This is a rush transcript from "Special Report," December 20, 2018. This copy may not be in its final form and may be updated.

BRET BAIER, HOST: This is a FOX News alert. You're looking live on Capitol Hill, the mics are set up there for the House Minority Leader, Nancy Pelosi, and the Senate Minority Leader, Chuck Schumer. They're expected to brief reporters in just a matter of minutes. This obviously as we get closer to a possible partial government shutdown. A lot of back today. Take a listen.


REP. PAUL RYAN, R-WIS., SPEAKER OF THE HOUSE: The president informed us that he will not sign the bill that came up from the Senate last evening because of his legitimate concerns for border security.

PRESIDENT DONALD TRUMP: The fact is we need the wall. The Democrats know it, everybody knows it. It's only a game when they say you don't need the wall. You can look at their eyes and you can say, well, they are not telling the truth.

CHUCK SCHUMER, D-N.Y., SENATE MINORITY LEADER: Democrats are not budging on the wall. We favor smart, effective border security, not a medieval wall.

There are not the votes of the Republican House for a wall, there are not the votes in the Senate for the wall. So what's the endgame here?


BAIER: The House majority leader currently, Kevin McCarthy, said he does have the votes in the House. We will see as they get ready to pass this piece of legislation. There you see what has been enacted already, about 75 percent of spending. We're talking about that red part, the 25 percent, but it still deals with a lot of people. You're looking north of 800,000 people, the furlough rates really hit HUD, Commerce, Treasury the most. It's possible that nonessential workers would still work but they wouldn't get paid. Some others wouldn't be allowed to show up for work. Obviously, it comes before Christmas. The one upside is that they did get paid this past week, this week, ahead of Christmas.

But this is really going down to the wire as you look live on the Hill. Let's bring in our panel, Byron York is chief political correspondent for the "Washington Examiner," A.B. Stoddard, associate editor at Real Clear Politics, and Matthew Continetti, editor in chief of the "Washington Free Beacon." I may interrupt you if I see Senator Schumer and the minority leader Pelosi. Byron, your thoughts as this developed today, and clearly the president is making a stand.

BRYON YORK, CHIEF POLITICAL CORRESPONDENT, WASHINGTON EXAMINER: It happened fast. We had seen a whole bunch of stories that Trump was caving and that he was going to agree to this. We had a lot of criticism of him by Rush Limbaugh and Ann Coulter. Paul Ryan and Kevin McCarthy go over to the White House, and he is not going to sign this bill that the Senate has passed.

No, one interesting thing here is in this procedural vote that Peter Doocy was reporting about, he said they had 400 votes, which means the Republicans have gotten a lot of their members back here in Washington. I think the Republicans had 217 votes in that vote. And they believe they can pass this. But they were actually quite affected by these predictions from Nancy Pelosi, and you just heard Senator Schumer predicting it as well, they were quite affected by these Democratic projections that they didn't have the votes in the House, and I think they are trying to say, yes, we do.

BAIER: OK, here is Senator Schumer earlier and the president talking about money.


SCHUMER: A Trump shutdown will not convince a single Democrat to support bilking the American taxpayer for an ineffective, unnecessary, and exorbitantly expensive wall.

TRUMP: Our nations has spent trillions of dollars and sacrificed thousands of brave young lives defending the borders of foreign nations. I am asking Congress to defend the border of our nation for a tiny fraction, tiny fraction of the cost.


BAIER: A.B., there are some senators already home. How does this logistically work? I tried to press the House majority leader on this about the logistics of getting it past the House and then getting it past the Senate. How does it come to conclusion?

A.B. STODDARD, ASSOCIATE EDITOR, REAL CLEAR POLITICS: The senators were told by the vice president yesterday that they could pass this and go home.

BAIER: A continuing resolution.

STODDARD: And the president would sign it. A stopgap, short-term measure.

BAIER: Did it have the $1.6 billion for the wall in that? I don't think it did.

STODDARD: That's old money.

