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ANDERSON COOPER 360 DEGREES

Government to Blame in Madoff Case?; Caroline Kennedy Gets Big Endorsement

Aired December 16, 2008 - 22:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


ANDERSON COOPER, CNN ANCHOR: We begin tonight with breaking news on what may be the biggest investment fraud in American history, the alleged $50 billion ripoff by this man, Bernard Madoff.
His alleged scam has already sent shockwaves through Wall Street. But, tonight, the SEC, the government's Wall Street watchdog, admits they were nothing more than a lapdog -- SEC Chairman Christopher Cox saying his agency dropped the ball, even though whistle-blowers were warning regulators. The tipoffs go back almost 10 years. Despite the SEC's acknowledgement, the question remains tonight, why wasn't Madoff, the man who just days ago confessed to the crime, stopped years ago?

Joe Johns is "Keeping Them Honest."

(BEGIN VIDEOTAPE)

JOE JOHNS, CNN SENIOR CORRESPONDENT (voice-over): He was a Wall Street genius and pioneer who once proudly proclaimed that there was no way to cheat on the Street.

BERNARD MADOFF, DEFENDANT: By and large, in today's regulatory environment, it's virtually impossible to violate rules. And this is something that the public really doesn't understand.

JOHNS: But now Madoff himself is accused of breaking the rules, big-time, and the government never caught him, until, authorities say, he admitted his role in an alleged fraud he estimated at an astounding $50 billion.

LINDA THOMSEN, DIVISION OF ENFORCEMENT DIRECTOR, SECURITIES AND EXCHANGE COMMISSION: (AUDIO GAP) justice.

JOHNS: But, tonight, SEC Chairman Christopher Cox says his agency appears to have screwed up, repeatedly, and in a big way, saying that "credible and specific allegations regarding Mr. Madoff's financial wrongdoing, going back to at least 1999," that he's gravely concerned by multiple failures of the agency, and that he's launching an internal investigation.

So, who were the whistle-blowers? Securities executive Frank Casey, for one. Back in 2005, he and a colleague, Harry Markopolos, started looking at Madoff's gravity-defying investment returns, and figured, something was up.

FRANK CASEY, FORTUNE: And Harry said, "Frank, you know that this can't be right. It's got to be a fraud."

JOHNS: Casey says Markopolos even took it to the next level, firing off letter after letter to the SEC, all but predicting how the Madoff story would end.

CASEY: This is a Ponzi scheme, I mean, in giant letters, 36 type, instead of 12 type. This is a Ponzi scheme. And he laid out 25 -- 28, if I can recall -- red-flag areas that they need to investigate.

JOHNS: But Casey isn't congratulating the SEC for finally figuring things out, because they got there too late. After all, billions of dollars apparently vanished through the doors of Madoff's office.

CASEY: If the SEC is going to simply come in after the fact and clean up the bodies and the blood, and not prevent the hit, it doesn't serve any purpose.

JOHNS (on camera): It's not the first time the SEC has gotten slammed for oversight in the last few years. But now some critics are saying, the case of Bernie Madoff just might turn the place inside out.

Joe Johns, CNN, Washington.

(END VIDEOTAPE)

COOPER: The FBI has set up a hot line number for victims of the Madoff scheme. The number is at the bottom of your screen right now, 212-384-2359.

You may not have money with Madoff, but the fact that he got away with it means that others likely have been getting away with it as well, and they're yet to be discovered. We're talking about your money, your future.

Let's talk now with senior business correspondent Ali Velshi, and Andy Serwer, managing editor at "Fortune" magazine. Don't miss his in-depth coverage of the scandal at Fortune.com.

So, Andy, What do you make of the SEC now admitting, just a couple hours ago, that -- that they blew it, basically?

ANDY SERWER, MANAGING EDITOR, "FORTUNE": Yes, I have never seen a mea culpa like this in my career, and I have been covering Wall Street for 25 years.

COOPER: At least they admitted they blew it, which is, I mean, more than most government officials do.

SERWER: They did. I mean, it's systemic on the part of the SEC. I mean, there really has been a broad regulatory failure since this economic meltdown has unfolded.

We have seen that, you know, in banking, in derivatives, and on Wall Street. But, really, the SEC is at the heart of overseeing our exchanges and our securities, our markets. And they really failed generally. And specifically, very much, as you said, repeatedly, they did not heed warnings about this guy.

COOPER: What's stunning about this to me is, as a layman, you know, I tend to believe these people who say they're business experts, who say they are, you know, hedge fund experts and SEC experts.

SERWER: Right.

COOPER: I don't believe anybody knows anything anymore. I mean, who really knows what is going on?

(CROSSTALK)

ALI VELSHI, CNN CHIEF BUSINESS CORRESPONDENT: I was just saying to Andy a little while ago, I spoke the one hedge fund manager who said he couldn't figure out what Madoff was doing. Those returns were too smooth and too consistent, 1 percent a month or better, for years.

And because he couldn't figure it out, he wouldn't invest. But, if you were invited by Bernie Madoff to invest, you thought that was a privilege.

COOPER: Sure. Yes.

VELSHI: And, by the way, for a lot people...

(CROSSTALK)

COOPER: And it took millions. You have to have a buy-in of several million, right...

(CROSSTALK)

VELSHI: Yes, although what we're finding, we're getting -- we're hearing from people who were victims, because they weren't direct investors with Madoff. They were investors through other people...

