This is a rush transcript from "The Journal Editorial Report," May 16, 2009. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: This week, on "The Journal Editorial Report," Nancy Pelosi and enhanced interrogations. What did she know and when? We'll look at her latest attempt to clear the air.

Plus, Obama and the rule of law. Have corporate contracts and state sovereignty taken a back seat to union politics?

And Gates fires his top general in Afghanistan as the left begins to question the administration's strategy there. Is a revolt brewing?

"The Journal Editorial Report" begins right now.

Welcome, to "The Journal Editorial Report." I'm Paul Gigot.

Well, after weeks of denials and changing stories over what she knew about so-called enhanced interrogation techniques and when she knew it, House Speaker Nancy Pelosi attempted to set the record straight Thursday in a contentious press briefing that raised more questions than answers.

Take a look.

(BEGIN VIDEO CLIP)

SPEAKER OF THE HOUSE NANCY PELOSI, D-CALIF: The CIA briefed me once on enhanced techniques in September 2002 in my capacity as ranking members of the Intelligence Committee. The only mention of waterboarding at that briefing was that it was not being employed. Five months later, in February 2003, members of my staff informed me that the Republican chairman and the Democratic ranking member of the Intelligence Committee had been briefed about the use of certain techniques which had been the subject of earlier legal opinions. I was not briefed on what was in that briefing. I was just informed that the briefing had taken place.

He said that the — that the committee chair and ranking member and appropriate staff had been briefed that these techniques were now being used. They — that's all I was informed of, they were being used and that a letter was sent.

No, I wasn't — I was informed that a briefing had taken place. Now, you have to look at what they briefed those members. I was not briefed that. I was only informed that they were briefed, but I did not get the briefing.

(END VIDEO CLIP)

GIGOT: Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; foreign affairs columnist, Bret Stephens, and Washington columnist, Kim Strassel.

Dan, this whole investigation, Democrats were saying, it's about the Bush administration, the enhanced techniques. How did the Speaker of the House get engulfed in this situation?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: I think the answer is what goes around comes around. You're right. For at least five years, the Democrats and Nancy Pelosi has used this issue to scream torture, torture, torture, at the Bush administration, the purpose of which was to undermine the Bush presidency. Now it turns out that Nancy Pelosi and the Democrats were present at the creation of this issue.

What was the creation? That was in early 2002, just months after September 11th, when the government was in a state of high anxiety, didn't know whether more attacks were coming and the CIA asked the Justice Department how far they could go to interrogate the suspects they had in hand. And Nancy Pelosi and the Democrats were themselves living in that environment.

And then — and then in retrospect, for them to attack the Bush administration for having tried to protect the country at that time was preposterous then and it was preposterous now.

GIGOT: It was inevitable that if we are going to have this big truth commission investigation of what the Bush administration did, you were going to have to have members of Congress who were briefed brought into this because they were brief at the time, under law. This is according to law that an executive branch, when it has the covert operations or secret operations, must, under law, brief the senior members of the Intelligence Committee.

BRET STEPHENS, FOREIGN AFFAIRS COLUMNIST: Well, but this gets to the second point that needs to be made here, that the Democratic attack on the Bush administration wasn't only torture, torture, torture, it was also lies, lies, lies, they didn't tell us this, they didn't inform us. Last week, the CIA released a dossier of the 40 meetings that — or briefings the CIA offered senior members of Congress, increasingly a larger and larger number of them.

GIGOT: Of both parties.

STEPHENS: Of both parties, bipartisan briefings beginning in September of 2002 in which they go into exactly what it is they were doing. And while those — that information was secret, the Democrats knew full well about it and were not protesting precisely for the same reason, because we were in a post September 11th period and people understood the threat was real and there was the real possibility of a second attack.

GIGOT: Diane Feinstein, made that very point. The Democrat Senator of California defended the speaker this week saying, look, you have to think of the environment back in 2002, 2003, we were worried about a second attack. The CIA director at the time, George Tenet, said a couple of years ago I was terribly worried about such attack. If you're going to apply that standard to basically absolve Nancy Pelosi, don't you have to apply that...

