The NewsHour with Jim Lehrer

JIM LEHRER: Good evening. I'm Jim Lehrer. On the NewsHour this Thursday night: A summary of what happened today; a look at the coming investigations of Enron; an update on the Afghan campaign; the latest on the Israeli-Palestinian confrontation over a shipload of arms; and a NewsMaker interview with the home minister of India.

NEWS SUMMARY

JIM LEHRER: There were severaldevelopments today in the fallout from Enron collapse. A White House spokesman said the chairman of the giant energy firm had called the Treasury and Commerce secretaries last fall. He warned them Enron was "heading to bankruptcy." The cabinet officers decided against getting the government involved. President Bush today promised federal investigations of Enron would be thorough. Enron executives had been major contributors to Bush campaigns. The President also ordered a separate review of pension rules. Many Enron employees lost their retirement savings in the collapse. Yesterday, the Justice Department announced a task force to investigate possible criminal wrongdoing at Enron. We'll have more on this story in a few minutes. The U.S. Military began flying al-Qaida prisoners out of Afghanistan today. The first 20 prisoners left a Marine base in Kandahar. They were bound for a detention camp at the U.S. Naval station in Guantanamo Bay, Cuba. As the transport plane took off, small arms fire broke out at the edge of the base; Marines fired back. There were no reports of casualties. In southwestern Pakistan, search crews looked for the bodies of seven Marines killed in a plane crash; their refueling aircraft went down Wednesday. At the Pentagon, Defense Secretary Rumsfeld said there was no evidence it was anything except an accident. President Bush warned Iran today not to meddle in western Afghanistan. He responded to a "New York Times" report. It said U.S. officials believe Iran wants to weaken the pro-western, interim government. It also said Iran has harbored some al-Qaida fighters. At the White House, Mr. Bush said Iran had been helpful early on, and should continue to be.

PRESIDENT GEORGE W. BUSH: We would hope, for example, they wouldn't allow al-Qaida murderers to hide in their country. We would hope that, if that be the case, if someone tries to flee into Iran, that they would hand them over to us in any way, shape or form, if they try to destabilize the government, the coalition will be... Will deal with them. And you know, in diplomatic ways initially.

JIM LEHRER: The Iranian government denied it has interfered in Afghanistan. On the Middle East, the President said he'd begun to think a shipload of weapons was linked to Palestinian terrorists. Israeli commandos captured the ship in the Red Sea, one week ago. Secretary of State Powell said today, evidence linked that ship to the Palestinian Authority, but not directly to Yasser Arafat himself. In Gaza today, the Israeli army bulldozed dozens of buildings in a refugee camp. The place was home to militants who killed four Israeli soldiers on Wednesday. The Russian foreign ministry insisted today that reductions in the U.S. nuclear arsenal be irreversible. A top Pentagon planner had said Wednesday thousands of warheads might be stored, instead of destroyed. The United States has promised to reduce its stockpile of operational warheads by two-thirds over the next ten years. Energy Secretary Abraham today chose Yucca Mountain in Nevada for the nation's central nuclear waste dump. It's 80 miles northwest of Las Vegas. An underground site there would house spent fuel that's now kept at commercial reactors. It would also accept nuclear weapons waste. Officials in Nevada have fought such a move for more than a decade. The final decision is now up to President Bush.

FOCUS - ENRON - FALLOUT

JIM LEHRER: Now, the latest fallout from the fall of Enron. Spencer Michels begins.

SPENCER MICHELS: The collapse of Enron, the huge energy and trading company, continued to reverberate in thecapital. Justice Department officials said they were forming a task force to conduct a criminal investigation of Enron, the nation's largest marketer of electricity and natural gas. The probe is expected to focus on potential accounting fraud. Once ranked as the seventh- largest corporation in America, with 21,000 employees, the company is now in shambles. Enron's problems became public this fall, when the company revealed it had kept hundreds of millions of dollars of losses off the books. In the third quarter of last year alone, Enron had a $600- million loss. It filed for bankruptcy on December 2, the nation's largest corporate bankruptcy. Employees have lost much of their retirement money because their pension accounts were built around Enron stock; stock that once sold for $85 a share now is selling for less than a dollar. In the wake of those losses, President Bush said today his administration will "fully investigate issues such as the Enron bankruptcy" with an eye toward changing pension rules.

PRESIDENT GEORGE W. BUSH: One of the things we're deeply concerned about is that there have been a wave of bankruptcies that have caused many workers to lose their pensions. And that's deeply troubling to me. And so I've asked the Secretary of Treasury, Secretary of Labor, Secretary of Commerce to convene a working group to analyze pensions rules and regulations, to look into the effects of the current law on hard working Americans and to come up with recommendations as to how to reform the system to make sure that people are not exposed to losing their life savings as a result of a bankruptcy, for example.

SPENCER MICHELS: There are also questions about the administration's ties to Enron. The company's chief executive officer, Kenneth Lay, was a large contributor to President Bush's campaign. The President said today he never discussed Enron's problems with Lay, who took part in a White House economic summit last spring. Reportedly, lay also donated to a committee headed by then Senator John Ashcroft, and today, Ashcroft, now the Attorney General, removed himself from participation in the investigation. Yesterday, the Vice President Dick Cheney's office confirmed that Mr. Cheney met with Enron officials at least four times last year, although, aides said, Enron's financial position was not discussed. And today, the White House confirmed that Lay called Treasury Secretary Paul O'Neill and Commerce Secretary Donald Evans after the public disclosures of the company's finances. Spokesman Ari Fleischer was asked if the contacts were appropriate.

