The NewsHour with Jim Lehrer

GWEN IFILL: Good evening. I`m Gwen Ifill. Jim Lehrer is off.

On the NewsHour tonight: the news of this Wednesday; then, the latest congressional action on rules for trying terrorists; a debate over the details of parts of the intelligence report released yesterday; Paul Solman explains the stock scandals embroiling a number of companies; a look at what lower gas prices and soaring stock tables mean for the economy; and a report from Judy Woodruff about the online neighborhoods MySpace and Facebook.

(BREAK)

GWEN IFILL: Congress moved today to adopt new rules for interrogating and prosecuting terror suspects. The House approved the bill 253-168, and the Senate was expected to follow suit tonight or tomorrow.

The measure gives CIA interrogators greater latitude and legal protections. It also sets up military tribunals and gives detainees some additional rights. But it denies suspects the right to appeal their detentions in court. We`ll have more on this story right after the news summary.

Democrats pushed today for the White House to release all of a classified intelligence report. Portions were declassified yesterday. One key finding said Iraq has become a "cause celebre" for jihadists, winning them new supporters.

Today, Senate Minority Leader Harry Reid said Americans need to see the rest of the report.

SEN. HARRY REID (D-NV), Senate Minority Leader: Even though the White House released 10 percent of the report -- 10 percent -- 90 percent of it hasn`t been given to the American people. But that report clearly says, as everyone knows, that Iraq has made us less safe.

GWEN IFILL: In response, White House Press Secretary Tony Snow said releasing the full document would compromise intelligence gathering. And he insisted the president is justified in saying the U.S. is winning the war on terror.

TONY SNOW, White House Press Secretary: The critical judgment here is Iraq has become for them the battleground. If they lose, they lose their bragging rights. They lose their ability to recruit, and that is why at this point -- the president has made the point over and over. He`s not tried to say there are fewer. He has not tried to say they haven`t been winning propaganda victories. What he has said is we`ve got a different kind of enemy, and we`ve kept America safe, and we`ll continue to do it.

GWEN IFILL: Snow also denied claims by some Democrats that the administration is withholding a second assessment on Iraq until after the November elections. We`ll have more on this story later in the program.

In Iraq today, the U.S. military announced the deaths of three more Americans in the west; that made 67 U.S. troops killed so far during September. More than 2,700 Americans have died in Iraq since the war began in 2003.

Also today, U.S. forces killed four suspected terrorists and four Iraqi civilians in a raid in Baquba. And in Baghdad, gunmen killed 10 Iraqis near a Sunni mosque during Ramadan evening prayers.

The U.S. House approved another $70 billion for operations in Iraq and Afghanistan last night. It also contains a Democratic provision against setting up permanent bases in Iraq. Once the Senate approves the bill, it will bring total spending for the war effort to more than $500 billion.

The United States offered today to put off seeking U.N. sanctions against Iran for a few weeks. State Department Spokesman Sean McCormack said it`s still possible Iran will agree to suspend nuclear work. He said, "There may be a little opening if we just give the Iranians a little time and space."

He spoke as the European Union`s foreign minister, Javier Solana, met with Iran`s nuclear negotiator, Ali Larijani, in Berlin. A German official said he was optimistic about progress.

Secretary of State Rice issued a new warning to Sudan today: End the killing in Darfur and accept U.N. peacekeepers. Last month, the U.N. agreed to send 20,000 peacekeepers into Darfur. The Sudanese government rejected the move. Today, in a Washington speech, Rice said it`s time for Sudan to choose between cooperation and confrontation.

CONDOLEEZZA RICE, U.S. Secretary of State: This is now a real fork in the road. There is a chance -- everybody would like to have better relations with Sudan; everybody would like to see it a force for stability in the region.

It would make such a huge difference to the entire region if Sudan were to act responsibly. That route is open. But we`re not going to sit by and allow this kind of death and destruction to continue, and we`ll use whatever tools are necessary.

GWEN IFILL: Rice did not elaborate, but the United Nations has warned of possible sanctions. More than 200,000 people have been killed in Darfur in the last three years; another 2.5 million have been displaced.

California today became the first state to set limits on greenhouse gas emissions. Governor Arnold Schwarzenegger signed the curbs into law in San Francisco. They affect utilities, refineries and factories. Schwarzenegger said it`s a first step toward fighting global climate change.

The price of crude oil jumped 3 percent today, amid talk that OPEC will cut production. Oil gained nearly two dollars in New York trading to close just under $63 a barrel. The price has fallen sharply since July, when it peaked above $78 a barrel.

On Wall Street, the rise in oil today dampened the rally in stocks. The Dow Jones Industrial Average did gain more than 19 points to close at 11,689. The Nasdaq rose two points to close at 2,263.

We`ll have more on the markets and oil later in the program tonight. Also ahead: trying detainees; deciphering the intelligence report; backdating stock options; and connecting online.

(BREAK)

GWEN IFILL: Interrogating terror suspects. Congress puts its stamp on new rules. NewsHour congressional correspondent Kwame Holman reports.

KWAME HOLMAN: Soon after the Supreme Court struck down the military commissions designed by the Bush administration to prosecute Guantanamo- held terror suspects, the White House, the CIA, the Justice Department, the Defense Department, and the Congress all began active negotiations to come up with an acceptable, constitutional solution.

One reason the high court derailed the tribunal plan was that the president never asked Congress to approve it.

REP. DUNCAN HUNTER (R-CA), House Armed Services Committee Chairman: The Supreme Court did not say that Congress did not have the right to proscribe this new and define this new structure under which we`re going to prosecute terrorists. They said we had the obligation.

