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Merrill Lynch internet memo
5.31.02
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NARRATOR: You're watching NOW with Bill Moyers. With contributions from NPR news. This week on NOW...

MOYERS: This week on NOW: If you want to play on Wall Street, you better understand the rules of the game.

NEW YORK ATTORNEY GENERAL ELLIOTT SPITZER: The big institutional investors, the sophisticated probably knew that the analysts' reports should not be relied upon.

MOYERS: A look at how Wall Street really works.

And we hear from Palestinians questioning Yasser Arafat's leadership.

DEANNA BUTU:: There is a lot of anger right now, particularly because people over the course of the 20 months haven't heard any vision, haven't heard a strategy from him.

MOYERS: And from Israelis talking about a Palestinian state on the other side of the wall.

AMRAM MITZNA, MAYOR OF HAIFA: Nothing will help but to separate ourselves from each other.

MOYERS: NPR correspondent Deborah Amos goes behind the headlines where Palestinians and Israelis alike struggle to find hope for the future.




MOYERS: Welcome to NOW. Wall Street's collaborators in Washington attacked New York Attorney General Eliot Spitzer this week, saying his multimillion-dollar settlement with Merrill Lynch was grandstanding and coercion.

But the fact remains that Merrill Lynch was caught red- handed, its analysts publicly praising stocks they privately trashed.

Furthermore, some Wall Street insiders say the deceptive practices don't stop with one brokerage firm.

They are the rule instead of the exception.

Tonight, we learn more about how Wall Street plays the game and how you are affected.

NOW's Brenda Breslauer produced our report.

It was big news across the country. The largest brokerage firm on Wall Street in a $100 million dollar settlement for misleading its investors

NEW YORK STATE ATTORNEY GENERAL ELLIOT SPITZER: It was the Mr. and Mrs. Smith, whether in Utica, New York, or in Topeka Kansas, or in Jupiter, Florida who were the victims of this scam.

MOYERS: Merrill Lynch's commercials had conveyed a warm fuzzy feeling, Wall Street firms as purveyors of family values, a safe place for customers.

TV COMMERCIAL: Because they trust a team of financial advisors at Merrill Lynch.

MOYERS: Actually, the small investor was being treated like a hick from the sticks as New York Attorney General Elliot Spitzer discovered in his investigation.

SPITZER: My office developed evidence indicating that analysts gave misleading advice.

MOYERS: The evidence? Spitzer discovered a trail of damaging e-mails, e-mails that showed Merrill Lynch was recommending stocks to the public that its research analysts were privately trashing.

SPITZER: At the very moment they were telling us buy this stock, invest more of your money in it, they were saying internally, there's absolutely no reason to own this stock..It's a dog. It's worse. They were making us lose money so they could get rich.

MOYERS: Example: Lifeminders, an internet company. Publicly, Merrill recommended the stock as an "attractive investment" and advised investors to "Accumulate" it. Privately, Merrill's analyst was saying another thing about the very same stock: "I can't believe what a POS [piece of sh-t] that thing is."

For Excite@Home, a stock known as ATHM, Merrill publicly said: "We do not see much more downside to the shares" and recommended investors "Accumulate." But privately the analyst was saying this "ATHM is such a piece of crap!"

SPITZER: The small investor was the victim. The big institutional investor, the sophisticated investors, probably knew the analysts reports should not be relied upon.

MOYERS: The heart of the scam was a conflict of interest built into the system. A lot of the analysts you see on television picking stocks work for the research division of a Wall Street firm like Merrill Lynch. The Research Department is supposed to be completely separate from the banking division, a "Chinese Wall" between them, to avoid conflicts of interest.

But in reality analysts feel unspoken pressure from the investment bankers to come out with recommendations to buy stock.

The reports can then be used by the investment bankers to attract big corporate clients.

Spitzer's investigation revealed that the more business an analyst generated for the investment banking side, the more money the analyst made.

SPITZER: So even when they knew the stock was bad, they would say buy it, because the company whose stock they were promoting was a client. It was somewhat like the restaurant reviewer being a partner in the restaurant. He issued a good report and said, come to this restaurant. But if you read the review and didn't know he was an owner in the restaurant, you were snookered.

MOYERS: That's what happened to these women in Jupiter, Florida who formed their own investment club in 1996.

FRAEDA KOPMAN, INVESTOR: : I think that we put a lot of emphasis on the work that the analysts were doing for the various brokerage firms. Especially the big ones. Because we believed in them. I guess we were very naive. And we thought that that information was correct. They were the ones that were visiting the companies. So obviously, they would know a lot more than I would know by just reading about a company.

HELEN EHLERS, INVESTOR: Historically, you believed in the stock market because everybody knows, knew the stock market went up, the stock market went down, you assumed the analysts or whoever was following the stocks back in the older days knew what they were talking about.

MOYERS: One of the stocks they bought was Infospace, a wireless and computer software company.

KOPMAN: It was being touted as this phenomenal growth company with this fantastic chairman. Everything we read about it was good. And it looked like a good, solid company.

The main analyst that we were following was Henry Blodget from Merrill Lynch.

MOYERS: Henry Blodget, a telegenic whiz kid in his mid thirties, was Merrill's star analyst for internet stock.

Blodget wrote this research report for Merrill which says "Infospace continues to be one of the best ways to play the wireless internet" and recommends a "Buy". But his private e-mail says, "this stock is a powder keg." An e-mail from a colleague in Blodget's department reveals: Infospace is "very important to us from the banking perspective."

Now, translate that for the ladies down in Jupiter.

