The NewsHour with Jim Lehrer

GWEN IFILL: Good evening. I'm Gwen Ifill. Jim Lehrer is on vacation. On the NewsHour tonight, a summary of today's news, corporate accountability's latest test as CEO s sign off on company financial statements, a look at how local police are fighting the war on terrorism, and the growing tension between the U.S. and Saudi Arabia.

NEWS SUMMARY

GWEN IFILL: Corporate executives faced a major deadline today under a new law that forces them to personally vouch for their company's financial statements. In all, 947 public companies were under orders to file affidavits with the Securities and Exchange Commission. Most had to file by today, while some faced deadlines later in the year. Several firms had to restate their earnings. Household International, the nation's number two consumer finance company, has made the largest downward revision so far. It said its accounting was off nearly $400 million over nine years. We'll have more on this story in a moment. Wall Street rallied today, partly as a reaction to seeing the corporate leaders certify earnings. The Dow Jones Industrial Average gained 260 points, 3%, to close at 8743. The NASDAQ soared 65 points, 5%, to close at 1334. In other economic news, the Ames department stores are going out of business. Ames was the fourth largest discount chain in the US. Its announcement today blamed continued weak sales. Ames will close all 327 stores. They employ 22,000 people, mostly in the East and Midwest. And IBM confirmed it's laying off nearly 16,000 workers, about 5% of its workforce. The computer giant cited a slump in corporate demand. A flooding river crested today in the Czech capital of Prague as volunteers fought to protect historic sites. Flooding also continued in other parts of central Europe. We have two reports, from Gaby Rado of Independent Television News and Louise Bates of Associated Press Television News.

GABY RADO: Upstream from Prague, the river Vltava is still a menacing flood plain after inundating large industrial and residential areas just outside the capital. In the early hours today another mass evacuation in the old city -- by then some 200,000 people had been forced from their home as cross the Czech republic. There have been extraordinary glimpses of people caught in the floodwaters. It's impossible to know if this man survived or what he was doing. But the amateur cameraman who recorded this desperate rescue was able to witness the person trapped under one of the bridges brought to safety. One of his saviors was an amateur mountaineer. The good news is that it stopped raining and there's even some sunshine. But the bad news is that over there there used to be an island and it's been transformed into a raging torrent. Look how high the river is; it comes up to about here on this steel barrier, it s holding some of the water back, but it's coming through underneath. It's just a matter of time before this part of the town probably gets flooded. In the early afternoon the authorities announced the level of the Vltava had stopped rising. There were hopes the worst had been averted.

LOUISE BATES: Floodwaters have also swept across eastern Germany, Dresden, the capital of Saxony, was badly hit. About 30,000 people were evacuated when the river Elba rose to a level of almost 7 meters. The floodwater rose so quickly it flooded the city's main train station. Water rushed through the main ticket halls, flooding stairways and corridors. Tracks and platforms were left under feet of water, and the station had to be evacuated. The Danube River has receded slightly in neighboring Austria, but huge areas of the country remain under water. The torrential rains that caused the river to burst its banks have stopped. But river levels are still high.

GWEN IFILL: Across Europe the overall death toll from the flooding now stands at 98. Tension between North and South Korea eased a bit today. The two nations agreed to resume economic talks, and they'll also permit more reunions of families separated since the Korean War 50 years ago. There was no date set for renewed military talks, but both sides said they'd be held at an early date. That's it for the News Summary tonight. Now it's on to vouching for corporate accounting, policing immigration, and the US and Saudi Arabia.

FOCUS VOUCHING FOR VERACITY

GWEN IFILL: So do the numbers add up? In one of the first new measures in the wake of the past year's business scandals, chief executive officers and chief financial officers must now vouch that their dollars make sense.

Business correspondent Paul Solman of WGBH-Boston begins our report.

SPOKESMAN: Ever think it would come to this?

PAUL SOLMAN: Today's deadline is in the spirit of spectacles like the recent arrest of WorldCom executives -- to make CEO's and CFO's think twice about playing games with their companies company's financials. From now on, CEO's and CFO's of America's 942 largest publicly traded firms, those with more than 1.2 billion in revenues, must sign statements reviewed with their audit committees, that to the best of their knowledge their current financial report is neither untrue nor misleading. Penalties could be as high as 20 years in prison. And the number of firms required to make statements could get a lot larger. The idea is that future WorldComs won't, for example, inflate their profits, if prison is the price -- that the next Enron won't camouflage its debts with off balance sheet partnerships, if top executives can't use the excuse that they simply didn't know the numbers -- as ex-Enron CEO's both have.

