This is a rush transcript of "Special Report With Bret Baier" from January 27, 2010. This copy may not be in its final form and may be updated.

(BEGIN VIDEO CLIP)

DAVID AXELROD, OBAMA SENIOR ADVISER: What we can't do at a time that we are in two wars and we have a very determined enemy in Al Qaeda, we can't stand down. We have to make sure that we have adequate defense.

UNIDENTIFIED MALE: So the White House would disagree with the speaker on that particular aspect.

AXELROD: Well, I haven't heard what the speaker had to say, so I'm not going to get into a debate with the speaker. But the freeze that we're recommending is for discretionary spending.

(END VIDEO CLIP)

BRET BAIER, ANCHOR: State of the Union address tonight. The House Speaker Nancy Pelosi coming out with reaction to one of the proposals we already know about, and that is a spending freeze for three years on non- discretionary spending.

Now, here is what she said. She told politico, quote, "Well, I think that if there is going to be a spending freeze, it should be across the board. That is to say we all want a strong national defense and we want to fund it in an appropriate way," she said. "But we are not here to protect defense contractors, and the fact is, if we have to cut spending, we should subject every dollar to that same scrutiny."

It's just one proposal already getting pushed back from the House speaker on the left. Let's bring in our panel about the state of the union address, Steve Hayes, senior writer for the Weekly Standard, A.B. Stoddard, associate editor of The Hill, and syndicated columnist Charles Krauthammer

Steve, it's a little unique to hear the House speaker weigh in on the day of the State of the Union address about one of the proposals we know will be in there.

STEVE HAYES, SENIOR WRITER, THE WEEKLY STANDARD: Right, and if you look at what she actually said, she says defense spending is sort of goodies for defense contractors. I think there is a substantive problem she has.

But this perfectly encapsulates the president's first year, in my view. This has been his problem. His difficulty over the first year and the reason that I think he finds himself in so much trouble going into the State of the Union has been his own party.

He has had huge majorities in both chambers of Congress and he hasn't been able to enact his agenda. He hasn't been able to do the big things that he said he was going to do a year ago.

And it's not because Republicans have been too partisan. This is a call you are hearing by Democrats all day today, it's circulating I think in the White House talking points, Republicans haven't been playing ball. That's simply not the case.

The real problem the president has is bringing his own party along on an agenda that I think is so radical it scared the centrists in his own party. So that's where his problem is. And he has people like Nancy Pelosi continuing to try to pull him left.

BAIER: A.B.?

A.B. STODDARD, ASSOCIATE EDITOR, THE HILL: Of course the liberals in his party are miserable. And for the speaker to make a statement like that this afternoon right before the State of the Union is really a shot across the bow, this freeze, which doesn't touch Medicare or Medicaid or education. It's not an across the board freeze and obviously doesn't touch military.

It is unpopular in the liberal wing of the party as it is in the Republican Party and in the center, as it is with everybody. And the president knowing that the Congress is extremely unpopular, this is popping up in poll after poll, day after day, both Republicans and the Democratic majorities in Congress.

And the president, I think, will try to put some distance between himself and the Congress tonight. This spending freeze will be a big fight, a fight he will probably lose. But I think that that was an indication from the speaker that the liberal wing of the party, which is very disappointed on many policy issues with the president, has had it.

BAIER: Charles, let's step back 30,000 feet here about what you expect tonight, perhaps what he has to do.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: Well, the president has a choice. He can do a genuine pivot to the center the way that Bill Clinton did when he suffered a defeat early in his first term, or he can fake it.

I guess that he is going to attempt the second, and that is for two reasons. The first is that he is not a hostage of the party's left, he is a man of the left. Clinton was a man of the center. He had long been in the DLC, which is the centrist faction of his party.

Obama is a man, Harvard faculty club, 20 years in the pew of Jeremiah Wright, a friend of William Ayers, this is who he is and where he lived, and you saw it all in his agenda this year. It was a left-wing agenda.

But secondly, it's a question of his vanity. He's a man who believes that he can still do the magic. He's a man who believes with his silver tongue he can talk ayatollahs into giving up nukes, with his silver tongue he can talk America into believing you can expand health care by 30 million people and cut cost at the same time.

And a man who said even last week after the Massachusetts defeat, it was because of insufficiency of communication with the American people. This is a guy who has been on the tube practically every night.

