Sen. Feinstein talks Petraeus' scandal, Benghazi investigation; key lawmakers on 'fiscal cliff' threat

Senate Intelligence Committee chair on 'Fox News Sunday'


The following is a rush transcript of the November 11, 2012, edition of "Fox News Sunday With Chris Wallace." This copy may not be in its final form and may be updated.

CHRIS WALLACE, HOST: I'm Chris Wallace.

A personal scandal forces CIA Director David Petraeus to resign.


WALLACE: We'll discuss the startling end to a brilliant career, and look ahead to the congressional investigation, of that terror attack in Benghazi -- with the chairman of the Senate Intelligence Committee, Dianne Feinstein. It's a "Fox News Sunday" exclusive.

Then, the New Year will bring higher taxes, and huge spending cuts -- unless a divided Washington cuts a deal.

We'll talk with four congressional leaders, who will play big roles in trying to find a compromise. Republican Senator Bob Corker, and Congressman Tom Price, and Democratic Senator Kent Conrad and Congressman Chris Van Hollen.

Plus, President Obama looks ahead to a second term, while Republicans look to regroup. We'll ask our Sunday panel about what both sides need to do, moving forward.

All right now on "Fox News Sunday."


WALLACE: And, hello, again, from Fox News in Washington on Veterans Day -- when we honor the military for their service to our nation.

And, sadly, we begin today with a dramatic fall from grace, of one of the most respected military men of this generation. CIA director and retired four star General David Petraeus stepped down Friday after admitting to an extramarital affair.

Joining us to discuss that and upcoming hearings on the deadly terror attack in Libya is the chairman of the Senate Intelligence Committee, Dianne Feinstein.

Senator, welcome back to "Fox News Sunday."

SEN. DIANNE FEINSTEIN, D-CALIF.: Thank you very much, Chris.

WALLACE: In a statement Friday, you said you understand Petraeus' decision to resign, but that you wish that President Obama had not accepted that. After more revelations, this weekend, do you still feel that way?

FEINSTEIN: I talked to Dave Petraeus twice on Friday and he said to me, "I've done an egregiously dishonorable thing and I need now to do the honorable thing."

And when I thought about it and, for me, it's a heartbreak. I mean, I am very -- this is a truly bright man, a credible person, a great leader, and, could have really been a super transitional figure for the CIA. This is very, very hard and I think he did the right thing.

WALLACE: So, now, you accepted he should --

FEINSTEIN: Yes. Yes. When you realize additional complications, which I did not at the time I spoke to him -- I think did he did the right thing. I think the president really had no choice but to accept the resignation.

WALLACE: Well, let me ask you about those additional complications, because it turns out the way the FBI found out about this is because Paula Broadwell, the mistress, was sending threatening e-mails to another woman, whom she regarded as a threat to her relationship with Petraeus. What do you know about that relationship, between the other woman and Petraeus?

FEINSTEIN: Well, there's an FBI investigation that is continuing. I read both The Post and The Times this morning and it is pretty well laid out, I think. I hate to discuss it, except to say there are a number of things that one has to consider, the first of which was there any kind of national security breach. To date, there was not.

And, the FBI has briefed me now. I actually wish we had been briefed a little bit earlier so that the full intelligence committee -- one of the things I've tried to do, Chris, is bring both sides together. So, my vice chairman, Saxby Chambliss, and I share material and work together and that's a very important concept.

With neither of us knowing ahead of time, all of this, obviously, comes as a big shock. And we are very much able to keep things in a classified setting, at least if you know you can begin to think and then to plan. And, of course we have not had that opportunity. We begin our hearings on Thursday. This is an inquiry. It's not a single hearing. There are going to be many different aspects of it.

And, you know, obviously, General Petraeus -- excuse me, Director Petraeus, is going to be part of the hearing process.

WALLACE: You said a lot and I want to get to the hearings in a second. I have to ask you, though, directly. Do you believe -- have you been told that this other woman was also in a relationship, an affair, with General Petraeus?

FEINSTEIN: No. I have not been told there was an affair. What I was told is that there was somebody else that he knew and was close to, and, that Mrs. Broadwell sent these threatening e-mails to her, and, she was frightened and went to the FBI.

Oh, I can't believe it. But, that's what it is.

WALLACE: Let's talk about the FBI. By law, they are supposed to inform your committee of any development of significance to the intelligence community. This clearly passed that threshold.

Is it true that you received no advance word of this? And are you going to investigate the FBI's decision not to tell you about an investigation that has been going on for at least weeks?

FEINSTEIN: The answer is yes. And yes. We received no advanced notice. It was like a lightning bolt.

The way I found out, I came back to Washington, Thursday night, Friday morning, the director told me there were a number of calls from press about this. I called David Petraeus. And as a matter of fact I had had an appointment with him, at 3:00 that afternoon, and, that was canceled.

And, so, then, when these questions came up, I obviously took the action myself, to try to find out and then, informed my vice chairman, and I talked to the director twice. This is very hard stuff.

WALLACE: And are you going to investigate why the FBI didn't notify you before?

FEINSTEIN: Yes, absolutely. I mean, this is something they -- that could have had an effect on national security. I think we should have been told. There is a way to do it. And that is, just to inform the chair and the vice chairman of both committees, to -- this has happened before, not with precise, same things, but, none of the four of us have ever breached that confidentiality.