SPOKESMAN: I do.

PAUL SOLMAN: Reporter: What numbers? Well, the key financial statements in the quarterly and annual reports of publicly traded companies. The balance sheet and the income statement. So first let's take a look at a balance sheet. Enron's -- with Harvard Business School accounting professor, Paul Healy.

PAUL HEALY: The balance sheet shows the firm's assets, resources that it owns, it shows its obligations to creditors and banks, called liabilities, and it shows the residual, what's left over for share hold,.

PAUL SOLMAN: And it's a balance sheet because what the company owns, has to balance where the money came from.

PAULHEALY: Correct.

PAUL SOLMAN: The difference between what a firm owns and what it owes, is called shareholders equity. What you or I might call our net worth. And to pump up your net worth, or shareholders equity, you just show a greater difference between your assets than liabilities. So what Enron did was lower its liabilities by whisking some of them off the balance sheet entirely.

PAUL HEALY: In the case of Enron, the question key question that arose was whether all of its debts and obligations were properly recorded under its liabilities.

PAUL SOLMAN: But plenty of debt here on the balance sheet.

PAUL HEALY: There's lots of debt. The question is whether all of it was showing up. Enron had arranged for complex off balance sheet partnerships which it owned, so subsume a large part of the debts so we don t see it showing up on the balance sheet.

PAUL SOLMAN: So it s companies that Enron effectively owned, they take on debts off the balance sheet, don't show up here at all.

PAUL HELAY: That's right.

PAUL SOLMAN: We first illustrated these so-called partnerships in January. In a piece on Enron we called Accounting Alchemy:

PAUL SOLMAN: Now the key was the main tactic, the use of its so-called related party companies, like Raptor, companies created and ones almost entirely by Enron, subsidiaries, really, some run by chits chief financial officer. Get when it suited Enron's interests, these related parties were treated as independent arms length businesses.

PAUL SOLMAN: With nary a mention of them in Enron's annual reports to keep the debt from prying eyes. Now, while Enron did this in exotic ways, other companies did it much more simply. The head of Harvard s accounting department had one such example: A fast food chain that also seems to have played fast and loose with its balance sheet in the early 90s.

KRISHNA PALEPU: Like Enron, Boston Markets was Boston Chicken at the time, had its own off balance sheet financing, and the way they did it was by creating a lot of franchises to open stores, and these franchises are supposed to be independent parties. However, they gave them a guarantee that should they lose money, they will be willing to buy them out. And many franchises when they lost money went and borrowed a lot of money to cover up their losses and ultimately Boston Chicken shareholders had to repay all these loans even they knew all these loans were liabilities, because they were not on the books.

PAUL SOLMAN: Is that why they went bankrupt?

KRISHNA PALEPU: Yes, because they had all owes obligations they had to meet and didn't have enough cash flow to pay those obligations, so they had to clean up their act, close a lot of stores, and they are just now emerging with a new name and much fewer stores.

PAUL SOLMAN: The new rules aim to head off collapses like Boston Markets and Enrons by making CEO's and CFO's accountable for their balance sheets. And for their income statements as well: The report that shows the firm's income, and all the expenses that have to be deducted from it before you get down to the all important bottom line. A firm's reported profit, or loss.

PAUL HEALY: The second major financial statement is the income statement, or statement of operations.

PAUL SOLMAN: Here we have one for Qwest telecom

PAUL HEALY: Shows revenues, cost and bottom line.

PAUL SOLMAN: But the bottom line is a loss, so they were acknowledging they were losing money.

PAUL HEALY: The problem is the loss is greater than they were reporting. And the reason is included in their revenues, the revenues from long term contracts, where they're showing the full am of the contract revenues here in their income statement, and they haven't received cash from their customers yet, they haven't provided the service, so we don't know whether they're ever going to get paid for these.

