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Earthquake Hits Southern California: Governor Schwarzenegger Holds Press Conference; Pentagon Touts Proof of Progress in Iraq; McCain's Social Security Plan Draws Conservative Criticism; Obama to Meet with House Democrats

Aired July 29, 2008 - 17:00   ET


WOLF BLITZER, CNN ANCHOR: Not far away -- Ed Lavandera. He was with his family at Disneyland in Anaheim when all this happened.
You were about to put your kid on a ride when they obviously shut down that ride, Ed?

ED LAVANDERA, CNN CORRESPONDENT: Yes, Wolf, we were about to get on a little ride called the Astro Orbiter. And all of a sudden the ride before us was just wrapping up and we started hearing the metal clinging going back and forth. And I just thought it was part of the ride that maybe it was shaking back and forth it was something silly that the ride did at the end to kind of make the kids laugh or whatever.

And I looked up and all of a sudden, I thought, the ride's not moving. We're the ones swaying back and forth. It was a bizarre few seconds. The whole thing lasted less than five seconds before it was over. Before I knew it they were telling everybody to get out of line and away from the rides and that everything need to be inspected.

And that's kind of where we are right now. A lot of the rides are opening back up again here in Disneyland, so we're going to keep on having fun.

BLITZER: And Ed, what is the status of Disneyland right now?

LAVANDERA: Wolf, for the most part, I think everything is slowly starting to reopen. We just wrapped up two rides again. We're in the line for a third ride as well now. So, everything's kind of coming back on, and our definitely seeing people kind of getting back into the festive spirit here.

BLITZER: All right. Ed Lavandera, taking some time off from his vacation to update us on what -- what it was like at Disneyland in Anaheim outside of Los Angeles as well. This 5.4 magnitude earthquake.

We have some videotape right now of scientists talking about -- not only the earthquake, but the series of 10 to 20 aftershocks, much smaller, that occurred. Listen to this ...


KATE HUTTON, CALTECH: But I would not be too surprised to find people feeling aftershocks over the next few days.

QUESTION: What was the magnitude like? Are we going to be in the 3s, probably?

HUTTON: Well, most of them are going to be much smaller than that. The bulk of them will be in the 1s and 2s. OK, but there might occasionally be earthquakes -- aftershocks in the 3s. There might even be a 4. There's also that one percent chance that there could be bigger than 5.4.

UNIDENTIFIED FEMALE: What did you feel?

UNIDENTIFIED MALE: I felt -- I was scared. So, I just jumped over the counter and ran outside. It started -- it was only three or four seconds but everything shook up pretty good.

UNIDENTIFIED FEMALE: So, this was your first time, right? You didn't know what to do. You don't know some of the rules that Californians use when there's an earthquake.

UNIDENTIFIED MALE: No, I wasn't used to it. But I'm used to it now. I was really scared.

UNIDENTIFIED MALE: Tell me about the damage. How much do you think this is going to cost?

UNIDENTIFIED MALE: I think it's going to cost, you know, about $5,000. There was a lot of damage done. A lot of wine bottles dropped and we had some liquor in the back dropped, too.


BLITZER: All right, so you get a sense of what happened in Southern California when this earthquake occurred. Now about two and a half hours or so ago, out in Chino Hills, the epicenter. About 20 or 25 miles southeast of Los Angeles. Felt all the way down in San Diego, as far away as Las Vegas.

We're going to continue to monitor the aftereffects of this earthquake in Southern California. At some point, the governor of California, Arnold Schwarzenegger, will be making a statement, to answer people's questions. We'll go to that once we see Arnold Schwarzenegger.

But I want to move on. There's other major stories unfolding today as well. Including a major story unfolding right here in Washington. Senator Ted Stevens already in the midst of a tough battle for an eighth term is now fighting a seven-count indictment. The Alaska Republican is famous for steering federal money to his home state, but it's his own home that is now at the center of his case against him and renovations worth $250,000.

Our justice correspondent, Kelli Arena, is picking up the story.

Kelli, this has been hanging up over Senator Stevens. He's up for re-election this year for sometime. But today the Justice Department came full blast with these counts, with these charges against him.


As we've seen so many times before, money and politics, a deadly mix, and has led to many a downfall. If Stevens is convicted, it will end one of the most impressive political careers in history.


ARENA (voice-over): new first floor. A garage. A wrap-around deck, all for his vacation home in Alaska. More than $250,000 worth of gifts for an influential senator that were allegedly never disclosed. Senator Ted Stevens was indicted by a federal grand jury for not reporting those gifts as is required by law.

MATTHEW FRIEDRICH, ASSISTANT ATTORNEY GENERAL: These items were not disclosed on Senator Stevens' financial disclosure forms which he filed under penalties of perjury.