STEPHENS: Precisely.

GIGOT: ... to absolve everyone in the administration who was trying to protect the country? Because that was...

STEPHENS: All the more so because they were the executive, and it was their direct responsibility to prevent a second attack. And it wasn't just a kind of climate of fear that had been created by the September 11th attacks, there was real actionable intelligence that was obtained through these enhanced interrogation which prevented those second attacks from happening, potential attacks on the Brooklyn Bridge, on towers in Los Angeles, on other installations through out — American installations through the world. This wasn't just a witch hunt.

GIGOT: Kim, let me get you in here because of the politics of this. Now the Democrats have been pushing, John Conyers, Carl Levin, many others, for the so-called truth commission investigation into interrogations. What does the speaker's now involvement in this do politically? Are we still going to get that truth commission?

KIM STRASSEL, WASHINGTON COLUMNIST: The speaker herself called again for another one yesterday, but more and more members of her party really don't want to go down that road. Not just because the focus is now on what Congress knew and, as you said, that was always going to be inevitable, but the speaker herself raised the stakes yesterday or raised the stakes this week when she came out and said that the CIA misled her. This was an accusation our intelligence agency was deliberately misleading Congress. That's something that's going to have to be part of an investigation if there is one. And that's not something they want to deal with either.

GIGOT: Yes, the speaker will have to be under oath at some point if this goes on. And the Obama administration doesn't want to go there.

HENNINGER: Absolutely not. They've got an entire agenda, a health care bill to pass, and here, not more than a hundred days into the administration, the stature of the speaker of the house is being significantly damaged. This is kind of a circus going on, but as a political figure, she is being diminished here. And that's a big problem for the Democrats.

GIGOT: Kim, briefly, is there some tension between the speaker and her number two, Steny Hoyer, on this? I hear there is.

STRASSEL: There's never been a lot of love lost between the two of them. She did not support him when he ran for his position. He won it anyway. But he came out this week and said, look, he thinks it was important that a record be made of who said what and when and what people knew. By the next day, he clearly had got a talking from the speaker's office. He came back out and said, I was only talking about the Republican. We need a record of what Republicans did during that period of time.

But this is — certainly the tension. You're going to see this in the party more, too, as some people may try to distance themselves from her and try to come out and be on the side of, if we're going to go down this, we need to know what everybody did.

GIGOT: All right, Kim.

A good move this week by the administration, in a reversal, President Obama says he would fight the release of dozens of photographs showing the abuse of detainees in Afghanistan and Iraq, citing concern that the images could ignite a backlash against U.S. troops.

Dan, what's behind the welcome reversal?

HENNINGER: I think you might call it the real world. Undoubtedly, everybody involved, the Pentagon, General Petraeus came in to him. The CIA said, you cannot do this. It will put our people at risk while they're trying to carry out the policies in Afghanistan.

GIGOT: And make it harder to win the cooperation of moderate Muslims we need in Pakistan and Iraq and elsewhere to cooperate with us as we fight these radicals.

All right, Dan, thank you.

Still ahead, the Obama administration and the rule of law. First, they trampled on the contract of Chrysler's creditors. Now they're threatening California over that state's plans to close a $42 billion- budget gap. What's behind the bullying?

(COMMERCIAL BREAK)

GIGOT: Does the Obama administration have a problem with the rule of law? Two recent incidents might make you think so. First, they trampled all over the contracts of Chrysler's creditors. And now they're threatening the state of California over its efforts to close a $42 billion-budget gap. In February, the Democrat-controlled legislature there trimmed $74 million from a program that provides home health care to the elderly. But bowing to pressure from the SEIU, the powerful union that representing health care workers, the Obama administration recently warned Governor Schwarzenegger that unless the cuts are restored, it may deny the state's $6.8 billion in stimulus money.