SERWER: That's right.

VELSHI: ... who gave Madoff that money to invest.

So, I -- I talked to somebody yesterday who lost $30,000. She had no idea she was invested -- it had anything to do with Madoff.

COOPER: Right.

VELSHI: So, people should call if they think there is any chance that they have been defrauded and -- and let the SEC try and figure out what's going on.

COOPER: Now, I want to show viewers Madoff some -- Madoff actually lecturing people about how safe investing was, how it was impossible to cheat anymore as an investor. Let's take a look.

(BEGIN VIDEO CLIP)

Madoff: It's impossible for you to go un -- for a violation to go undetected, certainly not for a considerable period of time.

When you look at the scope of the trading that goes on today in Wall Street, and you look at the -- what we would consider to be the infractions, they're relatively small.

(END VIDEO CLIP)

COOPER: I think, Andy, you call this guy a financial psychopath.

SERWER: He is.

I mean, this is some of the most twisted stuff I have ever seen. I mean, he is distancing himself from fraud and criminal behavior by saying, it's impossible. I mean, think about the psychology that is going on there.

And -- and this guy, Anderson, I mean, he cheated investors. He cheated employees. He cheated family. He cheated friends. He cheated charities.

COOPER: Right.

SERWER: I mean, he had no feelings. I mean, besides being a crook, he's -- he's a psychopath.

COOPER: He claims he acted alone. I read today they're looking at his wife, perhaps. His sons actually turned him in.

VELSHI: Yes.

COOPER: But do you think it's true that he acted alone?

VELSHI: He had a lot of family in senior positions in -- in the company.

As of now, there doesn't appear to be a connection. But, again, this thing is unfolding. Every few hours, we are understanding the scope of this thing and how much bigger it is. It is remarkable. The SEC and SIPC, which is the organization that sort of protects investors in these sorts of funds, to some degree, both say that he had separate sets of books. This was very complicated.

So, either he spent all his time doing up separate sets of books or he had help...

(CROSSTALK)

COOPER: Can these people regain any of their money?

SERWER: Well, I think they may get some from SIPC, but there's also going to be -- which is the government agency that -- quasi- government agency that gives money back -- but I think that -- that -- that there will have to -- litigation will go on for many, many years. There is money missing, and it won't be recovered.

VELSHI: This isn't like the FDIC, where you go in if a bank shuts down, and, 24 hours later, you can claim all your money, your insured amount. SIPC doesn't work that way. So, we are going to have to figure out how bad this is and who was actually affected. Did you have to invest directly with him? If you invested through someone else, are you protected?

(CROSSTALK)

COOPER: Also, some people who took their money out a couple years ago may have to give that money back.

VELSHI: That's right.

SERWER: And then there are people who paid taxes on the gains for -- for decades.

COOPER: Right.

SERWER: I mean, it's an incredible tangled web.

(CROSSTALK)

VELSHI: This is going to go on for a while.

SERWER: The lawyers will be happy, Anderson.

COOPER: Unbelievable.

Andy Serwer, thanks.

Ali Velshi, thanks.

(CROSSTALK)

COOPER: Do you have confidence the government knows what it's doing in this financial crisis? Let us know. Join the live chat happening now at AC360.com. Also, check out Randi Kaye's live Webcast during the break.

Also tonight, more breaking news, this time out of Chicago -- a stunning twist in the scandal that could cost the Illinois governor his job. Investigators say Congressman Jesse Jackson Jr. has, for years, given federal pros information about corruption in his state. One of his aides earlier said he was an informant. Now Jackson insists, he gave information, but doesn't want to be called an informant. We're digging deeper.

And the battle over Hillary Clinton's Senate seat heating up. Caroline Kennedy got a major Democratic endorsement today. It's starting to look like a done deal -- new details tonight.

And case closed -- after nearly three decades of heartbreak, John Walsh finally learns who killed his little boy. (BEGIN VIDEO CLIP)

JOHN WALSH, HOST, "AMERICA'S MOST WANTED": I always -- for years, I tried to convince myself that justice was -- justice delayed was not justice denied.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

COOPER: There is also breaking news tonight out of Chicago, where investigators today revealed that this man, Congressman Jesse Jackson Jr., has been a reliable source of information about public corruption for years.

We and many others would call that being an informant. And there is nothing wrong with that term. Jackson, however, disagrees. Whatever he calls it, the information he shared with the feds allegedly involved past investigations, not the one that led to the arrest of Governor Rod Blagojevich.

Gary Tuchman joins me now.

Gary, what is going on?

GARY TUCHMAN, CNN NATIONAL CORRESPONDENT: Well, Anderson, for at least the last decade, two sources close to Jesse Jackson Jr. tell us that he did indeed inform federal law enforcement officials about alleged corruption in his district and in his state, including corruption against the governor of Illinois, who is in so much trouble right now.

But, like you just said, it doesn't pertain to this current investigation. Instead, it pertains to an investigation in 2002. And this is when Jesse Jackson says that the governor was running for governor for the first time, and he was approached by someone who was affiliated with the governor who asked for a $25,000 contribution for the governor's campaign.

Jesse Jackson, at that point, had a wife named Sandi who possibly going to get a spot as the director of the Illinois lottery. He ended up not giving the $25,000 contribution, and his wife did not get the job.

