Bright Lights, Big Citi

John Bolton dissents, Abu Dhabi bails out a U.S. bank, and Republicans face grim prospects in the Senate.

Paul Gigot: This week on "The Journal Editorial Report," after Annapolis, can President Bush achieve in his final year in office a goal that has eluded U.S. presidents for decades? Plus, Citi of Arabia. Abu Dhabi bails America's largest bank out of its subprime mortgage mess. Is that cause for concern? And Sen. Trent Lott joins the long list of Republicans retiring from Congress. Our panel looks at GOP prospects for regaining the majority, after the break.

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

President Bush convened a new round of Arab-Israeli talks this week trying to achieve in his final 14 months in office a goal that has eluded U.S. leaders for decades. The Annapolis summit signaled a shift for Bush, who since taking office in 2001 has shunned that kinds of hands-on role in peacemaking taken by his predecessor, Bill Clinton.

John Bolton is the former U.S. ambassador to the United Nations and author of the new book "Surrender Is Not an Option: Defending America at the United Nations and Abroad."

Ambassador Bolton, thanks for being here again.

Bolton: Glad to be here.

Gigot: Let's start with the Annapolis summit aftermath. There's no question this is a reversal for President Bush in his role at direct peacekeeping in this Arab-Israeli dispute. How do you explain the switch?

Bolton: It's, unfortunately in my view, one of several U-turns that the administration has taken in the past year or 18 months--on dealing with North Korea's nuclear program, the Iranian nuclear weapons program and now the Middle East. They've really adopted policies that the State Department bureaucracy has been advocating for some time. I think it's explainable because Secretary Rice is now channeling those State Department views, and she is without any doubt the dominant voice advising President Bush on foreign policy in the second term.

Gigot: What happened to Vice President Cheney? I thought he was supposed to be the de facto foreign policy president. Is he now taking a more reduced role?

Bolton: Well, so much for the conventional wisdom. I don't really know what the story is there. The vice president, I think commendably, has always kept his dealings and advice to the president confidential. So whether he's giving less or is being heeded less often, I don't think we can tell from the outside.

Gigot: Let's take this Arab-Israeli dispute. There are a lot of people who say that what we need to do is--that this is a good thing because what we need to do is shore up the Palestinian moderates. You have in President Abbas somebody who we think we can deal with. He's not Yasser Arafat, doesn't have the same terrorist history. And if we can deliver something, help deliver some kind of peace that Abbas can show the Palestinian people, then he'll be able to control--defeat Hamas. What's wrong with that argument?

Bolton: Well, I don't buy that argument. I think when the Palestinians voted Hamas into power in the elections a few months ago, that in effect what they were saying was not simply that they wanted to support a terrorist group, but that they thought that Abbas's faction, Fatah, was fat, corrupt and incompetent. And I don't think they have become any less fat, corrupt and incompetent in the intervening months. I think the Palestinian Authority, clearly broken, maybe irreparably broken. And propping up Abbas doesn't make the situation better. You don't have a Palestinian Authority that can make commitments or keep them at this point.

Gigot: There is also a strategic rationale, I am sure you've heard, from many inside the administration--you talk to them privately, they'll say that this is also about Iran. That is, if you can create a kind of moderate alliance with the Sunni regimes in Saudi Arabia, Egypt and even Syria, then perhaps we can--and you can show them that we're trying to help their concerns, address their concerns in Palestine, then they're more willing to help us in Iran. Is there anything to that, in your view?

Bolton: I think that's bad logic as well. Look, the states, the Arab states of the Persian Gulf are already terrified of Iran. They don't have any option other than to work with us. What they're really worried about in the Persian Gulf is a precipitous American withdrawal from Iraq. And what will calm them down is continuing success of the surge.

If you solve the Arab-Israeli problem tomorrow--which, of course, isn't gong to happen--but even if you did, extremism in the Islamic world would still be there, the extremists among the Sunnis, the Wahhabis, al Qaeda and the extremists among the Shia in Iran, principally. These are conflicts within Islam and debates and conflicts that have been going on for centuries that have little or nothing to do with Israel and the Palestinians.