ARI FLEISCHER: The government acted as the government should. It took a look at this from a substantive matter, from when Mr. Lay made those phone calls, and decided the appropriate step was not to intervene or take any action. I think if anything else were done, you'd be making just the opposite charge, that he took action because of his prior relationship with Mr. Lay. And that is not the case here; that did not happen. This was done based on judgment of the cabinet secretaries and the merits, and they decided properly and wisely so.

SPENCER MICHELS: Late today, Enron's auditor, the accounting firm Aurthur Anderson, said a significant number of company- related documents had been destroyed. Meanwhile, other investigations are under way. The Securities and Exchange Commission is in the midst of a ten-week-old inquiry into Enron and its auditor. And on Capitol Hill, there are now five congressional panels looking into the company's collapse.

JIM LEHRER: More on the Enron matter now from Ehud Ronn, professor of finance and director of the Center for Energy Finance at the University of Texas at Austin; John Coffee, professor of securities law at Columbia University; and Loretta Lynch, a former U.S. Attorney for the eastern district of New York.

JIM LEHRER: Professor Ronn, first on the criminal investigation by the Justice Department, potentially what are the crimes that might have been committed through the collapse of Enron? What are they investigating, in other words?

EHUD RONN, University of Texas: My understanding, Jim, is what they're looking at most profoundly is the issue of the accounting disclosures. As you know, there are a lot of issues having to do with the Enron collapse. There are business issues, there are ethics issues. With respect to the legal issues I believe they're focusing on whether proper accounting disclosures were made, and if not, why did they not make those disclosures?

JIM LEHRER: Disclosures of financial trouble, correct?

EHUD RONN: I would define them more as disclosures of the relationships between Enron and the so-called special-purpose entities that Enron had set up to avail itself of their capital. I think it's those disclosures that they'll be looking at very carefully.

JIM LEHRER: Now, Ms. Lynch, how could those be possible criminal violations?

LORETTA LYNCH, Former U.S. Attorney: Well, the issue really is whether or not there were any material misrepresentations that rise to the level of criminal fraud. Were people defrauded? Were false statements made to the government in any other filings that were produced by Enron to the Securities and Exchange Commission or to any other government entities or regulators? One of the things the Department will be looking at is when the disclosures were made, why were they made and why were the initial decisions to move those particular losses off the books made?

JIM LEHRER: Now, Ms. Lynch, one of the allegations here is that the company was failing, or the company was losing money, had severe financial troubles, but it did not tell not only the government, it also didn't tell its employees. When and where does that become a violation of federal law?

LORETTA LYNCH: Well, it depends upon how the company was presenting itself during that time period. If in fact it was putting forth information that its finances were other than they really were and people were relying upon those, it could give rise to criminal liability, wire fraud, mail fraud, certain other false statements. Depending upon its relationship with the shareholders, there could also be violations of its fiduciary obligations to them, as well.

JIM LEHRER: John Coffee, what would you add to that, in terms of what the possible criminal problems here could be.

JOHN COFFEE, Columbia University: It's not hard to come up with a scenario for criminal prosecutions. We have at least some indications that the books were cooked because the company has already restated its earnings by $500 million. And we also have a lot of allegations...

JIM LEHRER: Restated its earnings meaning it said it earned $500 million that it in fact did not earn?

JOHN COFFEE: Over three years, which is a long period of time. The company said, "we got it wrong." And the auditors said we made an honest mistake." But as the pressure gets added by a criminal investigation, we may see the auditors telling us that they were lied to by management, and that becomes a fraud case.

JIM LEHRER: Now, who is we? Who's management? How do you define management? If the company, as a company, made false statements to any of the folks along the lines of what Ms. Lynch just said and Professor Ronn, who's criminally liable?

JOHN COFFEE: Anyone who either falsifies documents, makes a false statement to a government agency or anyone who helps prepare a false statement. If you knowingly aid and abet a violation, you are criminally liable under federal criminal law. The government can also charge a conspiracy, possibly a conspiracy including Enron, its auditors and others. All of that requires proof. But if you can show that people deceived the auditors or deceived the SEC or deceived shares holders about material information, you have essentially proved the core of a securities fraud case.

JIM LEHRER: But if let's say you're the boss and I'm your number two, I actually do the bad things, I don't tell you about it, I start to tell you about it and you say, "no, I don't want to hear about it," are you still criminally liable?

JOHN COFFEE: Well, it's a technical point, but willful ignorance is the same thing as having knowledge. If you deliberately avert your eyes so you don't learn the damaging fact, we could have that knowledge attributed to you. That's a very established point in criminal law. But I don't think it's going to work that way. I think we're going to have people like auditors and others who will cooperate with the government. Once the pressure of criminal charges is out there, there is often a race to see who can be the cooperating witness and who can there be cut the first deal. And there are many who will want to do that.

JIM LEHRER: Now, Professor Ronn, you have said that October 16 is a magic date in this. Explain why, in terms of who's liable, who isn't liable, who might be guilty of something and who may not be.

