This is a rush transcript from "The Journal Editorial Report," December 1, 2007.

PAUL GIGOT, FOX HOST: This week on the "Journal Editorial Report," after Annapolis, can President Bush achieve in his final year in office a goal that has eluded U.S. presidents for decades?

City of Arabia. Abu Dhabi bails America's largest bank out of its subprime mortgage mess. Is that cause for concern?

Senator Trent Lott joins the long list of Republicans retiring from Congress. Our panel looks at GOP prospects for regaining the majority, after the break.

(NEWSBREAK)

GIGOT: Welcome to the "Journal Editorial Report." I'm Paul Gigot.

President Bush convened a new round of Arab-Israeli talks this week trying to achieve in his final 14 months in official a goal that has eluded U.S. leaders for decade. The summit signaled a shift for Bush who, since taking office in 2001, has shunned that kind of hands-on role in peacemaking taken by his predecessor Bill Clinton.

John Bolton is former U.S. ambassador to the United Nations and author of the new book "Surrender is not an Option: Defending America at the United Nations and Abroad."

Ambassador Bolton, thanks for being here again.

JOHN BOLTON, FORMER U.N. AMBASSADOR & AUTHOR, "SURRENDER IS NOT AN OPTION": Glad to be here.

GIGOT: Let's start with the Annapolis summit aftermath. This is a reversion a role in direct peacekeeping in this Arab-Israeli dispute. How do you explain the switch?

BOLTON: It is, unfortunately, in my view, one of several U-turns the administration has taken in the past year or 18 months on dealing with North Korea's nuclear program, the Iranian nuclear weapons program and now the Middle East. They have really adopted policies that the State Department bureaucracy has been advocating for some time. I think it is explainable because Secretary Rice is now channeling the State Department views and she is, without any doubt, the dominant voice individuals advising President Bush on foreign policy in the second term.

GIGOT: What happened to Vice President Cheney? I thought he was the de facto foreign policy president? Is he taking a reduced role?

BOLTON: So much for conventionalwigs.com. I don't know what the story is there. The vice president, I think, commendably, has always kept his dealings and advice to the president confidential. So whether he is giving less or is being heeded less often, I don't think we can tell from the outside.

GIGOT: Let's take this Arab-Israeli dispute. Some people say this is a good thing because we need to shore up the Palestinian moderates. You have in President Abbas somebody who we think we can deal with. He is not Yasser Arafat, doesn't have the same terrorist history. If we can deliver something, help deliver some kind of peace that Abbas can show the Palestinian people, then he will be able to control — defeat Hamas. What's wrong with that argument?

BOLTON: Well, I don't buy that argument. I think when the Palestinians voted Hamas into power in the elections a few months ago, that in effect what they were saying was not simply that they wanted to support a terrorist group, but that they thought that Abbas faction, Fattah, was fat, corrupt and incompetent. And I don't think they have become any less fat, corrupt and incompetent in the intervening months. I think the Palestinian Authority, clearly broken, and may be irreparably broken. And propping up Abbas doesn't make the situation better. You don't have a Palestinian Authority that can make commitments or keep them at this point.

GIGOT: There is a strategic rationale, I am sure you heard, from many inside the administration. You talk to them privately, they will say this is also about Iran. That is, if you can create a kind of moderate alliance with the Sunni regimes in Saudi Arabia, Egypt and even Syria, then perhaps we can — and you can show them that we are trying to help their concerns, addressing their concerns in Palestine, they are more willing to help us in Iran. Is there anything to that, in your view?

BOLTON: I think that's bad logic as well. Look, the states, Arab states of the Persian Gulf are already terrified of Iran. They don't have any option other than to work with us. What they are worried about in the Persian Gulf is a precipitation withdrawal from Iraq by Americans. What will calm them down is continuing success of the surge.

If you solved the Arab-Israeli problem tomorrow, which, of course, won't happen, but even if you did, extremism in the Islamic world would still be there, the extremists among the Sunnis, the Wahhabis, al Qaeda and the extremists among the Shia in Iran, principally. These are conflicts within Islam and debates and conflicts that have been going on for centuries that have little or nothing to do with Israel and the Palestinians.