And, according to these sources close to Jesse Jackson, after the governor became the governor of the state of Illinois, he met with Jackson, and, according to the sources, he told Jackson, you see what you could have done with that $25,000?

Well, Jesse Jackson at that point was talking to authorities about other alleged corruption in his state and in his district, but he didn't tell authorities, again to the sources, about that confrontation at that point. It wasn't until 2006, when infamous developer Tony Rezko was on trial here in Illinois and testimony came up that $25,000 donations were given to the governor, that Jesse Jackson then went to authorities and said, hey, I had this confrontation. It appears to be an alleged shakedown.

And the federal authorities were given that information back then. But it is seemingly very unusual for a congressman to have this kind of relationship with federal authorities. The congressman's office said he's being a good citizen.

Either way, what is curious is, just last week, Congressman Jackson want -- wanted and wants the U.S. Senate seat that Barack Obama has left. He met with the governor of the state of Illinois to talk about it.

And he had a very interesting conversation. Listen to what he said to us last week after the results of this, these arrest papers, became public.

(BEGIN VIDEO CLIP)

REP. JESSE JACKSON JR. (D), ILLINOIS: I thought, mistakenly, that the process was fair, above board and on the merits. I thought, mistakenly, that the governor was evaluating me and other Senate hopefuls based upon our credentials and qualifications.

(END VIDEO CLIP)

TUCHMAN: Now, you might wonder, why would a guy like Jesse Jackson Jr., who had this incident in 2002 involving his wife, think that the process would be fair?

That question hasn't been answered to us just yet. We should tell you that the U.S. attorney's office here in the Northern District of Illinois and the Justice Department, regarding whether they have had information from Jesse Jackson Jr., says, we will not comment, we will not confirm, we will not deny.

We asked the governor's office to give us a comment. His attorney would not return our calls. But we can tell you, at this point, it is a very curious situation.

We also want to mention to you regarding that informant word, Anderson, that you just mentioned, the Jesse Jackson camp, including Jesse Jackson himself, has told CNN he thinks that word has the wrong connotation. He says he's an informer who is a good citizen, but not an informant.

COOPER: All right. Well, we will let viewers decide.

Gary Tuchman, thanks.

Still ahead on 360: President-elect Obama filling -- fills -- well, he tells reporters to stop asking about the Illinois governor at a press conference today. Obama brushed their questions off. So, why did he give them the dodge? We will look at that.

Plus, the race to fill Hillary Clinton's Senate seat. Is Caroline Kennedy reaching out to Clinton, and will today's big Democratic endorsement clinch the seat for Kennedy? And almost three decades after 6-year-old Adam Walsh was murdered, the news his family was waiting for.

(COMMERCIAL BREAK)

COOPER: More now on the Illinois governor scandal.

Members of an Illinois House panel met today for the first time to determine if there is a basis to impeach the governor. Meantime, president-elect Obama announced a new Cabinet pick, his education secretary. But reporters didn't really want to talk about that at first. They wanted to talk about the scandal. Obama skirted their questions, basically just slammed down their questions.

Jessica Yellin has the details.

(BEGIN VIDEOTAPE)

JESSICA YELLIN, CNN CONGRESSIONAL CORRESPONDENT (voice-over): President-elect Obama began his day at this Chicago school, fielding questions from a receptive audience.

UNIDENTIFIED MALE: In 2009, are you moving into the White House?

SEN. BARACK OBAMA (D-IL), PRESIDENT-ELECT: Yes, I -- I -- I'm going to be moving into the White House next year.

YELLIN: If only every crowd were that easy.

During the grownups' Q&A, Obama shot down a reporter who asked about contacts his aides may have had with the governor's office.

OBAMA: John (ph), John, let me -- let me just cut you off, because I don't want to waste your question.

YELLIN: Or Obama's time.

The president-elect kept a tight focus on his agenda, naming new educator in chief Arne Duncan. He's a regular at the president- elect's pickup basketball games. Duncan once played ball professionally overseas.

OBAMA: I did not select Arne because he's one of the best basketball players I know.

(LAUGHTER)

YELLIN: Duncan has run Chicago's public schools for seven years, earning a reputation as a reformer and a centrist who has produced results. Scores are up. Dropout rates are down.

ARNE DUNCAN, EDUCATION SECRETARY DESIGNEE: It is the civil rights issue of our generation, and it is the one sure path to a more equal, fair and just society.

YELLIN: He has backed controversial policies, including paying students for good grades, closing failing schools, and opening charters.

OBAMA: Let's not be clouded by ideology when it comes to figuring out what helps our kids.

YELLIN: The most controversial? He supported the creation of a gay-friendly high school. Proponents say it would have been a safe place for gay and lesbian teenagers who have experienced bullying. But it stirred so much debate, supporters temporarily shelved plans for the school. They are vowing to push the idea again next year.

Duncan tells CNN, "This is a kind of innovative idea we will look at and evaluate on the national level."

Now, if Obama thinks so highly of Duncan's accomplishments, why didn't he enroll his own daughters in Chicago's public schools?

OBAMA: Arne, Joe, myself all agree that the Chicago public schools aren't as good as they need to be.

YELLIN: Obama's education team has big plans to improve all the nation's schools by reforming No Child Left Behind, recruiting new teachers, and encouraging local innovation.

But, in these brutal economic times, the fight for federal dollars will be as fierce as ever.