ARENA: Prosecutors say the gifts were given to Stevens by an oil services company VECO and it CEO, Bill Allen, who pleaded guilty last year to bribery. The indictment says when the senator was receiving those gifts, VECO employees were soliciting him, quote, for multiple official actions, including funding for projects in Pakistan and Russia, but the government stopped short of charging Stevens with taking bribes.

FRIEDRICH: The indictment does not allege a quid pro quo.

ARENA: Stevens has been under investigation for more than a year. As part of a larger propose into public corruption in Alaska in which seven people have already been convicted. His home was searched last summer by the FBI and the IRS. In a radio interview at the time he insisted he paid for his home's elaborate renovation himself.

STEVENS: Every bill that was presented to us has been paid. Personally with our own money.

ARENA: Stevens, one of the most powerful men in the Senate, is expected to turn himself in.

SEN. HARRY REID, (D) MAJORITY LEADER: It's a sad day for him. Us.

SEN. JOHN WARNER, (R) VA: I hope that this will turn out fairly and consistent with -- with law. And good decision.

ARENA: The fact that Stevens is 84 years old could play a role in any plea agreement or possible sentencing.


ARENA: Wolf, Senator Stevens did release a written statement. He says he's never knowingly submitted a false disclosure form, that he's innocent and that he intends to prove it.

BLITZER: Thanks very much, Kelli -- updating us on that story.

It's not every day that a United States senator has formally been charged, formally been indicted. We'll watch this story and all the ramifications.

Let's check in with Jack Cafferty right now. He's got "The Cafferty File" -- Jack.

JACK CAFFERTY, CNN ANCHOR: Yes, if he's convicted on federal perjury charges, that would carry possibly a mandatory prison sentence, would it not?

BLITZER: Yes, it would.

CAFFERTY: So, the bridge to no where could go right to Leavenworth.

BLITZER: Someplace like that.

CAFFERTY: Barack Obama is narrowing his search for vice president and Hillary Clinton ain't on the list. There are reports that Virginia Governor Tim Kaine is, quote, very, very high on the short list and that he has told his associates that he's had very serious conversations with Obama about joining the ticket. Some of the other names out there -- Senators Evan Bayh, Joe Biden, Kansas Governor Kathleen Sebelius, former Senator Sam Nunn but no Hillary. She may dream about being on the dream ticket, but that's apparently about all.

Funny, right after the primaries ended, CNN's Roland Martin and I were having a conversation. He told me then that the chances of Hillary being on the ticket were slim and none. When one of our bosses said, well, you've got to get a second source for that information, he said, there is no second source. It looks like he knew what he's talking about.

"The New York Times" says Clinton has told people close to her she thinks there is little chance Obama will pick her. Here is a clue. She has not been asked to provide any documentation to the committee that is vetting potential VPs. She's not campaigning for Obama either.

Hillary Clinton hardly darkened the door of the U.S. Senate when she was running for president. Now all of a sudden Terry McAuliffe said she's too busy working in the Senate to campaign for the Democrat who won the nomination. He said once she's done there, though, that, quote, "she's going to hit the campaign trail," unquote.

Her Senate work didn't keep her from campaigning for herself almost every day for a year and a half. And what about Bill Clinton? Almost as silent and invisible as his wife.

Here's the question: When it comes to Barack Obama, where are the Clintons?

Go to You can post a comment on my blog -- Wolf.

BLITZER: I may have misread it, but I read Adam Nagourney's story in the "New York Times" today. I think he said that they did ask her for some documents, even though that was probably just pro forma. I could be wrong. I don't know if you noticed that paragraph in his story.

CAFFERTY: I looked at the story. I don't recall seeing that sentence. She is quoted as saying that she hasn't been asked. But there could be some confusion there. But I don't think there's any confusion about is she ain't going to be on the ticket.

BLITZER: Well, the only scenario I could see is if he comes around, looks at all these polls especially in Florida and Pennsylvania, Ohio and Michigan and they are saying, you know, McCain is doing incredibly well. He's really edging up there. This is very competitive. You have only one hope to bring Hillary on the ticket. At that point he may have to hold his nose and say you know what, I really don't want to do it, but if that's the only way I will be elected president, maybe. That's the only scenario we could see unfold. But that's the long shot.

CAFFERTY: Well, we'll wait and see what happens.

BLITZER: We'll see what happens. Because you never know. There have been examples of other nominees picking examples of people they didn't really want to pick but in the end there was information that they really needed to do so.

CAFFERTY: Well, politics makes strange bedfellows. When they need each other, all of a sudden you may see something different.

BLITZER: All right, Jack, excellent. Thanks very much.

Jack Cafferty with "The Cafferty File."

An earthquake gives a good-sized shake to the Los Angeles area. We're waiting to hear from the governor of California, Arnold Schwarzenegger. He's going to update on what happens. We'll go live to his news conference once it starts.

