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President Says Sony Made a Mistake Canceling Movie; Sony Defends Decision to Pull Film; Rep. Adam Schiff Weighs in on Sony's Film Cancellation; New Statement from Sony; Inside North Korea's Cyber Terror Attack; Cyber Attacks Surge Against U.S. Government; Did Sony Consult with Rand about Film?

Aired December 19, 2014 - 17:00   ET


WOLF BLITZER, CNN ANCHOR: Happening now, breaking news, calling out Sony. President Obama weighs in on the exploding controversy, saying the studio should not have bowed to terror threats, as the FBI lays blame for the devastating cyberattack directly, publicly on North Korea.

Sony responds. The CEO talks exclusively to CNN, contradicting the president, saying he's mistaken. Will Sony still give audiences a chance to see the movie at the center of this drama?

Axis of evil. Experts say the Sony attack was too sophisticated to be carried out by North Korea alone. Did Kim Jong-un's regime have outside help?

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

ANNOUNCER: This is CNN breaking news.

BLITZER: We're following the breaking news. Sony Pictures now responding directly to President Obama who says it was a mistake for the studio to pull its new comedy movie, "The Interview," amid threats from cyber terrorists.

Sony Entertainment CEO just sat down for an exclusive interview with CNN's Fareed Zakaria. Fareed is standing by with that.

We also have our correspondents and our guests on the breaking news, including Congressman Adam Schiff. He's a key member of the House Intelligence Committee.

We begin with our senior White House correspondent, Jim Acosta. Jim, so what else did the president say about this fast-changing story?

JIM ACOSTA, CNN SENIOR WHITE HOUSE CORRESPONDENT: Wolf, it's been a tough year at times for President Obama. But he had a spring in his step as he delivered a stern warning to North Korea, saying the communist nation's leaders will pay a big price for the cyberattack on Sony.


BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Hello, everybody. ACOSTA (voice-over): On the most pressing issue facing him before he

leaves Washington, President Obama said there will be a response for the hack attack that prompted Sony to pull its movie, "The Interview," from theaters.

OBAMA: They caused a lot of damage. And we will respond. We will respond proportionally, and we'll respond in a place and time and manner that we choose.

ACOSTA: The president declined to specify whether that response would come in the form of sanctions or even a U.S. cyber counterattack.

But he echoed the complaints from Hollywood to Washington that Sony created a bad precedent by caving to a dictator.

OBAMA: Yes, I think they made a mistake. I wish they'd spoken to me first. I would have told them, do not get into a pattern in which you're intimidated by these kinds of criminal attacks.

ACOSTA: Still the president mocked North Korea's behavior as a bigger joke than the punch lines in the Seth Rogen-James Franco comedy.

OBAMA: I love Seth, and I love -- and I love James. But the notion that that was a threat to them, I think gives you some sense of the kind of regime we're talking about here.

ACOSTA: For the president, the confrontation with North Korea comes just as he's easing tensions with Cuba. Mr. Obama defended his decision to normalize relations with the island even as he acknowledged Democratic reforms won't come overnight.

OBAMA: Change is going to come to Cuba. It has to.

ACOSTA: But in a nod to critics, the president also seemed to tamp down speculation he may travel to Cuba anytime soon, something the White House didn't rule out.

OBAMA: We're not at a stage here where me visiting Cuba or President Castro coming to the United States is in the cards.

ACOSTA: Mr. Obama started his news conference touting his accomplishments of 2014, taking a victory lap over the improving U.S. economy.

OBAMA: Pick any metric that you want; America's resurgence is real.

ACOSTA: To complaints about his executive actions, he challenged the soon-to-be GOP-controlled Congress to work with him on immigration reform. And he appeared to dismiss the economic benefits of building the Keystone Pipeline.

OBAMA: At issue in Keystone is not American oil. It is Canadian oil.

ACOSTA: But he conceded big problems remain, such as the racial tensions that flared up in recent weeks after Ferguson.

OBAMA: There are specific instances, at least, where law enforcement doesn't feel as if it's being applied in a colorblind fashion.