SPITZER: What that means is, we're going to tell you to buy the stock not because it's a good stock but because it's a big client for us and it's generating fees for us. And that is a classic example of the conflict of interest, the taint we'll give you bad advice because we're getting a lot of revenue, and that's your problem, tough. Nobody will find out. Well, we found out.

MOYERS: But the Florida investment club didn't find out. They were following Blodget's advice closely.

KOPMAN: Henry Blodget's rating of Infospace was a buy. When the stock started sliding, we were bewildered because suddenly here is this stock that's going down. However, the analyst at Merrill Lynch still felt it was a strong buy. He didn't just think it was a buy; it was a strong buy. Well, he must know something that we didn't know.

MOYERS: What he knew was that it was a "piece of junk." The Women's Investment Club lost nearly $6000 on Infospace which once sold at a high of $261 but today trades at less than $1 per share.

MOYERS TO SPITZER: What is the responsibility for a man like Blodget in this? I mean, he was making, what $15 million a year?

SPITZER $12, $15 million a year. His obligation is to tell the truth. His obligation is to the investors who are relying upon his advice.

MOYERS: Did you find evidence that the analysts were receiving bonuses and higher salaries, if they, in fact, tainted the evidence for the investment bankers?

SPITZER: Absolutely. The analysts were compensated not based on the quality of their research for the public but based on the degree to which they had helped investment bankers generate deals and satisfy the companies.

MOYERS: And apparently, this is no secret inside the Wall Street club. Take a look at this e-mail from Blodget: "If there is no new e-mail forthcoming from Andy·[Blodget's boss] we are going to just start calling the stocks·like we see them, no matter what the ancillary business consequences are."

SPITZER: He said, if you don't tell me what to do I'm going to start telling the truth regardless of the impact on investment banking. He was threatening to tell the truth. It just shows you how twisted the mindset had become.

MOYERS: And, says Spitzer, it's not just these extreme examples. Because of the way Wall Street is structured, the small investor never gets the same information as the big boys on the block.

MOYERS: Is there a two-tiered system at work here? Is there a double standard so that the ladies in Jupiter who just read the report that Merrill issues get one piece of information but the big institutional investors, the big pension funds, the ones that bring in the big money to a company like Merrill, they sort of get a wink and a nod?

SPITZER: The big institutional investors knew not to rely on the analyst reports. They were more sophisticated. They understood·

MOYERS: How did they know?

SPITZER: Because they're from Wall Street. They're part of the culture where they understood these analysts are hyping and they understood that the analysts were responsive to the investment banking side of the house.

MOYERS: So no one blew the whistle.

SPITZER: Nobody blew the whistle because·

MOYERS: Why?

SPITZER: Too many people were doing too well.

CNNFN ANCHOR, FROM TAPE: Sean, nice to have you back on CNNFN.

MOYERS: Sean Ryan knows first hand. He worked as an analyst on Wall Street for nine years.

MOYERS: Do firms say one thing to small investors and another thing to large institutional customers?

RYAN: Not officially but in practice. A little old lady in Peoria will get the same report as Fidelity. What's different is Fidelity will also get a call from the analyst explaining the nuances of the report. And shading his opinion. So perhaps saying yes, I really like this company, but here are some of the things that, here are some of the flaws in the story that I didn't go into in great detail in the report but you may want to bear in mind.

MOYERS: And the small investor never hears about the other way the firm uses the research report, never knows the banking department uses that same report to seduce big corporate clients.

RYAN: The first thing he does is calls up the CEO of XYZ corporation and says, "I'm sending you over a copy of this report that I think you'll really enjoy because it's very positive about your company. And it shows how well we understand you company. And I think given how well we understand your company and are advocating it in the marketplace, you may want to think about, you know, perhaps offering us some business in the future.

MOYERS: Here's what Sean Ryan told us happened to him when he wrote a negative report about a big corporate client while working for the brokerage firm Bear Stearns.

RYAN: I got a very irate visit from the head of research who asked me what the hell I was doing. After a fairly lengthy tirade I was informed I'd imperiled something on the order of 10 million dollars in annual business for the firm. And if I wanted to stay at Bear Stearns and have a bright future there, I should straighten up and fly right.

MOYERS: And giving your honest opinion was not what you were expected to do.

RYAN: I called the Associate Director of Research and at one point said, how can I express these honest opinions in a way that isn't going to — to cause these sorts of problems. And her response was it's like your mother told you. If you can't say anything nice, don't say anything at all.

Which I think as a matter of etiquette is well advised. But I can't really reconcile that with the job of analyst, as I understand it.

MOYERS: Bear Sterns disputes Ryan's account saying "our analysts are encouraged and expected to maintain their independence and provide the best possible research products to our clients."

But tired of the pressure to compromise his work, says Ryan, he quit.

RYAN: There are things I'm not willing to do to have a career on Wall Street.

MOYERS: Help me to understand, is this more likely to be a few bad apples in the, in the barrel or is this sort of thing — this sort of pressure, this sort of ingrained conflict of interest, pervasive?

RYAN: Well, I think it is a few bad apples in the sense that most analysts are smart, honest people who want to do the right thing. But they're all operating in a corrupt system.

MOYERS: So if everybody on the team is using steroids, nobody questions the use of steroids.

RYAN: Precisely.

MOYERS: It's the way you win the game.

RYAN: Right. And if you don't want to use it, then maybe you just don't belong on this team.

MOYERS: Merrill Lynch's team includes some powerful players, including former-Mayor Rudolph Giuliani as a consultant. The firm hoped Guiliani could sway Spitzer — an ironic assignment for a man who originally made headlines himself for prosecuting Wall Street insiders.