EHUD RONN: Sure, Jim. One of the things I wanted to point out to you as you were discussing with your colleagues is that one of the things that is in dispute is what Enron told its auditors, and so I think that's one of the things that the government, both Justice and the SEC, looking... Will be looking into. With respect to October 16, I sort of divide the world into pre-and post October 16. Prior to October 16, you had the...

JIM LEHRER: What year are we talking about? You're talking about last year, right?

EHUD RONN: Yes, 2001, right. You had the decline in value due to a number of factors. You had California, the slowdown in deregulation...

JIM LEHRER: You're talking about the energy problems that California was having, right.

EHUD RONN: Indeed. And the ramifications that they had with respect to the slowdown of deregulation elsewhere. ...You had cap prices imposed on California, which reduced the profitability of trading. You had the recession, which lowered the demand for energy products, and hence, the level of prices. You had two Enron-specific issues: Their investment in water, the Azurec's investment, and the bandwidth investment, both of which turned out to be negatively valued investments. So all of those issues were partly macro and partly company-specific.

JIM LEHRER: Excuse me. But to make sure we understand a frame of reference, the stock had been at its high up in the 80s and the 90s, and then on October 16, it had gone down to 30 dollars a share. Your point is that you could make the case that those were all legitimate kinds of things that happen in a marketplace for that drop, right?

EHUD RONN: Indeed. There were bad news, negative news that caused that drop, correct.

JIM LEHRER: But then different things started happening after October 16, right, under your theory?

EHUD RONN: Right. What I think there is that basically you had these revelations with respect to conflict of interest and perhaps more important, with respect to the credit worthiness of Enron. And that I would submit to you, eviscerated the value of Enron because it caused people to stop trait trading with them, which was the very source much Enron's profitability. So that's the post-October 16 event.

JIM LEHRER: That's what he it went from $30 a share down to less than $1?

EHUD RONN: That's correct.

JIM LEHRER: Yeah. Now, Ms. Lynch, the additional issue here, the one the President talked about today in specific terms but also in general terms, are the pension funds, which is separate in one way at least from the criminal investigation. What's at stake there?

LORETTA LYNCH: Well, what's at stake is the huge amount of money that Enron employees poured into those pension funds. My understanding is they had very few options but to buy Enron stock. They were also prohibited from selling that stock while corporate directors and officers were able to do so and make a profit. There's a real issue there as to fundamental fairness, number one. If there's any criminal liability involved, you have to look and see whether or not, again, there was fraud involved in the way the company dealt with its employees in putting them into that particular pension fund. That's an issue that's going to go beyond this case and, in fact probably beyond this company. Other issues obviously are whether or not the officers and directors knew about the company's problems and its impending devaluation while they were engaged in selling the stock.

JIM LEHRER: Now, that's a big deal, isn't it, Professor Coffee I mean in terms of particularly the pension funds -- that's what... Thousands of employees for Enron lost their pension equity, lost everything. At the same time, their bosses were selling their stock, but they couldn't sell their pension stock, right? Why not?

JOHN COFFEE: That's what the public is so mad about. The public is intensely angry because this is a case that looks like the captain of the "Titanic" jumping into the lifeboat while he locks up all the crew down in steerage. And that's something the public does understand add it's created a firestorm. And I think we're likely to see some legislation trying to change the nature of what are called 401 k plans.

JIM LEHRER: Is it illegal under the law today what they did, if they in fact did this?

JOHN COFFEE: The only thing that could be illegal is if you assume that management had material, nonpublic information about the decline of the company.

JIM LEHRER: That's Ms. Lynch's point.

JOHN COFFEE: That's insider trading if you do that. But there is no evident criminal prohibition on designing with a 401 k plan today that restricts transferability by the employees.

JIM LEHRER: Just a quick thing, Ms. Lynch, on this issue that was revealed today that Kenneth Lay, the CEO of Enron, called two cabinet secretaries and said, "uh-oh, we're about to go bankrupt" -- on the surface, is there anything there that smells illegal or is illegal?

LORETTA LYNCH: Well, on the surface, it really could be nothing more than someone who is a large player in a major industry want to go alert the administration that there could be something that could affect the economy. The issue would be whether or not he asked for any government intervention, any particular help, any bailout. And so far, I haven't heard anything about that.

JIM LEHRER: Yeah. Professor Ronn, would you agree with that? In order for there to be something illegal here in terms of some connection between the large contributions to the Republican Party, or Governor Bush when he was a governor or President Bush... Or candidate for President Bush... Anyhow, you know who I mean. ...There would have to be some quid pro quo in addition to just the contributions, correct?

EHUD RONN: I think so, Jim. I think there are two sort of public policy issues. One is the issue of what we call corporate governance, the issue of conflict of interest within the firm. You've not yet alluded to that. The other one is the reference, the comparison of Enron to long-term capital in 1998. I think we do want our cabinet secretaries, the federal government, to be aware of things that might have systemic risk issues. And so they can make a judgment call on whether they want to intervene, but that is something they should be apprised of as part of their duties.

JIM LEHRER: Professor Coffee, what about today's word from the accounting firm, Andersen, that they... Uh-oh, they may have thrown away some of the documents involved in the Enron matter? What does that... How does that sound to you?

