The NewsHour with Jim Lehrer

JIM LEHRER: Good evening. I'm Jim Lehrer. On the NewsHour tonight: A summary of today's news; a Newsmaker interview with Defense Secretary Rumsfeld about the new military budget and other things; a look at the latest on what was wrong at Enron; and some thoughts on what went right for the New England Patriots in the Super Bowl.

NEWS SUMMARY

JIM LEHRER: President Bush sent his 2003 budget to Congress today. It includes billions of dollars in increased spending for defense and homeland security, and to stimulate the economy. Kwame Holman reports.

KWAME HOLMAN: At least two things are new about President Bush's budget request: The American flag on the cover, which traditionally is solid blue, and the return of projected deficits in a Presidential spending plan for the first time in four years. The plan calls for federal spending of $2.13 trillion next year, $80 billion more than the government is expected to take in. Total spending would increase by 3.7% over this year. For the war on terror, the President requested a 14% boost for the Pentagon, for a total of $379 billion.

PRESIDENT GEORGE W. BUSH: We're unified in Washington on winning this war. One way to express our unity is for Congress to set the military budget, the defense of the United States, as our number-one priority and fully fund my request. (Cheers and applause)

KWAME HOLMAN: There's also $38 billion for homeland defense, for airport and border security and research into antibiotics and vaccines to fight bioterrorism. The budget assumes the economy will grow 3.8% next year, and that Congress will leave in place last year's tax cuts and pass a stimulus package with more tax cuts. To offset new spending, the budget would cut funding for highways, water projects and Medicare payments to hospitals. Senate Budget Committee Chairman Kent Conrad said the President also would take money from programs for the elderly.

SEN. KENT CONRAD: He will be taking every penny of Medicare Trust Fund money and using it for other purposes -- over $500 billion according to his own calculations. He will be taking $1.6 trillion of Social Security trust fund money and using it to pay for tax cuts and for other government programs.

KWAME HOLMAN: Congress will take several months to agree on the budget for fiscal 2003, which begins October 1.

JIM LEHRER: We'll talk to Secretary Rumsfeld about the military's budget request, among other things, in a few minutes. The former chairman of Enron refused to appear today at Congressional hearings in Washington. His lawyer said Kenneth Lay feared the tone would be prosecutorial. He said some lawmakers had already pronounced judgment by saying Lay and other Enron executives broke the law. The Senate Commerce Committee canceled its hearing, but planned to issue a subpoena for Lay. The author of an outside review of Enron addressed a House hearing today. In prepared remarks, he said some managers misrepresented the company's financial condition. On Wall Street today stocks fell amid renewed concerns about corporate bookkeeping. The Dow Jones Industrial Average fell 220 points to close at 9687, a loss of more than 2%. The NASDAQ Index was down 55 or nearly 3% to end at 1855. In Afghanistan today, the interim government tried to mediate a truce between competing clans in the eastern city of Gardez. At least 50 people were killed in fighting there last week. One of the factions said there was no progress in the talks. In the north, two leading warlords did agree to withdraw from Mazar-e Sharif, under UN supervision. More than 40 people were killed there in recent fighting. Pakistan's government appealed today for the life of a "Wall Street Journal reporter." Daniel Pearl was kidnapped nearly two weeks ago in Karachi. In recent days, the investigation was complicated by emails that turned out to be hoaxes. The interior minister said police were now searching nationwide and the FBI was assisting. He addressed the kidnappers directly.

MOINUDDN HAIDER, Interior Minister, Pakistan: It's given us a bad image. We have decided that our image is of a responsible and a responsible country. And our image is of a moderate Islamic country. So I would appeal to those people if this message reaches them through that, that please release him.

JIM LEHRER: Pearl's wife joined the appeal. She said she was willing to die in his place. The kidnappers have demanded the return of Pakistani prisoners being held at Guantanamo Bay, Cuba. The United States has ruled out negotiating. In the Middle East, five Palestinian gunmen were killed today when their car exploded in Gaza. The Palestinian authority said it was an Israeli helicopter attack. The Israeli government did not comment. A radical Palestinian faction said it would retaliate "very soon." The American Academy of Pediatrics today endorsed adoptions by homosexuals. The nation's largest group of pediatricians said gay couples can offer children a healthy family life. It said, "There's no existing data to support the widely held belief that there are negative outcomes" for those children. The policy deals mainly with granting parental rights to gays whose partners are already parents. The New England Patriots are the new champions of professional football. They beat the heavily-favored St. Louis Rams last night in the Super Bowl game at New Orleans. The score was 20-17, with the Patriots kicking the game- winning field goal as time ran out. It was their first Super Bowl victory. We'll talk more about the game, at the end of the program. Between now and then, Defense Secretary Rumsfeld and an Enron update.

NEWSMAKER

JIM LEHRER: And to our Newsmaker interview with the Secretary of Defense, Donald Rumsfeld.

Mr. Secretary, welcome.

DONALD RUMSFELD: Thank you.

JIM LEHRER: The President's budget is being called a war budget. What would you call it?

DONALD RUMSFELD: I would say that it is a budget that reflects the priorities that are appropriate to our times. The pattern always is that if you're in a war, if you're in a conflict, that you need to fund that conflict. Some have tried to do guns and butter, both, in the past, as we recall. In this case the President decided to moderate and hold down spending for things other than defense or homeland security, and so for the most part that's been the case. This is, I think, a very appropriate and thoughtful, wise budget.

