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Blagojevich on Scandal; Rahm Emanuel Not Target of Blagojevich Illinois Corruption Probe; Auto Bailout Blame Game; Why Obama Could Lose, Too; Dancing on the Bailout's Grave

Aired December 12, 2008 - 17:00   ET


WOLF BLITZER, CNN ANCHOR: And to our viewers, you're in THE SITUATION ROOM.
Happening now, a CNN exclusive -- our own Drew Griffin -- he catches up with the embattled Illinois governor, Rod Blagojevich, and asks him about the scandal that has state officials now moving to try to force him from office. Stand by. You'll see it for the first time.

Also, the Obama family asks for an early check-in here in Washington so their children can start school. The White House response -- sorry, but no.

Why there's no vacancy at Blair House, the official residence for guests outside the White House.

Plus, the auto industry bailout dies in the U.S. Senate -- but who are the political winners and losers?

We'll speak with our political contributors, James Carville and Alex Castellanos. They're standing by live.

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

ANNOUNCER: This is CNN breaking news.

BLITZER: But first, we have some breaking news we're working on -- exclusive, brand new video just coming into THE SITUATION ROOM right now -- an exchange between the embattled Illinois governor, Rod Blagojevich, accused of trying to sell Barack Obama's Senate seat, and our own Drew Griffin of CNN's Special Investigations Unit. State officials are now moving to oust Blagojevich.

Will he step down? I want you to listen to what he said.



Can you say anything to the people of the State of Illinois, sir?

Do you have anything to say?

GOV. ROD BLAGOJEVICH (D), ILLINOIS: I will at the appropriate time, absolutely. GRIFFIN: Are you going to resign, sir?

BLAGOJEVICH: I'll have a lot to say at the appropriate time.

GRIFFIN: Governor, are the authorities right in their petition, that criminal complaint?

Did you do what they say you did?


Just 30 seconds for anybody from the State of Illinois?


BLITZER: All right, let's go to Drew Griffin right now.

He's joining us live from Chicago.

You're outside the governor's -- the attorney -- his attorney -- oh, you're in our bureau, actually, right now -- Drew, so tell us how this came about, because you finally caught up with him, but he clearly didn't want to say too much.

GRIFFIN: Yes. He's been hiding all day. But one of our producers tracked him down. That was at his attorney's office. He had been huddled in there for about three or four hours today.

We caught him somewhat surprised coming out. We were the only camera there. And as you saw, he didn't answer the question of whether or not he is going to resign. He wasn't prepared to really say anything was -- which was a bit of a shock, because he wasn't racing into his car. I thought he would stop and give us at least some thoughts.

But, no, nothing today from the governor at all -- which is why, Wolf, the politicians here in Illinois are really rushing now to do something to try to prevent this governor from appointing anybody to the U.S. Senate.


GRIFFIN: In perhaps a sign he has nowhere else to turn for help, pastors of local churches showed up at the governor's door this morning, emerging to say they came to offer support.

UNIDENTIFIED MALE: I had a prayer with him. I had a prayer with my governor. He called me.

UNIDENTIFIED FEMALE: What was your prayer?

What did you say?

UNIDENTIFIED MALE: That he continues to be a great governor. Stay the course. GRIFFIN: The governor waved to the press and waived off any questions on what he is going to do. At the downtown office building where the governor works, Illinois's attorney general announced she had filed a motion with the state supreme court to have the governor stripped of his power.

LISA MADIGAN, ILLINOIS ATTORNEY GENERAL: We think it is very clear that he is incapable of serving. And we are certainly hopeful that the Illinois Supreme Court will hear this matter and appoint Lieutenant Governor Quinn as the acting governor.

GRIFFIN: Behind the scenes, the legislature is gearing up to start their own removal procedures. Meeting on Monday, the house and senate are expected to take up motions to strip the governor of his ability to name a U.S. senator to the vacant seat prosecutors say he was trying to sell. And Democratic House members are circulating this letter -- asking colleagues to join them in impeaching the governor.

But that will take time. Politicians agree the best thing for the state is for the governor resign. And while his accused chief of staff, John Harris, did submit his letter of resignation, the governor apparently is still on the job, working -- and not telling his press secretary much else.

UNIDENTIFIED MALE: People are trying to deal with today's issues, as opposed to what's been going on this whole week.


GRIFFIN: Now, Wolf, that videotape that we showed you was just 20 minutes ago down the street at the attorney's office, in which the governor so far not answering the question -- what is he going to do -- is he going to resign?

Nobody in Illinois seems to know. And the whole entire process is being held up until he decides what he's going to do.

BLITZER: At least he answered one of your questions. At least he stopped a little bit -- not very much, though.

All right, Drew.

Thanks very much.

We're going to back with Drew.