MOYERS (ADDRESSING SPITZER): It's reported that he didn't want you to go public with this.

SPITZER: Right.

MOYERS: Why?

SPITZER: Well, I think that he was arguing on behalf of his client, Merrill Lynch, saying, you will harm Merrill Lynch. And my response to him and to others was, we will not change this system unless we make those e-mails public. I insisted that they be made public, because only the e-mails would persuade people that something fundamentally amiss was occurring on Wall Street.

MOYERS: The smoking gun.

SPITZER: The smoking gun.

MOYERS: We showed the Florida investment club those smoking guns, the e-mails uncovered by Spitzer's investigation.

Like one from an analyst who privately protested that the company was deliberately hurting it's small customers for the sake of its big corporate clients.

"I don't want to be a whore for f-ing mgmt . . . we are losing people money and I don't like it. John and Mary Smith are losing their retirement because we don't want Todd [company CFO] to be mad at us."

"The whole idea that we are independent from banking is a big lie."

KOPMAN: This is sick. Very very sad. No wonder they settled.

JUPITER INVESTORS: To me this is no different than going to, you know, John and Mary Public who have a small grocery store and sticking them up with a gun and taking the money out of their cash register. They just did it differently.

KOPMAN: This is awful.

GERRY CARRERA, INVESTOR: Other people lie on a statement for a bank and that's called bank fraud. If you fill out an application for a bank and you lie on it, you're liable for that. And you can go to jail and serve time. If we did that. Now, how can they do things like this?

SPITZER: If they've lied about the value of that stock and whether it's a good investment, they've violated the law.

MOYERS: But as part of the hundred million dollar settlement with Merrill, the New York State Attorney General has agreed not to prosecute them criminally. It will be left to individual investors and their lawyers to seek restitution.

KOPMAN: And hopefully, we'll be able to recoup some of the money that we lost back. Somebody has it. I mean obviously.

RYAN: The money that has been lost in internet shares can't be brought back. It's in money heaven.

MOYERS:Ryan advises those women not to hold their breath. And as for future investors, he says buyer beware. Merrill Lynch may have settled with the New York Attorney General and pledged to separate its research department from investment banking, but federal regulators have not been watching out for the public.

RYAN: You know you have this open secret on Wall Street and the SEC has been dragging its feet to such an extent that it falls to a state attorney general to finally take some action and achieve some concrete results.

MOYERS: In the wake of Spitzer's headlines, the SEC announced new rules this month to address analyst conflicts of interest. But Ryan claims they are far too weak to make a difference in the entrenched club culture.

RYAN: I'm sure it took an army of government lawyers several weeks working day and night to come up with such exquisitely useless reforms...it's like dealing with organized crime. Much of the worst behavior goes unspoken. It's a wink and a nod. And it's very tough to prosecute that.

MOYERS: And those in the club know the wink and the nod.

RYAN: Exactly.

MOYERS: And since the SEC hasn't taken strong action with all the evidence released thus far, this former insider is less than optimistic.

RYAN: When you have what's to me essentially fraud being carried out on this scale, you know it makes me wonder if the SEC isn't prepared to act on this, I don't know why it exists.

SPITZER: I think we need more substantial reform because if we are going to restore the public's confidence in Wall Street, which is critical, we must be able to say to investors, you can trust the advice that is given to you.

KOPMAN: It never dawned on me that they were giving me fraudulent information to stuff their pockets with money.

I'm hurt. And that sounds ridiculous to say, hurt, to be hurt emotionally.

HELEN EHLERS: I'm more betrayed.

KOPMAN: Exactly.

EHLERS: I mean you feel betrayed by people you trusted.

MOYERS: Wall Street has no problem getting powerful people on its side. It hires them or influences them one way or another. Who is looking out for the little guy in this kind of market?

SPITZER: Look, there are many more small investors than there are big sophisticated investors. And I think if we can explain to the public, your interests are being subverted, hopefully those folks will stand up and say, wait a minute, somebody's got to do something. And then maybe we will see real reform out of Washington, at the SEC, and there will be a change.





BILL MOYERS: Moyers: So as the Attorney General indicated all eyes now turn to the Securities and Exchange Commission in Washington.Its proposed reforms set the bar lower than those the state of New York got from for Merrill Lynch.

And low is where the big financial houses want to keep any talk of reform.

They may get away with it, because the industry has bought protection in Congress that has practically turned the S.E.C. from a watchdog into a lapdog.The new chairman of the Securities and Exchange Commission, Harvey Pitt, came to his job after a long and lucrative career representing every major accounting firm.He's got so many conflicts of interest; he makes a Wall Street analyst look like saint Francis of Assisi.

Remember all those reforms in accounting practices we were going to get after Enron? Well, according to the "New York Times," the big accounting firms, with the help of some generous campaign contributions, have managed to block them.This, too, is how the game is played these days.

Take that $100 million penalty on Merrill lynch, it's less than one third of what the firm paid for office supplies and postage last year.And the I.R.S. told us yesterday that both the company's penalty and legal fees may be tax deductible.A business expense for deceiving the public.

So as investors the ladies in Jupiter, Florida, not only have their purses snatched, as taxpayers they're expected to subsidize the fine paid by the thief.




MOYERS: Some of you have written us to say every time you hear this or any broadcast get to a story from the middle east, you reach for the remote control. Enough is enough, you say, enough sounds and sights of war.

But Americans can't put this war out of sight or mind, even if we want to.