JIM LEHRER: Before 9/11, you talked much about reforming the military, changing the way things work, changing the culture. Does this budget reflect any of that?

DONALD RUMSFELD: Oh, indeed, it does. The 2003 budget, which was part of the President's budget announced today, has a great deal of transformation in it. There's some who define transformation one way, would say that there's some $20 billion worth of transformational activities; another way of defining it would say $50 billion. I think it's almost inappropriate to look at dollars. I think that - that transformation is not an event; it is a process. It is something that involves a mind set, an attitude, a culture. It is something that, for example, might not even involve a new weapons system. It might just be the connectivity among existing weapons systems. It might be a different way of organizing or fighting, as we found in Afghanistan. So I think the transformation - the word - needs to think about it and understand that it's more of a process than an event.

JIM LEHRER: But if somebody were to look at this budget - forget the money for a while - just look at what it buys, does it buy anything that different than what we already have?

DONALD RUMSFELD: Well, I think when you say "that different," it's important to understand that you can - when the Germans transformed their armed forces into the Blitzkrieg, they transformed only about 5 or 10 percent of their force. Everything else was the same, but they transformed the way they used it, the connectivity between aircraft and forces on the ground, the concentration of it in a specific portion of the line, and it - one would not want to transform 100 percent of your forces. You only need to transform a portion.

JIM LEHRER: 14 percent increase will bring it to - as we just reported - the biggest military spending in 20 years, the largest outlays for the military. Why do you need so much money?

DONALD RUMSFELD: Well, it's interesting. If you take the - the increase and break it into pieces, a big chunk of it's for inflation. A large chunk of it is for the healthcare programs that were passed that had not been funded previously for retired military. A portion of it is for the war. And what's left is a relatively small number of something in the neighborhood of $10 billion. I mean, that's not a lot of money; it is a lot of money but as a part of a total budget it's a very small part of the total budget. That's the amount of free money, if you will, that can be used for something in addition to the war. So it's a fairly modest increase in that sense. That forced us -- actually to our benefit - to make sure we did things within the budget to stop doing some things we don't need to do and to do some things that we really ought to be doing to modernize and transform the force. The other thing that's in there is a pay raise for the military, because if there's anything that's central to the success of the armed forces of the United States, it is that the men and women be properly treated. These are the people who voluntarily risk their lives for our country. And we need to have talented people capable of doing the important jobs and increasingly high tech jobs. So we're competing in the civilian and power market.

JIM LEHRER: Again, when you came in you were concerned with - you came on the program and expressed the concern about how the money was being spent and controlled at the Pentagon. You wanted to get a control on that; you wanted to get your hands on that. And then 9/11 came along. Do you think this money can be well spent? Is the structure in place at the Pentagon to make sure this money is not wasted or poorly spent, whatever?

DONALD RUMSFELD: That's a good question. And I guess I would have to say that after 11 months or a little more in the saddle that I'm encouraged. The Department of Defense has been characterized by a lot of people as being very difficult to change, resistant, set in its ways, but if you think back over the last 11 months, what's happened, we have a new defense strategy. We have moved from a threat-based strategy to a capabilities-based strategy.

JIM LEHRER: What does that mean?

DONALD RUMSFELD: It means that instead of deciding that you're going to look at a threat in North Korea or a threat in Iraq or a threat somewhere else, the old Soviet Union and fashion your force to fit that, what you do is look at capabilities that exist in the world-- chemical, biological, nuclear capabilities-- the ability to... for cyber attacks, that type of thing-- and you say to yourself, it's not possible to know precisely where the threat will come from or when, but you can know what the nature of that threat might be and what capabilities we need to deal with that.

JIM LEHRER: You may not even know what country it's coming from.

DONALD RUMSFELD: Exactly.

JIM LEHRER: In the past it was all directed at the Soviet Union or a particular country.

DONALD RUMSFELD: Exactly. The other thing we did is we have a new force-sizing construct. Instead of the old two major theater wars we've adjusted that in a way that's appropriate. We have a new nuclear posture. We've rearranged our missile defense research and development programs. We've rearranged how we deal with space. The Department has had a record of enormous accomplishment in the last 11 months. And I think that it suggests that the men and women in the Defense Department do... Uniformed and civilian-- do understand that we do need to transform and that they're willing to get about that task. So I feel very good about the last year.

JIM LEHRER: Is there a simple... You can use the word simple any way you like-- but is there a simple military strategy that underlines the numbers? I mean what the United States military should be capable of doing -- before it was fight two wars and two -- what is it now?

DONALD RUMSFELD: Okay. The force sizing approach or construct was, as you said, two major regional conflicts. That is to say, the United States should be able to fight two conflicts anywhere in the world, be able to occupy the countries and take over the capital and change the regime. We have changed that. We weren't able to meet that. We had too little airlift. We had too few forces, and the world wasn't like that. We had lots of these other contingencies so we changed it. We still have to be able to win two conflicts but we only have to be able to occupy and change the regime in one while stopping the other, and in addition be capable of engaging in the kinds of other lesser contingencies or non-combatant evacuations or an event like Kosovo or something like that which is the more likely case. We're in Bosnia, we're in Kosovo. We have these different activities so we're structuring a force to fit that.

JIM LEHRER: Where does terrorism fit in there?