JOHN COFFEE: It sounds quite extraordinary. It's as if a Hollywood scriptwriter were righting a new chapter every day for a soap opera. I can imagine that you could lose some documents, but accountants are in the business of keeping their work papers, and they know that that's the only way they can genuinely establish a defense and show that they were decreed, as opposed to in on a conspiracy.

JIM LEHRER: Well, just today, in the News Summary at the beginning tonight and then Spencer Michels in the intro to our discussion went through just what happened today, developments in the Enron story. Do you foresee a lot of similar developments coming? Has this story got a long way to run?

JOHN COFFEE: I think there's a firestorm of public interest. I've seen lots of corporate scandals, they're sort of my specialty. And you can go all the way back to Drexel Burnham and not see a case...

JIM LEHRER: Refresh our memory on Drexel Burnham.

JOHN COFFEE: Drexel Burnham was a very big investment house that eventually failed but it invented junk bonds but it was prosecuted along with Michael Milken for a variety of securities fraud offenses. That's probably the next largest scandal that the public can remember. And this is looking like it'll be even larger than that in terms of interest.

JIM LEHRER: Does it look that way to you, Ms. Lynch?

LORETTA LYNCH: It certainly could be. I think we have some very, very troubling issues here involving the movement of huge losses on and off the books, the treatment of shareholders, the treatment of employees, and particularly when the corporate directors and officers were aware of the problems that led to the devaluation of the stock. As soon as the accounting was corrected, for example, I believe the bond status fell down to junk. So clearly it had a material effect on that. It's very troubling.

JIM LEHRER: Professor Ronn, in a word, troubling to you, as well? Or do you see trouble down the road? We've just begun down a very long road?

EHUD RONN: It is a long road, but I think I would compare it most recently to long-term capital in which the New York Fed intervened in order to address the issues of systemic risk and I think that's the story you're comparing between the discussion between Ken Lay and the cabinet secretaries to.

JIM LEHRER: Okay. Thank you all three very much.

UPDATE - AFGHAN CONFLICT

JIM LEHRER: Still to come on the NewsHour tonight: the latest o n the situation in Afghanistan, the Palestinians weapons problem and the home minister of India. Kwame Holman has the Afghan update.

KWAME HOLMAN: American troops at the U.S. Naval base in Cuba today prepared to receive twenty of some three hundred seventy al-Qaida and Taliban members now in U.S. custody. They were put aboard a military transport plane at Kandahar airport, for a 12-hour trip that includes a stop in Germany before arriving at Guantanamo Bay on Cuba's eastern tip. There were reports the captives might be chained to their seats and sedated. A Pentagon spokeswoman said their treatment would comply with rules of the Geneva Convention on handling prisoners of war. At a mid-day press availability with Australia's defense minister Robert Hill, Secretary of Defense Donald Rumsfeld said the prisoners may pose danger to themselves and those guarding them.

DONALD RUMSFELD: They have been authorized and instructed to use appropriate restraint, as you'll recall. I have no idea what, specifically, that means. What they have done is consult a variety of experts on prisons and prisoners. They have reviewed, at my instance, the uprising at Mazar- e-Sharif, where a great many people were killed because of the prison uprising. They have reviewed the difficulties that the Pakistani soldiers had, where some people were killed as the al-Qaida and Taliban forces that had been detained by the Pakistan army broke loose. And they're fully aware that these are dangerous individuals, that there are among these prisoners, people who are perfectly willing to kill themselves and kill other people. So I hope that they use the appropriate restraint, and that's what I suspect they will be doing.

KWAME HOLMAN: Rumsfeld also explained that the process of interrogating the prisoners could take a long time.

DONALD RUMSFELD: The truth is that, at some point, you get what you think you can get from a given individual. But you know in the back of your mind that you may discover some intelligence material, or a laptop, or an address book in a house in Kabul, or Kandahar, or Herat, wherever, that would connect this person. So you know that after you've gone through that first interrogation, it's best to wait a bit and see what other kinds of information comes up from other people, from computers, from various other types of intelligence gathering, including law enforcement actions all across the globe. You might arrest somebody with pocket litter that connects that person to one of the people you're interrogating. So you don't hurry through this. When you're talking about defending against terrorist actions against this country and our friends and allies around the world, you take your time and you try to do it right. And that's what we're doing.

KWAME HOLMAN: This afternoon, Secretary Rumsfeld hosted President Bush for a bill- signing ceremony in the Pentagon's auditorium. The President teased Rumsfeld about his frequent media briefings.

PRESIDENT GEORGE W. BUSH: At ease. (Laughter) I always love being introduced by a matinee television idol. (Laughter and applause) Who would've thought it? ( Laughter )

DONALD RUMSFELD: Not my wife.

PRESIDENT GEORGE W. BUSH: Only his mother. (Laughter and applause)

KWAME HOLMAN: Before signing into law the bill releasing Defense Department spending for this year, the President noted it raises service members' pay, and increases their health and housing benefits.