And America is awash in a sea of red ink. How would Barack Obama go about repairing that budget? I'll ask a man who helped balance it before, the former Clinton treasury secretary, the current Obama economic adviser, Robert Rubin. He's here in THE SITUATION ROOM.

And a multimillion dollar mystery. One man trying to trade in millions of dollars of old, decaying bills. And now federal authorities want to know the source of that cash.

Stick around. You're in THE SITUATION ROOM.


BLITZER: There was a strong earthquake in Southern California today, about 20 miles or so southeast of the Los Angeles area. The epicenter in Chino Hills. It could be felt in San Diego. Also felt as far away as Las Vegas. We're getting reaction. We're watching this. We have reporters throughout the area monitoring what's going on. We're also standing by for a news conference from the governor, Arnold Schwarzenegger, to update us on the aftereffects of this 5.4 magnitude earthquake in Southern California.

We'll go back there shortly, but there's other important news we're following as well.

Despite the deadly suicide bombings that have killed dozens of Iraqis in recent days, the Pentagon is now touting some unprecedented progress in Iraq, noting a steep decline in the number of attacks, and what will become the lowest American monthly death toll yet.

Let's go to our senior Pentagon correspondent, Jamie McIntyre. He's working the story for us.

All right, give us the latest, Jamie. What do we know?

JAMIE MCINTYRE, CNN SR. PENTAGON CORRESPONDENT: Well, Wolf, the news out of Iraq is not all good by any means, but nevertheless Pentagon officials looking at the trends see a glimmer of hope that Iraq may be turning a corner.


MCINTYRE: These are deadly days in Iraq. Suicide bombers, increasingly women who hide explosives under their flowing robes, continue to strike with impunity. Four attacks in Baghdad and Kirkuk claimed at least 60 lives in just a single day. But in the dark cloud, the Pentagon sees a silver lining. U.S. casualties have dropped to the lowest level since the war began over five years ago. Just nine Americans died in Iraq this month, as July draws to a close. Compared to 29 last month and 79 a year ago.

UNIDENTIFIED MALE: This is not the metric by which we measure success, but it is stunning nonetheless.

MCINTYRE: Another indication Iraq may have turned a corner -- attacks have dropped to 25 a day, from 170 just over a year ago. And on one day last week, there were no attacks and only five casualties in the entire country. That's a record low according to the Pentagon.

UNIDENTIFIED MALE: So, and this is all taking place, mind you, after all five surge brigades are out.

MCINTYRE: But one sign U.S. commanders are not so sanguine about the current trends, their refusal to shift 2,200 Marines sitting in Kuwait, now serving as emergency backup for Iraq to Afghanistan, where reinforcements are desperately need.

UNIDENTIFIED FEMALE: What other possible threat could be more pressing than getting those Marines in Afghanistan?

UNIDENTIFIED MALE: The situation is not precarious. It is not urgent. The sky is not falling in Afghanistan. And we will get the troops there as fast as we can without exposing ourselves to greater risk in a rather -- in a very volatile part of the world.


MCINTYRE: And the top commander in Iraq, General David Petraeus, who will soon become responsible for Afghanistan, is taking a cautious approach as well. Saying that his recommendations for troop cuts expected next month will be based on the conditions in Iraq, as he sees them -- Wolf.

BLITZER: Jamie McIntyre, watching the story over at the Pentagon, as he does every single day.

The House of Representatives, here in Washington, has now taken up an historic measure that would offer regrets on the record for slavery.

Let's go to Brianna Keilar. She's watching this story for us.

Brianna, this resolution has now been introduced. It's being debated. What do we know?

BRIANNA KEILAR, CNN CORRESPONDENT: Well, Wolf, it has been introduced and it's being debated. But, of course, this was taken up in the Capitol building, one of the most famous American buildings, built almost entirely by slaves.


KEILAR (voice-over): One-hundred forty three years after the end of slavery, Congress' first apology. A House resolution that acknowledges the injustice, cruelty, brutality, and inhumanity of slavery and Jim Crow segregation laws.

REP. JOHN CONYERS, (D) MI: This measure will take us another step forward toward the national heal-ment, atonement, and continued progress that must be made along these lines.

REP. STEPHEN COHEN, (D) TN: This government has not apologized to its own citizens, African American.

KEILAR: Congressman Steve Cohen, a white lawmaker from Memphis, Tennessee, is spearheading the measure.

COHEN: It's appropriate, I think, that a Caucasian member, particularly from the South, be the sponsoring party for an apology, for slavery was a Southern institution, a peculiar institution that the South utilized for its economic advantage. As America did.

KEILAR: Cohen acknowledges some people may question the timing of this apology. The majority of his district is black, and race has become an election issue, as he faces a challenge from fellow Democrat and former civil rights attorney Nikki Tinker in a primary election next week.