PAUL SOLMAN: In other words, while Qwest s annual reports were typical of the genre, devoting most of their pages to image, when it came to the numbers, they were inflated in the hype and in the fine print of the financials themselves. So shaky long-term rental contracts that were not even generating any cash in the current year were reported as revenues, and Qwest claimed the entire amount of the contract. The revenues on the income statement were thus overstated. And so the bottom line showed a much smaller loss than Qwest in fact incurred. Again, the new rules use accountability and fear to try to nip such flummery in the bud, and thus prevent boom bust collapses such as the one recently seen as our final example, WorldCom, where they monkeyed not with the revenues on their income statement, but with the expenses. WorldCom s annual report, posted on its website, emphasized its high tech hopes, telecom,cable running right across its pages -- from up high in the sky, to way down in the ground. Its numbers were similarly hopeful. Indeed, WorldCom never even used the lines it paid to rent, and then claimed that since it hadn't used them, the lines must have been a long-term investment. So you might say that to keep profits high, it buried its expenses, and when WorldCom had to restate the investment as a one-year cost, its stockholders wound up swimming with the fishes.

PAUL SOLMAN: So then how could WorldCom have in good conscience done this?

PAUL HEALY: They didn't do it in good conscience. It was almost surely fraud.

PAUL SOLMAN: Whether it was fraud or not remains something for the legal system to decide. But the point of the regulations whose deadline was today is to make it tougher for top executives to say they didn't really know the numbers.

GWEN IFILL: But will today's deadlines make it tougher to commit fraud? For more on today's developments we're joined by Linda Griggs, a former chief counsel to the chief accountant of the SEC, she is now a partner at Morgan, Lewis, and Bockius, a Washington law firm. Welcome.

LINDA GRIGGS: Hi.

GWEN IFILL: What is the significance of these signed documents today?

LINDA GRIGGS: Well, there are two sets of signed documents that we're seeing today. The first one is the one that is the sworn statement that refers to prior reports, and that one the SEC ordered 947 CEO's and CFO to certify to. Those 947 companies learned about this order in June, so they've had time to prepare, to figure out how to get comfortable with signing a certification that their old reports were fine. There's another set of certifications that are coming in today too. And that was required by Sarbanes Oxley. And that has --

GWEN IFILL: That's the corporate accountability bill that was signed by the President.

LINDA GRIGGS: That's right. And that one requires a certification that came out of the blue. Corporate America didn't realize that was going to come in so quickly. The SEC had proposed a certification requirement, but there was a comment process that ends on August 19, and so people thought they had some time to get used to it. So all of a sudden we have lots of certifications coming in today.

GWEN IFILL: If these CEO's sign their John Hancock to these documents, can they later say I thought at the time to the best of my knowledge that this was true, but there was just pure sloppiness at work here?

LINDA GRIGGS: Well, best of your knowledge. The sworn statement is to the best of their knowledge they think there's no material omission in those reports. That means they have to do more than just guess. They got to go through a process of and we've advised companies they should take to their management, gel their management involved, we ve advised them that they ve got to talk to their audit committee, because the other part of that sworn statement is that they discussed the contents of the sworn statement with their audit committee. But they need to get everybody involved in the company so that the company people get vested in making sure these disclosure documents are appropriate.

GWEN IFILL: We've all been watching the SEC website today to see who was filing and who wasn't. But one of the loopholes, at least a temporary one, is that people can ask for extensions. Does that raise a red flag when a company like Qwest or WorldCom, as they did, ask for extension?

LINDA GRIGGS: Well, I don't know if it will raise a red flag. Certainly companies who have discovered something that they want to follow through on will be filing or have filed 12B-25s asking for an extension and that gives them another five days to figure out whether they can, in fact, file a correct document or whether they will have to restate. The problem with restating is that it takes time. So if you discover a problem last week, for example, you may not be able to restate quickly enough in order to file even within the extended period of time.

GWEN IFILL: What if the SEC subjects these documents to smell tests and decides that a CEO has not truthfully signed this document. Is there a punishment, is there a penalty involved?

LINDA GRIGGS: Well, the SEC is reading these documents; in fact I bet they're sitting there right now, they've got a room full of people looking at the sworn statements and probably also looking at the other certifications. And on their face it's going to be hard for the SEC to know whether they're wrong. But as you know, Sarbanes-Oxley, the new act, is going to give a lot more money to the SEC, because everybody knows that the SEC hasn't had the manpower to review enough documents. So this will enable to SEC to look at more documents. And if they see something that doesn't make sense, they will certainly raise comments and try to get to the bottom of it.

GWEN IFILL: We saw the Dow Jones today shoot up a couple hundred points and we don't know why this ever happens, but assume for a moment that it's because these documents were arriving today. Are there market consequences for someone's truthfully filling out these documents or failing to do it?

