The NewsHour with Jim Lehrer

RAY SUAREZ: Good evening. I'm Ray Suarez. Jim Lehrer has the day off. On the NewsHour tonight, a summary of today's news; a look at today's Supreme Court arguments about zero tolerance drug laws; a report from South Korea, the latest stop on President Bush's Asia trip; Enron's collapse and pension funds; a debate on the media's coverage of Enron; and the final of Elizabeth Farnsworth's reports from inside Saudi Arabia.

NEWS SUMMARY

RAY SUAREZ: The U.S. Supreme Court today issued a decision in a case involving peer grading in schools. In a unanimous vote, the Justices ruled the practice of letting students grade one another's work did not break federal privacy law. In other action, the Justices heard arguments in a case testing a federal zero tolerance drug policy. Under it, entire families may be evicted from public housing, if one member is caught with narcotics. We'll have more on this in a moment. In the Middle East today, Palestinian gunmen shot and killed six Israelis today. Israeli radio said it happened near an Israeli roadblock. Earlier today in the Gaza Strip, eight Palestinians were killed in Israel raids. The targets included an office belonging to the militant group Hamas. Israel said it was retaliation for Palestinian attacks that left nine Israelis dead in six days. President Bush today urged peace on the Korean Peninsula, even as he renewed a pledge to defend the South from the North. He arrived in South Korea on the second leg of his Asia tour. In Seoul, demonstrators clashed with police. They objected to Mr. Bush's labeling North Korea part of an "axis of evil." They feared Mr. Bush's comments could undo recent diplomatic progress with the North. Earlier, in an address to the Japanese parliament, Mr. Bush had softened the tough talk.

PRESIDENT GEORGE W. BUSH: We seek a peaceful region, where the proliferation of missiles and weapons of mass destruction do not threaten humanity. We seek a region in which demilitarized zones and missile batteries no longer separate people with a common heritage and a common future.

RAY SUAREZ: Tomorrow the President will visit U.S. Troops patrolling the demilitarized zone. He'll travel to China on Thursday. In economic news today, the Commerce Department reported new housing construction went up 6.3% in January, to its highest level in almost two years. Lower mortgage rates and mild weather were among the reasons. At the Olympics in Salt Lake City today, American Derek Parra won the 1500 meter speed skating race; Joe Pack of Utah won the silver medal in the aerials freestyle ski jumping event. A Czech athlete won the gold. And Russia won the women's cross-country sprint; Norway won the men's. Again, video of the competition was not available, due to the Olympics' television contract. That's it for the news summary tonight. Now it's on to zero tolerance at the Supreme Court; South Koreans await President Bush; Enron and retirement funds; the media and the Enron story; and inside Saudi Arabia, part three.

FOCUS - SUPREME COURT WATCH

RAY SUAREZ: The Supreme Court heard arguments today in a housing eviction case from California. At issue: Can entire families be evicted from public housing projects for the drug use of one member? For more on today's proceedings, we're joined by NewsHour regular Jan Crawford Greenburg, Supreme Court reporter for the "Chicago Tribune." And give us a little history of the case. Where did this all begin?

JAN CRAWFORD GREENBURG, Chicago Tribune: Well, it started with a federal law that requires every public housing agency across the country to include in their leases with the public housing residents, a "no drugs" clause. And this federal law says that the leases must specifically say that a tenant will be evicted from public housing if the tenant or a member of his household, a guest or someone else under his control, a very broad group of people, engages in any drug-related criminal activity. Now, after that law took effect, the Department of Housing and Urban Development passed a series of regulations designed to implement that. And HUD took the position that tenants could be evicted regardless of whether or not they knew of the illicit drug activity. And then the local public housing authorities began to change their leases to reflect the position that, as you referred to it, the zero tolerance position. In case came about in 1997 when the Oakland Public Housing Authority moved to evict four tenants, four elderly tenants, four tenants who had lived in public housing for a very long time but whose grandchildren, in one case daughter, and in another case caretaker, had been engaged in illegal drug use.

RAY SUAREZ: None of the four holders of the leases themselves were accused of any drug activity.

JAN CRAWFORD GREENBURG: No, just their relatives or, in the case of an elderly disabled man, his caretaker. And in each of these cases, again as reflecting lease terms, the drug use was not inside the apartment. But under the regulations, it didn't matter. The drug use could be on or off the premises. In one case a daughter was found about three blocksaway with cocaine. In two cases, grandsons were found smoking marijuana in the parking lot. And then in the case involving the disabled man, his caretaker was found with a crack pipe inside of her jacket.

RAY SUAREZ: So in today's Supreme Court hearing, who took up the argument in favor of the law? Was it the Oakland Public Housing Authority or the federal government that originated this?

JAN CRAWFORD GREENBURG: That's right. Both did. Right. And the way this case actually got there was that after the local housing authority in Oakland moved to evict these tenants, they turned around and sued in federal court. They brought a civil lawsuit and they said you can't evict us. This is unconstitutional. We had no knowledge of this drug use. It's illegal. So that worked its way up through the lower courts and a federal appeals court in California sided with the tenants. So actually today the case got to the Supreme Court because the Bush Administration and the Oakland Public Housing Authority asked the court to review that decision.