NIKKI TINKER (D), CONGRESSIONAL CANDIDATE: Certainly you want the Congress to look at the -- of this country. Now, they are saying there are nine seats in the state of Tennessee, and this is the only one where African Americans even have enough courage to stand up and run. I think they are saying with those nine seats, can we just have one?

KEILAR: But Cohen insists the apology for slavery is the realization of a decade-long push and not a political calculation. The nonbinding resolution does not recommend reparation, but the National Association for the Advancement of Colored People hopes it's a step toward compensating the ancestors of slaves.

HILARY SHELTON, NAACP: Any process of repairing damage has to be done by first acknowledging wrongdoing. And an apology begins with an acknowledgement of wrongdoing. And then moves to address that problem.


KEILAR: John Conyers, chairman of the House Judiciary Committee, has proposed legislation to look at whether reparations are appropriate. But he's proposed similar legislation, many times over the years, Wolf, and so far it hasn't come up for a vote.

BLITZER: Brianna, thanks very much.

Brianna Keilar, up on the Hill watching this story.

Coming up, we're standing by to hear from the governor of California, Arnold Schwarzenegger, on the earthquake that struck almost three hours ago. Here you're looking at some live pictures. Arnold Schwarzenegger is going to update us on what we know about this 5.4 magnitude earthquake -- in the Southern California area. It shakes the Los Angeles area. Some buildings were swaying. Some residents rushed out on the street. We're on the scene for you.

Also, we're going to be checking in with the former treasury secretary, Robert Rubin. He has been advising Barack Obama. We'll hear from Robert Rubin on what he thinks Barack Obama would need to do if elected president to reduce the budget deficit.

Stick around. Lots more coming up right here in THE SITUATION ROOM.


BLITZER: Once again, we're standing by to hear from the governor of California, Arnold Schwarzenegger, on this 5.4 magnitude earthquake that struck Southern California, outside of Los Angeles, about, almost three hours or so ago. 5.4 magnitude earthquake.

There's been a series of aftershocks, much smaller. There has been some damage, but clearly, it could have been a whole, whole lot worse. We'll go to the governor once he starts talking in -- in California.

It's often -- it's not often that Senator Barack Obama has been spending two straight days here in the nation's capital. But the nominee-in-waiting has been on Capitol Hill today, getting ready for a meeting with House Democrats. Afterwards he's due to speak to reporters. We'll catch his comments live. We're standing by for that.

Meanwhile, John McCain has been drawing some harsh criticism from conservatives over his plans for Social Security and a fresh hint, just a hint right now, that he possibly would either consider raising taxes in order to help save Social Security. As they say.

Mary Snow has been working this story for us.

It's generated some unusual criticism from the -- for the Republican candidate from some conservatives out there, hasn't it Mary?

MARY SNOW, CNN CORRESPONDENT: It has, Wolf, because Senator McCain is drawing fire from one group that supports his economic proposals over rival Barack Obama. The anti-tax group says McCain is sending a mixed message and needs to not blur any lines.


SNOW (voice-over): High on John McCain's to-do list should the Republican presidential hopeful be elected, fix social security.

SEN. JOHN MCCAIN, (R) PRESIDENTIAL CANDIDATE: Sit down with the Democrats and say, look, let's fix social security. We cannot mortgage our children's future.

SNOW: But exactly how McCain plans to save the system is gaining scrutiny. In an interview with ABC's "This Week" he left open the possibility that he may raise payroll taxes for social security.

GEORGE STEPHANOPOULOS, ABC NEWS: So that means payroll tax increases are on the table as well?

MCCAIN: There is nothing that's off the table. I have my positions and I'll articulate them, but nothing is off the table.

SNOW: That statement drew fire from the conservative fiscal group the Club for Growth. It wrote a letter to McCain saying it's shocking as McCain has been vocal about not raising taxes.

MCCAIN: The choice in this election, it's stark and simple. Senator Obama will raise your taxes. I won't.

ANDREW ROTH, THE CLUB FOR GROWTH: John McCain is trying to have his cake and eat it, too. He's trying to appeal to both conservatives saying that he will be against tax hikes, and then he's trying to appeal to independents saying that he'll work with Democrats in order to reform Social Security. He needs to get off the fence and pick a side, basically.

SNOW: We asked an economic adviser for McCain to clarify, is there a contradiction between saying he doesn't want to raise taxes but saying he'll leave open the possibility for higher payroll taxes for Social Security.

KEVIN HASSETT, MCCAIN CAMPAIGN SR. ECONOMIC ADVISER: I know that he doesn't want to increase taxes. He thinks social security can be fixed without raising tax rates. And he also wants to sit down at the table and negotiate in good faith with Democrats. So -- so I don't see how those are inconsistent at all.