ACOSTA: Now one thing that is worth noting about this news conference is that all of the questions came from women in the White House press corps.

Meanwhile, the president in about an hour from now will be off to Hawaii for his annual family vacation. He said he has a whole list of movies to watch, Wolf. But did not say whether "The Interview" will be one of them -- Wolf.

BLITZER: All right. Thanks very much, Jim Acosta.

Let's get to that exclusive response from Sony Entertainment CEO Michael Lynton. He sat down for an exclusive interview with CNN's Fareed Zakaria, the host of "FAREED ZAKARIA GPS."

This is Sony -- Sony's first public response, Fareed. It's only on CNN. And I want everyone to hear this initial exchange you had with the Sony CEO.


FAREED ZAKARIA, CNN ANCHOR: The president says Sony made a mistake in pulling the film. Did you make a mistake?

JOHN LYNTON, CEO, SONY ENTERTAINMENT: No. I think actually the unfortunate part is in this instance the president, the press and the public are mistaken as to what actually happened.

We do not own movie theaters. We cannot determine whether or not a movie will be played in movie theaters.

So to sort of rehearse for a moment the sequence of events, we experienced the worst cyberattack in American history and persevered for 3 1/2 weeks under enormous stress and enormous difficulty. And all with the effort of trying to keep our business up and running and get this movie out into the public.

When it came to the crucial moment when a threat came out from what was called the GOP at the time, threatening audiences who would go to the movie theaters, the movie theaters came to us, one by one over the course of a very short period of time -- we were completely surprised by it -- and announced that they would not carry the movie. At that point in time, we had no alternative but to not proceed with the theatrical release on the 25th of December. And that's all we did.

ZAKARIA: So you have not caved in?

LYNTON: We have not caved. We have not given in. We have persevered and we have not backed down. We have -- we have always had every desire to have the American public see this movie.

(END VIDEO CLIP) BLITZER: It sounds like a pretty direct contradiction to what we heard from the president of the United States, Fareed. He understands that, right?

ZAKARIA: Oh, he does. I think Michael Lynton is a very intelligent guy. It was a direct contradiction of what the president said. He also directly contradicted something the president said, which you showed, Wolf. Which the president said, "I wish they had called me." Michael Lynton told me in that interview they did call the White House and spoke with senior administration officials about this very issue.

BLITZER: And the president said he wished he had spoken with me. He didn't make the point that they had spoken to others.

I want to play another exchange, where we go from here. This is a fascinating exchange you had with Mr. Lynton. Listen to this.


ZAKARIA: Why not release it online in some form or the other, video on demand?

LYNTON: There are a number of options open to us. And we have considered those and are considering them.

As it stands right now, while there have been a number of suggestions that we go out there and deliver this movie digitally or through VOD, there has not been one major VOD, video on demand, distributor, one major e-commerce site that has stepped forward and said they are willing to distribute this movie for us.

Again, we don't have that direct interface with the American public, so we need to go through an intermediary to do that.


BLITZER: And so they're all scared what North Korea might go after them, start hacking them, that they could launch some sort of terror attack, some reprisal. Is that why no one is stepping forward to show this film?

ZAKARIA: Exactly, Wolf. Think about it. Wal-Mart would have to decide to stock the DVDs, and they would face the same issue that the movie theaters did.

If it were video on demand, whether it's Netflix or YouTube, they have to agree to host it and recognize that they would probably be subject to a cyberattack, malware would get into their systems. The cyberattack on Sony is huge. I mean, we're talking probably about hundreds of millions of dollars, because they scrubbed Sony's computers clean, all of which has intimidated corporate America.

The story really here is that nobody stood by Sony. Not one movie studio signed anything in solidarity with it. You know, George Clooney talks about trying to get a petition, and he couldn't get one actor or director to do it. And so even to get it out on video, you need partners, you need

distributors who are going to be willing to do it. And so far, they haven't found them. But he did say they are in discussions and they continue to hope that they will be able to get the movie out.

BLITZER: We'll see if the president's powerful words have an impact on Hollywood and these other corporations around the country.