He's in Chicago.

Also in Chicago is our own Jessica Yellin.

She's covering the transition to power. And, obviously, this is a distraction for President-Elect Barack Obama and his entire transition team, Jessica.

But you're getting some new details on what's going on, because there's deep concern out there that, potentially, this could -- this could, at a minimum, shall we say, embarrass, politically, Barack Obama.

JESSICA YELLIN, CNN Capitol Hill CORRESPONDENT: That's right, Wolf. One of the concerns is whether any of his aides did have contact with the governor or his aides and what they may have said or done.

A lot of speculation has centered around former Congressman Rahm Emanuel, who is going to be his chief of staff, because Rahm Emanuel was a congressman in this community and obviously he knows all the players.

I've learned that he has today -- or at least he has been informed by investigators that he is not a target of the probe. A source close to him confirmed that that's what he has been told by the people who are running this investigation.

And what that means is that he did nothing wrong, in the view of investigators -- that if he did have conversations, he did not participate clearly in any horse trading or scheming that the governor may have initiated in any way.

It also does raise the question whether Rahm Emanuel was one of the people who at least did have conversations with the governor's aides, because one would assume he would not be notified by investigators about not being a target if he weren't even involved in any way.

So the headlines here, Rahm Emanuel clearly cleared of any wrongdoing or the suggestion of it. But, of course, more details will have to be forthcoming.

BLITZER: And do we have any idea, Jessica, when the transition team is going to release -- because they've been trying to do a catalog of all the contacts with the governor and the governor's staff?

Yesterday, Barack Obama said as soon as he gets that -- that summary, he would make it public.

Do we have any idea when that's going to happen?

YELLIN: They continue to say a few days. So one would assume that's less than a week, because they'd say a week if it were a week. So they say the next few days.

BLITZER: All right...

YELLIN: We'll just have to wait.

BLITZER: We'll wait and see. We're going to talk about it coming up with James Carville. He's standing by in THE SITUATION ROOM with Alex Castellanos.

Let's go to Jack Cafferty.

He's got The Cafferty File -- Jack. CAFFERTY: President-Elect Barack Obama's chief of staff, Rahm Emanuel, has been avoiding reporters ever since the news broke Tuesday that Illinois Governor Rod Blagojevich allegedly tried to sell Obama's Senate seat.

More specifically, Emanuel has refused to answer questions about whether he was an emissary who spoke to Blagojevich about the Senate vacancy. The criminal complaint says Blagojevich was willing to appoint Valerie Jarrett, a friend and adviser to Obama, to fill that seat in exchange for a reward, such as a high level appointment for himself.

Obama maintains that he nor anyone on his staff had anything to do with the governor's pay for play politics scheme caught on tape by FBI wiretaps.

Rahm Emanuel was noticeably absent from a press -- a press conference held by Barack Obama yesterday. And a reporter for the "Chicago Sun-Times" says that he saw him at Chicago's city hall yesterday afternoon watching his kids perform in a school concert.

When the reporter asked Emanuel directly if he was the adviser named in the criminal complaint, he said, "You're wasting your time. I'm not going to say a word to you. I'm going to do this with my children."

The question is this -- as these reports go on and on and on, ad nauseum, how much damage will the Illinois scandal eventually do to President-Elect Barack Obama?

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

BLITZER: Jack, thank you.

Jack Cafferty with The Cafferty File.

The blame game in full swing on Capitol Hill after the auto industry bailout dies in the Senate. We're about to talk about it with the former Labor secretary during the Clinton administration, Robert Reich. Stand by for that.

Also, the breaking news -- sources telling CNN that Obama chief of staff, Rahm Emanuel, as you just heard Jessica Yellin report, he is not -- repeat not a target in this probe surrounding the Illinois governor. We're going to speak about that and more with James Carville and Alex Castellanos. They're here to discuss. They're standing by live.

Plus, an alleged scheme costing investors billions and billions of dollars. And federal authorities now say a former Nasdaq chairman is right at the heart of it.

What's going on?

We'll tell you right here in THE SITUATION ROOM. (COMMERCIAL BREAK)

BLITZER: From Detroit to Capitol Hill, bitter finger-pointing right now in the wake of the failed auto industry bailout that died in the Senate last night.

CNN's Kate Bolduan is joining us now from Capitol Hill.

All right, so what happened to that cooperation, the compromise?

For a little while, it looked like there was a deal -- Kate.

But guess what?

It collapsed.


You're right, Wolf.

That air, that sense of cooperation and compromise faded very quickly when negotiations of a Republican demand for autoworkers' wage cuts broke down over setting a date.


BOLDUAN (voice-over): From shock...

SEN. CHRIS DODD (D), CONNECTICUT: We were incapable of coming up with answer.