DONALD RUMSFELD: Terrorism is one of the problems of the world-- cruise missiles, ballistic missiles, terrorism, cyber attacks-- that would be characterized as so-called asymmetrical capabilities that we need to be able to deal with, ways of attacking the United States where they don't have to go straight after our Armies or Navies or Air Forces which they can't do, the rest of the world, they're too capable. So we can deter those kinds of things. But these are the vulnerabilities we have, for example. We're so dependent on space assets and information technology that it's an attractive thing for someone to try to attack that.

JIM LEHRER: Here again you don't know who the someone might be but you're gearing up to combat it if somebody does want to do it, right?

DONALD RUMSFELD: Indeed. And we know a lot of countries that are actively trying to be able to do that. The al-Qaida, we didn't know precisely where they would attack or when they would attack. And in this case it was not even knowing that they would end up using box cutters to turn airliners filled with Americans into missiles.

JIM LEHRER: Now, when you and your colleagues sat down to draw this budget and the strategy, did you do it with the idea almost that if this was going to be done, if this capability was going to be reached, it was going to have to be done by the United States alone or did you figure, oh, well, the Brits got some of those and the French have some of those and we can do this? Or is this a go-it-alone budget?

DONALD RUMSFELD: No, no, it clearly isn't. There's no question but that... let me just say what the United States' responsibility really is today. The question suggests the truth, and that is that the United States is looked to by our people and by others to be able to contribute to peace and stability in the world. And we know that everyone's life-- our opportunity to go work and to pray and to travel and to be free-- depend on a peaceful and stable world. This budget and the United States' armed forces are "the" thing that contributes to that peace and that opportunity more than anything else. We do it with our allies and our friends. And we do it using their bases. We do it in their cooperation. There's six, eight, ten, twelve countries right now in Afghanistan with forces on the ground doing things. The United Kingdom has forces. Canada does. Australia does. Jordan does. A number of countries are involved. They have ships at sea that work with our ships every day. And there must be what, 20, 30 countries have liaison offices down in Tampa with central command with General Tom Franks. So it is a cooperative arrangement. We have alliances. We have treaties, not just NATO, but we have a close relationship with Korea and with Japan and with Australia.

JIM LEHRER: But as a practical matter, Mr. Secretary, Tom Friedman of the "New York Times" pointed this out in his column yesterday, that we're it as far as high-tech weaponry, as far as air power is concerned. Our budget, this budget if it goes through will be equal to the next 16 countries combined in terms of what they spend on military. I mean we're pretty much it when it comes to major military operations, are we not?

DONALD RUMSFELD: That is true. We have "the" greatest capability. On the other hand, we can't and don't function alone. We have wonderful cooperation from literally dozens and dozens of nations in the war on terrorism. We're sharing intelligence. We don't have a monopoly on intelligence. We do have certain things. We do have more high-tech weapons, that's true. We do have more airlift, that's true. But the cooperation we get is enormously valuable to us.

JIM LEHRER: There's been some grumbling I'm sure heard from some NATO people saying, well, NATO has just kind become kind of a mop-up operation in the United States. The United States goes in and wins the war and then says, okay, now you guys come in and keep the peace and, et cetera, and the U.S. goes away.

DONALD RUMSFELD: Well, you know, you said grumbling. Any country that wants to make the investments can make the investments. Any country that wants to cooperate at a level that's higher, fine. The NATO countries have talked year after year about the importance of those countries increasing their defense budgets and doing a better job of investing in the future. Some have done it. Others haven't. The fact that our country recognizes the nature of the threats that exist in the world today and the lethality of the weapons of mass destruction and their destructive power and have been wise enough to make those kinds of investments -- it seems to me -- is a credit to the United States.

JIM LEHRER: President Bush has issued these strong warnings about Iran, Iraq and North Korea. You mentioned a couple of them in passing just a moment ago. As Secretary of Defense, what would you add to the president's warning?

DONALD RUMSFELD: Well, I thought he did it very, very well. I thought he was clear. He was specific. He talked about the nexus between terrorist countries and each of those countries are on the terrorist list and there are others on the terrorist and their active weapons of mass destruction programs and the risk to the world if those countries make the terrible mistake of providing weapons of mass destruction to terrorist networks like al-Qaida. We know what al-Qaida is willing to do. We know that several terrorist networks have active programs to acquire biological weapons and chemical weapons, as well as radiation and nuclear weapons. We've found intelligence in Afghanistan that attests to the enormous appetite and effort they've put into this. And we're still finding documents as recently as this week that demonstrate that fact. We don't know precisely how successful they've been but we know they want them and we know there's countries that have them. And the power of a biological weapon, for example, is something that we have to be very respectful of as a country.

JIM LEHRER: So if one of these three countries... For instance, North Korea has a nuclear capability. What the President is saying to North Korea, "If you give this or share this capability with a terrorist, or if we think you may use it against a neighbor or anybody else, you are now being warned and we'll take action against you"?

DONALD RUMSFELD: Well, I am kind of old fashioned. When a President says what he says, it seems to me we let those words stand. And if I were living in any one of those countries or participating in the government of any one of those countries, I don't think there would be any doubt at all as to what he meant.

JIM LEHRER: Iran. You said yesterday on another television program that Iran helped some of the al-Qaida escape from Afghanistan. How many? How major a deal was this?