GIGOT: Where does this leave the U.S.-Syria — the U.S. policy toward Syria because they were invited in? The U.S. worked hard to coax them to sow up. Finally they did with a rather junior official. But this, again, is a big reversal from two years ago when we tried to isolate Syria, drive it out of Lebanon. What — what do you think the United States is trying to accomplish with Syria? Is it trying to peel it off from Iran?

BOLTON: That would be a nice thing to do if it were possible. But given Iran's hegemony over Syria, just being invited to Annapolis won't do the trick. I think the Syrians indicated just out how seriously they took it, as you point out, by sending a deputy foreign minister.

The real issue, I think, in looking at the Syrian-Iranian relationship is to find out whether Iran had anything to do with that likely nuclear facility near the Euphrates River that the Israelis bombed on September 6th. This connection, which principally involves North Korea, but which may involve Iran, really tells us who is calling the shots, not just in Syria, but potentially also in Lebanon where the democratic government there is under serious threat from the Syrian and Iranian-backed terrorist group Hezbollah.

GIGOT: Is the United States then simply ignoring that bombing episode in — that Israeli made — foray into Syria or do you think they are having private discussion was Damascus or just putting it out of sight out of mind?

BOLTON: You know, there is a growing feeling in Congress, not only among Republicans, but among Democrats, that the U.S. government it withholding information about the raid. Not because of legitimate intelligence or operational equities, but to avoid bad news coming out about what exactly was going on there and who was involved. Bad news that might tank the Six-Party talks involving North Korea. And it might take the Annapolis process as well.

It is to the administration's advantage. If there were no North Koreans involved with that that facility, why not say so? If it was not a nuclear facility, why not say so? That's why I think actually the administration is risking its own credibility by not being more forthcoming about what is going on at the facility the Israelis bombed.

BOLTON: We've talked about the State Department. You said the Secretary of State Rice is now dominating American foreign policy but, look, this is President Bush's foreign policy. He is ultimately responsible for these changes you talk about. Why has he made such a traumatic change?

BOLTON: You know, that's hard to say. I try and document in "Surrender is not an Option" these cultural problems at the State Department that have existed for decade. Will take a decade to cure. How they are able to seduce or co-opt political appointees. I think that happened with Secretary Rice. I think she's in the Colin Powell mode of representing the State Department to the rest of the administration rather than the Jim Baker mode of representing the president to the State Department.

But you are correct. Ultimately these are presidential decisions. I think many of these policies — Annapolis, Iran, North Korea — run contrary to the president's own instinct. My hope is that in the remaining 13 months, the real George Bush emerges again and we return to a more realistic American foreign policy.

GIGOT: All right, Ambassador John Bolton, thanks for being here.

BOLTON: Thank you for having me.

GIGOT: Still to come, an oil-rich Arab state bails Citigroup out of its subprime mortgage mess. Should we be concerned? Our panel debate after the break.

(COMMERCIAL BREAK)

GIGOT: Oil-rich Abu Dhabi will invest $7.5 billion in Citigroup, offering America's largest bank much needed capital to offset big losses from the subprime mortgage slump. The deal announced this week makes Abu Dhabi, the capital of the United Arab Emirates, one of Citigroup's largest shareholders.

Joining the panel this week, "Wall Street Journal" columnist and deputy editor Dan Henninger, foreign affairs columnist Bret Stevens and senior economics writer Steve Moore.

Dan, so Citigroup, Robert Rubin, the chairman of the executive committee, hat in hand to Abu Dhabi for the capital they need to stay solvent. Should we worry about this investment?

DAN HENNINGER, COLUMNIST & DEPUTY EDITORIAL PAGE EDITOR: I would say the proper word is concerned. I wouldn't be terrified about it. It is an interesting issue. The Middle East is a place we are heavily invested in militarily. You know, the 9/11 Commission said the 9/11 terrorists used the finance system of the United Arab Emirates to do what they were doing. That was then, this is now.

The UAE, Abu Dhabi, is trying to join the West, I think, and we should welcome that. We should try to pull them in to be part of our system.

That said, it is so interesting their investment was 4.9 percent, just below the requirement for the Fed to look into what they were doing. If it was a good faith investment, why didn't the UAE say we will invest 5.1 percent? We welcome an investigation by the Federal government.

