This is a rush transcript from "Journal Editorial Report," May 26, 2012. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: This week on the "Journal Editorial Report," as the presidential campaign into high gear, can Republicans tap into voters' economic anxiety without attacking the president personally? We'll ask Karl Rove.

Plus, Catholics in court. A look at the legal and political ramifications of this week's ObamaCare lawsuits.

And the Facebook fiasco. Who is to blame for that botched IPO?

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

Well, heading into the Memorial Day weekend and as the presidential campaign kicks into high gear, the Conservative Political Action Committee, Crossroads GPS, went up with an ad this week in 10 swing states, reportedly the center piece of a $25 million TV buy. The piece is not your typical attack on President Obama. Instead, tapping into voters' economic anxiety.

Here is part of the ad.


UNIDENTIFIED ACTRESS: I always loved watching the kids play basketball. I still do, even though things have changed. It's funny, they can't find jobs to get their careers started. And I can't afford to retire. And now we are all living together again.


Earlier, I spoke to Crossroads co-founder and former George W. Bush adviser, Karl Rove, and asked him why the ad doesn't take on the president more directly?


KARL ROVE, CO-FOUNDER, CROSSROADS & FORMER PRESIDENTIAL ADVISOR: Well, first of all, an effective ad is in part of an effective narrative. And an effective narrative is based on what people believe they know, and what the American people think they know, and it is accurate, is that their economic condition is not particularly good. We have fragile recovery, the worst since any recession since World War II. Unemployment at historically high and durably high levels. What we wanted to do with the ad was sort of resonate, if you will, with the feelings of the American people. Recent polls show that between 75 percent and 80 percent of the American people still think the economy is still in recession.

GIGOT: Right.

ROVE: And two-thirds of Americans think that President Obama's economic plans either have not helped the economy or made things worse.

GIGOT: How much of it is related to the fact that President Obama is still very personally popular with the American public? They say they like him a lot more than they like his policies.

ROVE: They don't like him that much better than they like his policies.


But they -- look, when running against an incumbent, you have to get people to vote for you, if you are the challenger, who voted for the incumbent when they elected him to office in the first place.

GIGOT: And they don't like to admit they made a mistake.

ROVE: And you don't want them to either. You want to give them permission to -- you want to give them permission for their doubts to rise to the surface. For them to say, I did the best thing but he's let me down. I'm disappointed. I'm regretful that he has done the things he has done. It's time to do something else.

GIGOT: You wrote this week in your Wall Street Journal column that Mitt Romney, the challenger, is now the narrow -- that was your word, narrow -- favorite to win this election. Why?

ROVE: Yes. President Obama was much better when he was on offense, attacking his predecessor and painting a vision for the future. Remember, his most powerful moments were things like, "I don't want to be the president of red states and blue states but the United States." Now, he is in trouble. He has got ratings in the 40s. The ballot is virtually, tied depending on what poll you look at. Critical battleground states are clearly leaning towards Romney or up for grabs. He is not good on defense, on sort of defending what he has done. He has turned out to be incredibly lousy on projecting a forward-looking vision. He's essentially squandered the prestige of the office over the last 14 to 16 months that could have given him a forward-looking vision. And I just think Romney is going to be better on offense. And it is easier to be fighting in a lot of different places, poking at the president's record as long as he shares his own vision, and for Romney to get where he needs to go.

GIGOT: When you were trying to get President Bush elected, his May 2004 approval rating, 49 percent. President Obama's May 2012, 47 percent. George W. Bush won reelection.

ROVE: Yes.

GIGOT: That is not that --


ROVE: And if you look at where our ballot position was, it is roughly comparable. But there was a hidden strength that carried us. First of all, remember this thing. The 2004 election was more about what? Security. About terrorism, Iraq, the world, the place that we found ourselves.

GIGOT: The president was -- the Iraq war was beginning to be quite unpopular.

ROVE: Right. But the president was seen as strong on these issues. The greatest strength any president has is the vision of himself as a strong leader. President Bush, in April of 2004, 64 percent of the American people said they felt he was a strong leader. 36 percent said he was not. President Obama, 51-48. That is a big difference. At the end of the day, people will vote for an incumbent president, even if they don't necessarily agree with him, if they see him as a strong and effective leader. They give him the benefit of the doubt. You are strong and effective, you may know more than I do so, so you know what, because I believe in you as a leader, I will vote for you, even if I don't necessary agree with your polices. President Obama has the problem that he doesn't have that reserve of strong leadership to go on.

GIGOT: Some people, who look historically at this, look at the 47 percent approval rating and look at the first six months of economic growth in the election year. And they say, because of the growth is going to be between 2 percent to 3 percent, most people figure that President Obama is going to win 51 percent. That projects to 51 percent of the two-party vote and a narrow election victory.