BOLDUAN: placing blame for the Senate's failure Thursday night to agree on an emergency loan for the auto industry.

DODD: No matter what they came back with, unless it was everything, the Republicans -- that handful wanted -- this deal was not going to go forward.

BOLDUAN: Democratic lawmakers, including Senator Chris Dodd, are putting the fault squarely on Republicans, suggesting the GOP is putting the burden on the backs of autoworkers.

The president of the autoworkers' union agrees.

RON GETTELFINGER, UNITED AUTO WORKERS: They thought perhaps they could have a twofer here maybe -- you know, pierce the heart of organized labor while representing the foreign brands.

BOLDUAN: The UAW is pointing to geography as a reason for the collapse of negotiations. More than a third of the senators, both Republican and Democrat, voting against the bill come from Southern, non-union states where foreign auto companies have plants.

Republicans are firing back. Tennessee Senator Bob Corker, the lead negotiator for Senate Republicans, suggests the UAW -- a large voting bloc for the Democratic Party -- is the cause of the breakdown. SEN. BOB CORKER (R), TENNESSEE: The only way a bill was going to pass out of the Senate and the House, on the Democratic side, was for the UAW to say, we release you to vote for this.

I mean I hate to be so blunt, but that's politics, OK?


BOLDUAN: Now, this all comes back to the sticking point of a date of when to reduce autoworkers' wages. Republicans wanted a date certain in the next year. Democrats and auto union leaders said no, saying they wouldn't make change before the contracts were up in 2011 -- Wolf.

BLITZER: Kate Bolduan on the Hill for us.

A sensitive moment right now.

Thank you, Kate.

Detroit is also looking to the Obama administration -- the incoming administration.

But can the next president and the Democrats make a deal when they're accused of being puppets of big labor?

Let's talk about that and more with Robert Reich.

He was the labor secretary under President Clinton.

He's now a professor of public policy at Berkeley.

He's been a senior adviser to Barack Obama, as well.

What do you say about that charge that, you know, the Democrats and President-Elect Obama specifically they can't be honest brokers, because they're really in the pocket of big labor?

What do you think?

ROBERT REICH, FORMER LABOR SECRETARY, U.C. BERKELEY: Well, Wolf, we're really talking here about jobs. Ultimately, it could be given the ripple effects if the big three went down, about three million jobs. And at a time when we are hemorrhaging jobs -- 1.2 million lost, really, over just the last few months, nobody -- whether they're Democratic or Republican senators or regardless of their ideology -- wants to see that much -- that many jobs lost, that many wages foregone.

So I don't think this is really an issue of UAW versus Republican senators. I think this is really a question of how to keep G.M. and Chrysler and, to some extent, Ford going until they can really restructure.

BLITZER: What do you think of the argument, though, that the Republicans made? They wanted a date certain when the UAW would agree to a wage reduction. If they would have gotten that date, they would have gone with the deal. But in the end, the UAW didn't want to give them a date certain -- certainly nothing before 2011.

Should they have agreed to a date certain?

REICH: Oh, look it, it's very, very difficult to get a date certain.

Number two, there's not much love lost between Southern Republican senators and the UAW. The UAW has not been a huge supporter of Republicans anywhere.

Number three, there are a lot of foreign auto plants in the South. In fact, very, very recently -- you know, Toyota has its largest plant outside Japan in Tennessee, in Bob Corker's state. And almost every Southern state has a lot of foreign automakers.

The foreign automakers have announced very recently that they are -- they are creating 18 more big vehicle car assembly plants in the South.

And, you know, to some extent, Wolf, this is a -- a kind of a new civil war having to do with automobiles.

The big difference, of course, is that...

BLITZER: Well, I don't want to interrupt...

REICH: ...all of those Southern plants are non-unionized.

BLITZER: That's what I was about to say. They can build those plants in the South because there are rules there that you don't have to be a member of the union to go ahead and work at an automobile factory, whether in Tennessee or South Carolina or Alabama or some of the other Southern states.

REICH: Exactly. And so that the big issue here, in terms of North/South, is union wages, which are, depending upon whether you include wages and also benefits and legacy benefits, union wages in the auto industry are about $60 to $65 an hour. In the South, they are about $50 an hour.

Now, the new UAW agreement last year did bring those wages down for new workers, but there are not too many new autoworkers.

BLITZER: What do you say about the -- you know, why can't the marketplace make these decisions, that if Americans want to buy imported cars or cars from Japanese owners or Korean owners or German owners here in the United States, what's wrong with letting the marketplace decide who survives and who doesn't in the automobile industry?

REICH: The marketplace is making the decision. In fact, Americans are buying more and more foreign cars -- the majority of them made here in the United States by American workers, but at lower costs than American cars.