We're back with Dan Henninger and Kim Strassel. And also joining us is James Freeman, assistant editorial page editor of The Journal.

James, can they get way with what they're trying to do in California from a legal basis?

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: They shouldn't be able to. But the Obama administration is brazen on this. When California officials got on conference call to discuss this with officials in Washington, part of our government, at the Health and Human Services Department, there was another group of people on the call, lobbyists for a large union in California, several other officials from this union. Bizarre to say the least.

GIGOT: Highly unusual. Arnold Schwarzenegger was talking to one of our writers, Steve Moore, this week — the governor, about the budget in California saying, it's extraordinary. He couldn't quite believe it.

FREEMAN: Astounding. You can't possibly think that California is not in bad fiscal shape. You can't think they don't need the $7 billion right now. They're looking at a $21 billion deficit in the upcoming fiscal year if voters, as expected, vote down a bunch of tax increases.

GIGOT: But the union would say, look, there's a stipulation in the stimulus bill that you cannot use this money and layoff workers. That's...

FREEMAN: Well, they're saying you can't put the money on local governments, but it doesn't. The state in California — and this plan is bipartisan. This is not just Arnold. It's not just Republicans in the legislature. Bipartisan. It says...

GIGOT: It took several months for them to hash out that deal.

FREEMAN: That's right. That's right.

GIGOT: It was very, very painstaking and painful.

FREEMAN: It does enforce the cuts on local government. What the plan does, it forces the cuts on the union. And that's what the Obama administration seems unwilling to tolerate.

GIGOT: And the union's, the SEIU, Dan, very powerful. It gave one of the biggest fundraisers for President Obama during the campaign, I think to the tune of about $33 million, so this is a little pay back, basically?

HENNINGER: Well, it looks like pay back and also it looks like they're trampling the idea of federalism. We had segments on this program about California on the brink of bankruptcy.

GIGOT: We will have another one. I...

HENNINGER: After this we will. But you know, they worked the deal out. It was — elected representatives of the people of California came to this agreement. And now Washington comes in, on behalf of the union, and says, sweep that off the table. Give them their money back. What kind of system do we have here?

GIGOT: All right, Kim, let's talk a little about Chrysler and what happened to its secured creditors, who are supposed to have priority under the bankruptcy code. You pay a premium to be a secured creditor. That's why they're called secured. You go to the front of the cue. And in this case, they seem not to have done as well in the Obama administration's proposal to the bankruptcy court as the union does. 30 cents or so on the dollar versus 50 cents for the UAW. What's going on here?

STRASSEL: Well, it's the exact same thing, a different union this time, United Auto Workers of America. But this is the exact same idea. Years and years of bankruptcy laws say that, if you're a secured creditor, you come first in line. Instead, the secured creditors were told to take a bath so that UAW could emerge from all of this with not only the majority ownership of a company, but, you know, their own payback in terms of what was going to come back to equity holder or people in the company. So, this is the exact same thing. And it isn't about law, it's about the political objectives of the Obama administration, in particular, the very special interests, by the way, that they said they weren't going to allow to run Washington.

GIGOT: Now, Treasury says, in its defense, that they have to keep the union happy because obviously...

(LAUGHTER)

No, this is a serious argument.

FREEMAN: OK.

GIGOT: OK. On background, they will tell you we have to keep the union happy because we have to make Chrysler a going concern. The taxpayers are implicated. You, James Freeman are paying your money to keep that good company going. You've got to make sure that the health care benefits of the employees are taken care of. You've got to make sure that the union are going to cooperate going forward. So look, the secured creditors aren't that vital. we had to take care of the union.

FREEMAN: The guy that saved Chrysler has exacting an enormous toll on out whole economy. Think of what this is saying to investors around world — no matter the terms are, if you lend money to a favored company, a company that is heavily unionized in the United States, it doesn't matter what the contract says, the government may intervene. This is just a — there's a reason that nobody else wants to give Chrysler debtor-in- possession financing other than the federal government.