BAIER: Right.

STODDARD: It hasn't even entirely been spent. They let them go home. And a congressman who was close to leadership and knows what's going on told me at 5:32 that they don't know what's going on. They weren't certain they've had the votes. And they were hoping that even if it failed, the president would come to his senses. There wasn't a Senate plan. There was a President Trump comes to his senses plan.

This is -- I think the nation's fourth-graders know this is no way to run a lemonade stand. This is completely irresponsible. The markets are rattling on the prospect of a shutdown that's turning on Ann Coulter's tweets. The president time and again is contemptuous of process and of compromise. He knew when he said he wouldn't sign another spending bill like this eight months ago that the time to produce the votes in the Senate was the election. He doesn't have 60 votes. He must compromise. He was offered a DACA deal. He refused to take it. He took four positions on the Goodlatte bill. He got the fewest votes --

BAIER: But if there was going to be -- I understand. I understand.

STODDARD: He refuses to do the hard work.

BAIER: I get it. I get it. But if he listens to Mark Meadows and the Jim Jordans and the other people on the House floor --

STODDARD: They don't know what they're talking about. This is political malpractice. They're wrong.

BAIER: Here is Chuck Schumer and Nancy Pelosi walking to the mics in Capitol Hill. We don't know if there's a deal or not, but we will listen in with you and then analyze on the other side.

REP. NANCY PELOSI, D-CALIF., HOUSE MINORITY LEADER: Good evening. For a number of weeks now House and Senate Democrats and Republicans have worked together to put together an appropriations bill to meet the needs of the American people and now to keep government open. Somehow or other, and I don't know what the answer to the question is, the president of the United States prefers to shut government down, and will resist any opportunity to keep government open.

Again, we are completely ready, as we have been for a while, with bipartisan, bicameral legislation to pass a sixth appropriations bill and have a continuing resolution for the seventh bill if we cannot come to terms on that. We've offered that to the president. We've also offered him a continuing resolution with seven bills in it. Yesterday the United States Senate passed legislation overwhelmingly, and I'll yield to the distinguished leader in the Senate to talk about that.

The president is doing everything that he can to shut the government down. You have to ask the question, why? Does he not believe in governance? Does he not care about the American people? Doesn't he know that the economy is uncertain? Hasn't he followed the stock market that he likes to brag about sometimes? There's something wrong with this picture, especially in the holiday season. And so if they make the bill bad enough, they are able to get enough votes on the House side, but for a shameful bill that is unworthy of this House of Representatives and certainly of the American people.

With that I yield to the distinguished leader from the Senate.

SCHUMER: Well, thank you, Leader Pelosi.

Today's events have made one thing clear -- President Trump is plunging the country into chaos. The stock market is down another 500 points. General Mattis is stepping down, and we know he has real disagreements with the president on Syria and on the wall. And now President Trump is throwing a temper tantrum and creating the Trump shutdown of the government.

Last night the Senate passed by voice unanimously a bill proposed by leader McConnell. All Speaker Ryan has to do is put it on the floor of the House, it will get a majority of votes, and the president can sign it and avoid a shutdown. But unfortunately, President Trump was attacked this morning and last night by the hard right, and, fearful, he backed off his commitment to sign this bill.

Republican leaders told us yesterday that he was ready to sign the bipartisan bill that passed the Senate unanimously, every Democrat and every Republican, to avoid a government shutdown. The bill contained neither Democratic demands or Republican demands. It said to the American people, we have a way to keep the government open. And Leader Pelosi, Leader McConnell, and myself have done everything we can to avoid a shutdown.

But President Trump wants one. He has asked for 25 times, and he said in front of us he'd be proud to shut down the government. It is nothing to be proud of. The bottom line is simple -- the Trump temper tantrum will shut on the government, but it will not get him his wall. The bill that is on the floor of the House everyone knows will not pass the Senate.