ROVE: Yes. There is a big difference between two percent growth and three percent growth. It is 50 percent difference.


GIGOT: That's right.

ROVE: So -- and we won't know what it is. But here is the problem.

GIGOT: But is that the biggest factor, how much the economy grows between now and November?

ROVE: Well, I think it's one. Look, we try and reduce this to one number, and it's not. It is a complex algorithm and the nature of the algorithm changes from election to election, and obviously, difference from individual to individual. But economic growth plays a part of it. Unemployment plays a part of it. Personal circumstances are a part of it.


GIGOT: How people feel about themselves.

ROVE: That's right. And a new poll out said 16 percent of the American people feel that their economic position is better under President Obama. That is the lowest number of any incumbent president running for reelection. And many who had higher numbers got defeated.

GIGOT: Let me ask about the president's attempt to link Mitt Romney to George W. Bush and his policies. It's clearly a part, a central part of the Obama strategy. Does Romney have to separate himself from the Bush policies?

ROVE: Romney will have his own policies. He doesn't need to separate himself. He just needs to try and be himself. Things change in four years. This is -- look, why do you think it that President Obama is 51-48?


ROVE: In part, because he is blaming everybody else. It's Bush's fault. It's the tsunami's fault. It's ATMs fault. I mean, it's -- and this wears out.


This is why I don't get it. Because when you're president, you want to look strong. You want to look like you're the commander of your desk and you --


GIGOT: But the public still thinks that President Bush's policies are as much to blame for the economic problems we have as President Obama's.

ROVE: You know what though, it sounds like --


GIGOT: In the polls.

ROVE: It sounds like -- it comes across as an excuse. And people don't really like people who are offering excuses. Look, I could have done better, but it is the guy before me. It's worse than I even though.


I said that he was unpatriotic and an unmitigated disaster that we're in the greatest -- but I was wrong. It was worse than I even thought. I was so stupid I didn't know what to do. This is not a good message to run on.

GIGOT: All right, Karl Rove, thanks for being here.

ROVE: You bet.


GIGOT: When we come back, dozens of Catholic groups file suit against the Obama administration over its birth control mandate. We'll take a look at their legal case and the political fallout, next.


GIGOT: The battle between the Obama administration and the Catholic Church intensified this week as 43 groups, including the Archdiocese of Washington and New York Catholic University and the University of Notre Dame, filed lawsuits challenging the mandate requiring religious employers or their insurance companies to pay for contraception services, including sterilization and the so-called morning-after pill.

Joining the panel this week, Wall Street Journal columnist, Bill McGurn; editorial board member, Joe Rago; and senior editorial page writer, Collin Levy.

So, Collin, let's start with you. How strong a legal case do the Catholic plaintiffs have here?

COLLIN LEVY, SENIOR EDITORIAL PAGE WRITER: This is an extremely strong legal case, Paul. It is based on two things. First, it's based on the First Amendment and the free exercise clause but it's also based on a law that was passed in the '90s, a hugely bipartisan law, called the Religious Freedom Restoration Act. And that act basically says that for the government to put any burden on religion it has to pass a high level of scrutiny and it also has to make sure that any burden it puts on is the least restrictive or intrusive way of accomplishing its goal. It is clear that the HHS mandate, contraception mandate doesn't do that. It is nowhere close to it. I think that is what they are look at here.

GIGOT: Bill, there is a Supreme Court precedent, though, a 1990 precedent written by Justice Scalia, the conservative justice, in the famous peyote case that said, that was an Oregon law that said -- that said churches, religions must abide by this kind of regulation unless -- as long as it applies to everybody.

WILLIAM MCGURN, COLUMNIST: Right, generally applicable. That is why what Collin says is important. This law was passed largely in response to that decision.

GIGOT: The 1993 --


MCGURN: And it puts a burden on them, what she was saying is the facts of it are. The Obama administration has given so many waivers on this law. It's hard to argue a case is that compelling if you are making exceptions. For example, it's a vaccination and you are overcoming some group, you have to vaccinate everyone when you do that. The second thing is you have to do it in the least intrusive way.

GIGOT: Intrusive way.

MCGURN: So just the facts are really against them on this.

GIGOT: Well, that's --

LEVY: Yes.

GIGOT: Well, Collin, a large part of this will hang on whether or not, therefore, this is the least restrictive means. And the administration says this is a reasonable compromise. We tried. We worked through -- worked it out and they don't have to pay for these contraceptive services themselves. Their insurance companies will do that. What is wrong with that?


LEVY: Well, a couple of things. For one, obviously, those costs are going to get cast right back on to the universities. Also, a university like Notre Dame self-insures, so it is really sort of irrelevant.