WALLACE: Let me ask you, and you raised the hearings and we'll get into that in a moment. But, Petraeus was supposed to testify in a closed hearing that your committee is going to hold this Thursday, about the attack on Benghazi. Now, because Petraeus stepped down, his deputy, acting director, replacement, Mike Morrell, is going to testify in his place.

One, are you going to insist on hearing from Petraeus at some point? And, secondly, do you think there is any link between his resignation and the events of Benghazi?

FEINSTEIN: On the events in Benghazi, and his resignation, absolutely not. And, I think if you really think this thing out, you will -- everybody will come to that same conclusion. So, that's that.

With respect to calling Director Petraeus or former Director Petraeus before the committee , that will be a committee decision. The hearing will begin with the DNI, Jim Clapper --

WALLACE: Director of national intelligence.

FEINSTEIN: Yes. And Mike Morrell, who is now acting director of the CIA, and Matt Olson of the Counterterrorism Center.

WALLACE: Do you think you need -- I'm going to ask you about the hearing in a second.


WALLACE: Do you think you need to hear from Petraeus?

FEINSTEIN: We may well and we may well ask. I think that's up to the committee. I think we should have this first hearing which is the way they wanted to set it up and then, the committee will make the decision.

WALLACE: All right. What -- let's turn to the hearing and as you say, it's not a hearing, but an inquiry. What are your biggest questions, your biggest concerns as you begin this inquiry into what happened in Benghazi?

FEINSTEIN: Well, my biggest concern is, there are literally hundreds of threat warnings in the material that has been accumulated. There were five attacks during the year, one prior attack on the consulate itself. The question I have, is, you know, why wasn't something done about it?

There are many options. One is to recall the ambassador. Sit down with him, have his personal assessment of security. See what you can do, and do it.

The second is, to immediately beef things up in a major way. Changes were made but the changes were not major.

What's clear to me -- and I went to the memorial service in San Francisco for Chris Stevens. The Libyan ambassador to the United States spoke and twice during his remarks, he said, "I am so sorry that we could not protect your consulate" -- which is a total admission that the Libyan government was incapable of protecting our facilities.

This raises a major question for the future. We have 285 embassies and consulates over the world. And, the threats pour in. What do we do? And I --

WALLACE: Let me ask you, if I may, Senator, excuse me, directly. Do you think that U.S. officials in Washington had enough information beforehand, enough of these warnings, to beef up security before the attack ever happened?

FEINSTEIN: Well, that is the purpose of our inquiry. And, that decision will be made by the committee. I have not had an opportunity get to go through what are thousands of pages. And, I -- you know, I want to do that. I want other members to do it. I don't want to jump to any conclusion.

But, it would appear to me -- and this is just me -- that the five prior incidents in the year, which aren't intelligence, they are not threats. They are actual attacks on the British ambassador, on our consulate once before, on a number of other things, on the United States missions.   Now, that, to me, is sufficient intelligence to make a decision. Now -- so we want to see what the extenuating circumstances are, that the security wasn't beefed by us, if it couldn't be beefed up by the Libyans or we didn't close down the consulate.

WALLACE: Do you think -- second question -- that there was enough time between the first attack and the second attack at 5:00 the following morning on the CIA annex, there was enough time to deploy U.S. forces to protect the Americans there?

FEINSTEIN: My understanding is there was not. I can't be dispositive now, before we have these hearings and really hear the testimony on just that question. It is a pertinent question. it's an important question and it must be answered.

WALLACE: One more question: there were also the changing stories after the attack. Changing stories from administration officials about what actually happened. Just take a look.


STEVE KROFT, CBS NEWS: Do you believe that this was a terrorist attack?

PRESIDENT BARACK OBAMA: Well, it's too early to know exactly how this came about.

SUSAN RICE, U.S. AMBASSADOR TO THE UNITED NATIONS: What happened initially was, there was a spontaneous reaction to what had just transpired in Cairo, as a consequence of the video.

MATTHEW OLSEN, DIR., NATIONAL COUNTERTERRORISM CENTER: Yes. They were killed in a course of a terrorist attack on our embassy.

OBAMA: The natural protest that arose because of the outrage over the video were used by extremists to see if they could also directly harm U.S. interests.


WALLACE: I'm asking you personally, not as the committee as a whole -- how do you explain these shifting stories, and the president continuing to talk about the video, after the head of the Counterterrorism Center said that it was a terror attack. And do you think -- do you think it had anything to do with politics, in the middle of the presidential campaign?

FEINSTEIN: I don't think it had anything to do with politics. I do think it had something to do with our assessment. And, you know, my view is very simple and very direct. The minute you know mortars were used, the minute you know RPGs are used, it's either a terrorist attack or it's a military attack. Those are the only two things it could be.

What is a terrorist? It isn't necessarily all one thing. A terrorist uses the attack as a vehicle and we all know that now. Therefore, it is pretty clear the minute mortars show up and RPGs show up, you have a terrorist attack.

WALLACE: Why was the president a week later talking about the video, especially, when it turns out, and they knew in real time, there was never a protest to begin with?