KWAME HOLMAN: The details, announced with great fanfare at the Capitol last week, were fashioned into legislation and brought to the floor of the House today. Florida Democrat Alcee Hastings stood to remind that no members of his party were asked or even allowed to contribute to that process.

REP. ALCEE HASTINGS (D), Florida: All of the negotiations were with the administration and with the Republican majority. Go to the record from yesterday`s Rules hearing and you will find that Duncan Hunter, the chair of the Armed Services Committee, said no Democrat was involved in those negotiations.

KWAME HOLMAN: House Republicans, however, nearly were unanimous in support of the key provisions of the new military tribunals bill.

REP. MAC THORNBERRY (R), Texas: I think this is a good bill, but I also believe that it is right up to the edge of tying our own hands or, to change my metaphor, of putting blinders on ourselves, to make it very, very difficult to stop future attacks.

KWAME HOLMAN: It gives detainees the right to respond to all evidence brought against them, including classified evidence.

REP. DUNCAN HUNTER: We don`t have crime scenes that can be produced, that can be taped off, that can be attended to by dozens of people looking for forensic evidence. We have, in this war against terror, a battlefield situation.

KWAME HOLMAN: It commits the United States to abide by provisions of the Geneva Conventions but allows the president to determine their meaning and application.

REP. TOM COLE (R), Oklahoma: These terrorists are not in uniform. They`re not under the supervision of legitimate governments. They don`t recognize the Geneva Convention. They don`t extend to the prisoners that they take of all faiths, of all nationalities, any rights, any privileges, any protections whatsoever.

KWAME HOLMAN: It allows the United States to continue vigorous interrogation techniques of detainees and protects U.S. agents from prosecution for past interrogation actions.

REP. CANDICE MILLER (R), Michigan: We need to give our professional interrogators clear direction and clear law because, right now, if you can believe it, they are actually faced with the prospect of buying liability insurance so they don`t get sued as war criminals in a federal court.

KWAME HOLMAN: Democrats talked about where the bill falls short.

REP. JANE HARMAN (D), California: There is a carve-out for the CIA. The bill would permit the CIA to continue a separate program for interrogation that does not comply with the Army Field Manual. If such a program is needed, then Congress must insist that it has strict limits and that we have the tools to do strict oversight.

REP. STEVE ISRAEL (D), New York: This bill says to potential terrorists, "The U.S. is surrendering the moral high ground, it is unilaterally relaxing the Geneva Conventions, that we are willing to keep people locked up indefinitely without a trial." And since I believe in executing people found guilty of perpetrating or planning a genocide on the American people, I want to make sure we`re executing the right terrorists.

KWAME HOLMAN: One major objection of Democrats is the lack of a habeas corpus provision in the bill, giving detainees the right to challenge their imprisonment in court.

REP. BARNEY FRANK (D), Massachusetts: And it is a terrible thing to contemplate that this bill will allow people to be locked up indefinitely with no chance to prove that they were locked up in error. We should not do it.

KWAME HOLMAN: And there was confusion as to whether a U.S. citizen could be labeled an "unlawful combatant," as described in the bill, and therefore be subject to prosecution under its provisions.

REP. STEVE BUYER (R), Indiana: And to the gentleman when you say that this is going to apply to everyone or all American citizens, that is completely false. I want the gentleman to know that.

REP. DAVID WU (D), Oregon: I`d like to respond to the two chairman`s remarks that I was incorrect in my analysis of the law or of the proposed bill. I stand by that analysis.

KWAME HOLMAN: The Senate operates under different rules from the House.

SEN. BILL FRIST (R-TN), Senate Majority Leader: I look forward over the next few hours to an open and civilized debate.

KWAME HOLMAN: In fact, Majority Leader Bill Frist brought the military tribunal bill to the floor this afternoon only after he reached agreement with Minority Leader Harry Reid to allow votes on several Democratic amendments.

SEN. CARL LEVIN (D), Michigan: While the bill before us is a modest improvement over the language originally proposed by the administration, it has adopted far too many provisions from the administration bill.

KWAME HOLMAN: And so, through this evening and perhaps into tomorrow, senators will debate possible changes to provisions dealing with interrogation, congressional oversight of it, and habeas corpus. Any changes would have to be reconciled with the House, which this afternoon approved the unamended version of the military tribunal`s bill with the support of 34 Democrats.

(BREAK)

GWEN IFILL: Next, what newly declassified sections of a once-secret intelligence report tell us about the state of affairs in Iraq. Ray Suarez has that story.

RAY SUAREZ: What exactly does the National Intelligence Estimate say about Iraq and terrorism? In response to the ongoing controversy, a small portion of the report, called "key judgments," was declassified by the president last night.

We`ll take up four of its findings with two analysts. Daniel Benjamin was a counterterrorism official on the National Security Council staff under President Clinton. He`s co-author of the book, "The Next Attack: The Failure of the War on Terror and a Strategy for Getting it Right."

Michael Rubin worked on Iraq policy in the Defense Department from 2002 to 2004 and advised the U.S.-led occupation authority in Iraq. He was last there in June.

Well, the first judgment, gentlemen, that comes in the declassified document says, "Although we cannot measure the extent of the spread with precision, a large body of all-source reporting indicates that activists identifying themselves as jihadists, although a small percentage of Muslims, are increasing in both number and geographic dispersion."

Do you agree with that, Michael Rubin?

MICHAEL RUBIN, American Enterprise Institute: I do agree with that. However, to put it in perspective, back in 1946, the predecessor of our intelligence agencies issued a report which said that the greatest threat over the horizon was the growth of radical Islam.