LINDA GRIGGS: Certainly I think there would be if a failed to file it. If they failed to sign the sworn statement or said they can't certify to prior reports it will be shown by the SEC on their website in the back bucket; the SEC has two buckets: the good bucket and the bad bucket. And that will not showed up for a few days because the SEC has to read these to determine if it goes to the bad bucket. But if a company can t swear if their officers can't swear to the accuracy of their documents, they will have to submit a statement or will have already submitted a statement today that says they can't make the representation.

GWEN IFILL: And, if that happens, is there a personal exposure for a CEO who signs, does it come right out of that CEO's pocket or is it the company that s liable?

LINDA GRIGGS: Well, the fact that the CEO or CFO said they couldn't certify isn't going to give them any risk. But the reason they couldn't certify is what will cause the problem. Normally CEO's and CFO's don't actually have to pay money unless they were involved in insider trading at a time when they had material nonpublic information. But the company will certainly have to suffer enforcement action if in fact what is going on is the financial statements are false, or there isn't good disclosure about the company's results of operations.

GWEN IFILL: Now some business people involved in this whole drama have said, listen, a crook is a crook is a crook and a crook who is going to commit fraud anyhow is not going to mind signing an untrue document in this case. Does that undercut the ability of this to actually change what happens?

LINDA GRIGGS: Well, I think you're right. A crook is a crook will still have false financial statements. But I think that there is a multi-faceted approach being under taken right now, Congress passed the law. The New York Stock Exchange, AMEX, and NASDAQ have been proposing far reaching new corporate governance requirements. The SEC is proposing and will be adopting soon new disclosure requirements. Those three coming together are going to have a dramatic impact. And getting more people involved. I can't underestimate the strides that I think will happen because of getting that next level of management involved, getting the audit committee involved.

GWEN IFILL: And if you're an investor who wants to find out whether the company you sent your life savings to has signed one of these documents, has submitted one of these documents, how do you find out?

LINDA GRIGGS: Well, the sworn statements are submitted to the SEC, but most companies are doing what the SEC asked them to do, which is to file a copy of it as an exhibit to an 8-K or to disclose it in an 8-K. And the certifications, if they're not filed as exhibits to a quarterly report, will be filed or at least described in an 8-K. So they can go on the SEC s website, look at the SEC filings, anybody can do it. And if you're interested in a particular company, look for that company's filings.

GWEN IFILL: And they can find it there.

LINDA GRIGGS: That s right.

GWEN IFILL: Okay, Linda Griggs, thanks for clearing it all up.

LINDA GRIGGS: Thank you, good to talk to you.

FOCUS POLICING IMMIGRATION

GWEN IFILL: Now, drafting local police to help fight the war on terrorism. Lee Hochberg of Oregon Public Broadcasting reports on some reaction in the West.

SPOKESMAN: Hello. Hi, I'm john. Nice to meet you. Thank you.

LEE HOCHBERG: Since September 11, Seattle's police force has reached out to the city's 50,000 Muslims. It hoped a police presence might protect Muslims from hate crimes while furnishing intelligence about criminal activity. So appreciative was one Muslim congregation that it held a ceremony to thank the police. But now the police say a new federal tactic in the war on terrorism threatens all the good they've accomplished. The tactic was laid out by Attorney General John Ashcroft at a press conference this summer.

JOHN ASHCROFT: Today I am announcing the national security entry-exit registration system. This system will expand substantially America's scrutiny of those foreign visitors who may pose a national security concern and enter our country.

LEE HOCHBERG: The attorney general wants to use local police as part of his expanded program to track aliens. He said more aliens will be photographed and fingerprinted upon entry to the U.S. and the names of those who overstay their visas will be put into the national crime information system. And he wants any police who encounter those aliens to arrest them.

JOHN ASHCROFT: The nation's 650,000 police officers check this system regularly when they make traffic stops or routine encounters, and we believe this is something which is so pressing in its nature that we can ask for their cooperation and volunteerism here.

LEE HOCHBERG: Arresting illegal aliens has been the duty of federal agents, not local police. In fact, the Justice Department in 1996 rendered an opinion discouraging local police from detaining aliens unless they had committed a criminal offense. But Ashcroft says war-time conditions change things.

JOHN ASHCROFT: This narrow, limited mission we're asking state and local police to under take voluntarily, arresting aliens who have violated criminal provisions of the Immigration and Nationality Act or civil provisions that render an alien deportable, that narrow mission is within the inherent authority of the states.