We're involved through the billions of dollars our government sends Israel and Arabs alike. Our strategic interests compel attention, and so do our humanitarian concerns. The personal tragedies keep mounting.

There were six funerals in Israel on Wednesday of this week alone — all the victims of terrorist attacks.

One was a teenager in an Israeli settlement on the West Bank. Seventeen years ago he was the first child born in that settlement; now he is the first of its residents to be killed. Desperate Israelis, even Israelis who once thought a political negotiation possible, talk now only of security, even if it means living behind the wall.

NPR correspondent Deborah Amos just returned from Jerusalem with this report.

NPR CORRESPONDENT DEBORAH AMOS: You can see it on the faces in Jaffa street, fear. A dozen suicide bombers hit this Jerusalem shopping center in the past year, killing Israeli civilians.

ARMY RESERVIST: When you get a suicide bombing every day, you just want, let's stop it. I don't know if its revenge, but you just want to live properly, you just want to stop it.

AMOS: There are security guards at every public door, including this pizza parlor where 16 died in a suicide bombing.

This wreath a reminder that 11 people died when a suicide bomber walked through a coffee shop door.

You don't have to be a soldier to feel the threat in this war. Ninety-two percent of Israelis believe they or someone in their family will be the victim of a terrorist attack.

TOM SEGEV, JOURNALIST AND HISTORIAN: Israelis are angry. Israelis are frightened. Israelis are frustrated, but more than anything else, Israelis are confused these days.

AMOS: Tom Segev, journalist and historian, has written five books about the 100 year conflict between Israel and the Palestinians.

SEGEV: Everybody knows that terrorism doesn't destroy the state of Israel, but it may destroy me. So it's a very personal relationship to the big conflict. Terrorism brings out the worst in us. If you want...it brings out fear, it brings out hatred, it brings out racism.

AMOS: A huge majority of Israelis backed the recent incursions into the West Bank. But as the tanks pulled out, and attacks resumed. Israelis are asking: what now?

Hersh Goodman fought in three Israeli wars, and covered one as a journalist. He says violence and fear are making israelis consider desperate solutions.

HERSH GOODMAN: What's happened in Israel is a very sharp shift to the right wing, they are saying I can't see us living together with the Palestinians, they can't see a peace treaty between us. So let them live there and us here.

AMOS: In Tel Aviv, Israelis sign on to a new and popular movement called unilateral separation.

It is a powerfully simple idea - build a big fence — Israelis on one side. Palestinians on the other.

But to understand unilateral separation you need to see a map.

In 1967, this territory was captured by Israel in the Six Day War. There are no physical borders.

It is now a patchwork of areas, some controlled by the Palestinians and some controlled by the Israeli Army.

More than a million Palestinians live in the West Bank — so do more than a quarter million Israeli settlers.

The separation movement wants to put a fence along the 1967 border.

Israelis agree the fence is about one thing — security — but there are differences over more controversial parts of separating.

For these activists separation means withdrawing the army from Palestinian areas. Others here want Israeli settlements in the West Bank disbanded.

When prominent Israeli politicians add their names, it is big news in Israel.

DANNY ATTAR: If this fence was built two years ago, it would have prevented 98% of the attacks.

AMOS: Danny Attar and Eid Salem are elected representatives from Israeli towns closest to the Palestinians.

I went to see Danny Attar in his northern Israeli office to see why he signed up.

ATTAR: We worked very hard to build a relationship of trust between us and the Palestinians of Jenin. Then came these suicide attackers and most of them came from Jenin.

AMOS: Attar lives in the Israeli town of Maquebila — the sign says Jenin is six miles away. From here, it looks much closer.

AMOS (ADDRESSING ATTAR): Where is Jenin?

ATTAR: There's Jenin.

AMOS: It is an open field that has been used by suicide bombers. Even on this day no one stops these Palestinians from crossing.

People can come in and come out now?

ATTAR: Yes, very easy.

AMOS: There are no check points — no army.

For Attar, separation means security. He wants an electrified fence across these fields.

And there are more "separation" supporters in the nearby Israeli city of Haifa. A place that seemed immune from the war, until the suicide bomber hit this popular local restaurant last March. Twenty-three people died, including the bomber who came from Jenin.

The mayor of Haifa, Amram Mitzna, is one of the founding member of the separation movement.

AMRAM MITZNA, MAYOR OF HAIFA: The level of hatred and anger between the two sides, the Israelis and the Palestinians is in such a level in the last few months that nothing will help but to separate ourselves from each other. It needs a fence to be good neighbors.

AMOS: Mitzna, a former military commander who fought against the Palestinians knows there is no military solution only a political one.

MITZNA: We will have to force them to build a state, a Palestinian state, and then start to be responsible for yourself.

AMOS: The violence will stop when Palestinians have something to lose other than their lives — a nation — a state next to Israel.

MITZNA: They blame Israel about everything..we don't have medical services, that is Israel, we don't have food, it is Israel, we don't have infrastructure, we don't have schools, take your own state and do something for your own.

AMOS: Mitzna wants many Israeli West Bank Settlements disbanded, an end to the army's occupation — but first, a fence.

Mitzna did not always believe in a closed border. He once had open cooperation with the Palestinian Governor of the Jenin Province, Zuhair al Manashreh.

But that cooperation is now on hold. Jenin was the scene of some of the worst fighting in the recent war.

So what does Mitzna's old partner think now? Like most Palestinians, he rejects separation because Israel is imposing a solution.

ZUHAIR AL MANASHREH, PALESTINIAN GOVERNOR OF THE JENIN PROVINCE: Logically, we can't have a fence without agreement. It is wrong. It cannot be. But the Israelis with force can do everything they want.