Then, 46 years ago, to the day -- to yesterday -- you had Abdel Nasser, Gamal Abdel Nasser, the Egyptian president, you had Khrushchev hanging on the U.N. podium, and you had Fidel Castro making a four-hour rambling speech at the United Nations, and the headlines were about how the United States was losing all public opinion throughout the world. Sometimes it`s the more things change, the more they stay the same.

RAY SUAREZ: Do you agree with that assessment in the first judgment, David?

DANIEL BENJAMIN, Former NSC Director for Counterterrorism: Absolutely. I think the evidence is quite clear. We see, essentially, three new categories of terrorists out there: home-grown, or self-starter terrorists, who have become particularly well-known in the United States because of their activities in Europe, but they`ve also shown up in the Middle East, in the Maghreb, in Pakistan, and many other places.

We have the foreign fighters who are in Iraq, most of whom come from the immediate neighborhood and predominantly Saudi Arabia. None of these people -- not none of them, but most of them were not involved in Islamic radicalism before.

And we also have thousands of Iraqi jihadists who were not there before.

RAY SUAREZ: Now, part of that same first key finding also said that the efforts of the United States have seriously damaged al-Qaida`s leadership and disrupted its operations. Do you have any quarrel with that?

DANIEL BENJAMIN: No, I don`t. I think that`s correct.

RAY SUAREZ: Michael Rubin?

MICHAEL RUBIN: No, I don`t have any quarrel. I think the key point is that jihadists aren`t just spontaneous. What`s important are the financial networks which support them that provide a template upon which they grow, which is why it`s not enough just to say, "Oh, jihadists are everywhere." Who`s funding them? Who`s training them? Who`s allowing them to increase their lethality?

RAY SUAREZ: Well, let`s turn to a second judgment about Iraq. "The Iraq conflict has become the cause celebre for jihadists, breeding a deep resentment of U.S. involvement in the Muslim world, and cultivating supporters for the global jihadist movement. Should jihadists leaving Iraq perceive themselves, and be perceived, to have failed, we judge fewer fighters will be inspired to carry on the fight."

Daniel Benjamin?

DANIEL BENJAMIN: I find all of those judgments to be correct. There`s no question that Iraq is right now at the top of the list of Muslim grievances and is the number-one issue for jihadists. It is certainly the issue that jihadists who have committed terrorist acts -- for example, the Madrid bombers, the London bombers -- it`s been the top thing that they have mentioned in their various tapes, in their utterances, what have you.

It`s also true that the disposition of Iraq is going to have a very big impact on how the jihad continues. If these fighters leave victorious, they will feel emboldened. And if, in fact, we are successful and have a stable democratic state, then that will take a good amount of air out of their tires.

RAY SUAREZ: Michael Rubin?

MICHAEL RUBIN: I largely agree. What I would say, though, is that jihadists will also have a cause celebre, whether it`s Iraq, whether it`s Afghanistan, whether it`s Spain.

The other factor, though, is that you`ve also had the growth of real discussion across the Muslim world about the issue of democracy, the issue of dissent, the issue of reform. Now, many people disagree with U.S. policy and the idea of pushing this with military force, but without a doubt the debate is there.

Now, the key thing that struck me, though, which really, I think, is highlighted in the report -- I was talking to some Somali generals and talking about the growth of Islamist movement in Somalia. The rhetoric which they are using is, "We defeated" -- Islamism -- "defeated a superpower in Afghanistan. And if we defeat a superpower in Iraq, then it will be clear that the international jihad is the way to go." It really has become the linchpin in the future of jihadism.

RAY SUAREZ: Now, Dan Benjamin, isn`t this finding, the one we just looked at, part of all the controversy of this week, alleging both that Iraq has been the proximate cause of the creation of new terrorists, but also, as the Bush administration maintains, the battle that must be won in order to discourage future terrorists?

DANIEL BENJAMIN: Well, there`s no doubt that this finding has caused a lot of controversy in political circles, because it does call into question the Bush administration`s strategy and the argument that Iraq is the central war on terror now is confronted with the counterargument, "Yes, it`s very important, but you`re screwing it up, and we have more terrorists than we did before, and, therefore, things are increasingly dangerous."

So I do agree that that is very much a political controversy. I have to say that, in terms of expert opinion on terrorism and on the global jihad, this is totally uncontroversial. And there are very, very few people, I think, who would argue that Iraq has not galvanized a lot of people to violence and really been a major recruitment tool for the global jihad.

RAY SUAREZ: Next, a third judgment from the intelligence estimate. "Four underlying factors are fuelling the spread of the jihadist movement: one, entrenched grievances, corruption, injustice, powerlessness; two, the Iraq jihad; three, the slow pace of reforms; and, four, pervasive anti-U.S. sentiment."

Michael Rubin?

MICHAEL RUBIN: I would largely agree. I would add irresponsible governance, or highlight that, and also the widespread acceptance of both incitement and conspiracy theories and an inadequate American response to counter that incitement and to counter that irresponsible government.

RAY SUAREZ: So you`re saying almost cultural factors on the ground in these countries?

MICHAEL RUBIN: Yes, indeed, cultural factors and political culture. The fact of the matter is that, if there is more openness and more individual accountability, there could be more progress.

You know, Saad Eddin Ibrahim, the Egyptian dissident, I thought put the dichotomy nicely when he said the trend within the Islamic world, or at least the Arab Middle East, is you have autocrats and you have theocrats. Each has a platform. Each is attacking the liberals in between, and the problem traditionally with U.S. policy is that we buy into the autocrats and we ignore -- we don`t create a platform for the liberals who might actually implement responsible governance.