And there's no question, even with a restructuring agreement, the big three are going to be slimming down.

The real question, Wolf, is how fast will they have to slim down?

How many people are going to get hurt?

This is the worst possible environment to lay people off, to cut wages and cut benefits. And, again, the ripple effects are not just the direct UAW members in the auto plants. They're also everybody from dealers to suppliers. You're talking about the whole industrial Midwest and beyond.

And let me just say one more thing, in that we're talking about big battleground states -- Ohio, Pennsylvania, Michigan, Minnesota, Indiana. No Republican wants to be tarred with getting rid of so many jobs in these battleground states.

BLITZER: One final question, Mr. Secretary.

Who would have thought that a Republican president, President Bush; a Republican secretary of the Treasury, now Henry Paulson; that they are on the verge, potentially, of saving the U.S. auto industry and going against so many other Republicans in Congress?

It's a pretty -- a pretty unique situation we're seeing right now.

REICH: It's pretty -- it is pretty astounding. I was watching the debate last night, Wolf, and thinking, well, it's interesting. Here's Bush on one side. Now, the Republicans in the Senate are not paying any attention to the White House at all. I mean, basically, unfortunately, to them, George Bush is really beyond a lame duck. He's a dead duck.

But it's also interesting that when it came to the Wall Street bailout, the Republicans in the Senate never said well, you've got to have strict limits on -- on the wages and benefits of employees on Wall Street.

BLITZER: An interesting little nugget there.

Robert Reich is the former Labor secretary.

Professor, thanks for coming in.

REICH: Thanks, Wolf.

BLITZER: A possible twist in Hillary Clinton's confirmation hearing for secretary of State.

Will Republicans call the former president, Bill Clinton, to testify?

And if they do, what can you and me -- what can we all expect. You know what?

I'm going to speak about that and more with James Carville and Alex Castellanos. They're standing by live.

And a stunning statement from the U.S. military about toxic chemicals in Iraq and the thousands of U.S. troops who were exposed to them.

Stay with us.



BLITZER: Deborah Feyerick is monitoring some other important stories incoming into THE SITUATION ROOM right now -- Deb, what's going on?

FEYERICK: Well, Wolf, smashed up windows, flying rocks -- the riots in Greece escalated again today, prompting the U.S. Embassy in Athens to warn Americans for a third time -- stay away. The violent clashes began last weekend after police gunfire killed a 15-year-old boy. The riots have become an outlet for anger over the economy and jobs.

Closer to home, in Minnesota, a Senate recount -- two boosts today for Democratic challenger Al Franken. The state board overseeing the recount cleared the way to include incorrectly rejected absentee ballots and it opted to count election night results from a Democrat leaning precinct where over 100 ballots went missing. At last report, Franken was 192 votes behind Republican incumbent Norm Coleman. But the recount still has a long way to go.

And you've worked hard this year. Times are tough. Take an extra day off. Really. Seriously -- well, if you're a federal employee. President Bush today issued an executive order giving federal workers a day off with pay, Friday, December 26th. The White House says when Christmas falls on a Thursday, it's not uncommon to excuse federal workers from duty on the 26th. Postal workers, though, well, they still have to report to work.

And tonight, take a walk outside and look up to catch a light show. The biggest full moon of the year will fill the sky. The reason -- the moon reaches its closest point to earth tonight. According to NASA, it's will appear 14 percent bigger and 30 percent brighter -- something definitely worth going out to take a look at -- Wolf.

BLITZER: Yes. That's maybe why we're having these amazing shots of the U.S. Capitol. I don't know if we have that available right now. But take a look.

FEYERICK: Gorgeous.

BLITZER: Jose, take a look.

Have we got that shot?

Yes, look at that. That's an amazing live picture you're seeing of the U.S. Capitol right now, I guess because of what you just reported, Deb.

Thanks very much.

FEYERICK: All right.

BLITZER: We're following breaking news developments here in THE SITUATION ROOM in the scandal surrounding the Illinois governor. Sources now telling CNN that Barack Obama's chief of staff -- incoming chief of staff is not a target in this probe. James Carville and Alex Castellanos -- they're standing by live to weigh in on that and a lot more.

And he was the chairman of the Nasdaq Stock Exchange. Now he's accused of a pyramid scheme that bilked investors out of billions. This could be the worst Wall Street fraud ever.

And it's an interview that shocked the nation -- the notorious confrontation between disgraced President Richard Nixon and his interviewer, Sir David Frost. It turns out it almost never happened.

Stay with us.



BLITZER: To our viewers,


Happening now, it was a risky move, thousands of jobs at stake -- so who won and who lost when the auto bailout crashed and burned?