Gigot: Where does this leave the U.S.-Syria--the U.S. policy toward Syria, because they were invited in. The U.S. worked very hard to coax them to show up, and finally they did with a rather junior official. But this again is a big reversal from two years ago, when we were trying to isolate Syria, drive it out of Lebanon. What do you think the United States is now trying to accomplish with Syria? Is it trying to peel it off from Iran?

Bolton: That would be a nice thing to do if it were possible. But given Iran's hegemony over Syria, just being invited to Annapolis isn't going to do the trick. And I think the Syrians indicated just out how seriously they took it, as you point out, by sending a deputy foreign minister.

The real issue here, I think, in looking at the Syrian-Iranian relationship is to find out whether Iran had anything to do with that likely nuclear facility near the Euphrates River that the Israelis bombed on Sept. 6. This connection, which principally involves North Korea, but which may involve Iran, really tells you who's calling the shots, not just in Syria, but potentially also in Lebanon, where the democratic government there is under serious threat from the Syrian and Iranian-backed terrorist group Hezbollah.

Gigot: Is the United States then simply ignoring that bombing episode in--that Israeli made--foray into Syria, or do you think they're having private discussion was Damascus, or just sort of putting it out of sight, out of mind?

Bolton: There's a growing feeling in Congress, not only among Republicans but among Democrats, that the U.S. government it withholding information about that raid, not because of legitimate intelligence or operational equities, but to avoid bad news coming out about what exactly was going on there and who was involved--bad news that might tank the six-party talks involving North Korea, and that might take the Annapolis process as well.

Look, it's to the administration's advantage. If there were no North Koreans involved with that that facility, why not say so? If it was not a nuclear facility, why not say so? That's why I think, actually, the administration is risking its own credibility by not being more forthcoming about what was going on at that facility the Israelis bombed.

Bolton: We've talked about the State Department, and you say that Secretary of State Rice is now dominating American foreign policy. But look, this is President Bush's foreign policy. I mean, he's ultimately responsible for these changes you talk about. Why has he made such a dramatic change?

Bolton: You know, that's hard to say. I try and document in "Surrender Is Not an Option" these cultural problems at the State Department that have existed for decades, will take decades to cure--how they're able to seduce or co-opt political appointees. I think that's what's happened with Secretary Rice. I think she's in the Colin Powell mode of representing the State Department to the rest of the administration rather than the Jim Baker mode of representing the president to the State Department.

But you're correct. Ultimately these are presidential decisions. I think many of these policies--Annapolis, Iran, North Korea--run contrary to the president's own instincts, and my hope is that in these remaining 13 months, the real George Bush emerges again and we return to a more realistic American foreign policy.

Gigot: All right, Ambassador John Bolton, thanks for being here.

Bolton: Thanks for having me.

Gigot: Still to come, an oil-rich Arab state bails Citigroup out of its subprime mortgage mess. Should we be concerned? Our panel debates after the break.

Gigot: Oil-rich Abu Dhabi will invest $7.5 billion in Citigroup, offering America's largest bank some much-needed capital to offset big losses from the subprime mortgage slump. The deal announced this week makes Abu Dhabi, the capital of the United Arab Emirates, one of Citigroup's largest shareholders.

Joining the panel this week, Wall Street Journal columnist and deputy editor Dan Henninger, foreign-affairs columnist Bret Stephens and senior economics writer Steve Moore.

Dan, so, Citigroup, Robert Rubin, the chairman of their executive committee, hat in hand to Abu Dhabi for the capital they need to stay solvent. Should we be worried about this investment?

Henninger: I guess I'd say the proper word is "concerned." I wouldn't be terrified about it. It's a very interesting issue. The Middle East is a place we're heavily invested in militarily. You know, the 9/11 Commission said that the 9/11 terrorists used the financial system of the United Arab Emirates to do what they were doing. That was then, this is now. The UAE, Abu Dhabi, is trying to join the West, I think, and we should welcome that. We should try to pull them in to be part of our system.

That said, it's so interesting their investment was 4.9%, just below the requirement for the Fed to look into what they were doing. If it was a good-faith investment, why didn't the UAE say We'll invest 5.1%. We welcome an investigation by the federal government?