PRESIDENT GEORGE W. BUSH: I'm honored to sign this bill, because the nation owes the men and women of the military our full measure of respect and our full measure of support. We owe you decent pay and a decent quality of life. We owe you the best leadership and training. We owe you the best equipment and weaponry. We owe you, our servicemen and women, our best, because we owe you our freedom. And really in our quest to save civilization, there are enormous sacrifices and a no more greater sacrifice than loss of life. And like the Secretary, I extend my prayers and sympathies to the moms and dads and wives and sons and daughters of those who've lost their life. But as I told the young lady the other day when I called her, whose husband had died, I said, "Please tell your children that he died for a just cause." Sacrifices are made willingly by volunteers. And having traveled our nation a little bit, I can assure you you're in the midst of a grateful people. (Applause)

KWAME HOLMAN: Mr. Bush then signed the bill appropriating $317 billion for the Pentagon and $20 billion to cover costs arising from the September terrorist attacks.

FOCUS - INCIDENT AT SEA

JIM LEHRER: The ship loaded with weapons that was intercepted by the Israelis in the Red Sea. Terence Smith has the story.

TERENCE SMITH: A week after Israeli commandos seized a Palestinian ship laden with weapons, the incident has become a focal point in the Bush administration's attempt to get Israeli-Palestinian peace talks back on track. Israel has accused the Palestinian Authority of attempting to smuggle the arms into its territory, but Authority Chairman Yasser Arafat has denied any knowledge of the shipment. This morning, President Bush stepped into the controversy.

PRESIDENT GEORGE W. BUSH: Obviously, I want to make sure that the evidence is definitive, but I'm, like many, beginning to suspect that those arms were headed in the wrong to... to promote terror. And terror will never enable us to achieve peace in the Middle East. So long as there's terrorists trying disrupt the peace process, there won't be peace. I do believe that once the evidence is in, that... That those responsible need to be held to account. Mr. Arafat must renounce terror, must reject those who would disrupt the peace process through terror, and must work hard to... to get to the peace table. It seems like it's up to him to make these decisions.

TERENCE SMITH: At the State Department, Secretary Colin Powell said Arafat must act, whether or not he is directly responsible for the shipment of weapons.

COLIN POWELL, Secretary of State: The information we are receiving and developing on our own makes it clear that there are linkages to the Palestinian Authority. I have not seen any information that yet links it directly to Chairman Arafat. I have been in touch with Chairman Arafat. I spoke to him yesterday, and our consul general is going in to speak to Palestinian authorities today, to make it clear to them that this is a very serious matter. They have to give it their immediate attention. They have to conduct whatever inquiries or investigations are necessary to get to the bottom of this matter. We are deeply disturbed by the arrival of this ship in the region, and the fact that it could have completed its mission and offloaded weapons that would have been put to the worst kind of use against Israel and others in the region. I'm glad the Israelis intercepted it. And now we have to find all those responsible and accountable for this incident.

TERENCE SMITH: Israeli naval commandos seized the Palestinian ship last week in the Red Sea, about 300 miles south of the Israeli port of Eilat. They confiscated 50 tons of Katyusha rockets, ammunition and explosives reportedly supplied by Iran. The ship's captain has said he was working for the Palestinian Authority.

SPOKESMAN: I am an officer, and I am a Palestinian officer. I am taking my salary and I am an employee of the Palestinian Authority.

TERENCE SMITH: Something the Israelis charged from the start.

ARIEL SHARON: The Palestinian Authority is involved in terror. The strategy of Arafat is a strategy of terror. This operation was connected directly by the leaders of the Palestinian Authority, was led by Arafat. It was his initiative. He instructed to pay the money, he sent the people and he is fully responsible.

TERENCE SMITH: But the Palestinian Authority has continued to deny responsibility for the shipment.

YASSER ABED RABBO, Palestinian Information Minister: We want these four parties-- the EU, the United States, Russia, and the U.N.-- To participate in the investigation concerning this ship incident. We don't have anything to hide.

TERENCE SMITH: After four weeks of relative calm, the cycle of violence in the region has escalated once again. Yesterday, Islamic militants attacked an Israeli army outpost near the Gaza Strip, killing four Israeli soldiers. Two Palestinian gunmen died, as well. The Islamic group Hamas claimed responsibility, saying it was partly a response to Israel's seizure of the ship. Early today, Israel retaliated, bulldozing 32 homes in a Gaza refugee camp. Local officials said hundreds were left homeless. But despite the new violence, President Bush said the U.S. peace-making efforts will continue, and that his special envoy, retired General Anthony Zinni, will return to the region.

TERENCE SMITH: For more on this ship and its impact, we get three perspectives: Robert Pelletreau was assistant Secretary of State for near eastern affairs during the Clinton administration. Khalil Jahshan is vice President of the American-Arab Anti-Discrimination Committee. And David Makovsky is a senior fellow at the Washington Institute, and the former executive editor of the "Jerusalem Post."

TERENCE SMITH: Gentlemen, welcome to all three of you. Robert Pelletreau, what's the significance of the seizure of this ship -- and both on the peace process and the way the two parties view each other?

ROBERT PELLETREAU: The significance is that the Israelis now have no doubts about whether they can ever reach a peaceful settlement with Yasser Arafat about his commitment to negotiations, his commitment to live in peace.

TERENCE SMITH: New doubts added to lots of old doubts?

ROBERT PELLETREAU: New doubts added to lots of old doubts. This shipment, if it had reached its destination, would have wreaked tremendous havoc.