AMOS: But Manashreh acknowledges a fence on the '67 border would help define a Palestinian state.

For this reason, Prime Minister Ariel Sharon has opposed unilateral separation. Now he embraces it — with his own definition. The army in buffer zones surrounding the Palestinians, with all the settlements in place. He even wants the U.S. to foot the bill.

HERSH GOODMAN: It's a simplistic, populist concoction that is there to fill the void of any real thinking of how to solve this problem, really. What is required in this country is leadership.

Running away in unilateral separation or kicking the Arabs out is not a negotiated settlement. And any settlement that's not negotiated will not last.

AMOS: Jenin's governor agrees. A message this Palestinian wants to send to his Jewish neighbor Danny Attar.

AMOS (ADDRESSING ZUHAIR AL MANASHREH): If you could talk to him, what would you say about the fence?

ZUHAIR AL MANASHREH: I would say to him, the best fence against violence is to grow a partnership.

AMOS: But Danny Attar is not looking for a partner. He wants security.

With just a few steps we cross from Israel into Palestinian Jenin. Attar wants to be sure suicide bombers won't cross these fields. With an end to fear, there can be a different future.

ATTAR: On one side of the border, there's going to be a Palestinian state. On the other side of the border, there's gonna be the state of Israel. And only then will we be able to build a normal life.

AMOS: In the meantime, he's raising money from Jewish communities in the United States to build a fence as fast as he can.





MOYERS: watching that report from Deborah Amos, it's obvious that what makes the demand for security so impassioned is what makes the conflict so bitter.

Both sides claim the same land.

To Palestinians it is "occupied territory."

To Israelis it is "disputed land."

And they live so close together.

A few miles, a few yards, sometimes just a few feet separate Israeli from Palestinian.

That Jewish teenager killed by a terrorist this week, his settlement overlooks the Palestinian capital of Ramallah, where Yasser Arafat was surrounded and trapped in his compound by the Israeli army.

Deborah Amos traveled the few miles from Jerusalem to Ramallah and listened to other desperate people, Palestinians who would be closed off and out by that wall the Israelis want to build.

Here, again, Deborah Amos.

NPR CORRESPONDENT DEBORAH AMOS: It was the largest Israeli military action in a generation — an operation to root out suicide bombers.

The occupation lasted more than a month, now with tanks and troops out of most Palestinian towns, I'm on my way in to see the aftermath and to find out how Palestinians see their future.

As we get close to the Palestinian town of Ramallah, Israeli soldiers block the way.

SOLDIER: Where are you coming from?

AMOS: I'm from the U.S.

SOLDIER: Where are you going to?

AMOS: Ramallah.

SOLDIER: That's a very nice camera.

AMOS: Thank you.

SOLDIER: Can you please close it?

AMOS: Just like the Palestinians, I have to cross an Israeli military check-point. Palestinians tell me these daily restrictions on travel are deeply humiliating.

It can take hours to get through — and even after the long wait, many here are turned back, it is all up to the soldier on duty.

Deanna Butu is also crossing the check point. A lawyer, Butu works for the Palestinian government after moving here from Canada two years ago.

AMOS (ADDRESSING BUTU): So you made it?

DEANNA BUTU: Made it across yeah, they told me that I should just leave this country.

AMOS: The first stop is the town of Ramallah, headquarters of the Palestinian Authority, and a target of the Israeli military.

Ramallah is one of the towns in the West Bank under full Palestinian control — or it was until the Israelis invaded.

Palestinians are surrounded by the Israeli military in unconnected islands they compare to apartheid.

The Israeli government says it wanted to root out the infrastructure of terror. The larger target appears to be the infrastructure of daily life.

The damage is everywhere, buses and cars, offices, banks and government buildings.

The Palestinian Authority can not deliver the most basic services. Humanitarian groups say a half million Palestinians will now need help to survive.

DEANNE BUTU, PALESTINIAN AUTHORITY LAWYER: I think what they wanted to do was they wanted to destroy the Palestinians. They wanted to destroy our history, our culture, and our very existence. The focus suddenly became on a humanitarian crisis rather than the political crisis we're living in. It's exactly what we're doing now, focusing on rebuilding rather than trying to get a state; which is what we really need.

AMOS: As soon as the tanks pulled out, Palestinians turned out for a massive clean up. University students sweep the streets.

LAW STUDENT, SHANAZ JUBRAN: We are cleaning everything with our hands.

AMOS: The price for an invasion launched to stop suicide attacks. Jubran was against the bombers before the Israeli action. Now, she's not so sure.

JUBRAN: I can't guarantee that if they killed one of my children or if they killed my brother or my father that I will not going to make a suicide operation, yeah.

AMOS: I hear the same answer over and over, hopelessness and a simmering rage.

The Israeli government said massive military force was a message to young militants: they are outmatched and can never win a military conflict.

The middle class got another message: whatever they build can be destroyed anytime.

This shopping mall was hit by the army in March. Now, the cell phone store is a pile of rubble. A hamburger restaurant, the first American franchise, is ruined beyond repair.

A few blocks away Mahmoud Abdullah Saleh is open for business again. Ramallah's largest modern supermarket has the first check out scanner — but these days business is slow. The scanner still works. The company safe is another matter. Saleh says it was blown up by Israeli soldiers during the invasion.

AMOS ADDRESSING SALEH: Why do you think they came to this grocery store?

MAHMOUD ABDULLAH SALEH, STORE OWNER: I think for theft. Nothing could be explained, or justified except the theft.