Fareed, excellent work. Thank you so much. We're going to have some more excerpts from your interview coming up here in THE SITUATION ROOM.

By the way, you can see the entire Fareed Zakaria exclusive interview with the Sony Entertainment CEO, Michael Lynton, in full once again later tonight on "ANDERSON COOPER 360," 8 p.m. Eastern, 5 p.m. Pacific only here on CNN. Of course, you can also watch "Fareed Zakaria GPS" Sunday mornings, 10 a.m. and 1 p.m. here on CNN.

Let's talk about the breaking news with Democratic Congressman Adam Schiff of California. He's a key member of the House Intelligence Committee.

Congressman, thanks very much for joining us.


BLITZER: Not only are you a key member of the House Intelligence Committee, your district in Los Angeles represents a big chunk of Hollywood, these studios, these people who work there. So you have unique perspective on this story from all sides. Do you agree with the decision by Sony to pull the release of this film?

SCHIFF: I'm very concerned about the precedent, Wolf, of not releasing the film. And I hope that Sony can find a way to do that. I hope that some of these companies that would distribute it through on demand will step forward and do this.

Because otherwise, it not only impacts this film, but you have to imagine that, when studios think about now the next film that may parody some other dictator or parody the same dictator, they're going to think, "Do we want to risk going through what Sony did?"

The best response, I think, to a dictator who doesn't want this film released is to release it all over the world, translated in multiple languages, translated into Korean. I think they ought to push this film out as aggressively as possible. We ought to help them.

BLITZER: Well, what about those corporations, those businesses, private enterprise, that are afraid they'll be hacked by North Korea and they'll suffer enormous damage or they could be the subject of a terror attack? How concerned should they be? You're privy to the intelligence.

SCHIFF: Well, they have to be concerned about a cyberattack. This is just the world we live in now. And no corporation is going to be immune from this. In fact, we've been seeing cyber theft of our intellectual property and our trade secrets for many years now on an extraordinary scale. So this is a fact of life. And I think corporate America is going to have to decide how they can respond to this. They can respond by backing down, or they can respond by saying, "We won't be intimidated."

And I have to hope they choose the latter course. Because if they don't, I think they're only inviting further extortion of the kind we are seeing through this North Korean attack.

BLITZER: Congressman, let me play another clip. This is from Fareed's exclusive interview with Michael Lynton, the Sony CEO.


ZAKARIA: You are well-known as somebody who supported President Obama.


ZAKARIA: Were you disappointed in what you heard today?

LYNTON: I would be fibbing to say I wasn't disappointed. I -- I -- you know, the president and I haven't spoken. I don't know exactly whether he understands the sequence of events that led up to the movie's not being shown in the movie theaters. And therefore, I would disagree with the notion that it was a mistake.

It's a generally held view by the public and the press that that's what happened and maybe that's how that view was held by -- by him. But knowing as I do the facts and how they -- and how they've unfolded, you know, we stood extremely firm in terms of making certain that this movie would appear in movie theaters.


BLITZER: So what happens here? Was there not enough of a dialogue between Sony and the federal government?

SCHIFF: Well, I have great respect for Michael. And it looks like, from what he's saying, that Sony feels that its hand was forced. That you had these theaters were saying, "We're not going to exhibit it." And, you know, I imagine that there's a certain threshold that you have to have in terms of exhibition to make any kind of a screening of a film successful.

So I think the story is not finished yet, because Sony is still considering putting this film out there. It wants to get it out before the American people, and I think, the world public. The question is, will Sony have partners? And I think what Sony is saying right now is, "We don't have partners in this. We can't do this all on our own."

And I think it's -- it's in our interest; it's in the White House's interest to encourage those other corporate actors to work with Sony, to have Sony's back, and to help distribute this film. BLITZER: Because the damage that has been done to Sony, that's a huge

operation in Los Angeles and around the world is -- some would say tens of millions, some say hundreds of millions of dollars. And people will say, you know, "It's easy for Congressman Adam Schiff or President Obama to say, you know, 'Just be a profile in courage and do the right thing.' These businesses, they have to worry about their bottom line. And they're nervous about losing hundreds of millions of dollars and maybe even having their computer systems and their entire businesses shut down."