RAY SUAREZ: Now, Dan Benjamin, the Iraq jihad is listed as one of the factors, but only one out of four, and its relationship to other things, like pervasive anti-U.S. sentiment, is not delved into further.

DANIEL BENJAMIN: Well, that`s an important reason I think why the rest of the report, or at least those parts that can be declassified, ought to be released, because I think people need to be able to examine the reasoning behind this. There`s no question that these are all major drivers of radicalism.

The jihadist movement grew in large measure out of a revulsion at misgovernance in the Middle East, and particularly in Egypt, and that revulsion continues to this day. One of the reasons the United States became a target is that bin Laden and his fellow jihadists decided that they were getting beat, the movement was getting beaten at the national level, and it was time to go after the supporter or the perceived supporter of regimes such as the Egyptian one.

So these are very deep-seated, very long-term problems. And on top of that, you`ve got this sort of galvanizing or catalytic concern about Iraq, so it all hangs together.

RAY SUAREZ: There was a fourth judgment that got a lot of attention: "Al-Qaida is exploiting the situation in Iraq to attract new recruits." Now, is that a controversial assertion, Michael Rubin?

MICHAEL RUBIN: No, they`re certainly trying, and anyone that looks at any of their propaganda videos sees that that`s happening. When al-Qaida is able to claim successful operations, they`re able to better their recruitment. And when they`re not, when they`re seen to be shut down, that hurts their recruitment.

DANIEL BENJAMIN: In every case where a terrorism conspiracy has either been investigated after an attack or has been disrupted before the attack -- in Europe, for example -- the investigators have found a library of Internet downloads showing either decapitations, assassinations, successful bombing attacks in Iraq.

There`s no question that this has become a kind of heroic narrative for disaffected young Muslims, and they look at this, and they`re very much inspired by it, and that`s attractive to them.

RAY SUAREZ: Let`s try to get down to some bottom lines here, for instance, on the impact of the Iraq war, on the number of people worldwide with the willingness and the ability to kill Americans. What do you think?

MICHAEL RUBIN: The willingness and the ability are two different things. This is why I`m saying that it`s not just the emotional revulsion that might be promoted by some inciting satellite stations that`s responsible.

It`s the people who are giving the money and actually giving the actual training. And for that, they existed before the Iraq invasion and after the Iraq invasion. We had international jihadists kill Americans throughout the 1990s and perhaps earlier than that, as well.

Iraq has become a center point of focus. It`s amplified attention to the problems, but it hasn`t itself created the problems.

RAY SUAREZ: Dan Benjamin?

DANIEL BENJAMIN: Well, I think, actually, their willingness has increased and certainly their capabilities have increased. Iraq has become the best on-the-job training the jihadists have ever had.

(CROSSTALK)

RAY SUAREZ: But what about Michael Rubin`s point that these factors existed, and in ample supply, before both the invasion of Iraq and, indeed, September 11th?

DANIEL BENJAMIN: Well, we would have faced a serious challenge from the global jihad no matter what after 9/11, but the challenge has been magnified enormously by Iraq.

Look, 50,000 to 150,000 Iraqis have been killed during the period that we`ve been in, in the country, and this has caused enormous anger at the United States, and it has moved some people to violence. It is true that the movement would have existed; they would have found a grievance. But I think there are just many, many more people who are interested and capable than there were before.

RAY SUAREZ: Very quickly, Michael -- I`ve got to get an answer to that -- magnified by Iraq or not affected by Iraq?

MICHAEL RUBIN: I think what`s affected by Iraq is the attention to the problem, not the problem itself. The real problem are the people that are training and funding. That`s not spontaneity. That`s preplanned networks, and that`s what we need to get at.

RAY SUAREZ: Michael Rubin, Daniel Benjamin, thank you both.

MICHAEL RUBIN: Thank you.

(BREAK)

GWEN IFILL: Still to come: the news on the economic front; and social networks online. But first, the growing scandal surrounding stock options.

Today, the Justice Department announced that a fugitive former CEO charged with securities fraud was captured in Namibia. Jacob Alexander is the founder and former chief executive office of Comverse Technology. The government said it would seek his extradition from Africa for his role in a stock options scheme.

The NewsHour`s economics correspondent, Paul Solman, has been looking into the larger stock options story and how it all works.

PAUL SOLMAN, NewsHour Economics Correspondent: The latest tsunami of scandal to hit corporate America is more bad news from the no-rules `90s, the decade that brought us Enron, Tyco, Qwest and the rest. Now, a new list of companies, perhaps 100 or more, many of them thought exemplary, suspected of backdating options, actually changing dates on financial documents to inflate their profits and, thus, their stock price.

Criminal charges have already been filed against Brocade Communications and Comverse. Shareholder advocate Nell Minow voices a common reaction.

NELL MINOW, Shareholder Advocate: I thought I had lost my capacity to be shocked, but I was really flabbergasted by this, by how widespread it was and by how blatant it was.

PAUL SOLMAN: But before we get too far ahead of ourselves, what exactly are stock options? And what`s so bad about backdating them?

To explain, we`ve concocted a company, NewsWear.com, a line of NewsHour clothing available exclusively on the NewsHour Web site and shipped from our offices here in Virginia.

We at NewsWear.com, like our competitors, are bidding for the next generation of star employees, and we want to give them the incentive to excel. How do we do it? We asked Donald Langevoort, a professor at Georgetown Law School.