TERENCE SMITH: All right, Khalil Jahshan, your view of it?

KHALIL JAHSHAN: Well, there is no doubt that this is significant in the sense that this is the first time at least the Palestinian side, if you will, is caught bringing in weapons to that degree or with, you know, that magnitude.

TERENCE SMITH: It has happened before.

KHALIL JAHSHAN: It has happened before. The fact of the matter, it has not happened in a vacuum. The Palestinian people continue to live under Israeli military occupation. For the past 14 months, or almost a year and a half, they have been in a military confrontation with Israel. Has Israel stopped or deprived itself of the right to bring in weapons during that period? Of course the accusation is that you know, the Palestinians promised a cease-fire a few weeks ago and now they bring in weapons. But let's think of the logistics for a moment. Let's listen to ourselves for a moment. An operation of this sort chances are, has been under way for more than a year, to organize, to buy the ship and to buy the weapons and what have you. So it's totally unrelated.

TERENCE SMITH: Although it could have been turned back, in theory?

KHALIL JAHSHAN: I of course, I agree. But again, there has been no contact, again, to create, if you will, a distance between those who have been managing this operation and those who have been running it. Clearly there has been no radio or other contacts. But Bob is right in the sense that it contributed to adding more distrust, if you will, to the formula, which is not needed. But the fact of the matter, both parties have no option in the future but to come back and talk to one another.

ROBERT PELLETREAU: And the effort is a violation of the Oslo accords, which the Palestinian Authority agreed to.

TERENCE SMITH: All right, David Makovsky, Israel has distanced itself already from Yasser Arafat individually. There was a report today that they are going to cut off all contacts with the Palestinian authority until individuals responsible for this ship are arrested. More distance between the two?

DAVID MAKOVSKY: Yes, I mean clearly this... I think this is devastating because really what you've seen here is that, as Bob said, this is a violation of what Oslo, the agreements of 1993. But more importantly, beyond that, this is a violation and it goes way beyond the cease-fire, is that the whole premise of this peace process is to set up two states within a 50-mile zone. That's between the Mediterranean and the Jordan. So for Israel to agree for a Palestinian street on K street, they want to know on L street that there is not Kaytusha rockets that could hit every Israel city, there are no c-4 explosives. These are the same thing the sneaker bomber had that are used for suicide bombings and roadside bombings. And another premise of it was that there would be no military relationships, and here it's with Iran, which is the most rejectionist state and it's number one on the State Department terrorism list. So the whole premise of peace making in a certain way has been thrown very seriously in doubt. And it's very serious. And as the captain we saw in the set-up piece said, he said, "I'm an employee of the Palestinian Authority." The guy who ran the finances has been... We know was a long-time associate of Mr. Arafat. And the guy who's been the arms purchaser, Adel Mugrabi has been in charge of weapons requisition. And we know Faci Rasin is the number two guy in the Palestinian navy. So these are four employees of the Palestinian Authority in senior positions, and therefore, the focus is very much on Mr. Arafat.

TERENCE SMITH: Khalil, is it reasonable to assume, then, that Yasser Arafat knew and authorized this shipment?

KHALIL JAHSHAN: Probably Yasser Arafat should have known. Whether he knew or not, I have no... I'm not privy to that information. He definitely should have known, if that indeed was the case. I mean there is evidence out there that indicates that some people associated with the Authority. But that's not the issue, I mean from a Palestinian perspective, if Yasser Arafat was not bringing in weapons to defend the Palestinian people against Israeli occupation, he would not have been doing his responsibility. Oslo? I mean what Oslo? Defying Oslo at this time, which is defunct -- it hasn't proved any... Look, Israel today, as we speak, you had it in your program, walked in and demolished 70 homes today affecting 109 families, affecting more than 600 people. This is state-administered terrorism using American weapons and using Israeli weapons. Why is the Israeli side allowed under Oslo to continue to arm and continue to administer violence to the Palestinian people, and the Palestinian people are not even allowed to use stones and we describe that as terror when they try to...

TERENCE SMITH: But you go too far, Khalil, in saying that Oslo is defunct. Arafat and the Palestinian Authority wouldn't even be in Gaza, they wouldn't even be in Jericho in the West Bank, in Ramallah right now if it weren't for the Oslo Accords.

TERENCE SMITH: Robert Pelletreau, what is the involvement of Iran, if in fact it is confirmed as the source of these weapons, say to you? And what does that do to the balance of power in the region?

ROBERT PELLETREAU: Iran has been involved for a long time, we know, in the financing and the supplying of Hezbollah, and it's not yet clear exactly what the role of Hezbollah and the role of Iran and which groups of Iran are in this shipment. But if it does come out that Iran, in its and its government entities, is involved now, has made a decision to be supplying arms to Palestinian groups in the Palestinian areas, this is an escalation. This is a new development, and quite a serious one.

TERENCE SMITH: And what does this do to the idea of the United States and Iran increasing discussions of late over terrorism issues?

ROBERT PELLETREAU: Well, it makes it much harder for the United States and Iran to take the next steps toward a normalization.