RAY SUAREZ: So what arguments did Oakland and the federal government bring to bear there today's hearing?

JAN CRAWFORD GREENBURG: Well, they stressed that congress passed this law to give local public housing authorities wide discretion and latitude to eradicate a terrible drug inflicted disaster in public housing, where people are essentially prisoners of their own homes. They can't leave their apartments because of violence and drug use. So they emphasize that Congress intended this zero tolerance policy because of the serious drug problems in public housing. And so they stress that the Court was wrong when it said Congress didn't intend that result, the lower court, and that surely Congress had meant for the Public Housing Authorities to have this widespread discretion.

RAY SUAREZ: So their point was not that any of these elderly tenants could have, in fact, controlled the behavior of their family members, but that their punishment was meant to be an example to other public housing tenants?

JAN CRAWFORD GREENBURG: Well, yeah, in a way. They said that the law, and the way that Congress intended it and some of the Justices picked up on this point today, for example Justice Scalia said look, these tenants signed leases when all these regulations took effect and when the leases changed and they acknowledged that if there is any drug use in their apartment or by people under their control outside their apartment, they can be evicted. The tenants knew that. They have a responsibility, as Justice Scalia said and suggested today, they have a responsibility to make sure that no one comes into their apartment with drugs and that members of their family don't engage in drug use if they're living in that public housing unit. And several of the other Justices seemed to suggest that that point really resonated with them because the statute doesn't suggest, it doesn't make any mention of the fact that the tenants have to know about the drug use. It flatly says you can be evicted for drug use, period. There is no additional sentence that says, "drug use that you knew about." So they suggested that the language of the law is clear, and that Congress intended this result and that's the result that happened, and that the tenants have a responsibility to make sure that drug use is not occurring.

RAY SUAREZ: So how did the attorney for the tenants do in argument?

JAN CRAWFORD GREENBURG: Well, he argued, and he made a very broad argument, that these evictions not only were contrary to what Congress intended because he said Congress, instead, meant for the evictions to occur on several serious violations. So this was just so out there, he said, there was just no way Congress intended this result. And furthermore, it's unconstitutional. You just can't just punish people, like these elderly tenants, for something that they didn't do. And that's what these eviction were. They were punishment, they were punishing the tenants for behavior they were in no way a part of or had no control over.

RAY SUAREZ: Did the Justices try to tease out from either sets of lawyers or was it part of the argument, that there is a different level of responsibility among these public housing tenants because they live in government-subsidized, government-owned housing?

JAN CRAWFORD GREENBURG: That came up in a slightly different way. The Chief Justice actually made this point, but so did some of the other justices, that this is not a right to live in public housing. It's a benefit. This is government property. And if we want to say in a lease that there is no drug use and it's zero tolerance, that's just a condition of being able to use government property. And the lawyer for the Bush Administration said that the public housing agencies aren't getting any benefit by evicting these people. They're just going to turn around and rent the unit to a law-abiding, or at least someone with law-abiding members of their household living there.

RAY SUAREZ: Now if this law is upheld by the Supreme Court, could this have effect on other drug laws that involve non... punishment for people who didn't necessarily commit the crime, forfeiture laws and seizure laws?

JAN CRAWFORD GREENBURG: No, I don't think so. I think this case is pretty targeted to the specific statute at issue and what Congress intended when it passed that statute. That came up today. That came up in the court. And several of the Justices made the point that this is different than those examples that you give because this is not the tenant's property. It's not like the government's coming in and getting a car that somebody had because there was, you know, drug use. It was being used to run drugs. This is government property. It's a little different scenario. One point the Justice made today, Justice Thomas asked a question today that I thought was interesting and suggests where he may be going with this. He asked the lawyer for the public housing authority how significant was the problem of drug use. "Very significant," the lawyer said. I think Justice Thomas where he may be going with that, where he has been in several other cases involving crime in poor neighborhoods and inner city neighborhoods. He has been much more willing to let the government come in and, as he puts it, try to protect the rights of the people, the innocent people who are living there.

RAY SUAREZ: Jan Crawford Greenburg, thanks a lot.

JAN CRAWFORD GREENBURG: Thank you.

FOCUS - KOREAN VISIT

RAY SUAREZ: President Bush has begun his visit to South Korea, and many Koreans want to know more about his Administration's policies on the divided peninsula. Special correspondent Simon Marks prepared this report from Seoul.

SIMON MARKS: In the South Korean capital, Seoul, the police want potential terrorists to know the country is ready for any attack. Soccer's World Cup will be hosted by the South Koreans in May, and at the purpose-built stadium in the center of the capital, hostage rescue teams take part in training exercises aimed at sending a message to any would-be attackers. The show of force is also an illustration that in the war on terror, South Korea remains on the Bush Administration's side, despite the fact that in this country there is rapidly growing concern about where U.S. foreign policy in the region is heading. Chung-in Moon of Yonsei University is one of the country's leading political analysts.

CHUNG-IN MOON, Yonsei University: Immediately after the September 11th attack, we were rallying behind the Americans. We were supporting American war against terrorism. But as time passes, and particularly since the decisive victory in Afghanistan, the South Korean people's attitude on the America's war against terrorism has been waning.