LEE HOCHBERG: The proposal has outraged many in immigrant communities, as well as civil libertarians on the left and right. And though there's no exact number available, many police forces have refused to cooperate.

OFFICER JOHN DITTO, Seattle: There's just no way that I'm going to find terrorists by trying to find people who are illegal aliens.

LEE HOCHBERG: In Seattle, Officer John Ditto says aliens who fear being arrested for visa violations aren't going to approach him with tips about more serious crimes.

OFFICER JOHN DITTO: From what I see I think people would have one more reason to runaway from me, and that's not something that I think I want to have happen.

LEE HOCHBERG: Seattle Police Chief Gil Kerlikowske, in fact, issued a policy statement opposing Ashcroft's order. It says Seattle police will encourage all complainants to communicate with Seattle police officers without inquiry regarding their immigration status.

GIL KERLIKOWSKE, Seattle Police Chief: The best prevention against a future terrorist attack is a police department that has the trust and good communication with all of the people that it serves, and something that is going to chill that relationship doesn't help any of us.

LEE HOCHBERG: Some in the immigrant community also fear that people will avoid the police at all costs.

ANA MARIA RIVERA (Translated): Police are supposed to protect me as a human being, not as a Mexican, not as a Latino, but as a human being.

LEE HOCHBERG: When Ana Maria Rivera was raped and battered by her then-husband, she didn't call police because her immigration papers weren't in order. Domestic abuse already is an underreported crime among immigrants. Rivera thinks Ashcroft's plan will mean even fewer women reporting it in the future.

ANA MARIA RIVERA (Translated): It's a weapon for the abuser. He's going to feel stronger -- even more if he's legal. He's going to say, "Call the police and they're going to deport you." This is going to be a weapon. And this is going to be another thing that women are going to be afraid of.

LEE HOCHBERG: Some abuse counselors say they've even altered the advice they give victims. Hollis Pfitsch of the Northwest Immigrant Rights Project.

HOLLIS PFITSCH, Domestic Abuse Counselor: Well, I used to tell my clients, even though you're undocumented, you can call the police, you have the right to their protection, and it's important that you do call the police if you're in a dangerous situation. And now I tell them be careful calling the police.

LEE HOCHBERG: For police themselves, there's also the issue of not having enough time to catch criminals as it is.

SHERIFF DALE BRANDLAND, Whatcom County, Washington State: I'm not going to have my folks out arresting illegal aliens and illegal immigrants. We have too many other things to do.

LEE HOCHBERG: Dale Brandland, sheriff of Washington State's Whatcom County, 2,000 square miles long the U.S.-Canada boundary with some 24 million border crossings per year. He says his force already prosecutes 90% of the immigration cases generated by the federal border patrol, Customs, and DEA agents. He says Ashcroft's new mandate would cost money his force doesn't have.

SHERIFF DALE BRANDLAND: To start suggesting this is our war and you've got to be part of the team, well, part of the team means everybody gets paid. (Laughs) We're not getting paid. We're just getting stuck with the work here. Of catching illegals is important to them, they need to go hire the people and do it themselves.

LEE HOCHBERG: But police forces that are abiding by the government's request, like Las Vegas, say the duty of local law enforcers expands at war time.

LT. VINCENT CANNITO, Las Vegas Police Department: Imagine if we were able to identify the 19 hijackers that were here in this country on visas that expired, on fake I.D. Imagine if we were able to identify them and prevent those criminal acts from taking place.

LEE HOCHBERG: Department spokesman Vincent Cannito:

LT. VINCENT CANNITO: September 11 clearly has shown us that intelligence gathering, intelligence sharing, working together with every agency in this country, particularly for our perspective within the southern Nevada area, we must work together.

LEE HOCHBERG: And David Muhlhausen of the conservative heritage foundation argues that with war being waged on American soil and the INS having only 2,000 agents available to track terrorists, Ashcroft is right to ask for help.

DAVID MUHLHAUSEN, Heritage Foundation: He is not calling on local law enforcement to go out and harass the immigrant community. He's asking them when they run into somebody who is wanted for violating their visa status, and this individual is from a terrorist country or has suspected terrorist ties, that law enforcement agent can pick up that person.

LEE HOCHBERG: He adds, it's a public safety issue.

DAVID MUHLHAUSEN: Police departments that refuse to cooperate with the attorney general's request are announcing to the world that their communities are safe havens for terrorists.