Gigot: And I want to pursue that point, though, Bret, because I think that that's an interesting point, and particularly in the light of the history of Abu Dhabi's dealings in American finance, particularly their previous ownership in a corrupt bank called BCCI, which really tried to evade American banking laws and was forced to settle for hundreds of millions of dollars. You have that history. So you say, why not just say, OK 5% or 7%. We'll open up everything? It looks like they are trying to slip right under the radar screen of the regulatory system here. That's one of my concerns.

Stephens: Because they learned the lesson from the protectionism, the protectionist impulses that came out of the attempted CNOOC purchase of Unocal, the Dubai Ports World failed purchase of American ports. So they understand it's politically sensitive. But this isn't something we should be concerned about. We should be delighted about this. First of all, better that Dubai bail out Citibank than the American taxpayers.

Gigot: Hold it. OK, fair enough. Fair enough. I take that point about the taxpayer, but better that Dubai bail out--

Stephens: Excuse me, Abu Dhabi.

Gigot: Abu Dhabi, I'm sorry. That Abu Dhabi bail out Citigroup as opposed to, say, Goldman Sachs or some American investor? Isn't there a net loss of sovereignty here when America's largest bank is controlled by Arab investors or dominated by Arabs investors?

Stephens: I think Lou Dobbs might think so, but I don't think that's the case at all. I mean, we live in a global capitalist system. We are having net losses of sovereignty all the time--when Japanese car makers come into this country, when British investors and French investors come into this country, when corporations take over Westinghouse, our nuclear power industry--and we don't worry about it. We celebrate it, because it means an integrated capitalist system in which everyone is a stakeholder. AndI'd rather have the United Arab Emirates investing productively in American capitalism than doing what the Saudis do, which is invest in Pakistani madrassas.

Gigot: So why shouldn't the Federal Reserve be able to scrutinize this, Steve Moore? Does that bother you at all?

Moore: I think that Bret has it right. The reason they fell below that 5% threshold is precisely because it takes so long, it's so burdensome, there's so much red tape. And if I were the Arabs, I wouldn't want to have to come under that kind of regulatory regime either.

Bret has exactly the right take on this, and I'm sort of surprised, Paul, at you and Dan for your kind of protectionist leanings on this. It is a good thing when foreigners invest in the United States. For the last year or two, all the discussion has been about foreigners disinvesting in the United States, taking their capital out. It's one of the reasons the dollar has been falling. Now the economic reality here is the Arabs have a lot of petrodollars. And it's a good thing if they reinvest that money in the United States rather than invest it elsewhere.

Gigot: One my problems, though, here, Steve, is they have so much money in part because of the blunders by the U.S. Federal Reserve System.

Moore: That's true.

Gigot: Which has not cared about the dollar, which has created the subsidy for debt that ultimately got Citibank into its problems on mortgages and ultimately allowed the flow of these petrodollars into these Arab governments, which is now--obviously it has to go somewhere. But what they're doing is taking advantage of an American government failure. And that's one of the problems here.

Moore: I agree with that. I mean, obviously there are big, big failures. I think that the decline of the American dollar is one of the big economic crises in this country. But you've got to get to my fundamental point here, Paul, which is that it's better that foreigners start reinvesting in America than they just pull out all of their capital, which would exacerbate the problem.

Henninger: We all agree with that, Steve. But this is not the 1970s when the Japanese were buying Rockefeller Center, right?

Moore: Right.

Henninger: This is 2007, and we're talking about a world of global Islamic terrorism. It's a two-way street. They have to present their bona fides and be willing to open themselves to transparency just as we should be willing, as Steve is suggesting, to take their investments. It's a two-way street.

Gigot: The other thing is, Bret, that the wire-transfer system--and you have to acknowledge this--is utterly crucial to looking after terror financing. It's been--the financing system is something we have to be worried about in the global war on terror. It's crucial through the Swift program that was tracking terrorist financing that was exposed by the New York Times, unfortunately. And I think we have to be concerned when a big bank--we have to be concerned with how well they will cooperate in that tracking of terror financing.