FEINSTEIN: These things can be assessed into oblivion, too. And I go by prior incidents. Prior incidents give me a good assessment of whether there is a high likelihood, so that the assessment can be with confidence. And, I think that assessment could have been made earlier on, with confidence.

Having said that, again, I have not seen these hundreds of threat warnings. I want to go through them and look at them. I want to see what -- see, this, now, comes down to our purpose.

We have been very proud that over the time from 9/11 the stovepipes have been down, the intelligence has been better analyzed, has been red teamed, it's been passed on. We have a national security branch of the FBI. We have a Counterterrorism Center, and all of the above.

Now, the question comes, how does that all really work? This is a live incident. To show something went wrong in the assessment. And, I want to see exactly what it is.

And I don't want to be premature. I don't think you want me to be premature, either, Chris.

WALLACE: No, I don't.


WALLACE: I want you to tell us what you know and that's it.

Senator Feinstein, thank you. Thank you as always for coming in.

When you know more, please come back and we'll follow your investigation into Libya, every step of the way. Thank you, Senator. Always a pleasure to talk to you.

FEINSTEIN: My pleasure. Thank you.

WALLACE: Up next, as we draw ever closer to the fiscal cliff, higher taxes and deep spending cuts, we'll ask four key members of Congress if they can reach a deal, before the New Year.


WALLACE: We are now just 51 days away from the fiscal cliff, when $644 billion in tax hikes and spending cuts will kick in next year unless the president and Congress make a deal.

We have invited four congressional leaders who will be at the center of any compromise, to discuss what's possible, and what isn't.

Senators Bob Corker and Kent Conrad, and Congressman Tom Price and Chris Van Hollen.

Gentlemen, welcome back to "Fox News Sunday." Good to have you all here.

Senator Corker, let me start with you.

How real is the cliff? Can Washington figure out a way in just 51 days to cut trillions from the deficit or are you just get an extension and kick the can down the road?

SEN. BOB CORKER, R-TENN.: I certainly hope we don't kick the can down though road. We all know what the issues are, Chris. We've had two dry runs already and nothing has changed.

And, I hope at least we'll go substantially down the road towards solving the problem.

People are conflating the fiscal cliff with fiscal reform and, I know Kent and I and Chris and others, Tom, have been working a long time on fiscal reform. And what I think we don't need to lose our eye on is the fact that that's what needs to be solved.

So, I'm hopeful when I listen to the speaker, when I listen to the president, I think there is room. I've said, from day one, the key to solving this, is Medicare reform. If we can agree to Medicare reform, I think the other pieces will fall in place.

WALLACE: Now, Senator Conrad, there is some talk, among Democrats, about going over the cliff, letting all the tax hikes kick in, letting all the spending cuts kick in, and, blame it on the Republicans.

SEN. KENT CONRAD, D-N.D.: Well, I don't know where you are hearing that. You certainty don't hear that from me. I've spent five years trying to put together a package in a bipartisan way to get us back on a sound fiscal course.

And, I think it's very clear that we have a near-term problem. We've got to make sure that we are doing everything we can to strengthen economic growth, and, we have a longer-term problem, that is an unsustainable fiscal course for the nation. That requires revenue reform, which is Bob Corker talking about fundamental reform, we absolutely need it in our entitlement programs, Medicare, Social Security. We need it in the revenue side of the equation.

And, I hasten to say the Social Security piece I don't think should be part of a deficit reduction package, but we do need to address Social Security because it's headed for insolvency as well.

WALLACE: All right. We're going to talk about entitlements and spending in a moment. But let's talk about taxes, which has gotten most of the attention.

WALLACE: Congressman Van Hollen, John Boehner offered a compromise this week in which and he said, yes, I'm willing to put more revenue on the table, but, through closing deductions and ending loopholes, not through raising rates.

Can you accept a compromise as part of this whole deal, that doesn't raise the Bush tax rate on the wealthy?

REP. CHRIS VAN HOLLEN, D-MD.: Well, here's the issue. How much revenue are we going to generate as part of the balanced package? And I take my lead on this from Simpson-Bowles in their framework and they assume the amount of revenue as if you started tax reform from a 39 percent rate. That's part of their built-in assumption.

So I'm all for doing tax reform. The issue is, from what starting point? And I think the Simpson-Bowles starting point -- which assumes that revenue from 39 percent -- is the right way to go to get the next that they got in hitting their deficit reduction target.

But, look, if what Speaker Boehner was saying is that he is truly willing to get what we consider Congressional Budget Office scorable revenue, then we can begin to work with one another.

If what he's simply saying is what Republicans used to say, which is we're just going to lower rates on the wealthy, and, that's going somehow generate enough evidence --

WALLACE: He was clearly talking about closing loopholes and deductions.

VAN HOLLEN: But Grover Norquist doesn't think that.


VAN HOLLEN: But the jury is out still on -- I thought the tone -- let me just be clear: the tone was good. I think the jury is still out on exactly what the substance of what he said is. Others may be able to clarify but he said something in a very artful way, which different people heard differently.