SIMON MARKS: Waning in part because analysts say many South Koreans have been alarmed by what they argue is the Bush Administration's bellicose rhetoric toward their communist neighbor to the north, and confused by precisely where the U.S. stands today on the divide between North and South Korea. Following the historic first meetings between South Korean President Kim Dae Jung and North Korean leader Kim Jong Il, the Clinton Administration pursued a policy of engagement with North Korea. Former Secretary of State Madeleine Albright even visited Pyongyang for talks with the country's reclusive leader. The North agreed to allow family visits to occur between Koreans who had been kept apart by restrictions on movement between the two countries. Those visits came to a halt last year in protest North Korea said of the Bush administration's increasing hostility toward Pyongyang. U.S. dialogue with the North was then halted pending a review by the Bush team. Last June, the State Department offered to restart talks without preconditions, but the North Koreans insisted there must be concessions over Washington's claims that the country sponsors terrorism. And then in the President's State of the Union Address, a single mention of North Korea was enough to become headline news in the South.

PRESIDENT GEORGE W. BUSH: North Korea is a regime of arming with missiles and weapons of mass destruction, while starving its citizens. States like these and their terrorist allies constitute an axis of evil, arming to threaten the peace of the world.

SIMON MARKS: That's not how either Korea sees things. In the South, editorial writers called the President's speech "erratic" and "contradictory." In the North, the government of Kim Jong Il said the State of the Union Address was tantamount to a declaration of war. Many South Koreans are expressing not only concern over the policy statements from Washington, but genuine bewilderment. After all, they say, it wasn't that long ago when former President Bill Clinton was publicly flirting with the idea of visiting North Korea and meeting with Kim Jong Il. Today in the country's parliament leading lawmakers are accusing the Bush administration of dangerously undermining Seoul's attempts to prod the North Koreans toward modernity. And some analysts say there is a gulf between what Seoul hears from the State Department and the message it receives from the White House.

CHUNG-IN MOON: The South Korean government has been hearing positive news from the State Department. They keep saying we will be talking with North Korea. We are willing to talk with North Korea. We will be in full cooperation with South Korea dealing with North Korea. Therefore, on the one hand, the South Korean government has been getting good news from Washington, D.C. On the other hand, when President George Bush makes a rhetorical speech, we get the very, very negative and bad news. We don't know which one is the correct one.

SIMON MARKS: The South Korean government in this television advertisement airing on a number of international news channels portrays itself as proud partners with the North in the process of bringing stability to process of bringing stability to the region. President Kim Dae Jung, who visited the White House last March, wants meaningful U.S. Support for his so-called "Sunshine" policy, aimed at drawing North Korea into the light. He's under pressure from opposition parties who support the Bush Administration's hard- line tone toward Pyongyang and accused him of producing few concrete achievements in his negotiations with the North. D.B. Lee is a former member of the Korean parliament.

D.B. LEE, Former Member, South Korean Parliament: You know, President Kim has been speaking about a plurality of agreements that he had attracted extracted from Kim Jong-Il of North Korea. Aside from the separate families, which remained more as a token effort, all the rest of the agreements have failed to materialize. On top of them, Kim Jong Il's promise to return President Kim's visit to Pyongyang with his own return visit, that has yet to materialize.

SIMON MARKS: The White House maintains it continues to support the sunshine policy, but many South Korean lawmakers aren't convinced. Former dissident Kim Geun Tae, who was jailed for many years during the military dictatorship, is today a presidential candidate in the country's upcoming election. An influential member of the ruling party, he questions the U.S. claim that North Korea is making significant strides developing weapons of mass destruction.

KIM GEUN TAE, President Candidate (translated): North Korea has been keeping its promises not to test missiles until 2003. Up until now, we haven't seen any sign that North Korea has violated the Geneva protocols it signed in 1994. I don't understand very clearly why President Bush said that he's ready to have talks with North Korea without any pre- conditions, but then changed his mind.

D.B. LEE: It is fundamentally a game of whether we see North Korea in the context of a bad guy or a good guy. And the entire duration of past history, since the end of Second World War, attests to the fact that this is a bad guy, not a good guy.

SIMON MARKS: Some South Koreans argue that even the famine in North Korea has eased in recent months, and you can see signs of the slow thawing in Cold War relations between the two Koreas on the streets of Seoul. Shoppers looking for a way to ring in the Lunar New Year could, for the first time, choose to do so with potent liquor imported from north of the border. With more than 37,000 U.S. troops stationed in South Korea, officials in Seoul acknowledge Washington has an important role to play in helping to determine the peninsula's future. They say what they want to hear from President Bush during his visit is clarity about U.S policy in the region.

RAY SUAREZ: Still to come on the NewsHour tonight, Enron and pension funds; media coverage of the Enron story; and Elizabeth Farnsworth's third report from Saudi Arabia.

FOCUS - AFTERSHOCKS

RAY SUAREZ: The themes of many Enron stories in recent months have featured top officers cashing out and little guys getting hurt. But some very big investors lost some very big money in the Enron debacle. Spencer Michels reports.