(on camera): CNN has learned that, on Wednesday, president-elect Obama plans to announce Iowa Governor Tom Vilsack as pick to run the Department of Agriculture. At the same press conference, he is expected to announce his nominee to run the Department of the Interior, Colorado Senator Ken Salazar.

Jessica Yellin, CNN, Chicago.

(END VIDEOTAPE)

COOPER: Let's dig deeper. We're joined by senior political analyst and former presidential adviser David Gergen, also Joe Johns, and CNN analyst Jeffrey Toobin.

So, David, is it realistic for the president-elect to think he can just stop reporters from asking him questions about the Illinois governor scandal, especially when there are all these loose ends?

DAVID GERGEN, CNN SENIOR POLITICAL ANALYST: Well, no. He can't -- he can't stop them.

I'm not sure -- where was that directed?

COOPER: Sorry. David. David Gergen.

GERGEN: Oh, I'm sorry. I'm sorry.

It's not realistic, Anderson. They're going to keep asking and he's going to keep trying to swat it away, because he doesn't want to lose focus on -- on -- on his appointments. And, today, he made a first-class appointment in Arne Duncan.

Duncan is someone as -- who excites reformers like Michelle Rhee, the very courageous superintendent of schools in -- or chancellor of schools in -- in Washington, D.C., but also has the confidence of teachers unions. And that's very hard to do in today's educational atmosphere.

But reporters are going to keep pushing on this, on these questions about Blagojevich, because, as you said tonight in the Jesse Jackson story, this gets curiouser and curiouser.

COOPER: Joe -- Joe, do you think the press should just give him a pass until he releases his review next week? I mean, he said, look, I can't do it until the -- the -- the prosecutor says so.

JOHNS: Sure. And nobody wants to jump out there and start slamming him immediately.

But I have got tell you, at the end of the day, this is a varsity media corps of the likes you have just never seen. And people are going to hammer away at a question an individual like Barack Obama doesn't want to ask. It's just the nature of the beast. Wherever you go, you're going to get that question after a certain point.

So, yes, there's a pass. It's only for a while. And Barack Obama realizes it's a distraction to him. It probably is frustrating him a little bit right now. But they need to just go ahead and deal with it and get on with it.

COOPER: Jeff, let's talk about Jesse Jackson Jr. a little bit. How unusual is it for a sitting member of Congress to be giving information in a case like this?

JEFFREY TOOBIN, CNN SENIOR ANALYST: Well...

(CROSSTALK)

COOPER: And -- and what do you think about his reticence to -- to be labeled as an informant? I mean, there is really nothing wrong with that term.

TOOBIN: No, it's not a term of art. It can be a range of relationships with law enforcement.

It could be wearing a wire...

COOPER: Right.

TOOBIN: ... which is what we think of as a real informant, or simply just answering questions of prosecutors.

You know, I think what makes the situation so unusual is how long it's gone on for. I mean, they're saying five years. They're saying maybe 10 years. You know, Illinois corruption scandals are more or less continuous. There is always somebody under investigation in Chicago. So, I guess, in that -- in that context, it's not all that surprising that someone who is part of the political establishment should be answering questions. But it's odd, of course, that it's coming out now, in that Jackson is trying to show that he's not a partner with Blagojevich. He is someone who has been informing on Blagojevich for years.

COOPER: Well, it is interesting, David, that he didn't choose to say that when he gave this press conference.

And I want to show our viewers -- Gary Tuchman showed it, but I just want to remind our viewers of what he said during that press conference, in which he kind of expressed shock, which now seems in a different light. Let's take a look.

(BEGIN VIDEO CLIP)

JACKSON: I thought, mistakenly, that the process was fair, above board and on the merits. I thought, mistakenly, that the governor was evaluating me and other Senate hopefuls based upon our credentials and qualifications.

(END VIDEO CLIP)

COOPER: David Gergen, we now know that doesn't seem to be true. I mean, he is -- if he has been informing or giving information for -- for years, he probably knew this guy isn't shooting straight.

(LAUGHTER)

GERGEN: Well, this is right out of "Alice in Wonderland."

I -- I -- on the face of it, it would seem to me that cooperating with the feds over five years is a good thing. That's what a good citizen ought to do. And think of it, had he not told the feds and he had known a lot of corruption was under way. I think we would all be jumping really hard on him. So, on the face of it, I think it's a good thing.

But the circumstances surrounding this, you know, raise lots of questions. Why didn't he say so a few days ago? You know, what is this thing about not -- you know, being reluctant? I understand there is a -- there is a certain odor attached to being called a snitch. And -- and, you know, you -- that may be used against him politically.

But there is something -- we don't know all of the facts here. I don't think we understand the bottom of this, Anderson. I think we're almost there, but we're not at the bottom. And it's just like the Madoff case that you led off with. I mean, you just -- you just have to shake your head and say, what's in the world is going on?

TOOBIN: Well, also -- also, Jackson is not answering questions about the -- the whole Blagojevich situation at the same time.

(CROSSTALK) TOOBIN: So, on the one hand, he is saying that he is very forthcoming, and has been with the government, but now he is not answering questions. So, it's a mixed message.

COOPER: Joe, do you think it likely that he still is in the running to be a senator from -- from that state?