KHALIL JAHSHAN: It definitely makes it more complicated for the United States in dealing with Iran and other actors in the region. But we do not know whether Iran, in terms of the government itself, has been behind this or not. It is important, I think, we should be clear before this audience that the relationship between the PA, generally speaking, and Iran, has not been a warm relationship. And that's why this is surprising and there must be, if indeed there is an Iranian party I doubt that it's the Iranian government, which has been opposed to the PA, opposed to the peace process or whatever is left of it, and have not been involved in arming anybody related to Yasser Arafat. So why all of a sudden?

TERENCE SMITH: David, this strategy of the Israeli government, of distancing itself from the Palestinian Authority, I mean in the end, don't you have to negotiate with your enemy to get anywhere?

DAVID MAKOVSKY: There's no doubt that you have to. But the whole premises of Oslo in 1993 and to continue on Bob's point, is that somehow Arafat would be a Mandela, that he would be transformed, he'd have a stake in this process and therefore, have a stake in its success. What we've seen by his actions that he's not Mandela, he's act can like Mugabi and the net effect is you will not find a phone booth of Israelis who are willing to state willing to have the sort of state that Khalil Jahshan just talked about. If you were to say bring us right to your borders and have Kaytusha rockets aimed at you and C-4 explosives aimed at you and have dozens of car bombs, suicide bombings go out, nobody would agree to this. And that was just... At the center of Oslo was that this would be side by side states, and I think the Palestinian people deserve, frankly, better leadership. 60%, according to the most poll say they want a cease-fire. And I think, frankly, the United States has to think the way... The same problem in the '90s with Yeltsin, which goes you get behind the man and you forget the principles. For the last decade, all the U.S. has been thinking about is the man.He is the only alternative to Hamas, to the militants. But instead, I think there needs to be a rethink and say, "Hey, what are the principles here? Maybe some of the younger generation is what we've got to look to because this policy is becoming a disaster."

TERENCE SMITH: Let me ask you both about that.

KHALIL JAHSHAN: Look, the rethink doesn't belong to you or me, it doesn't belong to President Bush. The rethink belongs to the Palestinian people. It is their right to replace Arafat...

TERENCE SMITH: Is there rethinking going on?

KHALIL JAHSHAN: There has always been rethinking, but unfortunately, we have not help the Palestinians since '94, when the Palestinian Authority was formed and Yasser Arafat went in to focus on that, on building a civil society, on building the infrastructure of a state. Instead, we focused on...

TERENCE SMITH: Is he still the man to deal with, Yasser Arafat?

ROBERT PELLETREAU: Yes, he is. Before we jump in to what would be a successor government, let's be real here that this is going to be a period of chaos after Yasser Arafat goes. He is the symbol of Palestinianism, the Palestinian identity. He does not have a designated successor. He hasn't allowed anyone to develop. So much as we dislike him in some ways, much as the Israelis are frustrated with him, he is the answer box right now.

DAVID MAKOVSKY: You right, but you've got to admit Bob. I'm talking about what Palestinians are saying - what Shakaki wrote in Foreign Affairs - what Saber -- there's with a new generation of Palestinian leaders that are coming to the fore that are saying, "this current strategy of confrontation has been a disaster for us as Palestinians, and we're so whetted to this old think, I think we need to revisit it. And I think the U.S. shouldn't be alone, by the way. Work with the Europeans, work with the Arab governments who keep saying this is important to them. It was only that sort of multilateral effort in December that even got Arafat to go as far as he did. But I think the key actors here have to rethink their whole policies.

ROBERT PELLETREAU: And how long would it take?

TERENCE SMITH: All right, we'll have to find out. Thank you, all three, very much.

NEWSMAKER

JIM LEHRER: Finally tonight, the first of two interviews about the conflict between India and Pakistan and to Ray Suarez.

RAY SUAREZ: Tensions between India and Pakistan have been rising sharply ever since Kashmiri militants attacked India's parliament building in New Delhi on December 13. Both sides have been mobilizing their military forces along the borders, and there has been constant shelling between the armies.

For India's perspective, we go to Lal Krishna Advani, India's home minister. He met with President Bush today.

Mr. Minister, welcome.

What did you talk about with the President?

LAL KRISHNA ADVANI, Home Minister India: Naturally we talked about terrorism in the world and how the United States and India could cooperate in combating terrorism and stamping out this evil.

RAY SUAREZ: Recently, when President Musharraf of Pakistan ordered arrests and crackdowns on various groups inside Pakistan, President Bush said he was very encouraged by that development, and hoped India was, too. What has the Indian reaction been to those gestures from Pakistan?

LAL KRISHNA ADVANI: When they arrested the leaders of Jaish-e-Mohammed and Lashkar e-Tayyiba, the two organizations responsible for the attack on India's parliament, we welcomed it as a move in the right direction. But we also took note of the fact that the first reactions from Pakistan were that this event has been engineered by India's own security forces; or secondly, these two organizations have been named only in order to malign the Kashmir freedom movement. And therefore, we felt that what has been done by Pakistan is essentially a tactical move because of Washington's pressure. Incidentally, I will mention that your observation that Kashmiri militants attacked the Indian parliament is factually not correct, because all the five terrorists who attacked the Indian parliament belonged to Pakistan. None of them had anything to do with Kashmir. These are facts which, if they known to the world, then the kind of terrorism we are confronting, it would be seen in the proper perspective.

RAY SUAREZ: So the response from Pakistan to these attacks has not been credible to India, and thus, you're still preparing for war?