DONALD LANGEVOORT, Georgetown University: Well, the modern way is to make the employees owners, make them want to make this company succeed, get the stock price up, because at that point it`s a win-win situation. Shareholders love the price up; employees love the price up.

PAUL SOLMAN: And how do we do that?

DONALD LANGEVOORT: We give them stock, which makes them owners, just like the shareholders.

PAUL SOLMAN: Let`s say we have a provisional employee we really want to keep. So how about we give you stock in the company, and you stay with us permanently?

PROVISIONAL EMPLOYEE: Are you serious? Yes, no, that sounds great.

PAUL SOLMAN: But for the current shareholders of our company, there`s a problem with just ladling out stock: dilution.

DONALD LANGEVOORT: Dilution.

PAUL SOLMAN: What does delusion mean?

DONALD LANGEVOORT: Dilution means that, before the stock was given out, I owned a certain amount of the company as a shareholder. After stock is put in the hands of all these employees, I own less of the company. My interest has been diluted.

PAUL SOLMAN: The problem of dilution is the key to unlocking what became the stock market scam. To show why and make this a little more personal, let`s assume that viewers like you were the shareholders of NewsWear.com, a representative sample of you in the condo complex next door watching the NewsHour, of course.

Now, if shareholders like you hold all the stock, and we turn a profit, then the profit`s all yours, at least in theory. You own all the shares. But if we at NewsWear issue more stock and dole it out to employees, then you have to divvy up the ownership with them. Your stock is worth less than it was. It`s diluted. And we`re afraid you`re going to be unhappy.

So firms like NewsWear.com gave stock options instead. And what is an option?

DONALD LANGEVOORT: An option is a right to buy something in the future at a price that`s set today.

PAUL SOLMAN: So if the price goes up in the interim, the person can exercise the option by buying the stock at that price, then selling it at today`s price, make the difference?

DONALD LANGEVOORT: Absolutely. And when the stock market is going up and company values are going up, employees can be very excited about that thought of getting seriously rich.

PAUL SOLMAN: Unfortunately, there`s a downside to stock options for employees, as our provisional NewsWear.com hire understood.

So how about we give you stock options at today`s stock price?

PROVISIONAL EMPLOYEE: But if the stock price tanks and it never gets back up to what it is now, then it`s worthless to me.

PAUL SOLMAN: He`s right. Say today`s stock price is $100 a share, and we grant options at $100 a share. Then, if the stock price sinks and never rises above today`s price, the options won`t bring him a dime. They`re underwater, as they say on Wall Street.

But if we really want an employee, we could give him or her an option at below today`s stock price, say $30 a share. So an option to buy at $30, which the person exercises, then sells immediately at $100, and makes the difference. Such options are called "in the money."

It`s perfectly legal, but there is a catch for executives trying to maximize profits and keep you shareholders content. While options granted at today`s stock price don`t have to be deducted from profits, "in the money" options do. So grant a $30 option when there`s $100 stock price and $70 gets pulled from profits for every option issued.

DONALD LANGEVOORT: If the stock option is granted "in the money," you do have to put on the financials that portion that represents the "in the money." That does become an expense; that does reduce the company`s earnings. Companies hated that. They didn`t want to take that hit.

PAUL SOLMAN: Because you investors didn`t want lower profits. Talk about dilution. Some of you investors might have thought you were getting soaked.

So some executives fudged. They issued options at today`s stock price. It`s just that they were flexible with the meaning of the word "today." In fact, they backdated the options to a time when the stock price was lower.

DONALD LANGEVOORT: Two weeks ago, the price was lower. But if that was the price and that was the date, it wasn`t "in the money." Nothing to expense. That way, we don`t have to take the hit, but we do have to lie.

PAUL SOLMAN: And now comes the kicker: If executives could do this for new hires, why, they thought, couldn`t they do it for themselves? They could, so they did, backdating their own stock options.

NELL MINOW: Executives. It`s executives. It`s appalling. They know what the outcome is going to be, and they switch around the date to benefit themselves.

PAUL SOLMAN: At Comverse, where the CEO has gone missing, the scam seems to have gotten even more audacious.

DONALD LANGEVOORT: The chief executive officer, chief financial officer were alleged to have doctored documents, created a slush fund of options for fake employees, all so they could be awarding these options to other employees and, in some cases, putting money in their own pockets.

PAUL SOLMAN: Which they allegedly did, to the tune of millions of dollars.

SINGER: What a way to run a business...

PAUL SOLMAN: Naming these slush funds for phantom employees after Andrew Lloyd Webber`s haunting "Phantom of the Opera," and backdating to taste. But how could they be so bold? We asked former federal prosecutor Jacob Frenkel.

Isn`t it obviously fraud if you change the date on something?

JACOB FRENKEL, Former Federal Prosecutor: That`s the exact kind of case that the prosecutors are bringing. And that is something that is obvious to the average person who is going to sit in the jury box, and they`re going to understand these documents were manipulated. This is fraudulent conduct.

PAUL SOLMAN: Fraudulent conduct that may seem egregious, but turns out to have been pretty run-of-the-mill. As to how many more prosecutions there will be, we can make only one promise: There`s a place where they won`t find anything wrong, NewsWear.com.

GWEN IFILL: And as we noted earlier, Comverse`s former CEO, Jacob Alexander, was arrested in Namibia today. Paul`s report was filed before Alexander`s capture.

(BREAK)

GWEN IFILL: For the past several months, Judy Woodruff has been crisscrossing the country, listening to and profiling young people between the ages of 16 and 25 for an upcoming PBS documentary. Along the way, she`ll also be filing reports for the NewsHour.