DONALD RUMSFELD: Well, first we have to recognize that the borders of Afghanistan are porous. There are four or five countries around the periphery. Iran is along the border. They have tribes that move back and forth for centuries so it's not as though there's a border patrol or an electronic barrier that stops things. We do have a good deal of information to the effect that al-Qaida and Taliban have taken refuge there and others have used it as a transit point. We have no evidence at all that Iran has tried to stop them, that Iran has tried to turn them over to us or some other country or to incarcerate these people, the al-Qaida, a terrorist network. We know simultaneously Iran is very active in sending Hezbollah terrorists down through Damascus into the Baca Valley and down in to Lebanon. We know that Iran has been selling or giving, probably giving weapons to Afghan elements in the country, which we find notably unhelpful. So that's a fact. These are facts. That's a behavior pattern not by the people of Iran. I think a lot of the people of Iran would like to throw off that regime. I think that there's a lot of young people and women in that country that feel repressed. And I also there's some people in the political process who feel that it ought to be changed. But the ones that have the control have been doing the things I just said. Let there be no doubt.

JIM LEHRER: You say the evidence is clear. The president -- you say what the president said is clear. So what is the message to Iran -- stop it or we'll take you out or we'll do something to you?

DONALD RUMSFELD: I'll give you the same answer I gave before.

JIM LEHRER: Okay. Okay. But I mean, for instance, let's say... Let's don't be specific because I understand why you would not want to talk specifically about Iran, Iraq or... What about Iraq? I mean what is it you want, you and the President want Saddam Hussein to stop doing? And then we'll get to the general thing.

DONALD RUMSFELD: Well, Saddam Hussein has been a threat to its own people. It's used weapons of mass destruction on its own people. It's a threat to its neighbors. It's invaded Kuwait. It is constantly calling neighboring regimes illegitimate and suggesting that its intent is to take them, if they're allowed. It is a country that has had and does today a very active weapons of mass destruction programs. It threatens Israel as well as some of the moderate Arab regimes continuously. It is a repressing its own people. It has thrown out the inspectors. It has been a number of years since the inspectors have been in there. They have had free play to develop these weapons of mass destruction. The technologies have enabled them to make advances to be sure. And they have obviously the ability to deceive and deny others from knowing precisely what they're doing through a variety of underground capabilities and mobility. Absent the world -- someone, the United States, other countries-- pointing out the danger they pose to their own people and to their neighbors, they would run free and they would invade Kuwait again to be sure. They might invade Saudi Arabia, which they threatened to do. They clearly are no friend of Jordan. They're no friend of Israel. And this is a vicious, repressive regime.

JIM LEHRER: But from U.S. policy standpoint, since the President's speech the other night and the reaction to it and follow-up statements from you, Secretary Powell and others, there has been some people-- the French, the Germans, the King of Jordan today-- have all said wait a minute an action against Iraq might not be in the interest of the region, whatever. Is the message that the President is giving is that the United States, if necessary-- I'm not saying they will-- but if necessary would act alone if they felt that this was a threat...if Iraq or any other country was a threat to stability or to peace?

DONALD RUMSFELD: I think the... What the President is saying to the world and to those terrorist countries and weapons of mass destruction countries is very clear. He's saying, "Look, world, be on notice. This is a very dangerous time for the world" -- that these weapons are enormously powerful. They can kill not thousands of people but tens of thousands of people and that these countries that have engaged in a behavior pattern of terrorist acts cooperating with terrorist networks, providing haven to terrorists, that have those weapons pose a threat that we need to be conscious of and attentive to. What the next step might be is a question for the President not for me. But I don't think there's any doubt in those countries but that they now are on notice that the rest of the world also knows that they pose a threat to their people, their neighbors and indeed other countries.

JIM LEHRER: You made a speech last week in which you talked about the lessons of the Afghan war. One of them was that you said preemption may be necessary in the future. You said, quote, the best in some cases, the only defense is a good offense. Now that's a major change of US defense policy, is it not? Have we ever taken a preemptory strike against another country without them first attacking us?

DONALD RUMSFELD: We did in Afghanistan. Yes. The answer is. If you think about, we have no choice. A terrorist can attack at any time at any place using a range of techniques. It is physically impossible to defend at every time in every location against every conceivable technique of terrorism. Therefore, if your goal is to stop it, you cannot stop it by defense. You can only stop it by taking the battle to the terrorists, where they are and going after them. Now, you can tolerate it if they're not going to have access to powerful weapons and not going to kill thousands of people. If it's one or two or three people, the world has learned to live with a level of carnage that's modest. You don't like it. But when it's not modest, when it's large numbers, when it's something like smallpox or anthrax or a chemical weapon or the radiation weapon or killing thousands of people at the World Trade, then you say to yourself, well, if we can't stop terrorists at every location of every technique at every moment of the day or night, what must we do -- Just sit here and take the blows like the World Trade, take the blows that biological weapons would pose to us? The answer is no. You have a responsibility to defend your country. Everyone in the world knows-- even the UN Charter provides-- for the right of self-defense. And the only self-defense, the only effective way to defend is to take the battle to where the terrorists are. They are planning, they are plotting, they have trained thousands of terrorists very well, and we have no choice but to find those people and root them out, as the President said, and stop them from doing what they're doing and stop countries from harboring them.