JOHNS: I have got to tell you, this is a very strange deal, like David said. And the one thing you can say is, like it or not, whether it was fair or not, Jesse Jackson has gotten slimed in this situation.

And, when you look at the atmospherics there in Illinois right now, anybody who has gotten slimed can't possibly think it's good for them. So, if he had good chances early on, maybe now Jesse Jackson has got to be thinking his chances of being the senator from Illinois have been dramatically reduced.

COOPER: All right. We're going to leave it there.

Joe Johns, Jeff Toobin, David Gergen, thank you, as always.

Up next: Caroline Kennedy got a big boost in her quest for Hillary Clinton's Senate seat today. We have the "Raw Politics" on that.

Also ahead: more than two decades after his son was murdered, the two words John Walsh has been waiting to hear: case closed.

(BEGIN VIDEO CLIP)

WALSH: The not knowing has been a torture, but that journey is over.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

COOPER: There are reports tonight that Caroline Kennedy has called Senator Hillary Clinton to discuss her desire to take over her Senate seat. But neither office is talking publicly about it.

What is known for sure and has people talking on Capitol Hill is the major endorsement that Kennedy got today.

Mary Snow has the "Raw Politics."

(BEGIN VIDEOTAPE)

SNOW (voice-over): Caroline Kennedy now has the backing of the most powerful Democrat in the Senate. Majority Leader Harry Reid says he called New York Governor David Paterson, urging him to appoint Kennedy to Hillary Clinton's soon-to-be vacant Senate seat. He made the comment in an interview on "Face to Face with Jon Ralston."

(BEGIN VIDEO CLIP, "FACE TO FACE WITH JON RALSTON") SEN. HARRY REID (D-NV), MAJORITY LEADER: We have a lot of stars from New York, Bobby Kennedy, Hillary Clinton. I think Caroline Kennedy would be perfect.

(END VIDEO CLIP)

SNOW: In New York, some Hillary Clinton supporters are not so enthusiastic, and still feel the sting of Kennedy's endorsement of Obama.

UNIDENTIFIED FEMALE: I don't think she has the experience, and I think it would be a slap in the face to Hillary to give her the job.

SNOW: As for Senator Clinton, she is not commenting on the process. Her spokesman has said it is entirely Governor Paterson's decision. And she has not commented on any individual candidate.

A person familiar with the replacement process says, supporters who made anti-Caroline Kennedy comments were immediately rebuked by the Clinton team, which included Congressman Anthony Weiner and Robert Zimmerman, a CNN contributor, DNC member, and Clinton supporter.

Weiner was not available to respond, but Zimmerman says he is not speaking for Clinton when he questioned Kennedy's qualifications.

ROBERT ZIMMERMAN, CNN CONTRIBUTOR: That's her challenge, to demonstrate her qualifications, her passion, her experience that enables her to hold this particular post.

SNOW: Former New York City Mayor Ed Koch, who supported Clinton, chided critics who questioned Kennedy's qualifications.

ED KOCH (D), FORMER NEW YORK MAYOR: I say it's baloney. I say she's as qualified as any of those in the Senate.

SNOW: Koch says he favors either Kennedy or state Attorney General Andrew Cuomo over the roughly dozen potential candidates.

As one political observer notes, while it is not an election, the lobbying efforts make it feel like one.

CHRIS SMITH, NEW YORK MAGAZINE: This is a very weird non- campaign campaign. You know, everybody says, "Oh, it's not a campaign." But, of course, it is. There's an electorate of one, which is truly bizarre.

SNOW (on camera): And to make her case, Caroline Kennedy has hired a political consultant who's worked in the past with other New York politicians, including Senator Schumer and New York City Mayor Michael Bloomberg. Kennedy still hasn't made any public statements about the Senate seat. She's only expressed her interest through private conversations.

Mary Snow, CNN, New York.

(END VIDEOTAPE) COOPER: Well, is the Senate seat Caroline's if she wants it? We're going to talk strategy with David Gergen, Joe Johns and Jeffrey Toobin.

Also ahead, "Crime & Punishment." An emotional day for the parents of Adam Walsh.

(BEGIN VIDEO CLIP)

REVE WALSH, ADAM WALSH'S MOTHER: There is no words that can tell you how I feel. Listening to the words that came off of Chief Wagner's lips, just penetrate my soul.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

COOPER: So is Caroline Kennedy now a slam dunk for the Senate, with today's big endorsement from Harry Reid and no signs of serious opposition from Hillary Clinton? Really, what realistically could derail her momentum?

Let's talk about that. Let's talk strategy with senior political analyst and former presidential adviser, David Gergen, Joe Johns, and senior analyst Jeffrey Toobin.

So David, Harry Reid revealing today that he wants to see Caroline Kennedy in the Senate. Hillary Clinton reportedly telling her supporters to not get in Kennedy's way. Is this thing a done deal?

DAVID GERGEN, CNN POLITICAL ANALYST: All but, Anderson. (INAUDIBLE)

COOPER: We're having a problem with David's -- sorry, David we're having a problem with your mike. We'll get to you.

Jeff Toobin, is this a done deal?

JEFF TOOBIN, CNN ANALYST: You know, I don't think so. I think it's -- as -- as we've said earlier, it's an electorate of one. David Paterson has a lot of people who want this seat. I guess Caroline Kennedy is the easiest choice.

COOPER: He's facing enormous pressure.

TOOBIN: Is he really? I don't see enormous pressure.