Tonight, her first report: on the way we`re talking to each other, the social networking phenomenon.

ADORA MORA, Student: "Hi. I know you`re probably wondering who this may be."

JUDY WOODRUFF, NewsHour Special Correspondent: Eighteen-year-old Adora Mora is reading a message she received on her favorite Web site for socializing.

ADORA MORA: "I know your sister Ebella (ph). When I searched her last name on Facebook, I also came across your page."

JUDY WOODRUFF: For millions of young people like Adora, responding to messages like this one has become an easy way to make and sustain friendships. Before arriving at Harvard University to begin her freshman year, Adora has already connected online with a number of new "friends."

So how many in the freshman class at Harvard do you already know?

ADORA MORA: Probably around 50. How many do I talk to on a regular basis? Maybe around like 10, you know?

JUDY WOODRUFF: Really? Already?

ADORA MORA: Yes. Yes. I got kind of addicted to it last month. I would do it everyday.

JUDY WOODRUFF: These Internet social clubs, known as social networking sites, allow users to join for free, create personal profile pages, add photos, music, blogs, and messaging, and, with no geographic boundaries, build their own network of "friends," people they already know or may never meet, who willingly share their lives on the Internet.

Kevin Maney covers technology for USA Today.

KEVIN MANEY, USA Today: If you can imagine having a club, a social club, where everybody walked around with a big sandwich board on the front of them saying everything about themselves, if you take that concept and take it to the Internet, something that`s happening electronically across the world, not just in one little building, that`s kind of what social networking does right now on the Internet.

JUDY WOODRUFF: Whether at school or at work, young adults, like Alesha Hardin, access their online social networks throughout the day.

ALESHA HARDIN, Young Adult: If I`m going to sit here for a full day, if I`m on the phone, I`m checking it. So I can check it up to five or six times a day when I`m working because, you know, as you can see, I have to multitask when I`m doing something.

JUDY WOODRUFF: With more than 200 competing sites, social networking is more than just chatter. It`s become big business.

So would you call yourself a computer geek when you were growing up?

MARK ZUCKERBERG, CEO, Facebook: Oh, absolutely.

JUDY WOODRUFF: Two and a half years ago, Harvard sophomore Mark Zuckerberg and his two roommates came up with the idea for Facebook, a Web site where students share photographs, messages and information about themselves with those in other Harvard dorms. It proved so popular that, within a few days, over a thousand students were accessing the site.

By the end of 2004, Facebook expanded to almost 300 schools, with access granted only to those with a valid college e-mail address. Students in one school could now befriend students at another, expanding their personal network of friends. And with privacy controls, they had the option of limiting access to their personal information.

Today, more than 2,000 colleges and 22,000 high schools are on board. And this past summer, Facebook expanded yet again, allowing 15,000 corporations, nonprofit groups, and members of the military to set up their own networks.

MARK ZUCKERBERG: Up here is everything except product development and engineering.

JUDY WOODRUFF: Mark Zuckerberg dropped out of college, and today the 22-year-old executive in flip-flops and a t-shirt heads a multimillion- dollar company, with a staff of around 150 people, most close to his own age, and a business that has grown to more than nine million members.

MARK ZUCKERBERG: I`m really young, so I have to be thinking about the long term, you know, and how the stuff is going to play out. And I think that the way you achieve the best long-term value is by building real value in the world.

You know, so we focused a lot on our product. And what do the people who use the service get out of it? Are we actually helping them achieve their goal of understanding the world? And if we can do that, then I don`t think we`re going to have a hard time making a lot of money.

JUDY WOODRUFF: Facebook recently announced that it would no longer limit membership, making its social networks available to anyone on the Internet, and matching the open door policy of networking giant MySpace.

With over 100 million user profiles and over 80 percent of the social networking market, MySpace is now the most visited Web site in the country, ahead of Google, auction powerhouse eBay, and longtime industry leader Yahoo.

And online advertisers have taken notice, spending about $280 million this year on MySpace, Facebook, and their networking competitors, in an attempt to reach the lucrative youth market. It`s a figure that some experts predict could balloon to nearly $1.9 billion by 2010.

JANE BUCKINGHAM, President, The Intelligence Group: How many friends or contacts do you have on MySpace?

SOCIAL NETWORKING USER: I probably only have, like, 200, maybe, not too many.

JANE BUCKINGHAM: So 200, but that`s not too many?

SOCIAL NETWORKING USER: Well, probably only like 100, maybe, are, like, really good friends, though. So, like, a lot of them are kind of like people you know, not like you talk to them all the time.

JUDY WOODRUFF: Focus groups, like this one, help marketing consultants like Jane Buckingham develop strategies for advertisers interested in the youth market.

JANE BUCKINGHAM: There are their close friends, and then there are the 2,000 people who they talk to on MySpace. There`s that feeling of, even if I`m not super-popular in my highs school, I have, you know, 1,000 people who want to talk to me, so I can`t be that bad.

SOCIAL NETWORKING USER: You can kind of judge people based on how many friends they have. You know, it sounds kind of mean. But, like, people who have 1,000, you`re like, "Ew, they`re weird." People who have, like, 300, you`re like, "Oh, OK."

RADIO ANNOUNCER: If you think "MASH" is or ever was funny, I swear to God, you are way too old to be listening to this show. "Gen-Y U." on 103.7, Free FM.

RADIO HOST: All right, San Diego, what`s happening? This is "Gen-Y U" radio.

JUDY WOODRUFF: On their popular "Gen-Y" radio program in California, Brent Williams, John Fiske, and Kris White debate issues of interest to their generation. Today`s topic is MySpace.