BRET STEPHENS, FOREIGN AFFAIRS COLUMNIST: Yes, but that's...

(CROSSTALK)

GIGOT: Yes, I want to pursue that point, Bret, because that's an interesting point, particularly in light of the history of Abu Dhabi's dealings in American finance, particularly their previous ownership in a corrupt bank called BCCI, which really tried to evade American banking laws and was forced to sell for hundreds of millions of dollars.

You have that history. So you say why not 5 percent or 7 percent. We will open everything. It looks like they are trying to go under the radar screen of the regulatory system. That's one of my concerns.

STEPHENS: Because they learned the lesson from the protectionism, the protectionist impulses that came out of the attempted purchase Unocal, the Dubai Ports World failed purchase of American ports. So they understand it is politically sensitive. But this isn't shouldn't be concerned about this. We should be delighted about it. First of all, better that Dubai bail out Citigroup than the taxpayers.

GIGOT: OK, hold it. Fair enough. Fair enough. I take that point about the taxpayer, but better that Dubai bail out...

STEPHENS: Excuse me, Abu Dhabi.

GIGOT: I'm sorry. That Abu Dhabi bails them out as opposed to Goldman-Sachs or some American investor? Isn't there a net loss of sovereignty when America's largest bank is controlled by Arab investors or dominated by Arabs investors?

STEPHENS: I think Lou Dobbs might think so, but I don't think it is the case at all. We live in a global capitalist system. We are having net losses of sovereignty all the time. When Japanese car makers come into this country, when British and French investors come into this country, when corporations take over Westinghouse, our nuclear power industry, and we don't worry about it. We celebrate it because it means an integrated capitalist system in which everyone is a stakeholder. I'd rather have the United Arab Emirates investing productively in American capitalism than doing what the Saudis do, which is invest in Pakistani madrassas.

GIGOT: So why shouldn't the Federal Reserve be able to scrutinize this, Steve Moore? Does this bother you at all?

STEVE MOORE, SENIOR ECONOMICS WRITER: I think that Bret has it right. The reason they fell below the 5 percent threshold is because it takes so long, it's so burdensome. There is so much red tape. If I were the Arabs, I wouldn't want to come under that kind of regulatory regime either.

Bret has exactly the right take on this, and I am surprised, Paul, at you and Dan for your protectionist leaning on this. It is a good thing when foreigners invest in the United States.

For the last year or two, all of the discussion has been about foreigners disinvesting in the United States, taking their capital out. It is a reason the dollar is falling.

The economic reality here is the Arabs have a lot of petro dollars. It is a good thing if they reinvest that money in the United States rather than elsewhere.

GIGOT: One problem I have here, Steve, is they have so much money, in part, because of blunders by the U.S. Federal Reserve System.

MOORE: That's true.

GIGOT: Which does not care about the dollars. Which has created the subsidy for debt that ultimately got Citigroup into problems on mortgages and ultimately allowed the flow of petro dollars into these Arab governments. Which is now — obviously it has to go somewhere. They are taking advantage of an American government failure. That's one of the problems here.

MOORE: I agree with that. I mean obviously there have been bank failures. I think the decline of the American dollars is one of the big economic crises in this country. But you've got to get to my fundamental point here, Paul, which is that it's better that foreigners reinvesting in America, then they just pull out their capital, which would exacerbate the problem.

HENNINGER: We all agree with that, Steve. But this is not the 1970s when the Japanese were buying Rockefeller Center, right?

MOORE: Right.

HENNINGER: This is 2007. We are talking a world of global Islamic terrorism. It is a two-way street. They have to present their bona fides and be willing to open themselves to transparency just as we should be willing, as Steve is suggesting, to take their investments. It is a two- way street.

GIGOT: The other thing, Bret, the wire transfer system — and you have to acknowledge this — is utterly crucial for looking after terror financing. It is — the financing system is something we have to be worried about in the global war on terror. It is important through the SWIFT program that was tracking terrorist financing that was exposed by the 'New York Times" unfortunately.

And I think we have to be concerned when a big bank — we have to be concerned with how well they will cooperate in that tracking of terror financing.