Speaker Ryan, Leader McCarthy have cynically put it on the floor of the House, knowing it can't pass the Senate. Everyone knows it can't pass the Senate. It's a cynical attempt, a cynical attempt to just hurt innocent people, and do just what President Trump wants, even though they probably know it's bad for the country.

So the bottom line is very simple. There's still hope. Leader Pelosi and I have put two proposals on the table -- we have not taken them off -- that would avoid a government shutdown and get a majority of votes in the House and the Senate. Leader McConnell had put on the floor last night a proposal that would avoid shutting down the government. It is a shame that this president, who is plunging the nation into chaos, is throwing another temper tantrum and going to hurt lots of innocent people. The Trump temper tantrum may produce a government shutdown. It will not get him his wall.

UNIDENTIFIED FEMALE: Mr. Leader, what happens next in the Senate if this bill does pass the House tonight?

SCHUMER: Leader McConnell has said he will schedule a vote. It clearly will not come close to getting the 60 votes that it needs. And then Leader Pelosi and I and probably Senator McConnell would hope that the House would then consider passing the bipartisan, unanimously passed bill that the Senate would pass. But whether they will do that or not, your guess is as good as mine. Donald Trump wants a shutdown, and they seem to be so afraid that they are going to along. We'll see.

UNIDENTIFIED MALE: A couple minutes ago you told some of us that you were shaken by the news about Jim Mattis' resignation. Why are you shaken by this news?

PELOSI: I'm shaken by the news because of the patriot that General -- Secretary Mattis is. I think everybody in the country should read his letter of resignation. It's a letter of great patriotism, respect for the president, but also a statement of his values, where he talks about the strength of our nation is intrinsically linked, the strength of the unique and comprehensive system of alliances that we have that he talks about, that we must be resolute and unambiguous in our approach to those countries with strategic interests that are increasingly in tensions with ours.

It's a beautiful letter about, again, our values as a nation in terms of our national security written by a patriotic American, who was a comfort too many of us as a voice of stability in the Trump administration. So just look at this week. The president taking troops out of Syria without the full consultation with the national security leaders of his own administration. The president taking actions that encourage his secretary of defense to issue a letter of resignation. He's reversing his position about signing a bill. Maybe he thinks if government is shutdown he can golf more comfortably. That's not how it works. Government must work even if you are golfing for two weeks.

So there is something very wrong with this picture, and this resignation is one -- we just agreed from Secretary Mattis and Secretary Pompeo, that was last Thursday, so it was one week ago. Our troops look to Secretary Mattis as a leader, and now he is going to be leaving them. This is very serious for our country. I yield.

SCHUMER: Secretary Mattis was one of the few symbols, the few items of strength and stability in this administration. Everything that indicates stability, everything that indicates strength, everything that indicates knowledge is leaving this administration. General Kelly, General Mattis, so many others.

PELOSI: McMaster.

SCHUMER: McMaster, exactly. There is chaos now in this administration. This week was one of the most chaotic weeks we have ever seen in American government, and amazingly they want to close the week -- President Trump does -- by shutting down the government, shutting down the government.

Now, we all know that Secretary Mattis had disagreements with the president on Syria and the wall. Some have speculated that the president was going to demand that he started building a wall, which he knows he can't do by law, and maybe that's one of the reasons he stepped down.

UNIDENTIFIED MALE: Leaders, do you think there's any reasonable prospect that if there is a shutdown you can override President Trump's veto of a CR in the next week or so?

SCHUMER: You would have to ask our Republican friends.

PELOSI: It's very strange about how our Republican friends, the worse he gets, the more they rally around him. And this, just to refer back to what Leader Schumer was saying about the voice of stability in this administration and the people who have let. You have leaders, great leaders who have left the administration in dismay, and the rest of them have left in disgrace. That is what this administration has been about.

We don't want to be fearmongers in terms of our country. This great country can withstand just about anything, but it shouldn't have to. It shouldn't have to. So yes, I'm shaken by the resignation of General Mattis for what it means to our country, for the message it sends to our troops, and for the indication of what his view is of the commander in chief.