Why do you hate MySpace?

RADIO HOST: I think it`s just a shrine for yourself where you can go online and go, "This is what I did this weekend. Here are pictures of me." Everyone come to my page and look at me...

RADIO HOST: A tribute to yourself.

RADIO HOST: ... as a tribute. Yes, that`s just stupid.

And then people make the argument of, "Oh, I get to keep in contact with people that I lost contact with." Generally when you lose contact with someone, there`s a reason for that. And if you want to gain contact, then -- like, we were saying, don`t just e-mail, "Oh, you got an invite from this person to be your friend."

RADIO HOST: But it depends on the person.

RADIO HOST: How about pick up a phone, and call them, and say, "Hey, I haven`t talked to you for a while, and I care to get in contact with you"?

RADIO HOST: But it depends on the person. Some people`s MySpace page is a tribute to themselves...

SARAH MCGARITY, Young Adult: I don`t have a MySpace page. I think that`s a little too open, because it`s for everyone.

So what classes are you going to take this quarter?

JUDY WOODRUFF: For some young people, like Sarah McGarity and Jesse Jones, the issue isn`t about self-promotion or friendship. It`s about safety.

JESSE JONES, Young Adult: At first, it was just a friendly way to, you know, say hi to friends that maybe you haven`t seen, meet new people. Now it`s turned into this terrible, you know, thing that, you know, predators are looking for young women, and women, you know, may not, you know, know better and that -- you know, things happen.

JUDY WOODRUFF: A recent survey by the Polly Klaas Foundation found one out of four teens say they have talked online about sex with someone they never met in person, while nearly 20 percent reported knowing a friend who has been harassed or asked about sex online by a stranger.

ALESHA HARDIN: I get MySpaced all the time. Like, "Oh, baby, you look so hot." And like, oh, you can really tell that from, you know, a little five-inch picture.

JUDY WOODRUFF: In the wake of a number of reported incidents, including alleged sexual assaults, and mounting concern over open access to personal information, MySpace has added privacy options and beefed up its security. And many young people have started to censor what they post.

ALESHA HARDIN: People of my generation don`t realize that your employers are searching for you on MySpace to see what kind of lifestyle you lead before they hire you. You really have to watch your back.

DOAN TRANG PHAN, Social Networker: Well, that`s why I have my profile on private, because I have a professional job. And the last thing I need is for my employer to be able to pull up and see a picture of me going out partying or something like that, because it`s not a professional image.

JUDY WOODRUFF: Despite these concerns, online networking continues to gain traction among young people and capture the attention of big business. Last year, Rupert Murdoch added MySpace to his News Corporation empire, paying a reported $580 million for the leading Web site and its parent company.

For its part, Facebook`s open-door policy may make it more attractive to potential suitors, the subject of takeover rumors for months. The Wall Street Journal now reports that Facebook and Yahoo are discussing a possible sale for close to $1 billion.

(BREAK)

GWEN IFILL: And finally tonight, our economic update.

In recent weeks, gas prices have dropped like a stone. The stock market is approaching a record, yet sales of existing homes are sinking. What to make of this mix of good and bad economic news?

Here to help us out, mark Zandi, chief economist at MoodysEconomy.com; and John Kilduff, senior vice president for energy risk management at Fimat USA, a global financial services company.

John Kilduff, gas prices have dropped by 50 cents in the last month. Why?

JOHN KILDUFF, Fimat USA: We got through the summer in a big way. The fears over Iran, the fears over the hurricane season, and the fears over the government`s implementation of ethanol as an additive for clean air rules throughout the country all passed without our worst fears being realized. As a result, the market, the marketplace has basically exhaled and said, "We have enough supply. Prices, come down."

GWEN IFILL: If you had to balance the domestic concerns, which you talked about, weather and other concerns, against the geopolitical concerns, about what was going to happen with the oil supply in the Middle East, for instance -- Venezuela, other places -- what would you say had the greater impact?

JOHN KILDUFF: Well, certainly, the strong U.S. consumer demand for gasoline that was unrelenting, despite the $3 price mark, fed into the whole situation. But I think the greatest fears, the culmination of the $80 crude oil or the $78 crude oil, was the Hezbollah situation with Iran as a central player, not only as a backer of the Hezbollah, but also over their nuclear ambitions.

We had President Bush saying that the matter over Iran`s nuclear ambitions would be resolved in a matter of weeks, not months, so it looked as though a showdown was imminent. And when it comes to oil and gasoline prices, when you`re talking about Iran, the stakes are just huge, and that`s why traders run for cover, and buy up, and push up the price.

GWEN IFILL: So, Mark Zandi, let`s talk about the stock market for a moment. We saw the market was flirting again today with new records, didn`t quite get there. It was dampened somewhat. But what has been driving it so high when there are all these other indicators which would seem to be counter-indications?

MARK ZANDI, MoodysEconomy.com: Well, the lower oil prices certainly helped. There`s nothing better for the economy than lowered fuel costs. It boosts growth, and it takes the edge off inflation. Corporate earnings were strong.

And the most fundamental reason for optimism in the economy is that businesses, with a few exceptions, are doing very, very well financially. So all of those things -- and, obviously, lower rates have helped, too, and the Federal Reserve is putting monetary policy and the tightening cycle on hold. So all those things together have clearly come together and helped investors get into the market in a bigger way.

GWEN IFILL: It was only a few years ago when we saw the last big record broken. We did the same, following breathlessly, day by day, waiting to see what was going to happen. What`s different this time? Or is anything different this time?