LAL KRISHNA ADVANI: We are not preparing for war, but what we know is that a war has been inflicted on us of a different kind for the last 20 years in which war the enemy is unknown, and in which the enemy gets support and sustenance from Pakistan, comes across to our part of the world and there indulges in sabotage, in terrorism, in killing innocent people. And therefore, we have to frame a response different from the response we have been giving for the last so many years. And it is, therefore, that after 13th of December, we felt that the situation calls for a different response. And we have till now taken a series of steps... calibrated steps on the diplomatic level to put pressure on Pakistan, and we believe that this pressure, accompanied by international opinion, would help us resolve the problem.

RAY SUAREZ: There have been many references to state-sponsored terrorism coming from Indian leaders. What, in the view of the government of India, is the nature of the support of Pakistan's government for terrorism?

LAL KRISHNA ADVANI: The Pakistan government has been financing terrorists. The Pakistan government has been supplying them arms. The Pakistan government has been facilitating their entry across the line of control, across the international border into India, something that is impossible without the government's support. I would say that with the armies lying on both sides of the line of control, or the international border, it is impossible even for a stray dog to come across the line unless it is facilitated by the government on the other side. And therefore, in my demands that I have made publicly yesterday here, I have mentioned these financing, arming, training and enabling infiltration; plus, of course, I have been of the view that those who have found asylum in Pakistan, those who have been guilty of committing crimes, committing violence, bombing, et cetera in India and whoever has been given asylum in Pakistan, those 20 terrorists, most of them named by the Interpol, should be handed over to India.

RAY SUAREZ: Pakistanis have suggested that the Indian government either does not appreciate or doesn't wish to credit how difficult it is for Pakistan, given its domestic situation, to come down hard on these groups, given the passions inside Pakistan for the eventual absorption of Kashmir.

LAL KRISHNA ADVANI: Far more difficult for Pakistan was to disown and de-link itself from Taliban. But pressed hard, Taliban is their creation. Taliban is the creation of Pakistan's ISI. And yet, when the world stood up against Taliban and America mobilized world opinion against it, and America put pressure on Pakistan to de-link itself from Taliban, it did it. I see that the... India's concerns being addressed by the international community are of a different nature and are certainly simpler than what Pakistan had to do in case of Taliban.

RAY SUAREZ: Well, I'm wondering how your two countries-- and now, two nuclear-armed countries-- craft a future for a place like Kashmir that they have two mutually contradictory views of?

LAL KRISHNA ADVANI: And therefore, it was that after a series of wars between India and Pakistan, at Shimla we made a final agreement that hereafter, we will have no wars. We will discuss Jammu and Kashmir. There is a wide gulf... different perceptions of the two countries. We'll try to sort them out by dialogue. India is keen that we adhere to that Shimla agreement, discuss and debate the issues of Jammu and Kashmir, see how we can narrow the differences. But in the meanwhile, we urge General Musharraf to pledge that these shall not be held hostage to the resolution of these differences.

RAY SUAREZ: But I'm wondering what a possible future could look like, given the fact that for many Indians, that place is part and parcel of India, and for many Pakistanis, it is similarly part and parcel of Pakistan, should be and they feel that it should have been all the way since partition.

LAL KRISHNA ADVANI: This is hardly an occasion where I could explain at length what really are the nuances of the Jammu-Kashmir issue. But all that I can say in the affirm is that a resolution of this dispute has to be by dialogue. It cannot be by war; either direct or proxy, either covert or overt. It has to be either by peaceful dialogue and negotiation.

RAY SUAREZ: You, yourself, were born, grew up in, was educated in what is now Pakistan. You remember pre-partition India as a young adult. Does this make war on one level unthinkable for you?

LAL KRISHNA ADVANI: That's right. That's right, exactly. You've mentioned a point, which I emphasized as strongly as I could when General Musharraf came to Delhi six months back. He had been invited by Prime Minister Vajpayee. And when he came to Delhi, the first question I asked him, "General, you've come to Delhi after how long a period?" He said, "I've come after 54 years." And I said, "is it not an irony that you've been born in Delhi, and yet you visited Delhi for the first time in 54 years?" I have been born in Karachi, and I have visited Karachi only once in 54 years. Is this not a situation that you and I must strive to change?" And we can change it. I said, "With this government in office here led by Vajpayee, the chances of changing the situation are maximum." But the minimum requirement is that terrorism must stop. The minimum requirement is that we both must pledge that we'll have no war, overt or covert, direct or proxy, on the issue of Jammu and Kashmir. We'll discuss Jammu and Kashmir.

RAY SUAREZ: Minister, thanks for being with us.

LAL KRISHNA ADVANI: Thank you.

JIM LEHRER: We'll hear the other side of this tomorrow night from Pakistan's ambassador to the United States.

RECAP

JIM LEHRER: Again, the major stories of this Thursday. A White House spokesman said the chairman of Enron warned the Treasury and Commerce secretaries, last fall, his company was "heading to bankruptcy." President Bush promised federal investigations of the giant energy firm would be thorough. And the U.S. military began flying al-Qaida prisoners out of Afghanistan. We'll see you online, and again here tomorrow evening with Mark Shields and David Brooks, among others. I'm Jim Lehrer. Thank you and good night.