SPENCER MICHELS: Throughout the California energy crisis, politicians focused much of the blame for high electricity costs on so-called "out-of-state generators." Among them was Enron, which-- like several other companies-- was selling the state power at what Governor Gray Davis called exorbitant prices. (Applause) He put Enron on his gougers list, despite the fact that the firm had given him a total of $97,000 in campaign contributions.

GOV. GRAY DAVIS, California: Never again can we allow out- of-state profiteers to hold California hostage. Never again will we allow out- of-state generators to threaten to turn off our lights with the flip of their switch. (Applause)

SPENCER MICHELS: The crisis appears over, and electricity is available. But now, Enron's collapse is causing California problems. Enron owes the state back taxes. And the drop in Enron's stock price has caused many pension funds to lose millions of dollars. 136,000 retired professors and staff at the University of California are beneficiaries in the university's $38 billion pension fund, which bought Enron stock. Because the stock dropped to almost nothing, the fund and the university's $4.6 billion endowment pool lost $145 million -- second highest amount in the nation. Nationally, the largest loss was to the Florida State Pension Fund: $325 million. Other big losers: The Georgia State Pension Fund; Ohio Public Employees and Teachers; New York City; Washington State employees; and four other California funds, including Calpers, the giant public employees' retirement system. At the University of California, the pension fund is managed by the treasurer's office. It has been so successful that no one, not the university nor its employees, has had to contribute to it in a decade. Its value has tripled over 12 years. According to assistant treasurer Mel Stanton, Enron looked like a winner.

MEL STANTON, Assistant Treasurer, United Nations of California: Things looked very, very good. This was a dynamite company doing very well. Obviously, energy was a very key thing, especially in the state of California. So this company looked like it had, you know, had the wherewithal to move forward. So we were, like everybody else, sort of lulled into a situation that really was not justified.

SPENCER MICHELS: When Enron's reported earnings declined unexpectedly last October, Stanton said, university analysts began hearing rumors of trouble. But he said they don't sell stock based on rumors; their calls to Enron went unanswered.

MEL STANTON: Everybody was trying to seek information. They were being very closely guarded; not providing information. Obviously, all the way along, prior to this time period, months ago, they were giving false information as well. So we weren't getting anything any different than anybody else.

SPENCER MICHELS: On the Berkeley campus of the university, Physics Professor Emeritus Charles Schwartz, a frequent critic of the pension fund's administration, says the Enron loses might have been avoided.

CHARLES SCHWARTZ, Retired Physics Professor: If the people in the treasurer's office, and their consultants, had been doing the kind of thorough investigating that they claimed to do before investing in anything, then they should have uncovered that there was something wrong in Enron's books, which we now all know.

SPENCER MICHELS: And they claim they were the victims of fraud?

CHARLES SCHWARTZ: Well, but part of their job is to look for lousy bookkeeping, unclear terms on the balance sheet. That's just what a good investment analyst does.

SPENCER MICHELS: The university said it had to rely on information from Enron. But Stanton admits there is a lesson.

MEL STANTON: It's going to make us more cautious, everybody more cautious. The problem here is, really, accurate information.

SPENCER MICHELS: The university's investment in Enron amounted only to 0.3% of its $54 billion portfolio, so small that no individual's pension will be reduced by the stock collapse. Nevertheless, the university is joining a lawsuit against Enron.

MEL STANTON: There was some activities that took place that could... may turn out to be criminal in nature. I think this is a very unusual situation.

SPENCER MICHELS: Like the university, Calpers, the Sacramento-based California Public Employees' Retirement System, also bought Enron stock. In addition, Calpers was involved in private business deals with the firm, including some money-making partnerships in the energy field. Calpers runs the largest pension fund in the country, with assets of $152 billion. It lost about $100 million on Enron stocks and bonds, less than 0.1% of the system's assets. So its members, many of them retired state and local government workers, won't have their pensions cut. Calpers invested in Enron stock-- or equity, as it's called-- not because it researched the company, but because it was part of an index fund, a compilation of companies. Michael Flaherman, an economist with the Bay Area Rapid Transit District, is investment chairman of the Calpers board.

MICHAEL FLAHERMAN, Calpers Investment Chairman: Almost all of our equity investments are held passively in index funds, which means that we buy companies because they are publicly traded in the United States, and we hold them as long as they continue to be publicly traded.

SPENCER MICHELS: So you don't look into the company. You didn't look into Enron before you bought its stock.

MICHAEL FLAHERMAN: We did not. Some of the stock was held by outside managers who manage money on our behalf. Those outside managers do have a responsibility to assess the outlook for the companies whose stocks that they are buying, and... and, in general, did. But like everyone in the financial community, they missed... they missed the threat that... that these structures posed to the company.

SPENCER MICHELS: Flaherman, along with San Francisco Mayor Willie Brown and other public employees, are part of the Calpers board, which has had a reputation as a watchdog, pushing for good corporate governance and social responsibility by companies in which it invests. Flaherman cited an unsuccessful vote cast by Calpers against Enron former chairman Ken Lay.

MICHAEL FLAHERMAN: We voted against his reelection because we were aware of one conflict of interest that we thought was significant, and that was a relationship between Enron and a travel agency that was owned by his sister.

