern flying back to Bahamas tonight, coming back to court tomorrow -- Wolf.

BLITZER: And the judge kept making all of these personal statements during the course of this hearing today. What was that all about?

CANDIOTTI: That's hard to explain, Wolf. I must say that I have never seen anything like it in many years covering all kinds of hearings and trials and the like.

But he would talk about going out jogging for the day. At one point, he talked about the men and women serving in Iraq and that we should wish them god speed. And then bringing it back on track.

So we were all over the map. But I think that things are moving ahead slowly. BLITZER: And this is a very narrowly focused issue, where she will be buried. What happens after that?

CANDIOTTI: Well, he must determine who gets Anna Nicole Smith's remains. And he also indicated he might possibly get into who the natural father is, although that has yet to be established by a blood test.

BLITZER: Susan Candiotti watching this for us unfold in Fort Lauderdale.

Susan, thanks very much.

We'll be back in one hour. Much more of our coverage coming up, 7:00 p.m. Eastern.

In the meantime, let's check in with Lou. He's in New York.

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