UNIDENTIFIED FEMALE: Are matters less safe without Mattis running the Pentagon?

SCHUMER: Look, our military soldiers, the 2.15 million of them, our civilian employees in defense looked up to General Mattis. I'm sure they feel it's a great loss. I'm sure most Americans feel it's a great loss, and everything like this that happens, a resignation of a strong leader, gives the American people less and less faith in President Trump and the way he governs.

PELOSI: It's just all the more reason for us to pray for our country. Our country has been blessed in so many ways by leaders throughout the centuries and the decades, and some of them, one of them, General Mattis. This is a very sad day for our country. Read his letter. Have you read his letter? Read his letter and examine the activities that have led up to it and what it means.

Because of his leadership, we are safe, yes. We have to pray that we are safe and we have to continue to make sure the American people are assured we're safe. That is the oath of office we take, to protect and defend, and we will. We shouldn't have to do so because of the temper tantrums of the commander in chief.

SCHUMER: Last question.

UNIDENTIFIED MALE: Now that the Senate is going to have a number of key cabinet posts that they're going to be forced to confirm here in a very short period of time, is your caucus able to will work with the administration with this new round of appointments?

SCHUMER: Unlike previous presidents, Democratic and Republican, there is no consultation. They don't call us and say what do you think of this person, what do you think of that person? And most of the nominations have been so below par in their ethical standards, in their ability to govern, in their ideology, which is so far over. And I hoped there would be a change, but given the past group of nominees, I don't. So they are going to get very, very thorough examinations. They are going to get serious, serious questions. And in the past, almost all of them have not passed muster. Thank you.

PELOSI: Thank you, all.

BAIER: Senator Chuck Schumer and House Minority Leader Nancy Pelosi briefing reporters there about the way forward, and also the other big news of the night, Defense Secretary Jim Mattis resigning -- retiring, but really resigning if you listen to the resignation letter and specifically what's in there.

First let's talk about the shutdown and what they said there and the way forward. It does not seem like they are going to consider even anything that comes out of the House that has a $5 billion for a wall.

MATTHEW CONTINETTI, EDITOR IN CHIEF, "WASHINGTON FREE BEACON: Right. And have a bicameral Congress, so even if the House is able to pass this bill with funding for the wall, it still has to pass the Senate. And you see from Chuck Schumer there's no way that the Democrats are going to vote for it. In fact, it seems --

BAIER: Because they need 60. They can't do it with 51.

CONTINETTI: They need 60 votes to break the filibuster. And it seems as though the Democrats have become more emboldened, actually, in their position since that meeting in the White House last week. They have gone from maybe there's some money, maybe it's old money, but there is some money for the wall, to now there will be no money for the wall. And this has put Trump in a very precarious political position, because, on the one hand, both a shutdown and the wall are unpopular with the public at large. But when it comes to his conservative base, if Trump fails to secure money for the wall during this, which may be his last opportunity that means the base might rebel, and that's the difference between a president who is at 43 percent approval and at 37, 36 percent approval.

BAIER: Byron, let's talk briefly about a government shutdown, because it really does look like we are headed there. Partial government shutdown. You are looking at a lot of people affected from different agencies that have not been funded yet. But there will be people who argue that this is not going to be as painful to see, and that they are going to eventually solve on the back end of this before anybody feels the pain.

YORK: I think as far as the general public is concerned that's absolutely true. There are hundreds of thousands of federal employees who will not be paid at Christmas time. They will be paid later when the whole thing is resolved. But they won't be paid now when it's due to them.

But in terms of the public at large, 75 percent of the public -- of the government has already been funded. And a lot of what is done here does not affect people's everyday lives like the receiving of benefit checks and things like that that will not stop. So it's not as if we've never had a government shutdown before.

BAIER: And the national security people, which is a lot of the DHS, actually, they will be working, but they're working with a paycheck.

YORK: That's a good story, somebody protecting our country who is not being paid for doing it. What with that?