SCHIFF: Absolutely. I mean, these are my constituents. I probably represent more of the industry than any other member of Congress.

You have the employees who are concerned about their personal privacy. You know, you read the stories about the celebrities whose privacy is invaded. But everyone had their data stolen or it was a massive theft of data. The other studios have to look at that and say, you know, "There but for the grace of God, go I." So they're worried do they have adequate security?

I mean, this is an unprecedented situation where you have a country attacking a single studio over a film. I mean, you couldn't write this stuff. And nonetheless, it has to be a real-life concern.

So listen, I think those concerns are absolutely valid. At the same time, these companies have to understand -- and I think they do -- what the impact will be if they're seen as backing down, if they're seen as allowing a dictator somewhere to decide their editorial content or their artistic content.

So there's a lot at stake here. And I have to think the end result is going to be the distribution of this film.

BLITZER: I suspect no one is more surprised how this situation has exploded than Kim Jong-un himself. He's probably sitting there in Pyongyang saying, "How did this happen?" Everybody is basically cowering in the face of what North Korea did.

SCHIFF: It's absolutely extraordinary. Extraordinary that they would make such a big deal over a satire and extraordinary that thus far it's been successful. But we have to make sure that there's a different ending to this story.

BLITZER: We have a lot more to discuss, Congressman. I want you to stand by, including what the U.S. should be doing about this.

And once again, you can see Fareed's exclusive interview with the Sony Entertainment CEO, Michael Lynton, in full later tonight on "AC 360," 8 p.m. Eastern only here on CNN. We're going to have much more on the breaking news right after this.


BLITZER: We're following the breaking news. President Obama and Sony now at odds over the cyber-terror threat that prompted the studio to cancel the release of its new comedy, "The Interview." President Obama calling the decision a mistake and says Sony should

have reached out to him before making that decision. In an exclusive interview with CNN, Sony Entertainment CEO Michael Lynton says he did reach out to the White House, and that President Obama's mistaken about the studio's decision.

We're back with Democratic Congressman Adam Schiff of California. He's a member of the House Intelligence Committee and also represents a big chunk of Hollywood in Los Angeles.

So what does the U.S. do now? How can the U.S. retaliate proportionately, as the president says, against North Korea?

SCHIFF: It's very hard, because if we get in a cyber tit-for-tat with them, they can do a lot more damage to us than we can probably do to them because of the primitive conditions in North Korea and our incredible exposure.

So I have to think the administration is really looking at what economic levers can it pull to make life difficult for the regime, for the cronies who surround Kim Jong-un. There are ways, I think, that we can tighten the financial screws to them, make them pay a price and hopefully deter them from doing this again.

But again, I think the biggest deterrent is to do what they wanted to avoid, and that is have the broad distribution of this film.

BLITZER: Yes. The economic sanctions against North Korea by the United States, they're already pretty tight. But there are some areas where the U.S. could really take some steps to further punish North Korea.

SCHIFF: There are. North Korea's engaged in a lot of illegal commerce with drugs, with other denied goods. And we can go after some of that illegal export that brings in money to the regime. We've done some of that in the past. I think we'll do it with a vengeance now and look for other opportunities to make them feel the pain.

But getting in a very public fight with them or getting in a very explicit cyber fight with them might either undermine our own capabilities or cause greater damage to be inflicted on our own businesses.

BLITZER: Now you have no problem with the FBI conclusion that North Korea directly did this cyberattack?

SCHIFF: No, I don't. I've talked to intelligence officials about it, and they use levels of certainty in describing their conclusion that you don't often hear from the intelligence community. And also looking at the facts of what we've been able to corroborate seems pretty overwhelming.

BLITZER: The president -- the president says there's no indication North Korea was acting in conjunction with any other country. You accept that? SCHIFF: I do. I haven't seen any evidence that some other countries

were complicit. Now, these actors, they try to hide their actions by distributing their attacks in other parts of the world. There's no indication that there were knowing partners elsewhere. And this looks like purely the result of the regime making a decision and then tasking its people with implementing it.