MARK ZANDI: Well, I think equity prices, stock prices are more consistent with the economy today. Back around the turn of the decade, there was a lot of froth in the stock market, a lot of speculators, particularly in technology stocks.

So stock prices, I think, got ahead of the economy. Stock prices today are a clear reflection of the economy. They`re much more consistent with what actually is happening. So the records today are real; they`re not fake.

GWEN IFILL: John Kilduff, how do we begin to square the good news about oil prices -- certainly, when I fill up, I think it`s good news -- against all the other indicators, when we pick up headlines and hear about layoffs, and weakness in manufacturing, in automaking, and all of these other industries, airlines? How do we square those two things?

JOHN KILDUFF: Well, unfortunately, as I like to sort of twist the analogy, there`s a gray lining to this silver cloud of low oil prices. They are coming down in part -- and maybe to a very large degree -- as a result of the slowing economic environment.

Mark will have a better opinion as to whether or not the U.S. is looking at a recession next year or not. But certainly a big part of what`s pulled the rug out from under oil prices and gasoline prices is the backdrop of robust economic demand and growth, which translates into even greater amounts of energy usage that producers are having a hard time keeping up with right now, coming out of the equation and helping to push prices lower.

GWEN IFILL: More of a supply...

JOHN KILDUFF: And they`ve done their damage. They`ve done their damage, obviously, energy prices have.

GWEN IFILL: More of a supply question, you believe?

JOHN KILDUFF: It is definitely not a supply question right now. I mean, that`s been bedeviling, I think, to anyone who`s looked at this whole picture, because, back in June, crude oil inventories in storage in the U.S. hit multi-year high, and then we had almost $80 crude oil. It`s not about that.

What`s being priced into this market is growing demand and fears about the continuity of supply, whether oil will get knocked offline in countries like Iran, Iraq, Saudi Arabia, even Venezuela, for that matter. So we`re pricing in the fact that we might not have it coming online next month or the months ahead, not what we have on hand today.

GWEN IFILL: Now, Mark Zandi, let`s talk about the potential for other drags on the economy in the future, because even though today we saw good numbers, positive numbers on new home sales, we`ve seen consistently poor numbers on existing home sales, and mortgage applications, and other things, which show that there`s a fundamental slowdown. How much of a concern is that?

MARK ZANDI: Well, it is the most significant concern to the economy. The housing downturn is quite severe. The market peaked a year ago. We`ve seen sales off 15 percent. Unsold inventories are up 50 percent. And now, for the first time since the early 1990s, house prices are falling nationally.

So all of this is a very significant drag on the economy, and that`s why growth is slowing and will continue to slow. At this point, I don`t think it`s enough to send the economy into recession. We`re not seeing the ill effects of the housing problems bleed out into the rest of the economy, but, clearly, it is a reason to suspect that growth will be measurably slower in the coming year, compared to the past couple, three years.

GWEN IFILL: And what do you say to John Kilduff about recession?

JOHN KILDUFF: No. I think the odds -- they`re obviously up from where they were a year ago, but they`re still very low. I put them close to one in four, which is not insignificant. It`s measurable, but still low in the broad historical scheme of things.

GWEN IFILL: Well, as long as we`re looking to the future, John Kilduff, let`s ask again about what happens with these gas prices and these oil prices. We`re about to enter the winter heating season. Everyone`s keeping an eye on the cost of oil and the cost of gasoline. What do you see happening?

JOHN KILDUFF: They`re going to continue to lower. The price at the pump is going to continue to fall. We could see the national average actually get down around $2 a gallon, maybe even dip below it, just in time for the holiday season, which should help bail out the retailers and, I think, help out the overall economy, maybe even prevent what was partly -- if a recession was on the horizon, was a high-energy-price-driven one.

We`re also seeing, it appears, alternative investors who have put money in commodities, like hedge funds and pensions and endowments, cycle out, basically move their money out of commodities into the equity markets and allowing prices to fall, as well.

GWEN IFILL: Well, let me ask Mark Zandi about that, because, in fact, if one effect -- that is to say, these declining house prices and the declining gas prices -- are there other effects that are just under the surface that we`re not necessarily seeing, when we look at that price drop at the pump?

MARK ZANDI: Well, one of the things to note is that the benefit of lower oil prices, gasoline prices, goes mostly to lower- and middle-income households. They devote a much larger share of their budget to energy and, of course, have fewer financial resources.

So when energy prices, gasoline prices are up, they really have to make some hard choices. Now that they`re down, that really does help, particularly as we make our way into the Christmas buying season. So one of the more positive dimensions of this decline in oil and gasoline prices and home heating prices is that it really benefits the people who need that help the most.

GWEN IFILL: But what does the continued weakness in the housing market do to buyers who are trying to get into the market or are trying to sell?

MARK ZANDI: Well, yes, the housing market is the economy`s weak link. It will remain the economy`s most significant problem and threat, and so that can`t be discounted. That clearly is the thing that we need to worry about the most at this point.

GWEN IFILL: You just can`t help but stay worried. Mark Zandi, John Kilduff, thank you both very much.

MARK ZANDI: Thank you.

JOHN KILDUFF: Thank you. Good evening.

(BREAK)

GWEN IFILL: Again, the other major developments of the day. The House adopted new rules for interrogating and prosecuting terror suspects. The Senate was expected to follow suit.

The U.S. offered to put off seeking U.N. sanctions against Iran for a few weeks.

And California became the first state to set limits on greenhouse gas emissions.

We`ll see you online and again here tomorrow evening. I`m Gwen Ifill. Thank you, and good night.