This is a man who I think will fake a pivot and will at least attempt it and see if it works. We saw a hint of that when he announced the freeze yesterday, which is in and of itself a phony and a fraud.

BAIER: I had lunch today at the White House with the president and the other anchors who are covering the State of the Union address. And the overall tone was a little bit defiant. He says he is upbeat.

There is a sense A.B., that this White House is still going to push ahead, or try to, with healthcare reform because they have come this far and they are not turning back. What about that?

STODDARD: Well, they are making the argument, you heard the president's team all weekend long making the argument that the Democrats who have supported either the House bill or the Senate bill are going to pay for their support of those bills, and so at this point they must jump off the cliff and at least get the credit for an accomplishment and hope that history vindicates that vote in the years to come in a less politically hostile environment.

That's actually probably true. It's probably the case that they have already poisoned their records by supporting a bill that most Americans are still afraid of and maybe, perhaps, don't entirely understand.

We are not going to see a pivot tonight though, and I understand why the president was defiant. They have made it clear that they think that their agenda — that they have the right agenda and that they failed to explain it. They will explain it one more time. So it's a repackage and it's a reframe but it's not a retreat.

And we won't see a big — a policy turn. It is literally some polishing, some substance and style. And it might be — he might be relying on the silver tongue, but I think that but for putting a little distance between himself and the unpopular Congress, I don't think we will see anything new.

BAIER: I should point out that lunch is off the record so I can't get into quotes and everything he said, which is why I am not telling you that.

Steve, Rahm Emanuel, the chief of staff, just told CBS that the Massachusetts elections in which Scott Brown beat Martha Coakley, "We could have won," "we" being the White House and Democrats in Washington, could have won that Senate seat.

HAYES: It's absolutely astonishing that they are continuing to say this. You have heard similar comments from Robert Gibbs and from David Axelrod. It's clear this is the White House view institutionally. This is what they think. It is crazy.

BAIER: What they take out of the election, that it was the candidate, and not...

HAYES: Yes, that it wasn't a repudiation of the Obama agenda. As Charles has pointed out several times, Scott Brown campaigned specifically to be the 41st seantor against health care. He campaigned specifically against the administration's policies on Mirandizing terrorists, giving them rights and trying them in civilian trials.

Issue by issue by issue, Scott Brown campaigned against the White House. They have can say that all they want, but it simply — it doesn't make it true.

BAIER: Final word.

KRAUTHAMMER: If the president is under the impression that it's one more speech, one more attempt rhetorically, he is reaching a level of obliviousness which approaches clinical denial.

BAIER: But in his mind he is trying to, what, build up political capital that was lost from last week?

KRAUTHAMMER: I think — look, I would be reassured if I thought he was cynical in saying all of this and believing otherwise. But if he believes it, I think he has lost touch with political realities, and in the end, meaning in November, he'll pay.

BAIER: Republicans are going after the attorney general over the Christmas Day bombing suspect and what happened there. We will talk about all of that and the trials in New York in three minutes.

(COMMERCIAL BREAK)

BAIER: This is a Fox News alert. We can now confirm that President Obama will ask Congress tonight in his State of the Union address to repeal the "don't ask don't tell" policy in the military. That's the policy for gays in the military to not announce their sexual orientation. The president will ask Congress to repeal that in his speech tonight.

It's something we have heard from the left that they wanted to see, and the president tonight will say it and ask Congress to do it.

Another issue we are talking about here is the Christmas Day bomber, how it was handled, how he was Mirandized, the process, and also the trials planned for New York and suspected terrorists. Take a listen to today's sound.

(BEGIN VIDEO CLIP)

ROBERT GIBBS, WHITE HOUSE PRESS SECRETARY: We can bring justice in this country. We can seek justice on behalf of the thousands that were killed on 9/11. We shouldn't be afraid to employ our justice system on behalf of bringing murderous terrorist thugs to justice once and for all.

MITCH MCCONNELL, R-KY., SENATE MINORITY LEADER: Apparently it's going to cost $200 million. Is that about right?

UNIDENTIFIED MALE: $236 million.

MCCONNELL: $236 million for the city to put on this show trial. It strikes me as a substantial benefit of our adversaries, the terrorists. The American people don't get this, don't understand it.