LEE HOCHBERG: The attorney general's office refused to be interviewed for this report, saying his press conference said everything there was to be said. He didn't address specific police criticism, but did reiterate war time special needs.

JOHN ASHCROFT: We are dealing in a world that requires us to strengthen the hand of those who fight terrorism, and I believe that this is the right thing to do to protect America.

LEE HOCHBERG: But in cities like Seattle, where memories still exist of local police helping round up the Japanese in a different war effort 60 years ago, some say there's a lesson about how police involvement can go wrong.

TOM IKEDA, Densho Project: It's eerie to see step by step these things unfolding, how first people were detained and then you get the local police involved, and step by step some of the things that happened in '42 are happening today.

LEE HOCHBERG: Tom Ikeda directs the Densho Project, which is collecting video interviews about the Japanese American incarceration during World War II. He says it stigmatized the Japanese community when local police fanned out across Seattle interrogating 7,000 Japanese.

TOM IKEDA: Local police officers are part of the community. And so once you have people within your community questioning and worried about a particular segment, that's when sort of the fabric of the community changes. That's what I see happening here.

LEE HOCHBERG: Ashcroft's proposal will go through a comment period. The administration hopes to implement it in the fall, and also hopes to have up to 200,000 new names by then in its database of immigration violators.

GWEN IFILL: Still to come on the NewsHour tonight, the U.S. and Saudi Arabia.

FOCUS FRIEND OR FOE?

GWEN IFILL: Now an update on continuing tensions between the U.S. and Saudi Arabia. Ray Suarez has that story.

RAY SUAREZ: For decades the United States has considered Saudi Arabia one of its most valuable allies in the oil-rich region of the MidEast. But since the September 11 attacks in which 15 of the 19 hijackers turned out to be Saudi nationals, those ties has come under new strains. The U.S.-Saudi relationship received a new jolt last week. The "Washington Post" reported details of a classified briefing made to a Pentagon advisory committee known as the Defense policy board. The briefing was delivered by Laurent Murawiec, an analyst for RAND, a research organization. It reportedly characterized Saudi Arabia as an enemy of the U.S. The analysts said: Saudi Arabia supports our enemies and attacks our allies. The Saudis are active at every level of the terror chain, from planner to financiers, from cadre to foot soldier, from ideologist to cheerleader. The Saudis, he went on to say, are: "The kernel of evil, the prime mover, the most dangerous opponent" in the Middle East. Defense Secretary Donald Rumsfeld was asked about the analyst's report at a meeting with Pentagon personnel.

DONALD RUMSFELD: He had an opinion, and of course everyone has a right to their opinion. It did not represent the views of the government, it didn't represent the views of the Defense Policy Board. And, of course, Saudi Arabia is like any other country-- it has a broad spectrum of activities and things, some of which, obviously, just like our country, that we agree with and some we may not. And it is, nonetheless, a country where we have a lot of forces located, and we have had a long relationship.

RAY SUAREZ: The Saudi government went on U.S. Television to respond to the report as well, and insisted it was cracking down on terrorism. The most recent example of that, it said, was Iran s recent expulsion and return of 16 alleged Saudi al-Qaida members to Saudi Arabia.

PRINCE SAUD AL-FAISAL: Is this something that is believable to the committee and suddenly Saudi Arabia, that was considered a staunch ally ten years ago and even four years ago, suddenly turned into the kernel of evil that spread evil all over the place?

RAY SUAREZ: But some American politicians said they are concerned about what they see as a growing conflict for American interests.

SEN. FRED THOMPSON: It's a complex relationship. They're our friends, but it's a marriage of convenience right now. They need us; we need them. We have to get off our dependence on foreign oil. Until that time, we're going to need each other. But they are the hotbed and they are the center of the religious extremism that's caused us so much trouble.

RAY SUAREZ: Saudi Arabia is the birthplace of Islam. It's home to 22 million people and to the great mosques in Mecca and Medina. The government only allows one form of Islam, known as Wahhabism. Saudi Arabia controls 25% of the world's known oil reserves, and even now accounts for 8% of American oil imports, far less than the 25% it comprised in the 1970s.