GIGOT: Basically, they're saying, with this act, your property right can be shredded in the name of a higher or stronger political force? That's...

HENNINGER: Exactly. There's another way to put this, that everyone is familiar with, the ends justifies the means. Under this administration, I think the — the rule of law is simply one issue on the table equal to social justice, the public good. And in their mind, the rule of law simply has to take a back seat under some...

(CROSSTALK)

HENNINGER: And they regard that as a legitimate theory of operating the government.

GIGOT: What happens if they're vindicated in the bankruptcy court, and the bankruptcy judge says, look, we agree with what the administration proposes?

HENNINGER: Then we're living under a new system.

FREEMAN: This is so fundamental. It's Article 1 of the Constitution, uniform laws on bankruptcy. This is sending a message around the world that politicians are going to rewrite contracts. It's horrendous.

GIGOT: All right, James, thanks.

Still ahead, is Afghanistan Obama's Vietnam? Some on his own party seem to think so. And there may be a revolt brewing.

(COMMERCIAL BREAK)

GIGOT: Afghanistan is President Obama's war now. And his decision this week to replace the top general there makes it official. But some on the left are beginning to question his strategy, even going so far as to compare it to Vietnam.

Democrat David Obey, who chairs the House Appropriations Committee, said last week that he was dubious about a positive outcome in Afghanistan and that he felt the same way about Vietnam when he first came to Congress in 1969. But he said, quote, "If I could give Richard Nixon a year, I don't see why I can't give Barack Obama a year to see what he can do," end quote.

Pretty amazing, huh? When people talk about the Vietnam syndrome, typically, they mean it metaphorically. But here you have a case where this is the Vietnam generation right in front of you. And what's going on here?

STEPHENS: Well, basically, what we are learning is just now dishonest much of the liberal critique of Bush's war in Iraq was. If you remember, people say it was a mistake for the Bush administration to go to Iraq because distraction of the war that we had to win.

GIGOT: The good war.

STEPHENS: The good war, the war in Afghanistan, where our NATO partners were involved, where Osama bin Laden plotted the attacks against us. All valid arguments, by the way, so long as you're then prepared to support and fight the war in Afghanistan.

Now, President Obama, to his credit, is surging troops into Afghanistan. He's just appointed a new top commander for that theater. And what is the liberal wing of the party? What they're proving is not that they were against the war in Iraq. They were against any war, period, no matter what the stakes are.

GIGOT: Kim, let me ask you, Robert Menendez, the New Jersey Democratic Senator, and Russ Feingold, of Wisconsin, this week raising real doubts about whether or not they're going to give President Obama the $7.5 billion he's asked for for Pakistan and for that theater. Pakistan being an utterly crucial ally to be able to prevail in Afghanistan. How much jeopardy is this money in?

STRASSEL: He's likely to get the money. The appropriations bill for the wars was passed in the House this week. It's headed to the Senate. What they're doing is putting him on notice. They made it clear during a hearing they had with the president's envoy to the region, Richard Holbrooke. They grilled him and suggested that, in some way, actually going after the Taliban in Afghanistan might actually be hurting things in Pakistan because of the pressure it's putting on. They're throwing up every reason they can to hope to set the groundwork for possibly not providing more money in the future.

GIGOT: President Obama is at 66 percent in the polls approval and they're raising the doubts. What happens if he falls to 50 and we're a year into the war?

HENNINGER: It's a big problem for the Democrats. Let's look at the raw politics of this, Paul. If they did anything during the presidential campaign, Barack Obama and Hillary Clinton sought to convince the American people that they, as Democrats, were not soft on national security. By and large, they were pretty successful with that effort.

Look at this. They're doing it again. It's like genetic in the Democratic Party. All of that effort to prove their credibility on national security could be rolling downhill here.

GIGOT: There's a danger, I think, Bret. I'm a little worried about this. The president's going to get caught in the political cross fire. The left wing of his own party wants the money. They want that $150 billion or so, whatever we spent on Afghanistan in a year. And in the right wing of the Republican Party, there's some isolationist elements in that party. They may end up opposing it as well.