JIM LEHRER: But we only did this after we were attacked which is the traditional... I'm just saying just as a matter of history the United States has always been attacked and then react. You're saying no more, not... This is a different kind of warfare.

DONALD RUMSFELD: We were attacked. So it is self-defense to go out.

JIM LEHRER: But you're saying that now we're not going to sit back and wait for another World Trade Center, we're now doing that.

DONALD RUMSFELD: We've already been attacked so what we're doing is in self-defense.

JIM LEHRER: Well, but we haven't been attacked by North Korea. We haven't been attacked by Iran; we haven't been attacked by Iraq. You can have a whole list of other countries. But you're saying... I'm just trying to understand how you define a preemption under your definition of the lessons of Afghanistan.

DONALD RUMSFELD: It is what we are doing. We identified the reality of al-Qaida in all of these countries and the reality of Taliban harboring them. We said that we have no choice but to defend ourselves, and the only way to do that is to go find them. We have gone in to Afghanistan and we are working the problem very hard. We are also working the problem elsewhere in the world: Where they hide and where they operate and where they train and where they find haven from other countries. And the President has said if you're harboring a terrorist, you're supporting the terrorist. That means that the countries that engage in terrorist act and harbor terrorist and provide haven for terrorist and run the risk of transferring weapons of mass destruction to terrorists, that they pose a danger to the world.

JIM LEHRER: And we may not wait we will not wait for you to strike us before we strike you?

DONALD RUMSFELD: Certainly self-defense suggests that if we had reason to believe that that nexus was being bridged or that al-Qaida and terrorists were being provided haven, clearly we have an obligation to try to find them.

JIM LEHRER: Mr. Secretary, thank you very much.

DONALD RUMSFELD: Thank you.

UPDATE - INVESTIGATING ENRON

JIM LEHRER: Still to come on the NewsHour tonight, the latest on Enron and the super Super Bowl. Kwame Holman begins our Enron report.

KWAME HOLMAN: These members of the Senate Commerce Committee had expected to spend the morning questioning former Enron CEO Kenneth Lay. Instead, they had to cancel their hearing because Lay suddenly announced yesterday he would not appear before them. North Dakota Democrat, Byron Dorgan, was to chair the hearing.

SEN. BYRON DORGAN: I regret that he's not coming to the committee at this point. We had been told for over a month that he was going to be available, was anxious to testify. We were told that on last Friday and last Saturday.

KWAME HOLMAN: Dorgan speculated it was the release of a critical internal report that caused Lay to decide not to testify.

SEN. BYRON DORGAN: And then the Powers report came out, which was the report commissioned by the board of directors of the Enron Corporation, and I think that represents the door through which Mr. Lay escaped. I believe that the report that was issued by the board of is a pretty devastating indictment of a number of things that went on inside the corporation.

KWAME HOLMAN: Lay's attorney blamed members' strong statements about Lay over the weekend for his refusal to come forward. Today, members were undeterred.

SEN. PETER FITZGERALD: Mr. Lay may contend, and I would stipulate it's theoretically possible, that Mr. Lay as CEO did not know what was going on beneath him. But the documents give the impression that there were so many transactions taking place over so long a period of time that, to believe that, you would have to conclude that Mr. Lay was the most out-to-lunch CEO Of any corporation in America.

KWAME HOLMAN: Committee members will meet tomorrow to decide whether to subpoena Kenneth Lay, which may guarantee his appearance, but cannot force his testimony. Later this afternoon, the second Enron investigative committee scheduled to hear from Kenneth Lay today went ahead without him, but this house financial services subcommittee had other witnesses scheduled, including the author of the Enron internal investigation. The report by William Powers, dean of the University of Texas Law School, is an analysis of the myriad transactions between Enron and its investment partnerships that led to the company's plunge into bankruptcy. The report concluded high- ranking employees involved in Enron partnerships "were enriched by tens of millions of dollars they should never have received"; management allowed Enron to conceal from the market very large losses -- at least a billion dollars -- by using misleading accounting procedures; and controls were lax and oversight was inadequate by both managers and the Enron board of directors. Early this evening, the Committee swore in and began hearing testimony from report author William Powers.

JIM LEHRER: Gwen Ifill takes it from there.

GWEN IFILL: Here to dissect the Powers report and more, we're joined by john coffee, professor of securities law at Columbia University; John Fahy, a certified public accountant and former federal prosecutor in New Jersey; and Charles Elson, director of the Center for Corporate Governance at the University of Delaware. Gentlemen, welcome. Professor Coffee, the effort this report, the Powers report, is clearly an effort to lay out a road map at least to investigators. The question I guess is, after looking at this report, do you think it's also a road map to crimes?

JOHN COFFEE: I think we see two different road maps here. We see even from the perspective of the board of directors everything about the governance of Enron had become pathological. Nothing was working as it was supposed to work. And along the way-- and this is very normal-- we find that when the mechanisms of corporate governance break down, some officers, particularly at the lower and middle level, wind up with their hands deeply in the till. And there is a very specific picture here of a number of officers who seemed to have engaged in predatory self- dealing, receiving millions of dollars without ever disclosing to the board that they were contracting with the board of directors of Enron.

GWEN IFILL: Mr. Elson, do you think that there is a case here of intent, and is it important whether there was intent involved?