SNOW: But adding to the confusion, the McCain campaign spokesman earlier today said in an interview, quote, "There is no imaginable circumstance where John McCain would raise payroll taxes," adding "it's absolutely out of the question."

Separately today in Sparks, Nevada, McCain was asked by a young girl if he would raise taxes if elected. He said flat-out, no -- Wolf.

BLITZER: Thanks, Mary, for that update.

Mary Snow working this sensitive story for us.

We're standing by, by the way, to hear from Senator Barack Obama. He's getting ready to meet with House Democrats. You're looking at live pictures as they gather there. He's going to be emerging from that meeting, going to the microphones and speaking to all of us. We'll hear what he has to say on this day. This, the second day in a row he's been here in Washington.

We're also standing by to go out to the West Coast. The governor of California, Arnold Schwarzenegger, he's going to be going to that podium right there. Updating on us on this 5.4 magnitude earthquake in Southern California today.

Lots of news happening right here in THE SITUATION ROOM.


BLITZER: We've got some breaking news. The governor of California, Arnold Schwarzenegger, briefing everyone right now on this 5.4 magnitude earthquake.

Let's listen in.


GOV. ARNOLD SCHWARZENEGGER (R), CALIFORNIA: We'll continue to monitor the situation very closely. We also want to stress that individual citizens should make sure that they are taking all precautions possible. I think the Office of Emergency Services recommends that you have a disaster evacuation plan for your family and also for your pets, which is very important and which we have stressed many times before.

So, again, I want to say thank you to the OES for the quick action. And now if you would like to come out and say a few words, please.

UNIDENTIFIED MALE: Thank you, Governor.

Again, as the governor stated, there has been no major injuries reported. No major loss of infrastructure or major structural damage. Although, we do have teams out right now that are inspecting all the major roadways, our power lines, infrastructure, our hospitals, vulnerable populations and all the things that we normally do after these type of events.

We do want to stress that it is important that people remain calm. Monitor your radios and televisions for emergency information and important messages that may come about. Aftershocks are occurring. And they will continue to occur. I think we've already counted for almost 30 aftershocks after this event.

Initially this was reported as a higher magnitude earthquake. It has been scaled down to 5.4. I think we will be seeing some reports of some minor damage as the day goes on. But luckily, we -- I think we dodged a bullet here. And have not seen any major issues with this event.

I do want to stress, again, that our local officials, fire, law, emergency medical, are all out right now, inspecting and dealing with their routine emergency response plans. Our local emergency operations centers are activated. Our regional state operations center is activated, and all state agencies have been directed by the governor to provide any support that the locals may need. So, at this point we're still gathering some more information -- Governor.

SCHWARZENEGGER: Do you have any questions about any of this, please feel free.


SCHWARZENEGGER: I, of course, called home right away after the quake, just to see if the family's OK. And I think she was in the middle of a meeting and felt the house rock. But she's OK. Everyone else is OK.

Like I said, we were very fortunate that there were no serious injuries or the property damage that we know of at this point.

And we have here a map, just as you can see, where the quake took place, which is in Chino Hills. And it is -- it shows here the color. Red represented is a real severe earthquake. So, it was kind in the medium range, a 5.4.

Any other question about this?

QUESTION: Kind of retrofitting the last few years in California, do you think, even though this wasn't a major, major earthquake, that a lot -- why there wasn't a lot of destruction because of retrofitting action taken by the state?

SCHWARZENEGGER: I think that the state has done a great job in preparing ourselves for quakes and for fires and for all those kind of disasters, mud slides and whatever else that we have here.

And I think the key thing also is not only preparing the infrastructure, but also to prepare in our offices. I think that one thing that has helped us continuously in our state is that we are trained and we practice those things, that there is immediate action. Because the more you debate over those things and the more you think about it, that's when you waste time.

So, assume the minute that we found out that we had the quake, I immediately was on the phone with Mayor Villaraigosa. I immediately was on the phone with Sheriff Baca, and all the different people, the acting mayor and so on. Because I think it's important that you act and that you set everyone in motion. And the same was also happening from the Office of Emergency Services. So, I think that we are -- because there are so many disasters in California, we are very well prepared for those kind of things.

QUESTION: Governor, can I ask you -- are you prepared to sign the executive order I understand tomorrow about state worker pay? The controller had said he's not going to honor it, he's not going to do it? So isn't this a largely symbolic measure on your part?

SCHWARZENEGGER: First of all, I cannot really tell you any more news about the budget negotiations. All I can tell you is that they're moving forward. We are negotiating. Everyone is working very hard. Everyone knows that there is, you know -- no time to waste. That it's very important to get a budget as quickly as possible. And we have to do things as, you know, being governor, I have to make sure that we pay our bills and that we have the money. And so there is an executive order that I will be signing on Thursday. That --

BLITZER: All right. So, the governor of California, Arnold Schwarzenegger, happily reporting no significant damage, no major injuries right now in this 5.4 magnitude earthquake in Southern California. All good, good news. We'll continue to monitor the fallout from the earthquake as well.