COOPER: Harry Reid, all these Democrats are saying...

TOOBIN: What does Harry Reid do to the governor of New York? I mean, Ted Kennedy. I mean, I think she is -- has liabilities, as well as attributes. She's very famous. She's very likable, but her record of accomplishment is thin. And there are a lot of people who think she's not earned it. And also, you know, the Kennedy name is not the magic that it once was. Kathleen Kennedy Townsend lost the race for governor of Maryland. There's been nobody on the ballot in New York named Kennedy for decades. I mean, it's...

COOPER: What about that? I mean, on her record, you know, people say she's dedicated her life to public service. And honestly, and no disrespect to her, but she never really held a job. And never -- you know, she's raised a lot of money for the public schools in New York and stuff. But there's a lot of people who raise a lot of money.

GERGEN: Well, she's served in a lot of good causes. Anderson, I can well remember back in 1962, a long time ago, when Teddy Kennedy indicated an interest in running in Massachusetts, and the same sort of reaction: thin record, too young, hadn't shown enough promise and so forth and so on. And there was a rush by the establishment to go the other way. He won that election and has served with great distinction.

She's had two uncles and a father who have served with distinction in the United States Senate in years stretching back to the early 1950s, almost continuously.

And I think it's worth remembering this: whoever gets the job has to run again in a very short period of time, just a couple of years. So it's -- whoever gets it is going to have to stand the test of a Democratic election in a couple of years. I think she's all but in right now.

COOPER: Joe, is there -- do you see any scenario under which David Paterson is not going to appoint her?

JOE JOHNS, CNN CORRESPONDENT: Well, you know, it's got to -- it's got to be a good idea for him.

Harry Reid is a big deal. And when you think about it, the sound bite in the Mary Snow piece about star power, he's probably looking for somebody he can sort of cultivate into star power in the Senate, because I mean, look who he's losing. He's losing Barack Obama. He's Hillary Clinton. He's even losing Joe Biden. So these are some pretty big names. And it would be nice to have somebody else out there, who's sort of a headliner for him in the United States Senate, will help with fund-raising, and cultivate it into whatever you want it to be.

So maybe Paterson will go that way. But, I mean, who knows what this governor is going to do?

COOPER: Jeff, you're not convinced, though?

TOOBIN: I'm not. And I just -- I mean, why are we only looking at politicians for this job? Why isn't Harold Varmus, who's the head of the Memorial Sloan-Kettering Hospital and a Nobel Prize winner, why isn't he on the list? Why isn't Wendy Kopp, the founder of Teacher of America, on the list? Why is it just people in politics? COOPER: I'm always fascinated. It's not just people in politics. It's celebrities seem to think they have a right to certain things. And I'm not saying -- putting her in this category, but like, Fran Drescher is saying she wants to run. And no disrespect to her. She says she's done work. I don't know much about, you know, her record on -- in terms of politics.

I was watching Elisabeth Hasselbeck on "The View" today, was outraged she wasn't invited to the White House Christmas party. Why should she be invited to the White House Christmas party? I don't understand. Just because you're well-known, why do you -- why does one have a -- I know I'm veering off topic, but just because people know her name, why should these people get special treatment?

TOOBIN: David Gergen is going to answer your question.

COOPER: Tell me, David.

GERGEN: You know, they shouldn't. But it's not as if Caroline Kennedy is coming in from the entertainment world.

COOPER: I know. She's not Elisabeth Hasselbeck. I don't want to say that.

GERGEN: Exactly. And it is -- this isn't a political situation. I think you have to look at the polls, too. When people were asked to look at all the names who might run, she ran away with it in the public polls a couple of weeks ago.

You know, Andrew Cuomo does very well. He has -- he is another -- he is a son. Do we have too much dynastic power in American politics? Yes. Bush, Clinton, all of the rest of it.

TOOBIN: The polls now...

GERGEN: But nonetheless, I do think that when you're sitting there and you've only got a two-year term and you've got somebody, conceivably, might turn out to be a terrific senator and then run in her own right in two years, I don't quite see what the public loss is.

Harold Varmus, by the way, is serving an enormously important role as a scientific adviser to Barack Obama right now.

COOPER: And she can certainly raise the money that she'll need for -- to run in two years.

TOOBIN: But so can a lot of people. And also remember, this is New York. This is such a Democratic state. Now anybody who runs is going to win. So the idea that they need someone desperately who can raise money with name recognition, anybody, any Democrat is going to win this seat.

JOHNS: Yes, it's a beautiful thought. Citizen legislator, but it just doesn't happen anymore.

COOPER: Jeff Toobin, Joe Johns, David Gergen, thank you very much.

Still ahead, new demands to free the reporter who hurled a shoe at President Bush, and what the president told CNN's Candy Crowley about his attack.

Plus one of the most famous cold cases ever, the murder of Adam Walsh, is finally closed. Something his father has been waiting for for 27 years.

(BEGIN VIDEO CLIP)

JOHN WALSH, FATHER OF ADAM WALSH: Today this is a reaffirmation of the fact that he didn't die in vain. That beautiful little boy.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

J. WALSH: Not knowing is almost as bad as the murder. But today is a good day. Today is a wonderful day. We can end this -- this chapter of our lives.

(END VIDEO CLIP)

COOPER: John Walsh reacting to today's news that, after 27 years, he and his family finally know who murdered their son, Adam, when he was just 6 years old.