SPENCER MICHELS: But the "New York Times" alleged recently that, early on, some people at Calpers knew of other troubles at Enron, but didn't blow the whistle. That allegedly happened in one of the Calpers-Enron partnerships, called LJM.

MICHAEL FLAHERMAN: I resist the characterization that we knew about it and didn't tell anyone. I think that what happened, and I think this is pretty clear in the record, is that there were people who were looking at the LJM partnership who were concerned about the conflicts of interest potential that it represented, but that they didn't recognize the significance of that conflict of interest to the larger corporate entity.

SPENCER MICHELS: For Flaherman, the main lesson from the Enron experience is that big investors have to look more closely at the management of the companies they invest in.

MICHAEL FLAHERMAN: Many institutions don't take an active interest in the governance issue because it seems to have no payoff, but when it does have a payoff, it's huge.

SPENCER MICHELS: He says the payoff could have been the survival of Enron. Instead, Calpers has joined the class action suit against Enron, hoping to recoup some of the money it lost.

RAY SUAREZ: A federal judge has now merged 60 separate lawsuits into one class action case against Enron and Arthur Andersen. The University of California was named as lead plaintiff in the case.

FOCUS - ASLEEP AT THE SWITCH?

RAY SUAREZ: Journalists can't say enough about the story of Enron's fall, but that wasn't always the case.

Media Correspondent Terence Smith reports.

LOU DOBBS: Growing trouble tonight for Enron.

CORRESPONDENT: You've been hearing a lot about Enron recently and you're about to hear a lot more.

TERENCE SMITH: Recent coverage of Enron's collapse has been exhaustive on television and in print. But weeks earlier when Enron declared bankruptcy on December 2nd, most Americans and most reporters had no idea what the Houston-based energy concern did. The largest corporate bankruptcy in U.S. history merited only mentions in the media that December night and was not front-page news in most of the next morning's papers.

SPOKESMAN: Enron was especially well connected in the White House and in Congress.

TERENCE SMITH: But now it's Enron all the time, thanks largely to the company's ties to the Bush Administration and its showering of campaign money on Capitol Hill. The mere possibility of a political scandal and the convening of 13 separate congressional hearings into the matter have catapulted the star of the business pages to the front pages.

SPOKESMAN: This is an exclusive report, and it will come as a big blow publicly to Enron.

TERENCE SMITH: But should those big blows to Enron have come sooner? Were reporters asleep at the switch? Since January, journalists have been forced to play catch-up on this story of financial chicanery. Enron's accounting slight of hand concealed and buried in dense financial statements went largely unnoticed until the end. One reporter who did try to examine Enron's suspect books was Bethany McLean of "Fortune" Magazine, who questioned Enron's stock value last March. McLean says the lesson reporters should take away from the Enron collapse is quite simple.

BETHANY McLEAN: It's a really important lesson for reporters to keep in mind, as well as other supposedly sophisticated people, that sometimes the most obvious question really is the question. In Enron's case: How do you make money? It's such an obvious question that you almost feel stupid asking it.

TERENCE SMITH: From the tone of reporting on Enron before its collapse, very few in the media asked that question. Instead, former CEO Kenneth Lay, now disgraced, was lauded as a visionary; his company showcased as a cutting-edge giant of the new economy. Not until the house of cards came crashing down did the true picture emerge in the media.

TERENCE SMITH: Joining us to examine the media role in the Enron story are three business journalists who have been monitoring it closely. Correspondent David Faber covers Wall Street for CNBC, and hosts the "Faber Report" on the cable channel. Jeff Madrick writes a column for the "New York Times," and is also editor of "Challenge" Magazine, an economics journal. And "U.S. News and World Report" assistant managing editor Jodie Allen edits the business and technology section of the "Weekly" magazine. Welcome to you all three.

TERENCE SMITH: Jeff Madrick, how would you rate the coverage of Enron, the media coverage of Enron before the scandal broke?

JEFF MADRICK: Well, I think I have to be a little extreme about this. I think it was pretty outrageous. The idea of saying the media were asleep at the switch mischaracterizes what happened. The media in many ways told the biggest whoppers about this company that could be told. They tended to be credulous about what analysts said. As we all know, "Fortune" magazine before the final report labeled Enron the most innovative company in America four or five years in a row. "Fortune" was by no means an exception. But what the media also did, Enron apart, was create an environment, an attitude about the new economy that was so enthusiastic and so beyond a true economic foundation, that you could believe almost anything. The media became a participant in the new economy, when its real mission had always to be something of a public watchdog, something of an observer leaning against the wind. Now it's blowing as hard or harder indeed than anybody else.

TERENCE SMITH: Jodie Allen, complicity; that's a pretty serious charge.

JODIE ALLEN: Well, I think that there is some reason to support it. There is no question that especially, and I'm sure David will want to argue with this, on the television cable networks, they thrived on the bull market. They got their popularity from touting stocks. They were part of the online trader ethos. On the other hand, I don't think it's quite fair to just broadly condemn all the media. Some people were following, were raising questions, but it has to be said that Enron discouraged the kind of simple question that Bethany McLean so rightly points to; that any reporter that asked them, "well how come your cash flow would be negative if it weren't for your tax breaks." "Oh, you just don't get it" they would say and they would call up as they called some of our sources, after we ran in U.S. News a critical piece early in the spring, and they would go to the head of the firm, whether they went to "Fortune" and criticized McLean's article -- they would go to the analysts and they would say these people are wrong; they're wrong all the time. So they made it awfully easy for the media, like the analysts, to become cheerleaders.