BAIER: I want to turn to Jim Mattis. A lot was said there about the resignation letter. And I asked Secretary Mattis at the Reagan Defense Forum about this possibility of him stepping down soon.


BAIER: Do you have any plans to leave the administration soon?

JAMES MATTIS, DEFENSE SECRETARY: If I did, Bret, you wouldn't be the one to know.


MATTIS: But ladies and gentlemen, let me explain something. When the president of the United States, Republican or Democrat, male, female -- none of that matters. When the president of the United States, and I never met Mr. Trump until I met him as president-elect when he called me back for a job interview, when the president of the United States asks you to do something in America, you just do it.


BAIER: It turns out I was the last to know, or one of them.

In that resignation letter, A.B., Secretary Mattis writes "My views on treating allies with respect and also being clear-eyed about both malign actors and strategic competitors are strongly held and informed by more than four decades of immersion in these issues." He also writes that the president should have someone who is aligned with his thinking. Clearly a signal that comes after the Syria withdrawal move and ahead of what we now confirm is an Afghanistan withdrawal as well.

STODDARD: Right. He made it clear in the letter, and there is some mixed speculation about whether or not he was fired and then wrote that letter or whether or not he quit. I was upset that he quit. Apparently he might have been fired, which makes it even worse.

But in a letter he makes sure to draw contrast with what he sees as a need to nurture and protect the liberal order that we spent 70 years investing in that he thinks Trump and other critics of Trump's America First policy is taking a wrecking ball to, and he makes clear that respect for allies, coalition building, all of this is part of our long-term national security. I'm speculating here, but what we learned today about his conversation on Friday, the president's, with president Erdogan of Turkey, that he would announce an assault on the Kurds and then we would leave the Kurds hanging with this announcement within a few days, has to be a huge central focus of this disagreement.

BAIER: Senior U.S. defense official telling Jen Griffin this was not a forced resignation. The peninsula saying not forced resignation. He informed his staff after returning from the White House this afternoon. Mattis met with the president this afternoon at 3:00 p.m. He called his staff together for meeting a little after 5:00. He had handed in his resignation letter. And obviously, Matthew, you can extrapolate why that gets to that point. He had been talked about, rumored about leaving at some point, which is why I asked the question at the Reagan Defense Forum.

CONTINETTI: Probably not anyone expected to be in this manner. Mattis, one of the most popular members of Trump's cabinet along with Ambassador Nikki Haley who is also departing at the end of the year -- the word that struck out to me, Bret, was "alliances." And Mattis has had this long held this belief that alliances our force multipliers, that in fact alliances are the instruments of American power. You need to sustain them. They are what increase our deterrent edge.

If I think people in Washington are shocked, I think people in foreign capitals are going to be even more shocked and more worrisome about this move. There is this idea that all of these withdrawals, firing Mattis, removing Mattis is going to make the world more a peaceful place. In my view, that's completely wrong. In fact, as America withdraws, as we know, bad actors move in, the chances of war have increased tonight.

BAIER: Since we've been talking, I have received three texts from different ambassadors concerned with this move. And Marco Rubio, Republican up on the Hill, saying, Senator from Florida, "Just read General Mattis resignation letter. It makes it abundantly clear that we are headed toward a series of grave policy errors which will endanger our nation, damage or alliances, and empower our adversaries. I don't have that much time, Byron, but this is quite a week for this White House.

YORK: On the Mattis thing, there has been this long theme in the presidency of President Trump -- why are we spending so much money to defend the rest of the world? They should be helping us do that. And he is asking people, what was our goal in Syria? What can we do in Afghanistan that we haven't already done in 17 years? So the president is now pushing back against the national security establishment.

BAIER: A lot happening in the past couple of hours. We have you covered on FOX News Channel. Thanks for inviting us into your home tonight. That's it for this SPECIAL REPORT, fair, balanced, and unafraid. We said breaking news changes everything. It did. "The Story" hosted by Martha starts after a very quick break. We'll see you tomorrow.

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