STEPHENS: Well, I don't see — I don't see any evidence to suggest that Citibank won't be following the laws after this investment as they have before. It is a 4.9 percent stake. This is not necessarily a controlling stake.

GIGOT: Now, that I don't agree with.

STEPHENS: They don't get a seat on the board.

GIGOT: But that's eye wash. If you combine this with the other largest investor, the Arab prince, this means that they are the dominant shareholder in Citigroup. No question about it.

STEPHENS: Well, we should have been more concerned about Saudi investment in Citibank rather than the one from UAE, which has been a stalwart ally of the United States. This is not simply — we are talking about the post-9/11 world. The issue here is, is the Arab world going to move in a Jihadi direction or move in the direction that we hope it does, which is toward globalization, towards capitalist investment in the rest of the world. That is what we have to promote.

MOORE: Yes, and, you know...

GIGOT: Steve, we have to go. I'm sorry, Steve, we've got to go. Thanks.

Still to ahead, the Republican exodus continues. What Senator Trent Lott's retirement means for GOP hopes to take back the majority, after the break.

(COMMERCIAL BREAK)

GIGOT: Welcome back. Republican Senator Trent Lott announced his retirement this week, following in the footsteps of five GOP Senate colleagues and 17 Republican House members. This wave of retirements is making an already difficult 2008 electoral landscape more complicated for a minority party trying to regain power.

We are back with Dan Henninger and Steve Moore. And also joining us is Washington columnist Kim Strassel.

Kim, Trent Lott, retiring, the number two Republican in the Senate. Why is he doing it and what does it mean for Republicans in the Senate?

KIM STRASSEL, WASHINGTON COLUMNIST: It isn't clear exactly why he is leaving. The big conventional wisdom here is he is getting out now so he will not be under new restrictions coming in next year that keep him from lobbying his former colleagues in the Senate for two years. He will be able to do it in one year if he gets out now.

GIGOT: So he is going into business in Washington.

STRASSEL: He's going into business, yes. It's apparently more lucrative than being in government, though it is arguable these days. What does this mean? It is a numbers game at this point. We have 25 Republican seats in the Senate that are going to have to be did he have defended versus 12 for the Democrats.

The Democrats have other natural advantages. when you are in the majority it is easier to get money. They are going to — it is going to be easier for them to defend the seats they have. This will be very tough, tough row for the Republicans to hoe this year.

GIGOT: Steve, some Republicans are saying they could even — well, they have 49 seats now. They would need at least 41 to be able to sustain a filibuster. And particularly if there is a Democratic president that becomes crucial. Can you really see Republicans losing as many as nine or 10 seats and fall below that 41 level?

MOORE: Yes, I really do. First of all, one implication of Trent Lott's retirement, and these other retirements, is that it makes it impossible to conceive that Republicans could take the Senate in 2008. The scary scenario is you could have Democrats take 60 seats in the Senate, which would mean Republicans couldn't have a filibuster against the Democrats.

If you have Obama or Hillary in the White House — I'm look at these states, Paul — Virginia, Colorado, New Hampshire, Oregon. It goes on and on. There are a lot of problems for Republicans across the country their holding onto the seats they already have.

GIGOT: Steve, are there any vulnerable Democrat seats? I think of Mary Landrieu, the incumbent Democrat from Louisiana.

MOORE: She is really the only one. That would mean for Republicans to take the Senate, they would have to win that seat and hold all of these other nine vulnerable seats. It seems impossible.

GIGOT: How realistic is this, Dan? There is a nightmare scenario. Will this happen assuming they have an empty al election that is somewhat close?

HENNINGER: Good question, yes. We are in November 2007. If that election were held next Tuesday, it would be a wipe out. The reason is that in the states, that Steve mentioned, like Colorado, Virginia and New Hampshire, George Bush's approval rating is totally in the tank. People in the middle would vote for the Democrat. What the Republicans need is definition. They need a new personality. They are going to need a...

GIGOT: A new party leader.

HENNINGER: Yes, exactly. In November 2008, someone will be running for president. They need a lot of help at the top of the ticket because that will determine the personality of the party. I think these Senate seats are lost unless they have a strong presidential candidate.