Stephens: I don't see any evidence to suggest that Citibank won't be following the laws after this investment as they have before. It is a 4.9% stake. This is not necessarily a controlling stake.

Gigot: Now, that I don't agree with.

Stephens: They don't get a seat on the board.

Gigot: But that's eyewash. If you combine this with the other largest investor, the Arab prince, this means that they are the dominant shareholder in Citigroup. No question about it.

Stephens: Well, then we should have been more concerned about Saudi investment in Citibank rather than the one from UAE, which has been a stalwart ally of the United States. And this is not simply--we're talking about the post-9/11 world. The issue here is, is the Arab world going to move in a jihadi direction or is it going to move in the direction that we hope it does, which is towards globalization, towards capitalist investment in the rest of the world. And that's what we have to promote.

Moore: You know, and--

Gigot: Steve, we've got to go. I'm sorry, Steve, we've got to go. Thanks.

Still ahead, the Republican exodus continues. What Sen. Trent Lott's retirement means for GOP hopes to take back the majority, after the break.

Gigot: Welcome back. Republican senator Trent Lott announced his retirement this week, following in the footsteps of five of his GOP Senate colleagues and 17 Republican House members. This wave of retirements is making an already difficult 2008 electoral landscape even more complicated for a minority party trying to regain power.

We're back with Dan Henninger and Steve Moore. And also joining the panel is Washington columnist Kim Strassel.

Kim, so, Trent Lott retiring, the No. 2 Republican in the Senate. Why is he doing it and what does it mean for the Republicans in the Senate?

Strassel: It isn't clear exactly why he's leaving. The big conventional wisdom here is he is getting out now so that he will not be under new restrictions that are coming in next year that keep him from lobbying his former colleagues in the Senate for at least two years. He'll be able to do it in one year if he gets out now.

Gigot: So he's going into business in Washington.

Strassel: He's going into business, yes--apparently more lucrative than being in government, though I think that's arguable these days. What does this really mean? It's a numbers game at this point. We now have 25 Republican seats in the Senate that are going to have to be defended, versus 12 for the Democrats. The Democrats have other natural advantages. When you're in the majority, it's easier to get money. They are going to--it's just going to be a lot easier for them to defend the seats they have. So this is going to be a very tough, tough row for the Republicans to hoe this year.

Gigot: Steve, some of the Republicans are saying they could even--well, they have 49 seats now. They would need at least 41 to be able to sustain a filibuster. And particularly if there is a Democratic president, that becomes crucial. Can you really see the Republicans losing as many as nine or 10 seats and fall below that 41 level?

Moore: Yeah, I really do. First of all, one implication of Trent Lott's retirement, and these other retirements, is it makes it impossible to conceive that Republicans could actually take the Senate in 2008. But the scary scenario is you could have Democrats take 60 seats in the Senate, which would mean that Republicans couldn't have a filibuster against the Democrats, and if you have Obama or Hillary in the White House--I mean, I'm looking at these states, Paul: Virginia, Colorado, New Hampshire, Oregon. I mean, it goes on and on. There are a lot of problems for Republicans across the country in holding onto the seats they already have.

Gigot: Steve, are there any vulnerable Democratic seats? I think of Mary Landrieu, the incumbent Democrat from Louisiana.

Moore: She's really the only one. And that would mean for Republicans to take the Senate, they'd have to win that seat and then hold all of these other nine vulnerable seats. It seems almost impossible.

Gigot: How realistic is this, Dan? There's sort of a nightmare scenario here for the Republicans. Is this really going to happen, assuming they have a presidential election that is somewhat close?

Henninger: Good question, yeah. We're in November 2007. If that election were held next Tuesday, it would be a wipeout. The reason is that in the states that Steve has mentioned, like Colorado, Virginia and New Hampshire, George Bush's approval rating is totally in the tank, and people in the middle would vote for the Democrat. What the Republicans need is definition. They need a new personality. And they're are going to need a--

Gigot: A new party leader.

Henninger: Yeah, exactly. And in November 2008, someone will be running for president. They need a lot of help at the top of the ticket because that's going to determine the personality of the party. I think these Senate seats are lost unless they have a strong presidential candidate.