We're also watching what's happening on Capitol Hill right now. Senator Barack Obama is about to meet with House Democrats. He's expected to make a statement afterwards. He just walked into the room over in the House of Representatives. We'll stand by to hear what he's saying, what he says when he emerges. Much more of that coming up.

Also, we're going to be hearing from one of his top economic advisers, Robert Rubin, the former treasury secretary during the Clinton administration. We speak to him here in THE SITUATION ROOM after this.


BLITZER: Just moments ago, Senator Barack Obama walked into the House of Representatives. He's meeting with House Democrats, a meeting that is sort of unusual right now. He hasn't spent a lot of time in Washington as he's been campaigning.

I want to show you some of the videotape as we caught up with him as he was walking into the House. There he is right now.

Let's just watch him for a second.



BLITZER: All right, so, there you saw briefly, as he's getting ready with this meeting with House Democrats. Once the meeting is over with, he's going to be going to the microphones. We'll hear what he has to say, presumably after some reporters' questions as well. Stand by for that.

Senator Obama, as you know, he's been focusing indirectly on the economy since he's come back from his trip to Europe, most of that time here in Washington. And he spoke today to the country's top economic officials. Yesterday, he had a roundtable meeting with a bipartisan group of economic and business leaders on how to handle the current economic slump.

And joining us now, the former treasury secretary during the Clinton administration, Bob Rubin. He's a director of Citigroup, former chairman of Goldman Sachs.

Mr. Secretary, thanks very much for coming in.


BLITZER: I want to get to some of the key economic issues right now. But in terms of the big picture, a lot of us remember your handling of the economy back then in the '90s. Where are we, the U.S. economy right now? Some have suggested we may be only in the third inning of a nine-inning game in terms of the deterioration and the distress, some would call it a recession already. Where do you think we are in big-picture terms?

RUBIN: Wolf, I've been around markets and economic issues for a long, long time. I think this is probably the most uncertain and complex environment with respect to the outlook in my adult lifetime.

And just to put it in very short terms, I think when you consider all the factors, all these competing considerations, there are negatives as well as positives -- and also some positives. I think there is some chance that we could have a recovery in the relatively near future, but I put the lowest probability on that.

I think the most probable scenario is that we continue as we are right now to somewhat worse, and there is some chance -- there is some chance -- that things could be very seriously worse. That's why I very strongly support to continuing as a policy point of view to be as proactive as sensible in terms of addressing the current difficulty.

BLITZER: But in terms of people that have money lying around whether in their 401(k)s or their savings, is this a time to get out of the stock market and buy T-bills or money market, low interest, but safe, secure investments, or is it a time to be risky and keep the money in stocks?

RUBIN: I'm not an investment adviser. But let me try to give you a framing kind of answer to that, Wolf. I think investors need to take the risks very seriously, because I think they are real. On the other hand, there are some very shrewd investors who feel that prices have come down in many asset classes that make purchases against long- term -- long-term -- values to begin to make sense.

And I just think you have to judge in terms of whether you want to do that, whether you have the financial and psychological ability to weather the possibility that even if assets have gotten less attractive relative long-term values, even if that's the case, you nevertheless could have a difficult period ahead and you have to decide whether you can weather that.

BLITZER: Individual in terms of your own stomach, in terms of your own ability to weather what could be a difficult period ahead and you're saying most likely this could go on for some time. Let's talk --

RUBIN: I think that's the most likely scenario.

BLITZER: Right, and I heard you.

Let's talk about this half a trillion dollar deficit that the next president of the United States is going to inherit. When you became the deputy treasury secretary and then the treasury secretary, you inherited a deficit as well, but you made it into a surplus in part by raising taxes. Is that what Barack Obama is going to try to do?


Firstly, just to correct the record a touch if I may. What we did was to raise income taxes on the top 1.2 percent of taxpayers. What Barack Obama has said is that he is now inheriting a difficult fiscal situation, and I might add, we should have had surpluses through this decade. Wolf, we started with surpluses, and there were some conditions that were favorable. We could have had surpluses had we had sound fiscal policy.

BLITZER: How is Obama going to cut the deficit?

RUBIN: He's going to cut the deficit by paying for everything that he does. And he's already set out those proposals. You've seen them.

He is going to, with respect to social security, take the cap off for the people who have incomes above $250,000, so he hasn't said what the rate will be.

With respect to Medicare, he has proposed a series of very important initiatives with respect to slowing the rate of growth of health care costs and that probably is the key to Medicare. And then what he said is that he's fully committed to re-establishing a sound fiscal regime and then what he's going to do is bring together the leaders of both houses and both parties into a process where they can take joint accountability. And I think, and I've thought for a long time, Wolf, that these issues that faces are so difficult that it's the only way that you can politically get back to a sound fiscal position.