RAY SUAREZ: Now two views about U.S.-Saudi relations. Retired Colonel Patrick Lang was a defense attach in Saudi Arabia during the 1980s and was the Defense Intelligence Agency's officer for the Middle East, South Asia, and terrorism from 1985 to 1992. He is now a consultant. Youssef Ibrahim is a senior fellow at the Council on Foreign Relations. Before that, he was a vice president at the oil company B.P. Amoco. From 1976 to 1996 he was a "New York Times" correspondent covering the Middle East and then Europe.

In view of Senator Fred Thompson, a marriage of convenience and in view of the Pentagon briefer, the most dangerous opponent, Patrick Lang, what is the state of U.S. Saudi relations?

COL. PATRICK LANG (Ret.): Well, It's been a longstanding marriage of convenience. It started back in the 1940s, and it persisted al through the Cold War as a matter of great convenience to the United States. Because of the alliance with Saudi Arabians pretty much ensured the fact that Soviet influence would not spread over the Arabian Peninsula. Trouble is the world has changed now and their internal behavior and their link was the cult of Wahabism, which is perhaps the most extreme form of Islamic zealotry. It has caused them to become associated with people across the world who wish to attack the west, in particular the United States. They don't seem to be doing much about that and that has irritated a great many Americans.

RAY SUAREZ: Youssef Ibrahim, same question. What is the state of U.S.-Saudi relations?

YOUSSEF IBRAHIM: I think it's kind of heading towards a divorce. It's on a collision course driven by two things, from our side it's the politics of anger because of September 11, and from the Saudi side it's become the politics of fear. I think the Saudi government has become convinced that we are bent on overthrowing their regime, the vitriolic campaign that has been conducted against Saudi Arabia and is still going on by the Defense Department, particularly has convinced them that we are on a collision course. Now my issue is this, is very simple. Is it in our national interest, it may very well be so. But it should be a conclusion that we reach after a proper national debate instead of leaks by the Defense Department and unknown analysts and the group of Rumsfeld and Wolfowitz and Perle. I think our policy towards the Arab world in general is heading towards a collision course. But before we get there, and we may very well need to get there, I think the Congress, the Senate, our academic community, and our society should be involved. This is, after all, 250 million Arabs and beyond that 1.2 billion Muslims. Before we engage in a fight with all of these people, we better make sure that it is in our national interest.

RAY SUAREZ: Well, what's behind that turning away from longstanding alliance? You mentioned the Defense Department, you mention leaks and vitriol. It didn't come out of nowhere. Where did it start?

YOUSSEF IBRAHIM: Well, of course it started with September 11. And of course it started with the fact that we were attacked. And we were attacked by a group of people headed by Osama bin Laden, and the majority of these people in those planes were Saudi citizens. There is no denial of this. Now, does this mean that the Saudi nation is our enemy? I mean, we have in this country a lot of Christian fundamentalists, our attorney general is a Christian fundamentalist, Ashcroft. They are against abortion, some of them actually shoot and kill doctors in abortion clinics. Does this make all Christian fundamentalists criminals? Does it mean we have to wage war against all Christian fundamentalists? I think we are losing the point here in this campaign that has gone, as they say in Britain, a bit over the top. We need to discuss this issue rationally. Is Saudi Arabia, who has been our ally with 60 years, who has supplied us with oil, has kept the price of oil under control, who has resisted the radicals in OPEC, who has purchased weapons with us, who has given us 3,000 permissions when we conducted the war against Afghanistan to fly over Saudi territories -- isn't really our enemy.

RAY SUAREZ: Patrick Lang, over the top?

COL. PATRICK LANG (Ret.): Well, the language may have been over the top, I haven't seen the briefing. But in fact, the alliance with Saudi Arabia although it's been extremely useful to the United States over the previous decades, may in fact have run its course. We may be in the early stages of seeing that, because I think even in the government of the United States generally where there is a tendency through inertia to continue in relationshipsthat may have changed over a long period of time there's a real questioning now as to what it is indeed that our relation amounts to. You look at things like the use of government money in Saudi Arabia to run religiously oriented universities who train people in Wahabi theology who go forth through the world to create organizations against the United States and the West. You look at the lack of cooperation with the Saudi government with the FBI or the Al Khobar barracks bombing in 1996 when we were never allowed access to the prisoners and suspects they had -- you look at many of the people, and many of the government see is really a very grudging and minimal cooperation in the war in Afghanistan -- these things all cause real questions to be asked about the value of this relationship. Now we have Prince Saud al-Faisal himself, the foreign minister, saying that under no circumstances will they be a party to whatever it is we feel we must do against Iraq. People begin to ask themselves, is this in fact an alliance.