One of the things here, too, though, is a lot of people are saying, is this act actually going to apply. And the Supreme Court already ruled on that in a case called Gonzales v. Sentro Espirito (ph), in 2006. They said that the Religious Freedom Restoration Act directly applies to the federal government. So there's no question that the Obama administration is going to be on the hook here.

GIGOT: Joe, why didn't the administration try to work more closely with the bishops on this, because it comes through in the lawsuit, particularly the Notre Dame lawsuit, that they kind of lay out, we attempted to work with them and they directly rejected our attempts for a compromise.

JOE RAGO, EDITORIAL BOARD MEMBER: Look, I think it is two things. Democrats think this is a winning political issue -- war on women, banning contraception. Of course, all of the Catholics and the litigants here are talking about is going to the status quo ante of six months or a year ago.

The other issue is ideological. They really think that the government should decide what counts as health care and what should be covered by insurance. And if, you know, their silly little moral qualms get in the way, well, that is too bad. This is government knows best paternally.

GIGOT: Bill, talk about the internal politics of this within -- among -- the debate among Catholics. You went to Notre Dame.

MCGURN: Right.

GIGOT: Notre Dame -- Father Jenkins, the president of the university, gave -- invited President Obama to speak in 2009, despite --

MCGURN: Right.

GIGOT: -- support for abortion rights, and praised his willingness to engage.

MCGURN: In fact, that, as the Journal Editorial put out, that is in the citation on the honorary degree.


They lauded him for his willingness to engage and also for his encouragement for people to bring their faith in the public square. If you read Father Jenkins' statement -- and I give him credit for doing it. It a tough decision from where he is. He is now suing his commencement speaker effectively for saying he is not willing to engage.


GIGOT: And that is explicit in the suit.

MCGURN: Very explicit. Same thing Cardinal Dolan says. I think, further, to Joe's point, they got very greedy. They could have -- if they had the traditional exemption, they could have had a big step for their mandates without any real institutional objections to it. And they got very greedy. They did the same thing when it was at Tabor (ph), and they were slammed, 9-0.


MCGURN: The case, because they were trying to say -- they argued a position so radical that there is no ministerial exceptions.

GIGOT: Collin, what is the political fallout of this -- this year, do you think?

LEVY: I was going to say, too, this is really a rude awakening for Catholics who went out on a limb here. And you now you have a suit that is essentially disproportionately targeting Catholics because nine out of 10 insurance plans already covered contraception. This is hitting them particularly hard. So I think that will be another issue in the politics here where they look and say, hey, we went out on a limb for Obama and we voiced our concerns, by the way, before this law went into effect and they pretty much --


GIGOT: And they still pushed through with the regulation.

But briefly --

LEVY: -- that's right.

GIGOT: -- on the politics here, Joe. Catholics aren't going to vote on this alone. They will vote on the economy and other things. How important is this?

RAGO: I think it helps feed the large unpopularity of this law. If you look, you know, 55 percent of the country hopes it will be repealed. And normal people look at this and go, what is that all about. Let's respect their rights of conscience.

GIGOT: All right. All right.

Thank you all very much.

When we come back, the Facebook flop. The much-anticipated IPO turns into a legal and public relations nightmare. So what went wrong?


GIGOT: Well, it was one of the largest and most-hyped IPOs of all time, and it has quickly turned into a legal and public relations fiasco. Facebook; its CEO, Mark Zuckerberg; Morgan Stanley; and the other big Wall Street banks that underwrote the deal were all sued this week by a group of investors, accusing them of withholding negative information about the social networking giant prior to last Friday's stock market debut. Facebook shares fell below the offer price of $38, setting off a debate about who is to blame for the flop.

Wall Street Journal editorial board members, Mary Kissel; and assistant editorial board editor, James Freeman, join us with more.

Mary, this was supposed to be a shining moment for capitalism and Wall Street, particularly after the last four awful years. We could support a big growing new company. What happened?

KISSEL: Well, they had problems right out of the block starting with NASDAQ, Paul.


GIGOT: That is the exchange that it is traded on.

KISSEL: That's right. About a 30 minute delay in the trading in the open and then it took NASDAQ hours to get back to brokers to confirm if they had bought or shorted the stock. So problems out of the gate with NASDAQ. There were also problems with the underwriters. And we have seen the "Wall Street Journal" news side cover this extensively over the last couple of days, where the underwriters were accused of telling clients, hey, don't buy this stock, their big clients, while at the same time allocating 25 percent of the offering to mom-and-pop investors and not telling them of their concerns.

GIGOT: They were saying, look, we've lowered our earnings estimates because we don't think it is going to perform as well.

And is that kosher, James? They can do that?