CHARLES ELSON: Well, the report certainly concludes that there was intent on the part of the officers of the company. Vis- -vis the board itself, obviously this report was written by the board itself or members of the board itself. It suggests really sloppiness on the part of the board. No surprise there. But vis- -vis the officers, the report seems to suggest that they knew exactly what they were doing and were acting to defraud-- pretty heavy charges. Again, you have to remember this report was authored by the board. It also shifts the blame to some other parties, too, including the third party advisors, Andersen and to Vinson and Elkins, which is obviously troubling for those folks. But remember, this was done by the board. It's not necessarily dispositive. It is going to be a long time before all the facts come out and we know who knew what when and where. At that point, we can reach pretty strong conclusions as to who were the intentional actors and who were not.

GWEN IFILL: You don't think it's significant... I want to get to your point about the board's involvement. You don't think it's significant that Mr. Powers and the other members of this committee were appointed to this and appointed to the board at the end of October, after all this happened?

CHARLES ELSON: There are three directors involved in this. The first director, Mr. Winnaker, has been on the board for a long time, and I think shared the Finance Committee that approved some of the conflict transactions that were in question. Mr. Powers came on the board in October to I think do this investigation, though some questions have been raised about his relationship to the company before coming on the board, though he's obviously an individual of great integrity and wisdom. Mr. Traub, who is the third author, truly came on after everything was done. He was appointed to the board the evening before the board went into bankruptcy, the company went into bankruptcy. But if you read through the report, it's sort of interesting, because there are all sorts of people making cameo appearances and cameo disappearances as conflicts come up. One part of the report, vis- -vis the law firm, had said, well, one of the directors will not comment, Mr. Powers, because of a relationship with Vinson and Elkins.

GWEN IFILL: A lot of interconnectedness.

CHARLES ELSON: Yeah, which, you know, again doesn't really affect the report dramatically, but does affect it, I think, as a dispositive document on what happened and when.

GWEN IFILL: Let me get to Mr. Fahy, because I'm curious from a prosecutor's point of view whether the unusual... How unusual were these partnerships that we saw set up, and therefore how prosecutable?

JOHN FAHY: The answer is that these partnerships are allowable under securities law, as long as there's a 3% owner outside of Enron, and as long as that owner has 3% of the liability that would be... That would come due and owing. The significance of the report, though, is that it indicates that they manipulated the ownership in those partnerships so those partnerships were almost shell corporations. The other thing with the report, from a prosecutor's perspective, is the report says they manipulated their income statement. They increased their profits, and the report goes on further to state that many of the transactions with these partnerships had no economic value at all, and they were done merely to keep the shell game alive.

GWEN IFILL: So when you talk about shell games, you're saying they created these partnerships, they created these entities that didn't exactly exist because Enron was behind both sides of the deal.

JOHN FAHY: Yes, it was. And to make it worse-- and I don't think we understood this before this report came out -- but there was a feeling that perhaps these partnerships were there to keep the company afloat, and even though that would be criminal, there wasn't a very good motive. According to the report, senior people at Enron made huge amounts of profits from these partnerships, and that... So now you have fraud, a reason for the fraud, on the one hand, and you have people who are perpetrating the fraud making millions of dollars. So for a prosecutor, that's something that they love to see, and it gives them a lot of sex appeal for a case, if they decide to bring one.

GWEN IFILL: Because of the personal benefit that these people got.

JOHN FAHY: Yes.

GWEN IFILL: Professor Coffee, I am curious about whether you think, based on what you're reading of the report, if there were enough red flags, if there were enough warning signals that this board, which authorized its report, should have seen some of this coming?

JOHN COFFEE: Of course they should have seen it coming. I think that the report itself says that the board was grossly negligent. What the report is emphasizing-- and what is the critical difference-- is that negligence doesn't create liability for fraud. You have to move frombeing stupid to being willfully intending to defraud before you have criminal liability. And this report, while it finds fraudulent intent on the part of some officers and possibly on the part of the outside accountants, is fairly strong in its statements that the board was deceived and the board didn't have that intent. And of course it's not entirely surprising that, given the author of this report, that they reached that conclusion.

GWEN IFILL: And they also seem to say that Kenneth Lay, the CEO, who did not testify today, may not have had intent, but that he may have been not a very good steward of his company.

JOHN COFFEE: I think there's no question but that this report does actually protect him, to the extent that it somewhat diminishes the prospect of a criminal prosecution for him. They don't find the evidence, and there isn't going to be the simple road map for the prosecutors with respect to an indictment of either Lay or Skilling. But it's very different once you go below their level.

GWEN IFILL: Mr. Elson, what should the board have done if they indeed had seen these warning signals, if they were responsible for recognizing and pulling the coat of the folks who were coming up with these deals?

CHARLES ELSON: The first thing, the real tip-off here was the fact that they were asked to waive the company's code of ethics with respect to a couple of the transactions involving the CFO. That's a really troubling thing. That's extraordinary, if you think about it. The CFO is the chief financial control officer. Asking to waive the company's code to allow the chief financial officer to be on two sides of the transaction from a corporate governance standpoint is extraordinary. Once that was proposed, the board should have been all over that.

GWEN IFILL: The CFO in this case is Andrew Fastow. Do we have any indication from that report whether he had an okay from the upper higher-ups in this, whether they signed off on these deals?