TERENCE SMITH: David Faber, cheerleaders?

DAVID FABER: I don't think so. I don't agree with that contention. There is no doubt that during the bull market CNBC and other television outlets as well as the general press in print were a participant to a certain extent, may have glorified certain members of management and the overall sense was certainly a positive one.

TERENCE SMITH: Why? If they did, why?

DAVID FABER: It was a function of the times, I think, to a large extent. And you know it's interesting because as a journalist, when you pursue a story, you look for feedback and you look to see what is the response. I did plenty of negative stories through the years on all sorts of things. We were very early talking about the conflicts analysts face on our show "Squawk Box." Six years ago we talked about it. And yet people, when you broke a big story, for example, about fraud at a Waste Management or Cendant or Rite-Aid or an Oxford Health, all which have occurred in the last five years, the response wasn't necessarily as encouraging as you might have expected to go after it even more. I think that changed. I think that Enron is a special case. It was not disclosed. It was not there for us to see. It has widely been described as one of the largest companies in the country, although that is not really accurate. Nonetheless, that added to it. The political ties are another key. And, most importantly, it came at the end of thebull market or in fact in the middle of a very brutal bear market when people's attitudes had changed.

TERENCE SMITH: Jeff Madrick, is Enron an isolated case, or is it endemic, is there a coziness in your view between the business press and corporate America that goes beyond Enron?

JEFF MADRICK: You know, I don't think there was ever a golden age in financial and business journalism. But I think once business journalists looked on themselves as public watchdogs. They were skeptical by nature. I don't think it is a good enough defense to say we weren't encouraged by our audience when we reported on these events. They didn't like it. That's the very point. What happened to journalism somewhere along the line, I think more so in TV, but certainly in print as well, is that they began to worry about the readers' reaction, the audience reaction, the corporate reaction, the so-called Chinese Wall in journalism between advertising and business, and what you reported as a journalist may have been violated somewhere along the line. So I do think it is endemic. Characteristically what has happened is journalists have come in after the fact. But in the meantime they've promoted the same kind of values that they seem to be decrying after the fact. So I find the lack of willingness to accept responsibility for this quite disturbing. I think there should be all kinds of soul searching in the boardrooms of the journalistic outfits right now because the fact is they contributed to this environment.

DAVID FABER: Jeff, there were many, many stories that came out in the last years and in the bull market about the bubble we were in, to a large extent, about the incredible payments being made to corporate managements, the options packages. I would go on every morning and do these things I ended up calling annoying comparisons where I would say Yahoo's market value equals that of Viacom, Disney, and what was Time Warner at the time. Many of the media did do that. Whether or not it fell on deaf ears is not our fault, I don't think, and I don't think that's our responsibility.

TERENCE SMITH: Let's let Jodie Allen have a word here.

JODIE ALLEN: I think that's right. We ran, you know, a when is the bubble going to burst cover, I don't know, two or three years ago and we took a certain amount of scorn for it at the time. But, on the other hand, it is hard in this particular kind of scandal to draw attention to because it is a green eyeshade scandal. It is very hard to go to your executive editor and say, gee, we really want to do this piece about Enron's 10-K filing. It's hard if there is-- look at Arthur Levit's problem when he kept pointing to this built-in conflict of interest about accountants who do both consulting and auditing for a firm -- never mind the fact that they're paid by the firm for both. And he couldn't get -- everybody kept saying what's the harm? There was no colorful figure. It's not easy. On the other hand, we do love scandal, and given an opportunity, we are usually criticized for liking scandal too much, not too little.

TERENCE SMITH: Jeff Madrick, is it reasonable to express-- is it reasonable to expect the press to cover and report on that which the industry did not?

JEFF MADRICK: I think it is reasonable for the press to start acknowledging that there are severe conflict of interests among their sources. And I think the defense is and always has been, look, we did six stories about this and two stories about this and nobody cared. Anybody who watches TV financial news, anybody who has been reading the press, the major magazines, and to some degree, a lesser degree newspapers, know that the environment in those newspapers and TV has been extremely enthusiastic. It has contributed significantly. Is it fair to say you didn't uncover Enron specifically? Maybe not. But in the context of what's been going on, I think probably yes. The press reported whoppers that analysts told and the press knew that analysts had severe conflict of interests -- vested interests.

TERENCE SMITH: David Faber, is there any new skepticism on your part, on your network, or is the in the business as you understand it, any reevaluation of corporate coverage?

DAVID FABER: I'm sure that there is a new focus as there is now of course in the investing public overall with regard to any financial disclosures. I always have viewed myself as a skeptic in all of my reporting. If I could have found an Enron, would I have been so happy to have broken that story -- of course, or any other fraud for that matter, if in fact that is what took place there, which appears to be the case. Those are very, very hard stories to find. They take an enormous amount of time, which is a resource that there isn't a great deal of when you're at a major news organization. So, sure, you know, would I have loved to, would any reporter have loved to? Yes. Do I approach things differently? No. I always have been skeptical. I think most of my colleagues on television and certainly in the press, in the print press, share that skepticism. Will we look even more skeptically? Yes, there is no doubt about it.