WALLACE: But I want to ask you directly, now I could be a yes or no. Are you willing to accept more revenue if it doesn't mean that the Bush tax cut has to be rescinded for the wealthy and it rises from 35 percent to 39 percent -- if they can make the math work?   VAN HOLLEN: The issue is the math and I think the starting point should be going back to Clinton era rates and then proceeding with tax reform, as the speaker may have been talking about. If he was generally talking about eliminating revenues, to eliminating -- excuse me, loopholes as part of that --

WALLACE: OK. Congressman Price, the president made one offer on Friday, which is, let's -- right now, extend the Bush tax cut rates for the 98 percent of the people that are making less than $250,000. He says, I'll sign it right away. Take a look:


OBAMA: Let's not wait. Even as we are negotiating a broader deficit reduction package, let's extend the middle class tax cuts right now. And I've got the pen, ready to sign the bill, right away.


OBAMA: I'm ready to do it.


WALLACE: Now, Democrats say that you, and I talk about Republicans, won't accept that because you want to hold the tax cuts for the middle class hostage until you get what you want on tax cuts for the wealthy.

REP. TOM PRICE, R-GA.: Chris, what we want or real solutions, House Republicans want real solutions. And to us that means that you've got to have economic growth. A tax increase never created a new job in this country and what we need is economic growth and vitality, get the economy rolling and get those jobs being created. That means, yes, more revenue --


WALLACE: Sir, let me interrupt just because I want to ask you directly. Would you accept the piece-meal, let's just pass the tax -- the extension of the Bush tax cuts for the 98 percent of people under $250,000?

PRICE: It doesn't make any sense to us to raise taxes on job creators at this time of economic challenge. The equation is revenue, and spending. And, we can increase revenue without increasing the tax rates on anybody in this country, we can lower the rates, broaden the base, close the loopholes, as you have discussed. And put in place pro-growth policies in energy and health care and the regulatory policy and address the spending. And the spending that has to be addressed is Medicare, Medicaid and Social Security.

WALLACE: We're going to get into spending in a second. But just so I can clear this up, you're not -- Boehner seemed to be saying, I am going to close some of those loopholes and use some of the revenue -- not just economic growth -- use some of the revenue from closing loopholes to cut the deficit. Are you accepting that or not?

PRICE: I think that's the formula, that's the way that we can reach agreement and I think that's what many of us are saying. That you can close the loopholes --

WALLACE: But it's not just growth. It's actually taking the money, tax expenditures, through loopholes and giving -- and using it as a deficit saving.

PRICE: As long as you close the loopholes, you limit the deductions, limit the credits, you can lower the rates and broaden the base. That's the formula for a solution. And that's a real solution.

WALLACE: So, Senator Corker, you have a draft plan you have been circulating to a number of members of the Senate. Is there a deal here?

CORKER: I think there is a deal. Look the yin and yang of this, we know there has to be revenues. And I think -- look, I haven't met a wealthy Republican or Democrat in Tennessee that's not willing to contribute more as long as they know we solve the problem.

So, the yin of revenue, we understand and I think there's a good, pro-growth way of putting that into place so you are getting revenues from people like me and other folks that make above x dollars. But what you have tied to that is true entitlement reform --

WALLACE: We're going to get to that.

CORKER: -- so people we solve the problem.

WALLACE: One last question and then I promise we'll get to that.


WALLACE: Senator Conrad -- I mean, is there the basis of a deal here? No, it's not raising the Bush tax rates. But, it's tax reform, where you close the loopholes, and will that work?

CONRAD: It could. Look, I think the reality is Bowles-Simpson, which I was a part of, actually lowered rates, but raised more revenue. And it did it by closing off preferences, exclusions, deductions, and it equalized capital gains and dividends with other tax rates.

If you really want to go to where many of us the tax code is unfair, you've got people who are paying very close, an effective rate, the top rate of 35 percent and people who are much, much wealthier paying an effective rate of 13 or 14 percent. That's really unfair.

How does it happen? Well, it largely happens because there is a 20-point differential between capital gains and ordinary income, 15 percent for capital gains and dividends and 35 percent for ordinary income. That differential really I don't think is justified.   WALLACE: OK. Let's get -- and I know you have been chomping at a bit to get to spending and entitlement reform which clearly has to be part of any deal.

Congressman Van Hollen, a year ago August, when Boehner and Obama were involved in these debt talks, the grand bargain that blew up, the president put on the table raising the eligibility age of Medicare and slowing the cost of living adjustment for Social Security.

Could you accept that?

VAN HOLLEN: Well, I'd have to look at the overall deal, Chris. And, we have already made significant reforms to Medicare, to achieve some savings.

There is a complication on this issue, which is the Supreme Court decision that said that some states don't have to cover people on Medicaid, could leave lots of individuals in that age group vulnerable. And so that's a major complicating factor as we move forward.

But, look, I'm willing to look at -- and I think Democrats, clearly the president, is willing to look at everything --

WALLACE: Major entitlement reform.

VAN HOLLEN: Yes. Everyone has a different meaning of major entitlement reform. After all, the Affordable Care Act made significant changes in savings as part of the Medicare program. Of course, during the last campaign -- no, but seriously, there were a lot of ads blasting Democrats for what was serious reform with respect to Medicare.

The difference being that we look for savings by changing incentives within the program as opposed to savings to Medicare, simply by transferring those costs onto beneficiaries. That is not a way to go. That kind of voucher plan, in my view.