Gigot: Kim, let's turn to the House, if I can, where you have these 17 Republican retirements. There had been some optimism among Republicans that if Sen. Hillary Clinton were at the top of the Democratic ticket, they might very well be able to gain seats in the House. Is that an increasingly difficult prospect?

Strassel: It's a difficult prospect, but the House is a very different situation. For one, remember, the House is the center of gerrymandering. Half of these guys have carved out safe districts for themselves. It's bad for voters; it's great for the politicians.

The other thing, though, is that I think one of the unsung stories of the House has been John Boehner's management of his minority. He has kept his people together through some very tough votes on Iraq, on spending, on children's health care insurance program. And his argument to them has been, Look, we are going to be in a better situation next year if we can say we hung tough on these questions and kept the Democrats from blowing the bank on spending. We're the reason why we're doing better in Iraq, et cetera. We'll see how that happens, how that plays out in the election. But that is a strategy that they've been taking, and some feel optimistic that it's going to help.

Gigot: One of the remarkable things here is that the Democratic approval rating, or the approval rating for all of Congress overall, is now sinking well below George Bush levels. Really, the friends and family plan--it's that low. So what do you--and the Republican can't pick up seats in that kind of environment? It'd be remarkable.

Strassel: One thing, too, to also mention--go back to the Senate. A lot of these guys who are retiring you've got to remember, they're the old guard. They have been there for decades, and they were part of the problem with this image of earmarks and corruption and everything else. A lot of the intellectual firepower has come from younger people. If Republicans are smart, they'd be using this opportunity to rebrand the party with some new reform candidates.

Gigot: All right, Kim. Thank you very much.

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

Gigot: Winners and losers, picks and pans, "Hits and Misses," it's our way of calling attention to the best and the worst of the week.

Item one, Google wants to be your new hard drive. Dan?

Henninger: Yeah, I think because of the Internet, Paul, privacy is essentially dead. And the big question is who are you going to sell your soul to, Microsoft, Apple or Google? Google is thinking about--

Gigot: Very appealing options, all.

Henninger: Well, Google is thinking of proposing that people can put all of their private records onto Google's hard drives. Your pictures, your bank records, everything. This reminds me of the movie "Tron," where a computer hacker was sucked into the operating system of his computer and has to live there the rest of his life. I'll tell you, if the question is, if the only thing I will be left with is the shirt on my back, I'm saying to Google, thanks, but no thanks.

Gigot: All right, Dan.

Next, Sudan sentences the so-called teddy-bear teacher. Bret?

Stephens: You remember the controversy over the Danish cartoons of the prophet Muhammed? Well, first time as tragedy, second time as farce. Although it's not such a farce for the British schoolteacher in Sudan by the name of Gillian Gibbons. She asked her students to name a teddy bear. They named the teddy bear Muhammed, after one of the students in the class, Muhammed being a very popular name. And the Sudanese government responded, predictably, first by attempting to sentence her to 40 lashes. Then, over the strong objections of the British government, that sentence was reduced to a mere 15 days in jail.

I think this raises a broader question, which is what is our obligation to be sensitive on these sorts of concerns? I would say that we have an obligation to be insensitive so long as people like the Sudanese demand us to be submissive.

Gigot: All right, Bret, thanks.

Finally, those poor Manhattan farmers. Steve?

Moore: Paul, what do Ted Turner, David Letterman and Scottie Pippen all have in common? No. 1, they're not farmers. But No. 2, they get tens of thousands of farm aid every year. There are four billionaires in America that receive farm aid, and maybe outrageous of all, there are 500 people who live in Manhattan that are getting farm aid. I don't know if Paul Gigot and Dan Henninger are on that list.

Gigot: Sorry, Steve. No such luck.

Moore: But who knew there are so many soybean farmers in and around Central Park? You know, mst Americans are fine with giving farm aid to poor farmers. But today, the real outrage in our farm programs--you don't have to be poor and you don't have to be a farmer to get the aid.

Gigot: All right, Steve, thank you.

That's it for this week's edition of "The Journal Editorial Report." I'm Paul Gigot. Thanks to all of you for watching, and we hope to see you right here next week.