TERENCE SMITH: Well, Jodie Allen, are there more Enrons out there right now that the press should be looking at, looking into?

JODIE ALLEN: Well, Terry, that's the question right now, and you can be sure whether we're late to the game or not, that's what we're pursuing. There is the contrary danger though, too, and I have gotten calls from several firms saying, hey, wait a minute, just because we have an off balance sheet partnership doesn't mean that we're an Enron. And what we're doing is perfectly legitimate. And our stock is getting killed. So at the moment, there's a lot of sort of loose kind of throwing around of allegations. It's going to take sometime to sort that out, but you better believe there is going to be at least, for a while, a lot more attention paid to balance sheets.

TERENCE SMITH: Jeff Madrick, do you have any confidence in that?

JEFF MADRICK: I don't have a lot of confidence in it because I don't see the press admitting what they've done. I've been in this press for a very long time. There are lots of good people. There were lots of exceptions. But the general enthusiasm, the ethos was not given to finding Enrons. As David said, indeed at the beginning in his first comments, he said there wasn't encouragement for this kind of thing. It's time to start assessing that. It's time to start assessing why. The fact of the matter is if you were a nay sayer in the new economy environment, there is a threat of losing audience, a threat of losing readership, and a threat of losing advertising, especially high-tech advertising. It is time to face up to this stuff and I'd love to see U.S. News and CNBC assign a reporter to talk about their own journalism, the quality of financial journalism across the board.

TERENCE SMITH: In just a few seconds, Jodie Allen, you were shaking your head.

JODIE ALLEN: I just wanted to say and repeat what David already said. And that is I think Jeff is wrong. If anyone could have found the Enron scandal, if we had been smart enough - and maybe we weren't -- we certainly would have been delighted to write about it.

TERENCE SMITH: All right. Jodie, David Faber, thank you very much, all three of you very much.

SERIES - INSIDE THE KINGDOM

RAY SUAREZ: Finally tonight, part three of Elizabeth Farnsworth's series from Saudi Arabia. This one is on how a house reflects a view of Islam.

ELIZABETH FARNSWORTH: Jeddah is a city of more than a million on the red sea that has long served as the gateway for Muslim pilgrims traveling to nearby Mecca and Medina. Muslims from all over the world have settled here, making the city a melting pot of people and ideas; of old and new. The old is visible downtown, where wood lattices cover windows on buildings constructed long ago. Streets are narrow and shops are small and intimate. New Jeddah can be seen on the great boulevard leading to the Red Sea, where dozens of modern sculptures line miles of street and beach. Children play here as families picnic on their day off. Architect Sami Angawi comes from an old Jeddah family descended from the prophet Mohammed. He's an authority on the architecture of his region, and his religion. He has spent the last ten years building a home that he hopes embodies both.

SAMI ANGAWI, Architect: The house here is a reflection of traditional Hijazi architecture.

ELIZABETH FARNSWORTH: And Hijazi, explain what that means.

SAMI ANGAWI: Hijazi is the local region here, which is an ancient name for this region. And Hijazi has always been the reflecting point. It's the melting pot of the Muslim world. So you can see something in Hijazi, which is from India, and you see something from Morocco, and something from Turkey, and something from Yemen. Everything is a reflection of the idea of the unity and the diversity. My statement here is that to live in a time now, you don't have to forget your traditions. So it's the balance between the constant and the variable. And that's how it's always been in Islamic tradition; Islamic architecture.

ELIZABETH FARNSWORTH: Angawi has designed into his house the dualities he thinks Islam embraces. The home is very private but also open to the world, as he thinks his religion has been. Many openings to the outside are screened, but light permeates every room, flowing through windows that evoke Islam and Christianity alike. There's a sunken dining area that feels like Japan, and tiles from various parts of the Muslim world. The designs of the tiles are themselves works of art, as are the quotes from the Koran and other details.

SAMI ANGAWI: Well, as you notice as you walk in the house from one place to another, it's really like walking in my mind.

ELIZABETH FARNSWORTH: What do you mean?

SAMI ANGAWI: What I mean is, is that's how my mind works. I see things from different perspectives. I see it in layers, I see it in details, and that's why I look even at our Islamic culture and Islamic concept from different perspectives. And that's how we have to see it now.

ELIZABETH FARNSWORTH: What do you mean?

SAMI ANGAWI: Not single minded. Not just seeing one thing. You have to see more than one thing in order to reach the balance, because you cannot have balance with a one-sided scale.

ELIZABETH FARNSWORTH: Angawi contrasts his vision of his religion with the more fundamentalist vision of Islam that has become familiar to foreigners since September 11. He sees his house as an example of the true Jihad, as opposed to Jihad as Holy War.

SAMI ANGAWI: There is always a choice in what's called Jihad, which is, again, misunderstood by Muslims and by non-Muslims. Jihad starts with yourself, with your inside, with your body, with your family, with your house. This is Jihad what I'm trying to do. The beauty you see is the Jihad of trying to do something beautiful.