AMOS: The theft of 15 thousand dollars, says Saleh. When Saleh complained, two Israeli officers brought the money back.

AMOS: Israelis seldom hear these stories — except from Amira Hass, the only Israeli journalist who lives in a Palestinian town. She writes for the Israeli newspaper HA'ARETZ.

She took us to the Palestinian Ministry of Culture.

AMIRAH HASS, JOURNALIST: I've seen a lot of destruction and vandalism during the last weeks, but this one, I must say, it even caught me by surprise.

AMOS: The smell is overwhelming. Before leaving the building Israeli soldiers used it as a massive toilet. They also destroyed a children's painting room.

HASS: How the Israelis think that this is the way to combat terror? How they think to convince Palestinians to live in peace with the Israelis?

AMOS: How to live in peace?

Store manager Saleh has no answers — only anger over the tight Israeli restrictions that squeeze the economy, and make life increasingly difficult for the family, his children and his wife Maha.

MAHA, SALEH'S WIFE: It's very bad to feel like a prisoner. Its like a prison, for me and for my kids.

SALEH: I think most of the people have this feeling, they don't want their children to grow in such conditions. They want them to feel their childhood they want them to play, to go anywhere, to go to the sea. We could not go anywhere.

AMOS: Maha's brother is even more vehement.

AYMEN SBEIEH, MAHA'S BROTHER: Humiliation, Checkpoints, all the time. You get humiliated all the time living through humiliation. You want to go to Jerusalem, it's a disaster. You want to go to work, to business, impossible. Huge stumbling blocks, all the time.

AMOS: Restrictions that are going to get tougher as the Israeli government rings eight Palestinian towns with additional barbed wire this week.

SBEIEH: And actually that does build up something inside you as a human being. One day you feel like you are going to retaliate against the occupier, or just give up.

AMOS: The children's games are rougher now. It is new and upsetting to Maha.

MAHA: There is no childhood for the children the Palestinian children, how can they feel it with occupation, with shooting everywhere, with hearing about the killing, the F-16, the bombs, how can they feel their childhood?

AMOS: In the bedroom, they play Arabs against the Jews. But in this household there is a more personal battle — should they stay or should they go.

SALEH: I have no plans. Before, I had plans, now even my wife is talking about immigration. Because we see no end, no future. She wants her kids and herself to feel some freedom I understand that. But for me as a Palestinian, I have my duty, I have to try to help people, and I cannot think only about myself.

AMOS: If the middle class give up hope for a peaceful, negotiated settlement, that strengthens radicals who say only violence will force an end to Israeli occupation.

Many of those radicals live in the refugee camp of Jenin — a place well known now because some of the most severe fighting in the war took place here.

Human rights groups reported no massacre in Jenin, but just look at the damage.

Four thousand Palestinians did lose their homes here — an engineering team makes sure other houses are safe.

This was Israeli retaliation for 23 suicide bombers who came from this camp, many of them trained and sent to their targets by Islamic Jihad — a group Israel vows to destroy.

Bassam al Shaheedi is one of the leaders of Islamic Jihad

AMOS (ADDRESSING AL SHAHEEDI): Are there going to be more suicide bombers from Jenin?

BASSAM AL SHAHEEDI, LEADER, ISLAMIC JIHAD: I think the number of suicide bombers will double. Every time Sharon attacks with violence, the reaction will increase and there will be more suicide bombers.

AMOS: Al Shaheedi insists that I see what is left of his second floor apartment — destroyed in an Israeli helicopter attack. He's lost a house, he says, but gained new supporters.

AL SHAHEEDI: Most of the young people in the camp want to join Islamic Jihad because it expresses what they are feeling. We want all people to live in peace, but we are being attacked, and we are defending ourselves"

AMOS: And suicide bombers have already resumed their attacks.

This is the man who is supposed to stop them.

The Palestinian President, Yasser Arafat, is under international pressure to keep a lid on the violence. But will he? Or can he?

Arafat's popularity is sinking again...not just with the radicals, but with an overwhelming major of Palestinians who want democratic reform, an end to the incompetence and corruption of the men who surround Arafat, profiteering, Palestinians say, while so many live in misery.

DEANNA BUTU: Corruption is an issue. Corruption is an issue that will have to be dealt with by the Palestinians.

I don't want to reform Palestinian society simply because Israel is telling me to reform it or simply because America is telling me to reform it, I want it to be reformed because it needs to be reformed.

SOUNDS FROM DEMONSTRATION: Palestine, Palestine, Palestine

AMOS: These demonstrators are demanding regular elections — an independent court — a free press. Dr. Mustapha Barghoutti leads the march.

DR. MUSTAPHA BARGHOUTTI: People are upset about how things are happening now.

AMOS: What do you want to change?

DR. MUSTAPHA BARGHOUTTI: A lot.

BUTU: People have been kicked and beaten for the past twenty months. There is a sense that we have to find a different way now.

AMOS: Reform, resistance, revenge — competing reactions to the longest invasion this generation has ever seen· — and there is very little talk of peace.

AYMEN SBEIEH: Giving up is not within our character. What we are trying today is rip out our freedom. There will be a price paid, so many people are coming to this conviction that we have to fight for it.



MOYERS: Take a look at this — altercation — a hot spot on the web. You will find it on msnbc.com.

Its creator is Eric Alterman, media columnist for THE NATION, author of books with topics ranging from the punditocracy to Bruce Springsteen.

Eric Alterman joins us now.