BLITZER: Well, he says no other country. But what about individuals outside of North Korea, subcontractors, if you will? Is it possible they were involved?

SCHIFF: Well, it's certainly possible that people outside North Korea were involved. I mean, the infrastructure within the country is pretty limited. So to carry out sophisticated cyberattacks, they're going to use some combination of what they do inside the country and some combination of actors outside the country.

But whether those are all North Korean nationals or whether they employ the services of others, I think this was probably predominantly, if not exclusively, a North Korean operation. But they may have other -- other players that are working with them.

BLITZER: Only China, presumably, could shut down that North Korean computer infrastructure, isn't that right?

SCHIFF: Well, China has the most leverage on North Korea, both in terms of its infrastructure -- Internet infrastructure, but also in terms of food and fuel.

The question is whether we can get China to do any more than we have tried to get them to do in the past over the nuclear program. China's obviously worried about a collapse of the regime, lots of refugees having essentially a South Korean government or a western friendly Korea, unified Korea on its border. So it's only going to go so far.

But China has expressed increasing displeasure with the rogue nature of this regime and the fact that it draws American resource, naval and other, into the region, which China doesn't want. And if they can't control their bad boy in Pyongyang, they know they're going to invite a stronger American presence into the region.

BLITZER: Adam Schiff, thanks very much for coming in.

SCHIFF: Thanks, Wolf.

BLITZER: Congressman Adam Schiff of California.

Up next, more breaking news. And new details of the FBI investigation of the Sony cyberattack and why officials are now calling it a game- changer.

Plus, why experts say North Korea did not act alone. Is there evidence of a new cyberterror alliance out there, a hack-sis of evil, as some are calling it?

(COMMERCIAL BREAK) BLITZER: We're following the breaking news of today's FBI confirmation that North Korea is behind the cyberattack on Sony Pictures.

In conversations with CNN, justice reporter Evan Perez, U.S. officials are describing the attack as a game-changer. Evan is joining us now with more.

This is a huge deal. And as you've been reporting, Evan, almost unprecedented how the FBI is reacting.

EVAN PEREZ, CNN CORRESPONDENT: That's right, Wolf. It takes a long time normally for the FBI to decide to name and shame countries responsible for cyberattacks. You started seeing a change earlier this year when the FBI and the Justice Department went after the PLA, the Chinese PLA for stealing secrets from U.S. companies.

What I'm told, Wolf, is that in the last few weeks, they've been working around the clock, weekends and nights, to try to nail down this attack to see that -- where it was coming from, and all signs pointed to North Korea.

The decision, Wolf, came when these hackers decided that they were going to threaten attacks on Christmas day, when this movie was supposed to open, threaten terrorist attacks against movie theaters. A decision was made, Wolf, that it was time to name and shame North Korea for this attack.

And Evan broke this story 48 hours ago right here on CNN, first reporter to break the news that the U.S. government had concluded North Korea was directly responsible for this cyberattack against Sony Pictures.

Good reporting, Evan. Thanks very much.

There's more breaking news coming into THE SITUATION ROOM now. Another brand-new statement from Sony.

Let's bring in our senior media correspondent Brian Stelter.

What are you learning, Brian?

BRIAN STELTER, CNN SENIOR MEDIA CORRESPONDENT: They're coming fast and furious today, Wolf. What Sony has just said goes a little bit further than where the CEO went with Fareed Zakaria earlier today.

We'll put it up on screen and I'll read it to you.

It says, "After the theater owners decided not to run this movie, they had no choice but to pull it." But then they say, "After that decision on Wednesday, we immediately began actively surveying alternatives to enable us to release the movie on a different platform. It is still our hope that anyone who wants to see this movie will get the opportunity to do so."

So what does that mean? Well, it means they are once again seeking digital distributors, maybe companies that were willing to let you buy this movie online and watch it for 10 or 20 bucks or maybe even release it for free.

I think everything's on the table right now. And the question becomes, is there any company that's actually willing to help Sony do this?