WALLACE: Congressman Price, it brings me to Obamacare. Speaker Boehner was asked this week whether the Republican drive to kill Obamacare is dead. Here's what he said:


SPEAKER OF THE HOUSE JOHN BOEHNER, R-OHIO: It's pretty clear that the president was reelected. Obamacare is the law of the land.


WALLACE: Question: do most House Republicans, do you agree with Speaker Boehner, that repeal of Obamacare with this election, with his re-election, is dead?

PRICE: No. As a physician I can tell you that the reason -- we're not opposed to the president's health care law because of the election, we're opposed because it is bad policy and it's bad for patients across this land. We absolutely must get a handle on this spending in this country and in order to do that, it has to be through Medicare reform and Medicaid reform and Social Security reform, all three programs under current law are destined for failure.

So, we need fundamental reforms so that we can save and strengthen and secure these programs for this generation and, future generations, that's what real solutions look like.

WALLACE: You lost the election -- yes, you still have the majority in the House, but you lost the election on the presidential level. You're not going to kill Obamacare for the next four years.

PRICE: I think what at the election said is that the American people don't want unified government here in Washington. They want divided government, which means we have to get together and solve these remarkable challenges that we have.

But they have to be solved with real solutions. They can't be solved with things that don't solve the problem, and that's what we've been doing in this town for years and years. That's not what the American people want.

WALLACE: All right. Let me go to the two senators to end this. I come away from this -- yes, there is a little, but a lot of the same old arguments, are coming up.

Are going to go over the cliff or not?


WALLACE: But is that because you all just kick it down the road, because you'll come to a solution --


CORKER: I don't think you want to go over the cliff. What I think would be a travesty for your country is, the reason we don't go over the cliff is we totally kick the can down the road. I mean, look, we -- again, we know what all the problems are. We have been through two ground runs, there's nothing new. Let's make a huge down payment on the problem and then let's have -- this is going to take years of work.

So, look, I'm optimistic, I am --


WALLACE: But you hear the conversation here, do you think that there is the basis for a deal?

CORKER: I think there is a basis for the deal. Because I think finally, Democrats are willing to accept -- and I don't mean this pejoratively, but I think they know that Republicans really are willing to put revenues on the table if we can do it in a pro-growth way, and there is a way of doing that, and you saw the "Washington Post" editorial this morning. Laid out 750 billion, an easy way of getting there. So, there is a way of getting there on the revenue side, the real question is can we come to terms on the entitlement side? By the way, when you deal with entitlements, you really don't do anything that deals with the economy in the short-term. So, it is the very best way, a $27 trillion problem, exists right now with Medicare, unfunded liabilities. That is where the focus needs to be. We can get to the appropriate revenue mix if we do that.

WALLACE: Senator Conrad, you are a lame duck in the lame duck session, and as your final act before you leave office, is there the basis for a deal here? Realistically?

CONRAD: I absolutely believe there is. Look, you can't settle every detail in these next few weeks. What you can do is agree on a framework agreement that sets out for the committees of jurisdiction how much they need to save, how much money needs to be raised. What we can also do, is have a significant down payment, so the markets understand we're serious about this, what we can also do is have it back-stopped so if the committees of jurisdiction did not perform, there would be a real consequence.

WALLACE: That was the fiscal cliff, that's what was supposed to happen here.

CONRAD: The difference is, the fiscal cliff was designed not to happen. That is, the sequester across the board cuts, $1.2 trillion defense, non-defense, was designed to be so onerous nobody would accept it. What we need to have as a backup is something that would actually be good policy if the operating committees didn't act.

WALLACE: Gentlemen, we have to leave it there, thank you all for coming in, and we'll be watching every step of the next 51 days. Good luck.

Up next, President Obama prepares for four more years in the White House. We'll ask our Sunday group what they will be looking out for.



OBAMA: I am looking forward to reaching out and working with leaders of both parties. To meet the challenges we can only solve together. Reducing our deficits, reforming our tax code, fixing our immigration system, freeing ourselves from foreign oil. We've got more work to do.


WALLACE: That was President Obama in his victory speech promising to work with Congress to get big things done during his second term. And it's time now for our Sunday group. Bill Kristol of the "Weekly Standard," former Senator Evan Bayh, syndicated radio talk show host Laura Ingraham and Kirsten Powers from the "Daily Beast" Web site. Bill, what do you think are the chances, the realistic chances the president can work with Republicans in a second term, to solve the nation's problems?

BILL KRISTOL, THE WEEKLY STANDARD: I think there is a very good chance that he'll pass major consequential legislation in the second term, and people like me won't like it that much. I think Republicans will have to give in much more than they think He won re-election, he is -- four president in the last century won more than 50 percent of the vote twice -- Roosevelt, Eisenhower, Reagan and Obama. And it pains me to say that, to put him in that window (ph) with the tree. But it is a fact. The Democrats picked up seats in the House and Senate, and the president is in good shape, you don't have -- the Republicans in the House will be able to get some concessions and some compromises, but I think there will be a deep budget deal next year, it will be an Obama-type budget deal, much more than a Paul Ryan budget deal, type budget deal. And elections have consequences.

WALLACE: Well, let me asks about that, Senator Bayh. You heard Congressman Price say, no, the country voted for divided government, they gave him a mandate, they gave House Republicans a mandate. As a moderate Democrat yourself, what do you think is the key to how Obama finds a way to work with the GOP and not just have two more years of gridlock?