So does Amity Shlaes. She writes a weekly column for the FINANCIAL TIMES of London and contributes to NATIONAL REVIEW and the NEW REPUBLIC. She's the author of this book, THE GREEDY HAND: HOW TAXES DRIVE AMERICANS CRAZY AND WHAT TO DO ABOUT IT. Welcome to NOW.

MOYERS: We're going to talk about some issues that others are talking about around the country, and I'd like to address this evening.

The ACLU, Amity, yesterday issued a report saying that we're beginning to lose some very important civil liberties because of the war on terrorism.

Do you agree with that?

AMITY SHLAES: No, I don't have any sense that the changes that are being made are forever.

We're in a very special situation basically we're recalibrating to address a threat against the country.

And when you have such a dramatic recalibration going from just being reactive to proactive, to finding the criminals before they commit the terror act, it's dramatic, but it's not necessarily permanent, and we have a lot of checks to ensure that nothing really bad or un-American happens.

ERIC ALTERMAN: I'm not so sure we have those checks.

I'm very disturbed to see that the administration is able to round up all of these immigrants to put them away.

Nobody's allowed finding out who they are, nobody's allowed to ask questions. we don't know their names.

These people have been in jail, have been kept in many of them in conditions that we can't even monitor in a very un-American way.

SHLAES: Well, Eric, there are certainly imperfections in the process.

ALTERMAN: ...These are fundamental American rights.

SHLAES: The fundamental American right is the right to survival. In order to have life, liberty and the pursuit of happiness, we have to survive first. We're in a very special moment. Maybe our survival is at issue.

Maybe someone's going to come to our town and launch his dirty suitcase bomb.

ALTERMAN: But you see...

SHLAES: This is not just a fantasy, it's a reality.

ALTERMAN: This kind of patriotism has always been the last refuge in the face of scoundrel...

SHLAES: And if... but...

ALTERMAN: And in the wrong hands...

In the wrong hands, it's open to all kinds of horrible manipulations. We've seen it during the cold war...

SHLAES: Well, let's balance the reality.

Let's balance...

ALTERMAN: And we've got to be vigilant to...

SHLAES: Which is really more in danger?

Our tradition of free speech or our lives because of terrorism? At this point, the general feeling is maybe our lives is... are what is in danger more than our tradition of free speech and to, as I say, to enjoy life, liberty and the pursuit of happiness and all those things we have better than most countries, we have to act in the interest of our own survival first. Those people who were taken into custody after September 11, many of them were... are suspects as terrorists.

That's the reality, and that's what we have to solve first.

ALTERMAN: The problem is... the problem is, is that the general feeling and the idea that people are suspect, these are all very general terms.

The whole notion of fighting a war against terrorism is a very general term.

SHLAES: But Eric...

ALTERMAN: But I would like to see some specific evidence...

SHLAES: ...Do you not believe...

ALTERMAN: I don't trust the government.

SHLAES: ...You...

ALTERMAN: I don't trust the government. I don't trust the government to tell me that it's doing what's best without proving it. And I'm amazed to hear that a conservative would.

SHLAES: The problem here is not the government here, it's the threat that comes from outside.

And insofar as we have to have our shoes inspected when we're at the airport, we shouldn't blame the bad republican administration; we should blame Richard Reid who tried to blow up an airplane with Centex in his shoes.

You always have to remember, where does this come from?

Insofar as we're losing any freedoms, it's because those bad guys made us do it.

ALTERMAN: I think that that shoe thing, that's actually the single sacrifice that this administration has asked the country to make, to have your shoes inspected.

MOYERS: The real sacrifice comes from the people inspecting the shoes...

ALTERMAN: You know, the problem, the basic problem with the administration position is that they're just saying, "trust us. We know best. And they don't know best.

MOYERS: Let me ask you about this. The justice department announced just yesterday, Thursday, that it's going to relax restrictions on the FBI's ability to conduct domestic spying. I mean, they're going to make it easier to conduct surveillance on religious and political organizations. Do you think that's essential because this is a war?

SHLAES: I think it's not just because this is a war.

Even if this weren't a war, it's very clear that this emanates from a certain extreme form of Islam.

it's very clear as it was in 1993 with the first world trade center attack that it emanates from certain mosques and certain sheiks.

And you want to go where you think the people who are plotting the problem might be.

It's a sad thing, but that's what you have to do.

And to not do that in the name of liberty and civil rights or being color blind, as we did until now, as much immigration visas as possible for flight pilots and so on, we let ourselves in for trouble.

So it's sad that we have to be a little bit more vigilant and we have to do this domestic surveillance, but it's clearly necessary for national survival given the seriousness of the threat.

MOYERS: During World War II, Senator Harry Truman ran a preparedness committee, an investigation committee, that held the Roosevelt administration accountable for the conduct of the war.

During the Korean War Lyndon Johnson, senator Johnson, chaired a preparedness subcommittee in the senate that held the Democratic administration under Harry Truman accountable for how that war was conducted.

Given those precedents, why do you think that the Vice President, Vice President Cheney, is resisting an independent commission to investigate the conduct of this war?

ALTERMAN: Well, I mean, historically no administration likes to be investigated by Congress, particularly when Congress is in the hands of the rival party.

And there are all kinds of things that are potentially embarrassing to them.

But I find it ironic-- enormously ironic-- that you have Cheney and Trent Lott, the leader of the republican senate, attacking the patriotism of democrats and the patriotism of journalists when in fact in 1998, if you look at the record, you can find all kinds of statements by Trent Lott, by these very same republicans, by Dick Army, saying... questioning Bill Clinton's bombing of Iraq, it's not only wrong, it's also hypocritical.