GIGOT: Kim, let's turn to the House, if I can, where we have 17 Republican retirements. There was optimism among Republicans that if Senator Hillary Clinton were at the top of the Democratic ticket, they might be able to gain seats in the House? Is that an increasingly difficult prospect?

STRASSEL: It is a difficult prospect, but the House is a different situation. For one, remember, the House is the center of gerrymandering. Half these guys have carved out safe districts for themselves. Bad for voters, great for politicians.

The other thing though is that, I think, one of the unsung stories in the House has been John Boehner's management of his minority. He has kept his people together through some very tough votes on Iraq, and spending, on children's health care insurance program.

And his argument to them has been, look, we are going to be in a better situation next year if we can say we hung tough on these questions and kept the Democrats from blowing the bank on spending. We are the reason why we are doing better in Iraq, et cetera. We will see how that happens, how that plays out in the election. But that's a strategy they have taken and some feel optimistic it will help.

GIGOT: One of the remarkable things here is the Democratic approval rating, or the approval rating for all of Congress overall, is now sinking well below George Bush levels. The friends and family plan — it is that low. So what do you — and the Republican can't pick up seats in that environment? It would be remarkable.

STRASSEL: One thing too, also mentioned, go back to the Senate. A lot of these guys who are retiring you have to remember, they are the old guard. They have been there for decades. They were part of the problem with the image of earmarks and corruption and everything else.

A lot of the intellectual fire power is coming from younger people. If Republicans were smart, they'd be using this opportunity to re-brand the party with reform candidates.

GIGOT: All right, Kim. Thank you very much.

We have to take one more break. When we come back, our "Hits and Misses" of the week.

(COMMERCIAL BREAK)

GIGOT: Winners and losers, picks and pans, "Hits and Misses," it's our way of calling attention to the best and the worst of the week.

Item one, Google wants to be your new hard drive — Dan?

HENNINGER: Yes, I think because of the Internet, Paul, privacy is essentially dead. And the big question is who are you going to sell your soul to, Microsoft, Apple or Google? Google is thinking about...

GIGOT: Appealing options, all.

HENNINGER: Well, Google is thinking of proposing that people can put all of their private records on to Google's hard drives. Your pictures, bank record, everything. This reminds me of the movie "Tron" where a computer hacker was sucked into the operating system of his computer and lived there the rest of his life.

If the question is, if the only thing I will be left with is the shirt on my back, I am saying to Google, thanks, but no thanks.

GIGOT: All right, Dan.

Next, Sudan sentences the so-called Teddy Bear Teacher — Bret?

STEPHENS: You remember the controversy over the Danish cartoons of the prophet Mohammed? First time as tragedy, second time as farce. Though it is not a farce for the British school teacher in the Sudan named Gillian Gibbons. She asked her students to name a teddy bear. They named the teddy bear Mohammed, after one of the students in the class. Mohammed being a popular name.

The Sudanese government responded predictably, first, by attempting to sentence her to 40 lashes. Then over the strong objections of the British government, that sentence was reduced to a mere 15 days in jail.

I think this raises a broader question, which is what is our obligation to be sensitive on these sorts of concerns? I would say we have an obligation to be insensitive so long as people like the Sudanese demand us to be submissive.

GIGOT: All right, Bret, thanks.

Finally, those poor Manhattan farmers — Steve?

MOORE: Paul, what do Ted Turner, David Letterman and Scotty Pippen all have in common? Number one, they are not farmers. But, number two, they get tens of thousands of farm aid every year. There are four billionaires in America that receive farm aid and maybe, outrageous of all, there are 500 people who live in Manhattan getting farm aid.

I don't know if Paul Gigot and Dan Henninger are on the list.

GIGOT: Sorry, Steve. No such luck.

MOORE: But who knew there were so many soybean farmers in and around Central Park? Most Americans are fine with giving farm aid to poor farmers. But today, the real outrage in our farm programs — you don't have to be poor and you don't have to be a farmer to get the aid.

GIGOT: All right, Steve, thank you.

That's it for this week's edition of the "Journal Editorial Report."

I'm Paul Gigot. Thanks to all of you for watching. And we hope to see you here next week.

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