CHARLES ELSON: You know, the fact that it went before the board, it had to go through the CEO to get to the board certainly. So obviously someone in management didn't think this was problematic. Again, it went to the full board. And the board, rather than stopping and saying, why is this going on? Why are we waiving this? What is the intent of these transactions? Perhaps we need a third party to come in and examine this. Are the auditors really comfortable with this? Is our outside law firm really comfortable with this? At that point bells and whistles should have gone off, and the board should have really stepped back. They didn't. That's what the board claims. Why they didn't we'll have to find out as time progresses. It's extraordinary.

GWEN IFILL: Mr. Fahy, how significant was it, what we saw in the report? Was it pointing fingers, or was there something significant about the degree to which this report went after Andersen Consulting and went after Vinson and Elkins, the law firm which had done the earlier study that said all of this was not irregular?

JOHN FAHY: I think it's significant that they went after them, because some of the blame has to lie with the outside authorities, and also with the law firm to some degree, the auditors. Management in a company wants opinions in a particular area, but it's up to the professionals, to the CPA's and to the lawyers, to make sure they're on firm ground when giving advice to large corporations.

GWEN IFILL: When the report says that Kenneth Lay was responsible for what happened there and he was the captain of the ship, does that make him criminally liable?

JOHN FAHY: From this report, it does not lay out any criminal liability by Lay. However, I suspect that perhaps one of the reasons he didn't want to testify today is, if he's asked other questions as to what his involvement was with Fastow, as to what he knew about these partnerships, as to what he knew what was going on since 1997-- all of those specific questions-- no matter how he answers it, if he says he didn't know about it, there may be documents that indicate that he's not telling the truth. If he says he did know about it, that may bring him criminal liability. There's an awful lot of unanswered questions. This report really doesn't address Kenneth Lay and his involvement.

GWEN IFILL: Professor Coffee, because there are so many unanswered questions and we did not see Kenneth Lay testify before Congress today, how do we begin to get to the bottom of so many of these questions?

JOHN COFFEE: Well, you're right. We haven't heard the last word. I'm sure we're going to hear Arthur Andersen reply to Enron and say it was more their fault than the auditors' fault. In that mudslinging contest, both sides could be right. But what we do see from this report is a very professional job of objectively describing facts, facts that show a complete breakdown in terms of the governance structure, facts that show pretty strong evidence of failure by the auditors, and finally facts that for the first time suggest to us that some people really did have their hand in the till, and were frankly looting the company by looting these off-balance-sheet funds that were out of sight and out of mind.

GWEN IFILL: Crystal ball. Do you have any reason to believe that any of the people who we talked to-- John Skilling, the former CEO; Kenneth Lay, the former CEO; or Andrew Fastow have any vested interest in this point testifying before Congress?

JOHN COFFEE: I would think that any criminal defense lawyer talking to any one of those three would give them very strong warnings that they are making their case much, much weaker if they make any statements under oath to Congress without immunity. And I don't think this Congress is willing to give them that immunity. So I think once you see the specter of criminal prosecutions loom out there, any criminal defense lawyer is going to strongly advise you to sit tight and come up with some reason why you can't testify, and if need be, take the fifth, as embarrassing as that is.

GWEN IFILL: Mr. Elson, does this bear any recommend ambulance at all in your recollection to the shadow games of the savings and loan scandal? Is this comparable in any way to that?

CHARLES ELSON: There's some similarities, but on the other hand, this appears, at least taking the report as true, it's just plain old garden kind of variety of financial fraud, again assuming that the report was accurate. Unfortunately, fraud on the market is as old as humankind. This will unfortunately not be the last. We hope it will be, but it probably won't. The key is reform to make it a lot tougher to have something like this happen-- reform, in my view, in the governance of the board itself and the way the board was structured.

GWEN IFILL: Okay, gentlemen, thank you all very much.

FINALLY - SUPER GAME

JIM LEHRER: Finally tonight, the "super" Super Bowl, and to Terence Smith.

NEWSCASTER: A minute and a half, the Patriots have no timeouts left.

TERENCE SMITH: Last night, the Super Bowl lived up to its name. It was an instant classic, decided on the final play by a 48-yard field goal by New England Patriots place kicker Adam Vinatieri.

NEWSCASTER: And it's right down the pipe.

TERENCE SMITH: In the crucial fourth quarter, the Patriots got the ball with a little over a minute remaining and the score tied at 17-17. Quarterback and game MVP Tom Brady marched his team down the field with short, crisp passes and a crucial 23-yarder that put the pats into field goal territory.

ADAM VINATIERI: I knew our guys could march down the field and get us in range, and the kick was just the icing on the cake.

TERENCE SMITH: The Patriots won 20- 17. And from Bourbon Street to Beacon Hill, Patriots fans partied through the night, celebrating Boston's first championship in any professional sport in 16 years.

TERENCE SMITH: For more about last night's Super Bowl, we hoped to be joined by Peter Richmond, author of two books on sports and a special correspondent for "G.Q." Magazine, and football commentator for National Public Radio's "Morning Edition." Peter, can you hear me? All right. We hope to have him shortly to talk about what turned into a simply terrific football game. Peter Richmond, can you hear me?

PETER RICHMOND: I certainly can.

TERENCE SMITH: Okay. Welcome.

PETER RICHMOND: Thanks.

TERENCE SMITH: Going into this game last night, the Rams were supposed to be a prohibitive favorite.

PETER RICHMOND: That's true.