SHLAES: Well, you also want to look at what is the utility of a commission, there were four, five, six commissions on terror in the '90s, one of them was led by Al Gore on aviation security and he put out a very useful report.

Actually I think you know you could also have Congressional action on this.

There's nothing wrong with the commission, and I don't think it necessarily needs to be politically opposed... but and it might be too slow a process.

MOYERS: It is Congress that I think more than journalism has been more skeptical or careful about criticizing the president.

ALTERMAN: Can we... I'd like to return to this question of war with regard to something that Amity said.

I agree with everything you've said about looking into religious groups and so forth and how it's necessary, and I agree with you, Bill, about the commission.

But my point is, let's take these issues on their merits.

Let's take them on a case by case basis.

What the administration wants to say is, it's a war, there will be no questioning of anything I do.

We will put people in Guantanamo, we will abrogate your civil liberties, we will question the patriotism of journalists, we will increase the defense budget by 50 percent.

And don't you dare question us, because this is a war, and any questioning of us helps the enemy.

And I say, "well, no, in fact, it's not a war."

If it were a war, maybe.

But it's not a war.

It's a very complicated problem that's going to be with us forever, and I don't want to live in that country where I don't have the right to question my government because the government has decided to call it a war.

SHLAES: Well, it's a war insofar that it has a great potential for us casualty on U.S. soil. And that's the motivation for these actions whether or not you call them a war, a series of security actions.

MOYERS: Let me turn the discussions on patriotism slightly in a different direction.

I know taxation is one of your great big subjects, and you write about it so much. Corporations that have gone overseas using tax havens in the Caribbean and elsewhere to lower their taxes are being accused these days of being unpatriotic, of not wanting to bear their fair share of the war on terrorism. And I agree with you.

I think there is a war on terrorism.

Are they being unpatriotic when they go abroad to lower their U.S. domestic taxes?

SHLAES: Well, I suppose you could say they are, but here's the way I think the war on terror is going to fail — because no matter what law you pass, and you have Republicans and Democrats backing a law right now to force these companies essentially to stay in the U.S. and tax terms to catch the revenue you're going to lose because money goes around the world where it wants to go.

It always looks for a cheaper place to live.

ALTERMAN: Well, I mean, there's draft dodging in times of drafts as well, but I just think it's amazing that someone would say that it's okay to ask families to give up their young people and risk their lives to defend the country, but it's not okay to ask wealthy corporations to risk a little bit of their profits. Maybe it's cheaper to go offshore, but I just think that's to me the essence of unpatriotism. And it's morally shocking to me that... I mean, I don't disagree that it's difficult to do.

It's a difficult law to enforce. But it's morally shocking to me that you don't think it's worth it to say to these people, you are part of this country, you benefit enormously from being able to do business in this country, and you should pay taxes in this country just like you and I and Bill do on our salaries.

SHLAES: But if you really, you know, take Chrysler, it would have been patriotic for Chrysler to say Chrysler or at least...

ALTERMAN: I don't care what they say.

SHLAES: Well, no, what I mean...

ALTERMAN: ...carry their weight.

SHLAES: Well, no. Chrysler Daimler, but instead it became Daimler Chrysler because we insisted on U.S. tax regime which was high. So it went off to Germany corporately and hid behind the more preferable tax regime.

The most patriotic thing you can do in terms of making the economy strong so we create jobs and in terms of keeping the jobs that exist, for example, those at Stanleyworks, the issue is to lower the taxes of the corporations so they can make profits and distribute them in...

MOYERS: Stanleyworks... Stanleyworks in Connecticut...

· is the company in Connecticut that was thinking about going to Bermuda to lower...

SHLAES: Yes.

MOYERS: ...Its taxes.

SHLAES: And Stanley points out that those jobs that they were able to keep, those thousand in Connecticut and they have I believe 5,000 other across the country, it's easier for to keep them if they save this tax money because they're not moving the jobs off sea in this instance, they're just moving the corporate headquarters on paper.

So I think the whole legislation and the whole patriotic effort from Washington in terms of corporate taxes doesn't really work.

ALTERMAN: Well, it would be easier for all of us to do a lot of things if we didn't have to pay taxes. I could hire a whole bunch of staff people to research my columns and so forth. But the fact is, is I get enormous benefit from living in this country. I get my streets cleaned and my police protection and my fire protection, and I have a government protecting me from terrorism as best as it can.

And I think I should pay for it, and I think the Stanley Corporation should pay for it, too.

SHLAES: Yes, but Eric, this isn't just our money...

ALTERMAN: And it's just tough luck if it's a little bit more expensive for them.

SHLAES: This isn't just our money.

But it's just tough luck, but this isn't just our money that we're talking about.

MOYERS: This discussion is going on around the country, and it will continue. and I hope we can come back to these subjects ourselves. thank you very much, Eric Alterman, for being here, and thank you, Amity Shlaes.

NARRATOR: Now a look at stories coming up on NPR radio this weekend.

NPR'S JACKIE LYDEN: Join me on the radio for weekend all things considered from NPR news.

Holding the front page of the WALL STREET JOURNAL for overweight belly dancers and restaurant serving rats, and from mini skirts to, images of Afghan women.

And a man who put down his schoolbooks and took up arms in World War II finally gets a diploma.

find your local public radio station on our web site at npr.org.

MOYERS: That's it for tonight. next week we take a detour into the past to hear from some old soldiers for NOW, I'm Bill Moyers. For NOW, I'm Bill Moyers.

I'll be looking for you on pbs.org.


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