STEPHENS: Yeah, and we will have to see what kind of mettle the president has. But look, the argument that he made during the campaign and the argument that he's making now, this is not a war we can abandon is a right one. If you look at it, even though the war in Afghanistan is, quote, "not going well," it's not going badly either. Casualties there remain a fraction of what they were in Iraq, just as the casualties in Iraq were a fraction of what they were in Vietnam. And people have to think about the consequence of allowing Afghanistan of falling into the hand of the Taliban to become a sanctuary for al-Qaeda.

GIGOT: Quickly, is the move to General McChrystal replacing McKiernan a good one?

STEPHENS: It is. I think McKiernan got — was shabbily treated to be fired so publicly.

GIGOT: So publicly.

STEPHENS: He was a talented general. McChrystal is a star. He was responsible for the capture of Saddam Hussein and then the killing of the arch terrorist, Abu Musab al Zarqawi. He spent a career in Special Operations. And that is the kind of skills set you need for these operations in the countryside.

GIGOT: All right, thanks, Bret.

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

(COMMERCIAL BREAK)

GIGOT: Now for our "Hits and Misses" of the week.

Dan, first to you.

HENNINGER: Health care reform is the centerpiece of the Obama agenda. It's estimated to cost $1.5 trillion dollars over ten years. Unfortunately, they left one thing out and that's how to pay for it. Details. Details. The Senate Finance Committee held a hearing today and tried to talk about how they would do this. On the table is a tax on bad behavior — cigarettes, alcohol, junk food, soda pop filled with sugar. So bad behavior is going to pay for health care. Big brother, M.D.

(LAUGHTER)

GIGOT: Bret?

STEPHENS: Well, this is a miss to Hillary Clinton for the comments she left on the voice mail of her indicted fundraiser Norman Hsu. Roll the tape.

(BEGIN VIDEO CLIP)

SECRETARY OF STATE HILLARY CLINTON : Norman, it's Hillary. What am I going to do with you, Norman? You are working so hard for me that I, I just don't even know what to say anymore. I've — I've just never seen anybody who has been more loyal and more effective and rally just had a greater success supporting someone than you. Everywhere I go you're there. If you're not, you're sending people to be part of my events. You know we're going to win this campaign, Norman, because you single-handedly are going to make that happen. I hope to see you again soon. Take care, my friend. Get some sleep. Slow down for a few minutes. We're going to get to the end of the first quarter. Then we can all take a little rest. Lots of love. Bye, bye.

(END VIDEO CLIP)

STEPHENS: Well, I hope it's not lots of love, bye, bye to Vladimir Putin and Mahmoud Ahmadinejad on the next voice mail message she lives.

GIGOT: All right.

Freeman, top that.

FREEMAN: Easy.

(LAUGHTER)

FREEMAN: The chairman of the board, Frank Sinatra, this is a hit to Martin Scorsese, the film director, who is going to make a film about Frank Sinatra and his life. It's about time Hollywood honored this legend.

GIGOT: All right.

Kim?

STRASSEL: A miss to the Food and Drug Administration, which sent a letter to food company General Mills saying Cheerios, because it contains a label saying the product might help lower cholesterol, is a drug. This means that if Cheerios wants to continue, it can either take that label off or, as the FDA helpfully explains, it can apply for a new drug patent from the FDA, a new drug application. so we always worry about why the FDA doesn't have enough manpower or people out there to protect the United States from all of these food-borne illnesses, et cetera and so on. Now we know why. It's because entire departments are making sure that America's favorite breakfast food is something that needs to be prescribed by a doctor.

GIGOT: All right, Kim. Looks like I'm going to have to find a new breakfast food.

That's it for this edition of "The Journal Editorial Report." Thanks to my panel and to all of you for watching.

I'm Paul Gigot. We hope to see you right here next week.

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