JAMES FREEMAN, ASSISTANT EDITORIAL BOARD EDITOR: Sure. They -- what they were doing was lowering their estimates based on the information everybody had, including the public small investor, which is that Facebook's revenue and profits were slowing. In fact, in the first quarter of this year, they actually made less than they made in the fourth quarter of last year.

Now, for are an exciting tech company valued at a sky high level, this should have been a warning for investors. And I think the question to Morgan Stanley and the others would have been, why didn't you lower estimates after that. They seem to have done what they should be doing here.

GIGOT: Is this -- all right, if this is not illegal, it's not fraud, as the lawsuits claim, is it still a little unfair to tell the big clients, OK, here is our real advice, and then say, but we won't tell everybody else?

KISSEL: It is a little unseemly, but Morgan Stanley's clients pay for that access to their analysts, so there is a reason why they were talking to those big clients.

Look, there are a lot of accusations flying out there, there's a lawsuit now. There is no evidence yet that there was any malfeasance here at the underwriter based on the information we have right now.

GIGOT: So the mistake was mispricing the offering. They just tried to get greedy, get make too much -- I mean, one -- obviously, Facebook is their client, too, and they were trying to raise as much money as possible for Facebook. But when you have an IPO, it is not good for anybody for the stock price to fall afterwards. That's bad for the company, its reputation.

FREEMAN: Yes, but --

GIGOT: It's bad are for the underwriter and bad for the investors.

FREEMAN: OK, but it is not clear how much of the decline, since the opening until now, is the result of pricing it the wrong way and how much is the NASDAQ botch on day one. And keep in mind, this is a technology company. You are buying it not on fundamentals, but because you believe it is the media platform of the 21st century. A big technological glitch on its debut is a big psychological factor.

KISSEL: Yes, you know, James, I have to disagree with you there.

If the 11 percent fall on the first day was due just due to a technological glitch, then the price would have recovered. But you have seen Facebook really languish in the days.


FREEMAN: Well, amid -- amid a lot of negative media attention since then. But I think --


KISSEL: Or economic fundamentals.

FREEMAN: Well, people are getting, on fundamentals or traditional valuations, it will be worth a lot less than it is now.


People are betting on the future. But I think the point is that there's no -- the underwriter's job is not to guarantee a rising stock price. It is trying to meet demand. And remember, when these big opening- day pops happen, often people say, oh, you left money on the table for the company. Remember the LinkedIn issue --


GIGOT: Another social media company.

FREEMAN: If they only put a few shares out to the public, unlike a greater share of the company with Facebook, well, then people say, how reflective of the value is it if you are only offering a little bit of the company.

KISSEL: Yes, but, James, I don't think anybody at Morgan Stanley is standing around this week and giving high-fives to each other and saying, yes, we raised a ton of money for Facebook.

FREEMAN: Certainly, not.

KISSEL: Too bad that the stock price dropped. I think this terrible for Morgan Stanley. It sets a terrible precedent. When they go out to pitch deals to other tech companies, this is going to be a stain on their reputation.

GIGOT: All right, Mary, last word. I guess the lesson is caveat investor, the eternal lesson.

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


GIGOT: Time for "Hits and Misses" of the week.

James, first to you.

FREEMAN: Well, this is a big miss to the United States government for not getting Shakil Afridi out of Pakistan. This is the doctor who helped lead us to the bin Laden compound, critical in the operation to take down bin Laden. We left him in the country and now he has been convicted or treason and sentenced to prison for --

GIGOT: In Pakistan.

FREEMAN: In Pakistan. And sentenced to prison for 33 years. Disgraceful.



LEVY: Paul, this is a not-so-fond farewell to U.S. attorney in Chicago, Patrick Fitzgerald, who announced this week that he's stepping down from his post after more than a decade now. He made his bones really prosecuting legions of corrupt Chicago politicians. But in recent years, he's kind of overstepped his bounds and really made a hash of some major high-profile cases against Scooter Libby, Conrad Black and also Illinois Governor Rod Blagojevich. So I guess a hit to him for taking himself out of the position where he can do more harm.


GIGOT: All right, thank you. I agree with that one.

All right, Mary?

KISSEL: This is a hit to Elon Musk and his company, SpaceX, which launched an unmanned space craft into orbit this week to dock with the international space station. This isn't just good news because we need something to replace the space shuttle, Paul. It is good news because Washington is slowly, slowly warming to the idea of private space travel and for politicians with taxpayer dollars to spend, that really is the final frontier.

GIGOT: Do you think that we will see a private space launch that goes to the moon?

KISSEL: I hope we do. SpaceX is heavily subsidized by NASA but, again, at least we are moving in the right direction.

GIGOT: All right, thanks.

Remember, if you have your own "Hit or Miss," please send it to us at jer@FOXnews.com. And be sure to join us on the web at FOXnews.com/journal.

That is it for this week. 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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