TERENCE SMITH: And everybody expected another lopsided Super Bowl, as we've seen so often in the past. But that was not the case. What happened?

PETER RICHMOND: Well, one thing that was a key here was that the game was played one week after the previous playoff games. In this case, historical precedent was accurate. Every time there's a Super Bowl that's played after a one-week delay-- not the usual two weeks-- for whatever reasons, it turns into a terrific game. The three greatest Super Bowls ever all happened after a one- week hiatus between the playoffs and the Super Bowl. And this was no exception.

TERENCE SMITH: We should explain that in this case, it was because the NFL took a week off after 9/11.

PETER RICHMOND: 9/11 meant a shortened season, and what that gave us was a great football game, because football players, especially professional football players, they're geared on a one-week cycle. They like to play every week. It gives them time to heal the injuries. And when you do a two-week thing, it gives the underdogs too much time to stew and gives them too much time to get distracted, because in the cities the Super Bowl is held in, there are usually lots of distractions. For whatever reason, one week is perfect. Yesterday proved the rule, because they played a football game and they held a Super Bowl, and against all odds they got a great football game.

TERENCE SMITH: The Patriots, of course, were classic underdogs. I've read that many of their players, of course, are retreads from other teams. They were in the classic underdog position.

PETER RICHMOND: They were. You know, 20 players on the Patriot roster had played with other teams, and most of them had been discarded. They're kind of a scrap heap team. That, of course, gave them a real thing, a unity. They had a wonderful beginning. The Rams allowed themselves to be introduced by name. The Patriots insisted that they simply be introduced yesterday together as a team. And they played that way. They were too much of an underdog. Sportswriters have looked back and seen that if they had given the Patriot coach, a guy named Bill Belichick, as much credit as the Rams' coach Mike Martz, the line would have been a lot closer. They wouldn't have been serious dogs. But Martz and the Rams were exciting offensive teams. We love big-scoring games. Bill Belichick is a defensive genius, and he is no less innovative on defense than Martz is on offense. The thing is, defense isn't nearly as sexy. Nobody saw it coming when the Patriots' coach actually out coached the Rams' coach. Therein lay the difference. The underdog Patriots were ready and had a plan to shut down the St. Louis Rams' very exciting offense.

TERENCE SMITH: They certainly did. And the Patriots had Tom Brady. Explain to me how... Who is only 24 years old. How can someone so young be so good at a game this sophisticated?

PETER RICHMOND: I'll tell you what. Something happened today, which kind of illuminates what kind of guy young Tom Brady is. He sounds like he's from some "Boy's Life" magazine article-- "young Tom Brady, age 24, off the bench." Well, somebody asked him this morning if he was nervous yesterday. He actually said that after the warm-ups before the game, they went back into the locker room, and he was so cool, he fell asleep in the locker room before the Super Bowl, when everybody else in his position would be nervous beyond belief. He's possessed, they say, of a very cool demeanor. The other thing is that the team loves to play for him technically because he doesn't take as much time getting rid of the ball as Drew Bledsoe. But on another level, the Patriots have hit a rut. This new kid came in, and football is a game that's very funny in this way. It's very technical. You have to be able to read defenses. You have got to be able to figure out the playbook, which is 250 pages long. How can you memorize it? But on another level, it's a very, very emotional game. Teams tend to play in a sort of group emotion. Tom Brady was cool enough to get the Patriots relaxed this season and just go back to playing football, and yesterday you could tell they had such confidence in him that even the St. Louis Rams weren't going to scare them. He's sort of a true leader. People are already predicting that he will be one of the greats, which means of course he won't be. Let's lay off young Tom Brady and let him play the game.

TERENCE SMITH: Very briefly, Peter, at the end here, this Super Bowl seemed to resonate with non- football fans. That's true here with the "NewsHour" and elsewhere. Why, quickly?

PETER RICHMOND: It really did. Here's why. Over the years, the Super Bowl has become the most overblown sports event of all. It calls itself the Super Bowl, so by definition it probably can't be. We're used to it being top-heavy with entertainment and God knows they tried to have some entertainment yesterday, but because of what happened on the 9/11, we were in a position, I think as a nation, to really, more than ever, want a sports event to give us what a sports event was supposed to always give us, which was just a good contest. And we got one against all odds. Everybody turned on the Super Bowl because we're looking for answers, we're looking for something to hold on. We got a game. That's why it is going to resonate for a very long time.

TERENCE SMITH: Peter Richmond, thank you so much.

PETER RICHMOND: Thanks for having me.

RECAP

JIM LEHRER: Again, the major developments of this day. President Bush sent his 2003 budget to Congress. It includes the biggest increase in Defense spending in 20 years. On the "NewsHour" this evening, Defense Secretary Rumsfeld said the budget reflects the fact that the U.S. military is now the single most important factor in keeping peace and stability in the world. And the former chairman of Enron, Kenneth Lay, refused to appear at Congressional hearings on the company's collapse. Late today he resigned from the company's board.

FOLLOW UP

JIM LEHRER: A follow-up before we go: Last summer, we had a report on the interior department's shut-off of federal irrigation in the Klamath River Basin to protect endangered fish. Farmers in Oregon and Northern California protested. Now an interim report by the National Academy of Sciences says there was no scientific basis for withholding the water. A final report is due next year. We'll see you online, and again here tomorrow evening. I'm Jim Lehrer. Thank you and good night.