Now over the years, we've all gotten to know John Walsh, both as an anguished father and as a crusader determined to spare other families the pain that he knew all too well.

Tonight some of the pain has finally been released. Randy Kaye has more in tonight's "Crime & Punishment" report.

(BEGIN VIDEOTAPE)

RANDI KAYE, CNN CORRESPONDENT (voice-over): Two words John and Reve Walsh have been waiting 27 years to hear: case closed.

J. WALSH: For 27 years, we've been asking, who could take a 6- year-old boy and murder him and decapitate him? Who? We needed to know. We needed to know. And today we know.

KAYE: Police say Otis Toole, a drifted and convicted serial killer, abducted and murdered Adam Walsh all those years ago. He's always been the suspect. He confessed to the crime twice, then recanted.

OTIS TOOLE, CONVICTED SERIAL KILLER: This isn't -- true.

UNIDENTIFIED MALE: What isn't true?

TOOLE: I didn't -- I didn't do that case. KAYE: Toole died more than a decade ago while serving time for an unrelated crime.

July 27, 1981, Adam disappeared from this Florida mall. Two years later, Toole told investigators he had taken him, driven to a deserted road and decapitated him. The little boy's severed head was all that was ever found.

(on camera) Why wasn't Toole ever charged? Investigators had discovered blood-stained carpet in his Cadillac, but DNA testing then wasn't what it is today, and investigators couldn't prove the blood was Adam's. And there were reports of sloppy police work. In 1994, detectives couldn't even find the carpet or the car for further testing.

Plus, Toole's story kept changing.

J. WALSH: The not knowing has been a torture. But that journey's over.

KAYE (voice-over): If Otis Toole were alive today, Hollywood Police Chief Chad Wagner says he'd be charged with Adam's abduction and murder.

When Wagner joined the department last year, he promised to review the evidence with an open mind, and concluded what so many before him never could. It was Toole.

J. WALSH: Reve and I tried very hard to make sure Adam didn't die in vain. Today this is a reaffirmation of the fact that he didn't die in vain, that beautiful little boy.

KAYE: The chief says there isn't any new evidence that convinced him Toole was the killer.

R. WALSH: Listened to the words that came off of Chief Wagner's lips, just penetrate my soul.

KAYE: John Walsh had always believed Toole had murdered his son.

J. WALSH: I'm not about revenge. I never have been. I don't believe in vigilantism. I believe that Toole is probably getting what he deserves.

KAYE: For John Walsh, the loss left him spiraling into hell, but losing his son transformed his life. Today he's a crusader for missing children, the host of "America's Most Wanted"; also co-founded the National Center for Missing and Exploited Children.

WALSH: For all the other victims who haven't gotten justice, I say one thing: don't give up hope. Don't give up hope.

KAYE: Hope is what you survive on when no one can tell you who killed your child.

(END VIDEOTAPE) COOPER: Why do they now say it definitely was this guy, Toole?

KAYE: Well, over the years, Anderson, they have ruled out other people of interest. They've looked at a man who John Walsh says was having an affair with his wife. He was staying in their house at the time. He took a polygraph test and passed it. The Walshes took polygraph tests and passed it.

At one point they were even considering the serial killer Jeffrey Dahmer. He was living in the area at the time where he worked. He drove a blue van, and witnesses of the abduction said that they had seen a man driving a blue van.

But they were able to rule all of these people out and eventually, it always kept coming back to Otis Toole.

COOPER: So finally, some sort of an end to at least one end of this drama.

Randi, thanks.

Up next, Candy Crowley's interview with President Bush on everything from the Iraq war to getting hit by a shoe.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: First of all, it's got to be one of the most weird moments of my presidency. Here I am getting ready to answer questions from a free press, in a -- in a democratic Iraq, and a guy stands up and throws a shoe.

(END VIDEO CLIP)

COOPER: And your pick for the first puppy. The results of our new poll. And Joe Biden's new puppy. A new look. We'll be right back.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

BUSH: I've watched Barack Obama come from basic relative obscurity to now soon to be the president of the United States. And he -- he gives a lot of people hope, and that's good for the country. Genuinely good for the country.

(END VIDEO CLIP)

COOPER: Up close tonight, President Bush. With only 35 days until inauguration, the president invited our senior political correspondent, Candy Crowley, to the White House for what we're calling an exit interview. He opened up about one of the darkest periods of his second term, 2006, when things were going badly in Iraq and he was under tremendous pressure to bring U.S. troops home.

Let's listen. (BEGIN VIDEOTAPE)

BUSH: A lot of people in Washington were saying, "Let's get out now." And I -- I obviously chose not to do that. But that was a very difficult period.

CANDY CROWLEY, CNN CORRESPONDENT: Did you consider it ever?

BUSH: Of course, I considered all options. But absolutely. You know, ultimately I had great faith in the universality of liberty. I had great faith in our military. I had faith in the Iraqis who had suffered so much. And I could not live with myself,

if I had chosen to just leave and leave behind the valor and the sacrifice of a lot of our young men and women. I would never have been able to face their -- their loved ones.

CROWLEY: Some of the criticism of you is he doesn't listen to outside voices. He doesn't hear people telling him to do something different than what he wants to do. Were there people saying to you, "Mr. President, you need to think about getting out right now"?