In the first instance, though, he recognizes that there are tradeoffs and he said he will pay for everything that he's doing as a consequence. There are certain things he's doing that will be difficult politically.

BLITZER: Here's what John McCain said in a statement yesterday. He said, "Senator Obama will not commit to balancing our budget, does not propose to control spending, and has only one answer to every challenge -- raise taxes."

RUBIN: You know, Wolf, two comments, if I may. When we raised the income tax rates on the top 1.2 percent of people in 1993, our opponent said we're going to lead the country in recession. Instead, we had the longest expansion in the country's history and 23 million new jobs.

What Senator Obama is saying today, he is committed to moving to a sound fiscal regime. And he will create the kind of process I've just mentioned. This process starts -- this is how it started with President Clinton. This process starts with a presidential leader, who recognizes the importance of sound fiscal conditions, and absolutely Senator Obama has --

BLITZER: Because, as you know, Senator Obama has some very, very ambitious spending programs, health care for all Americans, health insurance. That's going to cost tens of billions of dollars, maybe $100 billion out there. He's got a lot of other social programs. And a lot of people are saying you know what, that's simply going to increase the deficit.

RUBIN: Well, but you said what I know. Let me say what they should also know if you look at all the material, which is he has laid out proposals to pay for all of this. He's taken some heat for some of what he wants to do.

He wants to take tax rates on that top very small sliver of people. I believe it's for people with incomes over $250,000, back to the Clinton-era rates, the rates we paid in the Clinton era during which we had the longest expansion in our country's history.

And he has a number of other measures. He's also going to have at least some savings from his proposal to withdraw from Iraq. In any event, he has a program. And it's set out. And everything new that he wants to do he has paid for that and that reflects his commitment to fiscal discipline.

BLITZER: A lot of us remember that when Bill Clinton brought you into the Treasury Department and then you became the treasury secretary, he sent a powerful signal to the business community, the financial community, a source of reassurance because you were well known.

If -- and it's a hypothetical, but you're a straight talker. If Barack Obama were to say to Bob Rubin, if he were elected, you know what, I need you to come back and run the Treasury Department, what would you say to him?

RUBIN: What I would say to -- to Senator Obama is, one, I haven't -- the experience I had there was a remarkable experience. It was the most important part of my life.

Number two, I would say I have enormous respect for him, which I do. I think he's going to be a very effective president if elected. And I think he's going to be terrific on the economic issues. I'm also going to say to him, I think he has a goodly number of very good, very strong choices and I would recommend to him the people I think that he should choose just as I recommended to Governor Clinton after he won in 1992 that he should pick Senator Benson and I'd have some recommendations to make here, which he can take as he saw fit.

BLITZER: But it would be hard to tell the president of the United States if he says to you, Bob, I need you, please come back, it would be hard for you to say no.

RUBIN: Wolf, I think he has some other really very good choices and people that I think both would convey a strong sense to the financial markets and also I think be excellent in that job.

BLITZER: All right. Well, you are sort of leaving it a little bit open.

RUBIN: No, no, it's really not where my life is headed. I would love to be helpful to him. I have enormous respect for him. We had this meeting yesterday. I think he's going to be terrific to work with. But my mind isn't taking me back into Washington.

BLITZER: Fair enough. Robert Rubin is the former treasury secretary of the United States. Thanks very much for helping us better appreciate what's going on.

RUBIN: You're more than welcome, Wolf. It's good to be with you as always.

BLITZER: A 5.4 magnitude earthquake out in Southern California. We're going to have the latest from Los Angeles. We'll have live reports, including damage over at LAX.

And Jack Cafferty says they've been nearly silent and invisible. He's asking when it comes to Barack Obama, where are the Clintons, Jack and your e-mail. That's coming up.

And $20 million in cash, dirty, old, caked together. It seems like it's been buried for years. So, where did it come from? The multimillion dollar mystery coming up right here in THE SITUATION ROOM.

(COMMERCIAL BREAK) BLITZER: We'll check back with Jack Cafferty. He's got "The Cafferty File."

You've got a good question today on the Clintons, Jack.

I just want to update our viewers. In today's "New York Times," Adam Nagourney wrote that she has not, Senator Clinton, been asked to provide written documentation to the committee vetting the background of candidates for Mr. Obama, as you correctly pointed out. Although, Adam Nagourney and Patrick Healy did report on July 20th this, they said Democrats said they thought it was less likely now than it was a month ago that Mr. Obama would choose Senator Clinton of New York as his running mate. Though they said she remained in consideration and that she was being vetted.

Others have written she might be vetted but maybe as a courtesy. We'll see what's going on. But just a little update on the record.

CAFFERTY: Do I have any time left?

BLITZER: Yes. Go ahead.