The incoming chief of staff and the Illinois political scandal that shocked the nation -- there are new developments about Rahm Emanuel and the investigation into the Illinois governor.

And the FBI says he called his investment business just one big lie. Now his clients could pay a huge price -- literally billions of dollars.

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

The auto industry bailout dies in the Senate -- could President- Elect Barack Obama have done more to help?

Democratic Senator Chris Dodd today talked about the president- elect's role.


DODD: This is an impossible situation. We're in this limbo period. And he does not have the authority -- I mean, other than the authority of the bully pulpit. And then -- and that doesn't always work.

And I think the fact that he announced his economic team early, that he's talked about a stimulus package, he's spoken out -- including yesterday before the vote -- over the importance of this issue. He expressed his regret this morning over the outcome.

And I think it's hard to expect more of that from him. In fact, some may argue that's even asking too much of him at this point.


WOLF BLITZER, CNN ANCHOR: So who are the political winners and the losers? Let's talk about that and more with our CNN political contributors, the Democratic strategist James Carville and the Republican consultant Alex Castellanos.

James, from the narrow political perspective, forget about jobs and the economy, talks politics right now, who wins, who loses in this showdown that we saw last night in the senate between Republicans and Democrats?

JAMES CARVILLE, DEMOCRATIC STRATEGIST: You know, I hate to give this kind of Washington answer, but they asked Henry Kissinger asked what were the effects of the French revolution and he said too early to tell. Honestly, we don't know if GM and Chrysler go bankrupt and 2 million jobs lost, obviously this will be pretty bad defeat for the Republicans. But if by the same token, if everything turns out fine, maybe it will be good. The real thing here is the modern Republican Party is a low wage party. That's their obsession, low wages. I don't think that's a winning fight in the long run. I don't.

BLITZER: Alex, what do you think?

ALEX CASTELLANOS, REPUBLICAN STRATEGIST: I think doing the right thing for the country ends up being the right thing politically for Republicans and the Republicans are doing the right thing. American people understand that you can't save the car industry by throwing money at it. You know how the American know this? Because they're not buying cars from Detroit. They know you're trying to resuscitate somewhat of a corps here. So the Republicans I don't think are going to take a beating for this even if the companies go bankrupt. You can't just jump out of a building and say well, why didn't we save them before they hit the ground.

BLITZER: We had a poll that basically said the same thing, that most Americans oppose a bailout for the big three.

CARVILLE: Well you know the Republicans are for the bank bailout. Most Americans opposed that also. You know -- I will defend -- I drive a Detroit car. They're making as good a car as anywhere in the world. Always wasn't the case. There's certainly a case to make that these companies should can get a bridge loan. We did that with Chrysler and it worked before. If it, would, it will be fine. But you're right. There's a lot of political back and forth and the Republicans don't like the fact that the auto industry pays high wages, they don't like the minimum wage, they would like to do away with that. They don't like the social security system we had. Median wages went down under a Republican congress. They are a low wage party. I don't agree with that.

CASTELLANOS: No, James. Republicans don't like the fact that Democrats want taxpayers to pay for, you know, incredible benefits that union workers have and cars that cost $80 an hour to make in the United States when the Japanese only cost you $40 an hour.

By the way, there's a great auto industry in the United States that's not asking to get bailed out. It doesn't happen to be the three big auto companies from Detroit that Democrats have preserved and kept from making better cars.

CARVILLE: Can I throw a proposal on the table? Let's have every Republican senator give up what they get in the senate for health insurance and take what a UAW member gets. Weekend the debate right there. If they have such gold plated health care.

CASTELLANOS: Let's take those benefits away from everybody on Capitol Hill. I think Republicans would be fine with that. Why do you want to pay Detroit to make cars that people don't want to drive?

CARVILLE: I want people to make a living. What are you against the minimum wage? We're down to 7% unionization. Why did median income go down 2,000 under a Republican administration? You're a low wage party, Alex.

CASTELLANOS: No, James. You can't have government set people's wages. It would be if we could. Pay everybody $1 million.

CARVILLE: Work for the -- we're for the wage. You're against it.

BLITZER: Let's switch subjects to the Illinois governor. We heard Jessica Yellin report earlier that will two federal sources are telling us that Rahm Emanuel, the incoming chief of staff is not a target of this investigation. I know you're not surprised by that because if you read that 76-page document it, makes it clear that Blagojevich, he was angry at Barack Obama for not wanting apparently to give him anything in exchange for picking who he wanted for the U.S. senate seat.

CARVILLE: I know Rahm Emanuel very, very well and the one thing I'm 100% sure of is he did nothing wrong or illegal. Did he do something political? I'm sure he did. I mean, but no, I'm not surprised at this at all. And I think everybody that knows Rah knows he would not do anything nefarious, anything illegal. There never was a remote consideration here. And I don't know why we -- you know, he's a first class guy, comes from a first class family. I know his parents. No way that he would do anything that was untold against the law.