BUSH: Absolutely. I've heard all of those voices. There's urban myths in Washington, D.C. And you know, of course I listened to -- I listened to a lot of people before we went into Iraq. And I listened to a lot of people, including in my own administration, who said, "It's just not working. Let's get out."

And I listened very carefully to them. And obviously, came to a different conclusion.

(END VIDEOTAPE)

COOPER: We're following several other stories tonight. Randi Kaye joins us with the "360 Bulletin" -- Randi.

KAYE: Hi there, Anderson.

Eight American embassies across Europe and Great Britain received white powder in the mail today. Tests run in Berlin and Bucharest on the substance came back negative. A State Department spokesman said the envelope mailed to Berlin was sent from Texas.

Angry protesters in Baghdad today called for the release from jail of the Iraqi journalist who threw his shoes at President Bush. The man, al-Zaidi, could face up to seven years in prison for the attack. But many in the Arab world are cheering him as a hero.

In an effort to jump-start the economy and stave off inflation, the Fed slashed its key interest rate to near zero percent today, the lowest it has ever been. The Dow rallied at the news and jumped nearly 360 points today.

And news of a medical first from Cleveland, where surgeons are expected to announce tomorrow that they successfully replaced 80 percent of a woman's face two weeks ago. The skin came from a woman who died just a few hours earlier.

Only four face transplants have ever been done in the world, and this is the first time it's been performed in the United States. Details about the patient have not been released, Anderson.

COOPER: We'll try to have more on that tomorrow for our viewers.

Now it's time for our "Beat 360" winners, our daily challenge to viewers to come up with a caption better than the one we can think of for a photo we post in our blog.

Tonight's picture, President-elect Obama, along with Joe Biden, join Arne Duncan, the pick for education secretary today, to listen to some kids at a Chicago school.

Our staff winner tonight is Brooke. His caption: "Well, kids, the bailout is like the tooth fairy, except the money is worthless, and you get to keep our teeth."

(SOUND EFFECT: GROANS)

COOPER: Congratulations there. Our viewer winner is Greg from Houston. His caption: "Always remember, kids: study hard and never try to sell your seat."

(SOUND EFFECT: DRUM BEAT)

COOPER: Ba-dum-bah. Greg, your "Beat 360" T-shirt is on the way.

And you can play along tomorrow at AC360.com.

Still coming up, the "Shot of the Day": Joe Biden getting a new dog before the Obamas? Does he know what he's getting himself into? This puppy could be a handful. Wait until you see what was caught on tape.

And at the top of the hour, more on our breaking news: the biggest scam ever. Former Wall Street insider accused of taking $50 billion from investors. Why didn't the SEC know what was going on? They admit their mistake, coming up.

(COMMERCIAL BREAK)

COOPER: All right. Time for "The Shot." America's weighing in on President-elect Obama's search for a dog by a two to one margin. Those asked in a new CNN/Opinion Research Corporation poll -- yes, they actually did a poll on this -- say the Obamas...

KAYE: Within the margin of error.

COOPER: ... should rescue a puppy from an animal shelter instead of getting one from a breeder or from a pet store.

The Bidens, however, did not take that route. As we reported on Friday, Vice-president-elect Joe Biden picked out a German Shepherd puppy from a breeder's kennel in Pennsylvania.

There's no name yet for the puppy. The grandkids get to pick it after the new year, and the dog is going to be delivered house trained before it's delivered to the Bidens in a couple of weeks.

KAYE: Yes, right.

COOPER: Which is probably a good idea.

Check out this video, though, we spotted on Lively.com. A German Shepherd going after a small dog. Take a look.

(BEGIN VIDEO CLIP)

(DOG BARKING)

(END VIDEO CLIP)

COOPER: Actually, it's more like a small dog going after the German Shepherd, I would say.

KAYE: You know, Obama has said that he doesn't want to get one of these -- what do you call them, the girlie dogs? It will be interesting to see if Biden's Shepherd, grown up, how he's going to deal with Biden's dog -- Obama's dog.

COOPER: I love how the -- I love how the Shepherd is just kind of like playing along with this little yappy dog. Playing along. Very nice.

KAYE: This could be what we're going to see at the White House.

COOPER: All right. You can see all the most recent jobs on our Web site, AC360.com.

Up next, our breaking news. Serious stuff. The biggest Wall Street scam, Bernard Madoff accused of taking $50 billion from investors. Where was the sheriff of Wall Street, the SEC? Why didn't they know what was going on? Admit their mistakes. We're "Keeping Them Honest," ahead.

And the new twist in the governor's scandal in Illinois, Jesse Jackson Jr. revealing he's been talking to feds for years about the governor, but he says don't call him an informant. Details ahead.

(COMMERCIAL BREAK)

COOPER: We begin tonight with breaking news in what may be the biggest investment fraud in American history: the alleged $50 billion rip-off by this man, Bernard Madoff. His alleged scam has already sent shock waves through Wall Street.

But tonight, the SEC, the government's Wall Street watchdog, admits they were nothing more than a lap dog. SEC chairman Christopher Cox saying his agency dropped the ball, even though whistle blowers were warning regulators. The tip-offs go back almost 10 years. Despite the SEC's acknowledgment, the question remains tonight, why wasn't Madoff, the man who just days ago confessed to the crime, stopped years ago?

Joe Johns is "Keeping Them Honest."