CAFFERTY: OK. Question: When it comes to Barack Obama, where are the Clintons?

Some of these are serious. A lot of them are pretty funny if you want to check out the Web site.

Jim writes: "Hillary's managing the whisper campaign. Bill's working the back room boys. Obama is way too savvy not to be aware of it. The manure spreader will be out in the open and in full operation soon."

Douglas writes: "I think it's entirely understandable the Clintons are taking time until the convention to come to terms with the end of Hillary's campaign. I'll be surprised if they're not both fully engaged in the presidential campaign come autumn."

Ron in Florida writes: "Jack, the Clintons are where they belong, maintaining an up and coming political powerhouse. Each has their own baggage that Obama does not need. He's doing very well on his own. Obama only has carry-on baggage. The Clintons have gone over the accepted limit and Obama doesn't want to have to pay the extra fare."

Joanne in Hamilton, Georgia, wrote: "Who the hell cares where is the Clinton are, Jack? Good riddance. Time for change and they don't represent change. I can't wait for the Bushes to be gone, too. We need new people, new ideas."

Rob writes: "Cripes Jack, if the Clintons were already campaigning, two months from now you'd be crowing about Clinton overkill. Your question to us would be something like do you think the Clintons have been campaigning too much for Barack Obama? And is it hurting his run for president? Too much Clinton may hurt Obama's campaign and I think their camp is well aware of that."

Quentin in New York writes: "God only knows. On second thought, scratch that. The devil would be the one who would know Hillary's business best."

And Anita writes: "Plotting Obama's doom."

If you didn't see your e-mail here, go to the blog and check these out We posted hundreds of them. Some of them are laugh out loud funny. You'll enjoy reading through them I think Wolf.

BLITZER: I read them a lot and I do laugh out loud, Jack. Thank you.


BLITZER: Right after the break, millions of dollars in old crumbling bills handed out to different banks tracing the mysterious money. Brian Todd working the story.

And building sway, residents run out on the streets. We're on the scene, the latest on the earthquake that shocked and rocked Southern California today. Stay with us.


BLITZER: Now to a mysterious stash of decaying cash, millions in old green backs which a Texas man has been trying to trade in for new bills.

Let's go to CNN's Brian Todd. He's joining us now with more on the story.

Federal authorities are getting pretty interested in this story. What do we know?

BRIAN TODD, CNN CORRESPONDENT: They're interested, Wolf, and they are investigating because they're not sure where this money came from. Now, this case brings to light a fascinating system the government has for dealing with mutilated currency but it's a system that officials have to keep a close eye on.


TODD: Mutilated money, it can be burned, decayed, ruined by floods, chewed up by insects, and you can still exchange it for good currency. Each year the Treasury Department's Bureau of Engraving and Printing redeems more than 30 million damaged dollars. But they meticulously pick through it first.

LEONARD OLIJAR, BUREAU OF ENGRAVING AND PRINTING: One of the things we're also concerned with here at the bureau is that we could possibly be used to launder money that was a gain through elicit activities.

TODD: One such case involved Franz Felhaber. He says he's a customs broker from Texas who helps get foreign goods into the United States. A federal prosecutor tells us Felhaber showed up at the Treasury Department's door not long ago with a suitcase containing more than $5 million in mutilated bills like these. According to the Associated Press, which first reported this story, authorities got suspicious when he tried to redeem them for good currency.

The government search warrants obtained by CNN say Felhaber and members of his family went to several banks in the southwest during the past three years trying to exchange about $20 million in mutilated U.S. currency that had been buried in Mexico. The affidavit said they told several different stories about where it came from. Clients found it buried on their property in Mexico, it belonged to a client's grandmother, was stolen and buried in a coffin, it was buried in an alfalfa field.

FRANZ FELHABER, CUSTOMS BROKER: The attorney just called. We cannot do that.

UNIDENTIFIED MALE: Just a couple. Where did it come from, though?

FELHABER: I'm a pension broker. It's what I do.

TODD: Federal officials tell us they suspect it's drug money because it was in large denominations, buried in Mexico and hidden for a long time. They haven't charged Felhaber with anything yet but are investigating and have seized about $6 million of his mutilated cash.


TODD: We reached Franz Felhaber on his cell phone earlier this afternoon, he denies this is drug money and is confident that he will be exonerated. He says let the courts hear all the facts -- Wolf.

BLITZER: What else, Brian, do these affidavits say about his alleged activities?

TODD: They said that he sometimes showed up at banks under an assumed name. in one case, an agent for Immigrations and Customs Enforcement says he tried to pay a bank official off to exchange currency. I asked Felhaber about that as well. He called this accusations "blatant lies."

BLITZER: Brian Todd reporting.

Thank you, Brian.

And we're following two stories unfolding right now. And we want to welcome our viewers in the United States and around the world.