RAY SUAREZ: Youssef Ibrahim, is it, in fact, an ally, given the bill of particulars that Patrick Lang just read out?

YOUSSEF IBRAHIM: Yes, it is an alliance, because in an alliance the ally doesn't have to agree with every one of your policies. For example, nobody, and I mean nobody around the world agrees with our, the Defense Department, I should say, this cabal in the Defense Department run by Rumsfeld and Richard Perle that wants to attack Iraq. Our closest ally, and all the allies in this enterprise, Tony Blair, two out of three Britons are opposed to an attack on Iraq. Outside of this, all the Europeans are opposed to it, all the Arabs are opposed to it. Is it possible that they are right and we are wrong? I mean, shouldn't we at least ask that question? If the Saudis say we don't feel Iraq is a threat to us, and if the Kuwaitis say we don't feel Iraq is is a threat to us, why are we carrying on this campaign, at least without having a dialogue about it? Shouldn't our American nation be involved in having a dialogue about this? Instead of having the Defense Department simply go to war. I mean we're going to war, we're going into a system of changing regimes. We had one experience in Afghanistan, by the way. I would like to argue that our experience in Afghanistan is not a brilliant success. We went to Afghanistan to look for bin Laden and we lost him. Then we looked for Mullah Omar and we lost him. Then we said we were looking for the Taliban and they disappeared in the population. And that left us with al-Qaida, we've rounded up 2,000 people from al-Qaida. Not a single one of them is important. And we have a president who is a puppet, we are paying bribes to the vultures who are the tribal chiefs to leave him alone, to leave him alive. I wouldn't call this a success. We're proposing to take that experience and take it to Iraq, upset the whole region of stability of the region, perhaps upset the oil prices in a way that could harm the world economy, when our own economy is in a downward spiral. I would say, yeah, I mean maybe they have a point. Maybe they don't want to be used as a launching pad and maybe we should debate this.

RAY SUAREZ: But you note that Saudi Arabia parts company like a lot of other countries with the United States over the Iraq policy. But what about Patrick Lang's point about exporting a particular brand of Islamic activism through a series of mosques, clerics who travel freely from Saudi Arabia to other parts of the Arab world and to the United States, support for the Taliban, a refusal to allow certain operations to be staged from Saudi soil? You didn t answer the other points just the one about Iraq.

YOUSSEF IBRAHIM: Yes. I think we should engage them on this, and we should ask them to stop, but we should also remember that bin Laden first and primary enemy was the Saudi royal family. And we should also remember that half of Saudi Arabia, middle class, the business community, and the royal family itself, hates fundamentalists, and this is the time in fact for us to engage with this half in defeating extremist Muslim fundamentalists. I would actually argue that the bin Laden attack could mark the beginning of the end of extreme Muslim fundamental fundamentalism. But it's not going to happen by us telling every government in the region that we're coming to change them. I mean, we've pretty much told Iran we're coming after them, after Iraq. And we told the Palestinians -- Arafat that we want to get rid of him. Instead of challenging everybody, why don't we engage with the elements of secular civil society, in the Arab world, which have long opposed fundamentalism.

RAY SUAREZ: Well, let me just turn to Patrick Lang at that point and ask if that's possible, that approach in Saudi Arabia.

COL. PATRICK LANG (Ret.): I read Youssef s article in the paper the other day and I think the point he's describing now was by far the most interesting and really intriguing thing about it in that I think that an awful lot of the hostility that's being directed toward us and to the West in general is a result of the deep frustrations of the people in these countries against tyrannical, despotic regimes that limit their freedom of action, the scope of their lives in a big way. I think what we've done and what President Bush did in particular by stating that the standard that the American government expects in Arabia for people to live under a democracy and freedom, is a very important thing -- it means a revolutionary development. If it followed up by the creation of some sort of government for Afghanistan and Iraq in the post-war environment, which embodies something of those ideals, you will have truly created a revolutionary situation.

RAY SUAREZ: Patrick Lang, Youssef Ibrahim, thank you both.

RECAP

GWEN IFILL: Again, the major developments of the day: Corporate executives faced a major deadline to personally vouch for their company's financial statements. And Wall Street rallied-- the Dow Jones Industrial Average gained 260 points; the NASDAQ 65 points. We'll see you online, and again here tomorrow evening. I'm Gwen Ifill. Thank you and good night.