BLITZER: What do you think, Alex? CASTELLANOS: I think Rahm Emanuel is going to be a tough presence in the white house, going to make Dick Cheney look like a retiring wall flower. You don't want to go hunting with Rahm Emanuel if you're on the wrong side with him. He also is one smart political guy. I would be stunned. I don't believe for a moment he would doll anything untoward here. I think some of the discussion has been that when something came across his phone line that didn't seem kosher; he may be the one who turned it into the authorities. I wouldn't be at all surprised to hear something like that.

BLITZER: James, what do you think about the possibility that your good friend Bill Clinton, the former president of the United States, could be called to testify before the senate foreign relations committee on behalf his wife's becoming the next secretary of state? You're smiling when I even asked you the question.

CARVILLE: We couldn't be that lucky now, could we? I mean, there's nothing in the world that I or CNN or the country would find better than to have the senate Republicans question Bill Clinton. I think Senator Lugar who apparently has the benefit of an IQ, has decided this is not a great idea. And I don't think it's going to happen. One could hope. One could hope that it would. It would be quite a spectacle.

CASTELLANOS: Asking Bill Clinton to talk, giving him the opportunity to talk generally not a good thing for the other side. However, there are some real questions that need to be answered here. He's been getting money from all over the world for foundations, for the Clinton library. It would be nice if somebody would detail that that. Maybe this is a good opportunity to find out about their foreign entanglements.

CARVILLE: He has made all of that public. His foreign entanglements are fighting malaria and getting drugs to people. Saved over 1 million lives and made lives better. He'll be glad to list all of that. I hope for the sake of everybody that the senate Republicans get the.

BLITZER: We've got to leave it there. Thanks for coming in. James and Alex, always a good discussion.

U.S. troops in Iraq living a few feet away from lethal toxic chemicals.

UNIDENTIFIED FEMALE: They didn't know that the smoke that they were walking in every day actually could be harmful to them.

BLITZER: Her husband died of a brain tumor after coming home from Iraq. So why is the military saying there are no long-term health risks? We're taking a closer look.

A stunning Wall Street scandal. The richest investors trusted one man to invest their money and now they've lost billions of dollars.


BLITZER: A stunning statement from the United States military. It says open burn pits in Iraq exposed thousands of troops to toxic chemicals. It insists they're not in danger of long-term health risks but the widow of an Iraq war veteran isn't so sure. Let's bring in Jamie McIntyre.

What are the troops and their families saying?

JAMIE MCINTYRE, CNN CORRESPONDENT: It's very reminiscent of the 1991 Persian Gulf War. Once again, U.S. troops believe they were sickened by chemicals they encountered in Iraq.


JILL WILKINS, MAJ. KEVIN WILKIN'S WIDOW: Kevin was perfectly healthy before he went to Iraq. He's always been in good health. Good healthy eater, exercises on a regular basis and there was not one thing wrong with him when he went to Iraq.

MCINTYRE: Just months after returning home to Florida in 2006, Major Kevin Wilkins developed headaches but never saw a doctor. Soon after his second Iraq tour last year, Wilkins, a registered nurse in the Air Force reserve, died of an advanced brain tumor at age 51. His widow Jill suspects this is what killed him, an open air you burn pit at the Ballad air base in Iraq. For four years, it was a festering dump spewing acrid smoke over the base including housing and the hospital until three incinerators were installed, the pit was the only place to dispose of trash including plastics, food and medical waste. All burned by dousing it with jet fuel. While you Ballad is the biggest, pits like this exist at bases elsewhere in Iraq and Afghanistan. Some with no incinerators still.

WILKINS: They didn't know that the smoke that they were walking in every day actually could be harmful to them.

MCINTYRE: The military admits smoke from the pit exposed major Wilkins and thousands of others to toxic emissions including at times low levels of cancer-causing dioxins but says it was not a danger.

CRAIG POSTLEWAITE, PENTAGON HEALTH PROTECTION DIRECTORATE: The data indicate that there are no substances above a health threshold that should generate any long-term health risks including cancer.

MCINTYRE: While the cause of his brain tumor is not known, Jill was told by doctors who worked with her husband at a Florida emergency room that exposure to chemicals like those that come from burning trash is a potential risk factor. Mostly though troops complain about breathing problems, some coughing up a black substance or Iraqi crud as the troops call it.

POSTLEWAITE: We know some have been raised. We empathize with the people who feel like they may have been harmed in some particular way. MCINTYRE: At the Pentagon health directorate, officials analyzed more than 160 air samples and concluded the only risk of temporarily respiratory distress, not a long-term threat.