BAYH: The president needs to move to the middle, particularly on some fiscal issues. Chris, I have been as pessimistic as anybody about gridlock in Washington, but actually, like Bill, I am somewhat modestly optimistic here. The president has more flexibility to stand up to his base on things like entitlement reform because he's been reelected. The Republicans, remember what Mitch McConnell said their top priority was making sure that he is a one-term president, well, that is off the table now. The president will be thinking about his legacy, when he'd actually get things done, not just stake out positions. The Republicans need to worry about their brand, and in fact, they lost moderate voters by 56 percent. So, all that suggests to me that the president says something like starting particularly on the fiscal cliff, look, I am willing to have two or three to one spending reductions versus tax increases, and I am willing to have a pro-growth tax reform package -- you can really get something done there.   WALLACE: Laura, presidents' second terms are notoriously difficult, and the fact is, that although the president won reelection, he didn't give us much of an agenda for a second term during the campaign. What do you expect from him? Now that he no longer has to worry, ever again, about re-election?

LAURA INGRAHAM, HOST, THE LAURA INGRAHAM SHOW: Well, I think, it is instructive to go back to 2010, when the Republicans obviously had that great midterm election. And for Republicans thinking that compromise is the answer for their political future, I would say, think about what President Obama did that actually ended up helping him win a huge re-election victory. He decided not to moderate, not to necessarily compromise on pretty much any issue. He decided to double-down on liberalism, and he marketed it in a new way and he sold to it Latinos and he found inflection points with women voters, and he did it masterfully with Jim Messina and the whole crew in his re- election team. So I would think Republicans and conservatives should figure out what they stand for.

WALLACE: Wait a second. We are going to talk about Republicans in the next segment.


INGRAHAM: I got that. But my answer is I think the president is going to go full steam ahead with his agenda, which is a socially progressive and very liberal agenda. I think we heard talk of compromise before, Senator, we heard it during healthcare, and in the end it was my way or the highway. He got it the way he wanted it, with very little support. I think we are going to see that again.

BAYH: He did extend the Bush tax cuts for a year. So there was some compromise on his part.

INGRAHAM: Well, he had to do that. Even Democrats were obviously urging him to do that this time. But now, in the second term without really any check, I think Obama doubles down on all the things he really wants to do. I think he rams through an amnesty, immigration reform, whatever you want to call it, and I think he goes a lot further towards carbon tax, toward all sorts of other environmental regulations that are waiting. There is this huge regulatory framework that is about to be implemented. They have been holding up on it, this second term is going to be regulation heaven, for those ...

WALLACE: Let me bring in ...


WALLACE: Let me bring in Kirsten.

POWERS: I mean actually, you just laid out probably the two biggest things that will happen if Obama has his way, immigration reform, but the reason immigration reform is going to happen is because of what Bill was saying, that there are Republicans that are chastened and are going to work with him on it. Otherwise it wouldn't happen, so that will be one major accomplishment that he will certainly try to get done, and I think you are right on the carbon tax as well. The climate change is going to be a major issue.

WALLACE: But do you agree with Laura that he is not going to move to the center, in fact he is going to double down on liberal progressive, whatever you want to call them, policies?

POWERS: Well, I mean the problem is both Laura and I are never really going to agree on where the president is, I actually think he's fairly moderate. So I don't -- I don't seem ...

INGRAHAM: On what issue? What issues is he moderate on?


POWERS: He did compromise on the tax cuts, for example, which is a major issue for Democrats.

INGRAHAM: The one thing. Begrudgingly.

POWERS: Even -- even in his healthcare legislation, you know, the public option was taken off the table, there were plenty of things that ...


WALLACE: All right. I want to, before the second ends I want to talk a little bit personnel. Bill, we had the shocking resignation Friday of David Petraeus. I want to get your thoughts on that, and also, the whole national security framework. Secretary of State Clinton, Secretary of Defense Panetta, both indicating they want to step down. What does -- what does that mean in terms of who is going to replace them and any possible change in Obama policy? Let's start with Petraeus.

KRISTOL: Well, it was a terrible end to a horrible week. And, it really was -- and I don't know anything more than anyone else does. You know, I think the president will face national security challenges more quickly than people realize. That when things are well, we can put that on the back burner, make some personnel changes, new secretary of state, new secretary of defense, new CIA director now, and wait for six to nine months. But in fact, major decisions have to be made about Syria, where 30,000 people have been killed, and we are losing influence by I think not having been more forward leading in Afghanistan.

What is the president going to do, we have 68,000 troops there, as the vice president said we're getting out in 2014, period? His own administration policy is more responsible, in my view, to try to get a force there, advisory and support force there afterwards, but I don't know, will there be support on the Hill if Republicans and Democrats think we are just in slow motion defeat in Afghanistan? Will people support sending more troops over there for the next two years? I'm not at all sure. So he has got to make a decision, is does he want to get out of that war, does he want to try to have a stable outcome? In which case he needs to rally the country? So I think he will have a busy foreign policy agenda in the first six months, too.

WALLACE: Senator Bayh, you are going to get the last word because we are running out of time in this segment. Petraeus, in specific, and national security in the second term in general?