(END VIDEO CLIP)

BAIER: New York Mayor Michael Bloomberg came out today saying he wants the trial someplace else other than New York. And here is what the House minority leader told reporters, including myself, this morning, quote, "There is not going to be a trial in New York. I guarantee it. There is no appetite for the trials in Congress. I don't see it. This is a big issue, a big issue we will campaign on this year."

We are back with the panel. Charles?

KRAUTHAMMER: The Republicans are going to save the president's hide on this, because I think, in fact, when you get the mayor of New York today recommending that the trial be held elsewhere, you are beginning to get some cover.

You have got the introduction of a bill by a member of the Senate and member of the House to actually, to cut off the funding, which is a way of Congress stepping in and preventing the trial.

I think if that happens, the administration will have dodged a bullet, because if the trial actually happens, and it will be a circus, it will be a propaganda disaster, and it will be a security nightmare, it would hurt the administration every day as the news broadcasts in the evening.

If it is averted by congressional action, it will be a single hit on the administration and it's not going to be a constant drain on them. So I think, in fact, that they are lucking out on being stopped from doing, really, a really idiotic decision.

BAIER: A.B., we have been reporting on this for a while, and other news organizations haven't really touched it. But yesterday you had Lindsey Graham saying he has a bunch of Democrats signed on to pull the funding for the New York trials.

STODDARD: I think if you look at what is happening with this question of the trials and also what's happening with the question of the would-be Christmas day bomber being treated as a criminal and the process by which the FBI quickly interrogated him and obviously Mirandized him and put him into our system, our judicial system, I think this is — it's only a matter of time before you see Democrats joining with Republicans on all these issues.

It's an issue that Scott Brown ran on in Massachusetts. It is going to be very hard for Democrats to defend. The process was sloppy. They had three choices in the case of the would be Christmas Day bomber — to treat him as an enemy combatant, to slow down, just keep on interrogating him, and to wait for some intelligence officials to show up or to give him his lawyer, and they picked the worse choice.

I think it would be very hard for Democrats to defend.

BAIER: To that end, Steve, five GOP lawmakers, including the Senate Minority Leader Mitch McConnell sent a letter today to the attorney general saying it is critical to the American people that they have a full and timely understanding of what led up to this decision. They call it an "ill-advised decision."

What about that, the Christmas bomber decision?

HAYES: They want Eric Holder to answer these questions that they posed, several questions in writing, and they want him to testify, because, basically, the administration hasn't been able to provide, despite this month-long, supposedly exhaustive review, has not been able to provide even the basic facts surrounding the handling of Abdulmutallab.

And that's a problem — I mean, it's a serious problem. You see, you talk to Republican senators, and I sense genuine alarm in talking to the senators and their staff about how the administration is handling this.

This isn't one of those things where they think — they know the public is against the administration, they can score some cheap political points and they can press. There is I think genuine alarm.

And A.B. is absolutely right, the Democrats are going to start peeling off and peeling off quickly. In fact, Evan Bayh, a Democrat from Indiana, told The Weekly Standard today that he disagreed with the way the administration handled this and said that Abdulmutallab should not have been Mirandized and he should not be tried in a civilian trial.

So you are already starting to see these splits on the Democratic side.

BAIER: The spokesman at the Pentagon was asked if Defense Secretary Gates was brought in to the consulting on the Miranda rights, whether he would be Mirandized. Jeff Morrell saying no, I don't believe so.

And take a listen to this. This is from a former FBI agent who talked to folks he says were directly involved in this whole process.

(BEGIN VIDEO CLIP)

CHRIS VOSS, FORMER FBI COUNTERTERRORISM EXPERT: The description that has been relayed to me makes it hard to believe that he was making much sense at all. He was burned very badly in a very private area. That amount of intense pain is going to disrupt anybody's thought processes.

(END VIDEO CLIP)

BAIER: Chris Voss says he has direct knowledge of that interrogation. The FBI folks on the ground, Charles, they say they only did it 50 minutes.

KRAUTHAMMER: And of course it was inadequate because the interrogators had no access, we now know, to the dossier on the guy that existed elsewhere in the intelligence community, on his history, the Yemen, the context, and all of that.

You need information if you are going to ask intelligent questions and then ask other questions as a follow-up. In the absence of that, you get almost nothing. And you can't get it in one hour. It takes days and weeks.

BAIER: OK, one we will continue to follow.

That's it for this panel. But stay tuned for the importance of one vote in the Senate.

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