POSTLEWAITE: Some people are affected by that smoke. It's not the best quality of life for those individuals. But we have to remember this is a wartime situation.

MCINTYRE: One reason for the alarm, a 2006 memo in which an environmental engineer cited a study labeling the pit the worst environmental site I have personally visited. More alarm when results from a new study were released with a math error. Overstating the die oxen levels by 1,000 times. Meanwhile, Major Wilkins' widow is trying to stay upbeat as she deals with the department of veteran's fairs to get the benefits she feels her family deserves.

WILKINS: You have to make jokes about it. Otherwise you just cry every day. It's crazy. He would want me to sticking up for him like I'm doing now.


MCINTYRE: The U.S. military is continuing to monitor the situation. Officials say whatever the science shows, the most important thing is that the soldiers, the troops get the care that they need.

BLITZER: That's really important. Let's hope they do. This is critical. I want to thank you, Jamie, because after 16 years replacing me at the pentagon way back when, you're about to get ready to leave CNN. We're showing our viewers some moments of your extraordinary career here. We want to thank you very much for doing an excellent job and wish you only the best as you pursue some other challenges and I know they're going to be good.

MCINTYRE: Thank you. As you said, you conquered the pentagon in two years. It only took me 16. I had a great run.

BLITZER: We only wish you the best.

MCINTYRE: Thank you.

BLITZER: Sometimes not even the man who will become the next president of the United States can get what he wants. Barack Obama and his family hope to check into Washington a little bit earlier. We're going to find out why they may have to wait.

And shocking confessions from a Wall Street legend. Investors lose billions and billions of dollars. Wait till you hear who's taking the blame.

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


BLITZER: As if the horrible economy weren't bad enough, an alleged scheme that has cost investors billions of dollars is rocking Wall Street and federal authorities say a former chairman of the NASDAQ stock exchange is right at the heart of it all. Let's go to CNN's Allan Chernoff working the story for us in New York.

They say this could be the worst fraud ever on Wall Street, Alan. What do we know?

ALLAN CHERNOFF, CNN CORRESPONDENT: It's astounding. Prosecutors Bernard Madoff estimated his scheme may have cost investors $50 billion over the years.


CHERNOFF: The arrest of Wall Street legend Bernard Madoff has clients panicked their wealth may be gone.

JACOB ZAMANSKY, ATTORNEY: It's hard to believe somebody so successful who people trusted for years was so greedy and so corrupt to steal their money. It's remarkable. People who I've spoken to are shocked that Bernie Madoff a trusted guy would steal their money.

CHERNOFF: Madoff former chairman of the NASDAQ stock market built one of the most successful trading firms on Wall Street. It was at a separate more secretive investment division located on a different floor in this office tower that he allegedly perpetrated the fraud.

According to civil and criminal complaints, Madoff confessed he had been cheating investors for years, and he estimated his total losses from the fraud may have been $50 billion. According to the criminal complaint on Wednesday, here at his Manhattan apartment, Bernie Madoff confessed to his two sons, Andrew and Mark, both senior executives in the company. The father said of his investment firm, "It's just a big lie. It was basically a giant ponzi scheme."

Madoff allegedly had been using new investment money from clients to pay supposed profits out to other investors. Under the weight of a tumbling stock market, the scheme had collapsed. One of Madoff's attorneys said, "Bernie Madoff is a long-standing leader in the financial services industry. He will fight to get through this unfortunate series of events."


CHERNOFF: Madoff is out on bail of $10 million. He faces a single charge of securities fraud, which carries a maximum sentence of 20 years in prison. And Wolf, one employee of the firm did tell us that last night many employees were at the office packing up their boxes. They had no idea this was coming down, and they now anticipate that they will be joining the ranks of the unemployed on Wall Street.

BLITZER: Wow. What a story that is. All right. Devastating, devastating news. Thank you, Allan.

December, by the way, is shaping up to be another dismal month on the job front. 115,000 cuts so far. Bank of America, for example, will eliminate 35,000 positions over the next three years as it absorbs Merrill Lynch. Other cuts, Fairchild Semiconductor eliminating 1,100 jobs. Chemical maker Chemtura cutting 500 jobs. And the jobs sector is taking a hit. 200 jobs disappearing from the Las Vegas sands hotel.

Let's go back to Jack Cafferty. He's got the Cafferty file.


JACK CAFFERTY, CNN CORRESPONDENT: The question this hour is how much damage will the Illinois scandal eventually do to president-elect Barack Obama?

Jane in Minnesota says, "Totally naive for anyone to believe that there were not any conversations between the governor and members of Obama's transition team regarding the vacant senate seat. If it is proven that anyone from the team was involved in any pay for play discussions with the governor and covered it up, then how Mr. Obama deals with that type of a situation would determine the collateral damage."