BAYH: Well, the thing with David Petraeus is tragic. He is a patriotic American, he served his country well, it's -- it's really most unfortunate. Fortunately for us, that we have a deep bench in the national security foreign policy arena. I think you'll see the president making a smooth transition there. The big issue over the next 12 months, and it does involve the CIA, is we are coming to the moment of truth in Iran's nuclear program, and we face a fork in the road. There are no attractive alternatives, but there are profound consequences depending on which path we take, and that's going to be the major issue. Final thing, just in the last question, well, I just said it, he's going to compromise on legislation, because he has to. He will, as Laura said, be more progressive on the regulatory front because he can.


INGRAHAM: On the Petraeus thing, everyone thinks it's tragic, well, that is a given, but I think we have some real questions here. We had the head of our intelligence in the entire country sending personal e-mails after he was named CIA to apparently this gal, Paula, after the one report -- Ron Kessler's (ph) report is that she had broken off the relationship. He was sending scores and scores of e- mails, some reports say thousands of emails, from his personal account. And for Eric Holder, if he was the one who knew about this, and he had to have, to have not brought this to the attention of the president of the United States -- I think questions have to be asked, was it not brought to the president's attention if that is the case, because of a political concern? So, national security and politics, which comes first? Who cares who is president? Our country is on the line. Our security is on the line. And our CIA director was apparently distracted enough by this -- whatever this was, that he was sending scores and scores of e-mails from a personal account? I mean, this is insanity, that is not just tragic. This is a national concern.

WALLACE: A lot of that is unconfirmed.

INGRAHAM: Well, I think, I think we have a Congress who better investigate this, and he has to get his tail up on Capitol Hill.

So, tragic, yes. But it's outrage, more important for the American people.

POWERS: What Laura is talking about is as confirmed, is all these other stories that are being told about the women. I mean it's ...

INGRAHAM: Well, the "Washington Post and the "New York Times" had some pretty startling reporting today.

POWERS: Right. What I'm saying is that people need to be focusing on what she is talking about, which is if these e-mails were being sent, why aren't we talking about that? Why are we talking about Paula Broadwell's biceps?

INGRAHAM: National security -- Yeah, I mean who cares about that. It's about the national security concerns of the country.

WALLACE: All right. We need to take a break here. As you can tell, it's -- you can tell it's going to be a very calm, relaxed second term. Also here at Fox News Sunday, when we come back after a tough election night for Republicans, how does the GOP come back?



WALLACE: Check out Fox News for behind-the-scenes features, panel plus and our special Monday preview of the week ahead. You can find it at and be sure and to let us know what you think. Stay tuned, for more from our panel.




BOEHNER: It is clear that as a political party we've got some work to do. And I think the principles of our party are sound. But how we talk about the -- who we are as a party is clearly a conversation's that's under way, and we'll continue.


WALLACE: That was House Speaker John Boehner, acknowledging Republicans have to retool after a disappointing election. And we're back now with the panel. Laura, how much trouble is the GOP in?

INGRAHAM: Well, it depends on how they react to this. If the reaction to the election is let's dig into our core principles and try to remake them, I think the GOP will lose even more seats in 2014. If it becomes a bidding war with Republicans and this group or that group, whether it's Latinos or women, we are going to give you more stuff, or we are going to do amnesty-plus, just to keep in line with panel-plus (ph), Chris -- Amnesty Plus, so, you know, it's not going to work, but the Republicans I think have to take a lesson from -- and I hate to bring up Reagan again, but when Goldwater got shellacked in 1964, Bill Buckley and Brent Bozell Sr., all these conservatives got together and they said we're going to figure out how to sell this idea of economic conservatism and the conservative framework to new voters. And they went into the South and they transformed Mississippi and Alabama, all these places where people had never voted Republican before. It took time. And it took a lot of introspection, but it wasn't them just deciding, oh, our entire framework of ideas is wrong. So, it depends on how they react.

WALLACE: Kirsten, let's look at the exit polls which point out some of the challenge that Republicans face, let's put them up on the screen: Republicans lost women by 11 points. Hispanics, by 44 points. And young people, by 23 points. What does that tell you?

POWERS: Well, I think, well, first of all, losing women by 11 points isn't really that new, because they lost them by 13 points last time. It's more interesting to look at the swing states, where there was a much bigger swing, and I think that if you want to look at something recently that happened, that's similar to this, I think 2004. And that is what this reminds me of, this reminds of the day after Democrats, you know, just absolutely falling apart, oh my gosh, we have this new conservative majority, how are we going to change to attract them, and so I think there is a little bit of an overreaction on the right, except for on the immigration issue.

I do think that, because of the demographics of this country, that the Republicans are going to have to figure out a way to attract the Hispanic vote, and they're going to have to do a better job with women, but they actually could win an election still with that gender gap. It's just -- it's just, like I said, if you look more at the states where they -- the Obama administration bombarded women with messages, you saw a much bigger gap.

WALLACE: Senator Bayh, you know, it's interesting, because I was thinking of 2004 as well. The pendulum swings back and forth, and after the 2004, when Bush obviously had a lot of issues and he still won, the Democrats were dispirited, and, obviously, four years later, they came roaring back. What do Republicans need to do?