ELIZABETH FARNSWORTH: It's almost as if in your art and in your person you want to embody this vision of Islam that you think is the proper one, or is the way it should be? How would you put it?

SAMI ANGAWI: I put it that I'm not inventing anything. I put it that I'm part of a tradition, part of a heritage, which is 1,400 years old if we take it to the prophet Mohammed. If we take it to Abraham, it's at least 5,000 years old, or how long ago Abraham was. And it's a continuity of tradition. Not only ours, but tradition since the beginning of time. We believe in continuity.

ELIZABETH FARNSWORTH: In the past, Angawi said, Islam was open to many influences and traditions; and this is what made it a great civilization. He's worried that in Saudi Arabia, the cradle of the religion, Islam has become restricted to one narrow interpretation that is intolerant of other views.

SAMI ANGAWI: The way it's taught is mainly in one direction, of one view. Again, I'm not saying it's right or wrong. This is not for me. I'm not a religious specialist. But I know when I look at my Islamic culture and Islamic tradition and civilization, I know that one of the reasons that we did have this great civilization is because different views were represented: The flexibility that was there, the adaptability that was there. And we very much need that now, to bring it back and to teach our children how to have a dialogue, how to discuss, how to interact with other people; how to be friends and how to follow the prophet. The prophet at that time had said, "My companions are like stars. Whichever one you follow, you are on the right path." And so that even though the companions had many different opinions, he didn't say, "shut up," and "you are right," and he was wrong. No. He was always against extremism. He discouraged and even spoke strongly against extremism. Our crown prince was saying that recently. He was saying, "Don't be extreme on religion. Don't be extreme on religion. Don't be extreme on religion." Three times.

ELIZABETH FARNSWORTH: The extremism of the Islam taught in Saudi Arabia, often called Wahabbi or Salafi Islam, has affected Angawi directly in his work. He started a center in Jeddah to preserve the Islamic and natural environment of the holy areas of Mecca, the birthplace of Mohammed, and Medina, which houses the prophet's tomb. He said much of historic Mecca-- as seen in this old footage-- has been razed to the ground, partly to build accommodations for the millions of annual pilgrims, but more ominously because religious leaders in Saudi Arabia fear historic sites will be used for a form of idol worship.

SAMI ANGAWI: I feel very, you know, bad about those places being gone. You know, like this one here is one example, and I have many other examples. This is the tomb of the first wife of the prophet, which was there and was totally demolished and is gone because of certain viewpoints that this could lead to idolatry.

ELIZABETH FARNSWORTH: It could lead to idolatry?

SAMI ANGAWI: Idolatry, yes. Again, another site, which I worked on in discovering and actually digging, the house of the prophet in Mecca, near the mosque, and it has to be taken away and covered away.

ELIZABETH FARNSWORTH: Angawi also said that in the great mosque in the old days, four schools of thought were taught, and that a pilgrim could choose up to 35 different "rings" of teaching in the courtyards. I asked him what it's like now.

SAMI ANGAWI: Unfortunately, it developed into a way, which is only one viewpoint is presented. And of course, if you all the time you just listen to yourself, or those who compliment you all the time, you think you're right and nobody else is right.

ELIZABETH FARNSWORTH: So now, there's really only one form of Islam being taught in Mecca and Medina that's spreading all over the Muslim world, isn't it?

SAMI ANGAWI: Mecca is really, I think, critical, and Medina, that the beauty of the diversity, the beauty of the tradition that is, like I explained, many-sided views, and so on, is... in a way, has been now very much limited to basically one viewpoint. I'm not saying that viewpoint is maybe wrong or bad. I'm just saying we need to balance it and we need to listen to different views. It's very essential now. As we are a growing part of the world, Islam is the religion of balance. If we cannot do it in Mecca and Medina, where can we do it?

ELIZABETH FARNSWORTH: Angawi said his house is his answer to how more balance can be achieved through evolution, a respect for the past, and not radical change. He promotes dialogue about Islam in his work in Jeddah, as well as at Harvard, where he teaches part of each year. And he is convinced evolutionary change in his religion is already underway.

SAMI ANGAWI: I'm living now. But living now does not mean that you cut yourself from the past. Or appreciating the past and carrying on with it doesn't mean you do not live now. And that was always the challenge in Islamic tradition-- Islamic culture-- is to carry on.

ELIZABETH FARNSWORTH: Sami Angawi, thanks for being with us.

SAMI ANGAWI: Thank you very much.

RAY SUAREZ: That's the last of our series from Saudi Arabia. An editor's note: Prince Turki al-Faisal, who appeared in Elizabeth's first two reports, was identified incorrectly as half-brother of the King. He is son of the late King Faisal, and nephew of the current King.

RECAP

RAY SUAREZ: Again, the major developments of the day. The U.S. Supreme Court ruled peer grading in schools does not violate federal privacy law. The Court also heard arguments in a case testing a federal zero tolerance drug policy in public housing. And Palestinian gunmen reportedly shot and killed six Israelis. At least 22 people--Israelis and Palestinians-- have died in an upsurge of violence over the past 24 hours. We'll see you online, and again here tomorrow evening. I'm Ray Suarez. Thanks and good night.