Ryan in Illinois, "as long as the media's trying to drag him into this, it could do a lot of damage. On its merits, though, the story doesn't have legs."

Paul, "Obama will survive, but I can't say the same for Rahm. His silence -- that's Rahm Emanuel. His silence is deafening. Obama may be in the process of considering another chief of staff."

Bruce in Minnesota, "I think all of the swing states have finished swinging and the invites have already gone out for the inauguration. So short of an indictment, there isn't a lot that can hurt him."

Barbara in North Carolina, "Depends on how loudly you bigmouth talking heads keep screeching about it on the news 24/7."

Joe in Missouri, "Very little. Most of the talk will be from TV talking heads who have time to fill. All you have to do is read some of Blagojevich's comments about Obama and his team to know that Obama wasn't buying what Blagojevich was selling."

And Connor in Illinois, "None really. The people who were already convinced he was a fifth column terrorist who eats babies for lunch every day will continue to believe he's the same guy. But those of us who at least didn't oppose him see that he either wasn't involved or was able to distance himself from a bad deal that would have hurt him. Either way he is honest and/or shrewd, just the sort we need right now."

If you didn't see your e-mail here, you can go to my blog at Look for yours there among hundreds of others. Wolf?

BLITZER: It's one of the amazing things about our business. You never know when you wake up any morning where the news is going to go that day. It's one of the reasons you and I love this business, right, Jack?

CAFFERTY: I was talking to a guy that you know very well in this building today who had some considerable amount of money invested with that mutant that Allan Chernoff was just reporting on. He is devastated. His face was ashen and he was almost in shock over what's happened to money that he couldn't afford to lose.

BLITZER: Oh, my god. And a lot of families are just devastated. They lost almost everything based on what I'm hearing. All right. We'll stay on top of this story, Jack. Thanks very much. Awful, awful news.

He's facing a flood of questions about the scandal surrounding the Illinois governor. Up next, the congressman, Jesse Jackson Jr., he talks to CNN. Our own Don Lemon. About what he did and didn't do. Stay with us.


BLITZER: The new movie "Frost/Nixon," which I saw the other night, showcases the confrontation between former President Richard Nixon and the interviewer David Frost. But the interview almost didn't happen. Let's go to our CNN entertainment correspondent Brooke Anderson.


BROOKE ANDERSON, CNN ENTERTAINMENT CORRESPONDENT: Wolf, the interview showdown between President Richard Nixon and David Frost post-Watergate shook the country to its core. Now 30 years later those staggering conversations are rocking the big screen in a new political docu-drama.


ANDERSON: It was a confrontation powerful enough to be dramatized on stage and now on screen.

UNIDENTIFIED MALE: I'm saying that when the president does it that means it's not illegal.

ANDERSON: "Frost/Nixon" is the film version of David Frost's 1977 interviews with President Richard Nixon. It was the first time Nixon publicly answered questions about Watergate and his resignation.

UNIDENTIFIED MALE: No, no, no, no.

DAVID FROST, TALK SHOW HOST: There were two reasons I was desperate to get this interview. Which was one was obviously constitutionally he was the first ever American president who was ousted. But the second thing was that he was the most fascinating man.

ANDERSON: David Frost was a British talk show host who was willing to pay the disgraced president $600,000 for access. He spent nearly 30 hours conducting the interview, an amount of time he asserts most modern politicians wouldn't merit. With alleged government corruption continuing today, Frost sees parallels to the current political environment and believes the public will always demand answers from the politicians who disappoint them.

FROST: I think that they do want to see people put to the test. And also there was an air of mystery about Watergate.

ANDERSON: There were risks for Frost, who not only financed the production himself but cobbled together independent TV stations for the nationwide broadcast the networks wanted no part of. 45 million people watched in the U.S. alone.

FROST: If one had completely failed to get anything out of Nixon or any admissions out of Nixon and so on, it would have been pretty disastrous.

Would you go further than mistakes? The word that seems not enough for people to understand.

RICHARD NIXON: What word would you express?

FROST: And that was sort of a heart-stopping moment because I knew he was at his most vulnerable.

NIXON: I let the American people down.

ANDERSON: Frost, who continued to interview world leaders and still hosts a talk show on Al Jazeera, feels his interview with Nixon was one of a kind.

FROST: Someone has to be pretty fascinating, pretty enigmatic, pretty Nixonian to keep one fascinated for 28 3/4 hours.

ANDERSON: Frost/Nixon is a hit with critics and just scored five Golden Globe nominations, including Best Motion Picture Drama. Frost told CNN that recognition is the nicest possible Christmas present.

Wolf, back to you.

BLITZER: Brooke, thank you.

Brooke Anderson reporting.