BAYH: Two elections I'm thinking of, Chris, are, number one, four years ago, 2008, when some parts of the Democratic Party said this was a vote for a new progressive era and a more left-leaning government. It turned out that wasn't quite the case. So I think our party needs to be fairly modest in the, quote, "mandate" we take away from this. We need to govern from the center out, progressive center. That's number one.

Number two, I'm thinking about 1988 from the Republicans' perspective. Democrats had just lost two elections in a row to Ronald Reagan. What did we do? We nominated Michael Dukakis, who's a fine man but was a liberal from Massachusetts. It took three beatings for us to finally realize you have to make common cause with the moderates.

I think that's the internal struggle the Republicans will be going through. They've got to be true to their principles, particularly on economic and fiscal issues, but when they embrace the far right social agenda, it does drives off young people and it does alienate single women and suburban women...

INGRAHAM: Senator, we have 30 Republican governors.

BAYH: You see that in the numbers.

INGRAHAM: Senator -- and in your state of Indiana...

BAYH: Laura, can I say one last thing?


BAYH: If I can say one last thing, please continue to nominate people for public office who talk about women being raped and that being God's will.


KRISTOL: Mike Pence, who's actually a great star of the future, won by only five points, it was such a bad year. Republicans should not kid themselves. Republicans lost 25 of 33 Senate seats. Republicans gained back the two states that were easy to gain back, Indiana and North Carolina, won no other new states at the presidential level, even though Obama had a very tough economy, that the glow was gone from the first term, all of that. Republicans lost the national House vote by half a million votes.

They won -- they held the House because of redistricting and Democratic voters are more concentrated in some districts. It was a bad year. And the youth vote if very worrisome, 60-40. You -- you know, I believe Republicans have the right policies for the future. I believe it's the Democrats who are defending.

WALLACE: So what do the Republicans do?

KRISTOL: You need to have a totally vigorous and open debate, I believe. And I don't think the answer is to be more moderate, nor is the answer to be more conservative. The answer on some issues is going to be fresh thinking, which will be taken as moderate, and some issues actually to be more conservative.

I think we have a huge middle class problem. There, the particular nominee Republicans had was, you know, unfortunate in that respect. Four years after a huge Wall Street crisis, you nominate someone from Wall Street.

But I think honest debate, fresh thinking -- leadership in the Republican Party and the leadership in the conservative movement has to pull back, let people float new ideas. Let's have a serious debate. Don't scream and yell what one person says. You know what? It won't kill the country if we raise taxes a little bit on millionaires. It really won't, I don't think.

I don't really understand why Republicans don't take Obama's offer to raise taxes for everyone below 250,000...

WALLACE: Or a million?

BAYH: Make it a million. Really, the Republican Party is going to fall on its sword to defend a bunch of millionaires, half of whom voted Democratic and half of whom live in Hollywood, and they're not...


WALLACE: Bill, let me ask you about the Tea Party. Because this is the second election in a row where I think it's fair to say Republicans squandered a really good chance to take over the Senate. I mean, by all mathematical right, they only had 10 seats to defend. Democrats had 23. Because they nominated people who were strong enough to win in primaries but too out of the mainstream to win in general elections.

Does the Republican Party have a Tea Party problem?

KRISTOL: No, it has as much a Republican establishment problem as a Tea Party problem. Because the establishment nominees were nominated in Florida and Virginia and North Dakota and Montana and they lost; a sitting congressmen who had the same stale establishment Republican message.

So we have some -- Republicans have some Tea Party problem and some establishment problem, and, basically, they should get away from either maniacally defending the establishment or maniacally defending the Tea Party and try to find good -- let good young people volunteer themselves...


WALLACE: Laura, you have 30 seconds.

INGRAHAM: OK, fine. OK. We've heard this Tea Party thing. We heard it in 2006 -- I mean, 2006, "too far right," it was called then. We had some bad candidates, no doubt about it, Mourdock and Akin, terrible candidates. How did -- why did Scott Brown lose in Massachusetts? Why did we lose the North Dakota Senate seat, because of the Tea Party?

If it weren't for the Tea Party folks and the energy that they brought to the fore, Republicans would be in a disaster now. It doesn't mean they have to not nominate great people. Bill's right about that. But the Tea Party -- how many times can they get blamed for moderates losing seats? Come on.

WALLACE: Thank you, panel. See you next week. Don't forget to check out "Panel Plus," where our group picks right up with the discussion on our website, foxnewssunday.

Up next, a follow-up to last week's show.


WALLACE: Before we go, a follow-up to our interview last week with Obama senior campaign strategist David Axelrod. We asked him about a bet he made offering to shave his mustache if the president lost Minnesota, Pennsylvania or Michigan on election night.


WALLACE: How secure is your mustache today?

AXELROD: The next time we see each other, Chris, I guarantee you that mustache will be right where it is today...


...and where it's been for 40 years, by the way, so you know how serious a bet that was.

WALLACE: The president won all those states, but Axelrod's bet attracted so much attention, he had another idea this week. He and his wife Susan have a daughter named Lauren who has epilepsy. And they are key figures in Citizens United for Research in Epilepsy, or CURE.

Now David has promised to shave his mustache if folks will donate $1 million in total by the end of this month. It's a good cause. You can find more information at And let's face it, it would be fun to see David without his mustache.

And that's it for today. Have a great week, and we'll see you next "Fox News Sunday."

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