I did just during the commercial break, Wolf, hear from Netflix, you know, the first company that comes to mind when you think about who could possibly release this movie to everybody all at once. Well, here's Netflix's statement.

They say, "We were approached on virtually every unconventional release by the networks and studios. And as a matter of course, don't discuss publicly the pitches, concepts or ideas that come our way."

I interpret that to mean, they're not ruling it out but they're not willing to talk about it publicly either. I think the question now, and into the weekend, Wolf, is, is anybody going to help Sony release this movie?

BLITZER: Because these companies are all concerned about another cyber attack against them and they're obviously concerned about a terror -- a direct terror threat, a physical threat to employees or customers, aren't they?

STELTER: That's right. There's a number of different considerations. One of them is also this. Even if a company is willing to put it online, let you pay for it for 10 bucks, would any customers be willing to hand over their credit card information given concern about hacking.

BLITZER: It's a good point. There's a lot of fear out there.

Brian Stelter, the host of CNN's "RELIABLE SOURCES." Don't forget, Sunday mornings, 11:00 a.m. Eastern.

Excellent, excellent show on the news media.

While President Obama says there's no indication another country worked with North Korea on the Sony attack, it does leave open the question about who or what did help the North Koreans.

CNN's Brian Todd is working his sources.

What are you picking up, Brian?

BRIAN TODD, CNN CORRESPONDENT: Wolf, tonight, officials and experts we're talking to say the footprints of this attack are not as clear- cut as they seem. They say the Sony hack required a lot of skill and North Korea may have operated in the shadowy world of freelancers, maybe even cyber criminals, to pull this off.


TODD (voice-over): The cyber forensic evidence all points to North Korea, according to the FBI -- the computer code, algorithms, the IP addresses. But that's not necessarily a clear path to Pyongyang.

SCOTT BORG, U.S. CYBER CONSEQUENCES UNIT: It's all circumstantial evidence that can be faked.

TODD: Scott Borg's cyber security group monitors the skill levels of hackers across the globe. Despite North Korea's efforts to develop a sophisticated army of hackers, he says, there were elements in the Sony attack that went beyond their skill level.

BORG: The biggest one is that they were able to carry on with activities inside Sony's network for so long without being spotted, moving possibly terabytes of data without anyone noticing requires a lot of skill. Opening documents all over the place in order to download them and have no one noticed requires quite a bit of skill.

TODD (on camera): And they just didn't have that even recently?

BORG: That's right. Earlier this year, there was no sign of that level of skill.

TODD (voice-over): Borg believes Kim Jong-Un's regime may have outsourced at least some of the Sony hack. But to whom?

BORG: I think that most likely this was hacking talent that volunteered to help them or criminals that they hired or someone inside of Sony who provided them with all kinds of inside access.

TODD: U.S. investigators have evidence that hackers stole the computer credentials of a Sony system administrator to get inside access. But could another government have helped North Korea? One analyst says another U.S. enemy may be involved.

CLAUDIA ROSSETT, FOUNDATION FOR THE DEFENSE OF DEMOCRACIES: There are signs that suggest Iran may indeed have helped because they have worked together on missile development for many years because Iran has been a major client of North Korea weapons.

TODD: CNN reached out to Iranian officials about that. They didn't respond. The White House maintains North Korea acted alone.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: We've got no indication that North Korea was acting in conjunction with another country.

TODD: North Korea denies hacking Sony. But if Pyongyang pulled this off without any outside help, it would be the greatest success for their shadowy hacking group called Bureau 121.

FRANK JANNUZI, THE MANSFIELD FOUNDATION: Frankly North Korea probably doesn't need the help. They've been investing in their own cyber capabilities for the last four or five years very heavily and they've had a couple of trial runs with attacks on South Korean media and banks.


TODD: And one analyst points to a key reason why other governments may not have helped with the Sony hack. This analyst says these other governments probably wouldn't be foolish enough to hand any kind of attack tools to North Korea given their unpredictable behavior -- Wolf.

BLITZER: That's pretty good fear, I would say.

The way these attacks, Brian, are masked, we may never know who specifically did this in terms of outside assistance to North Korea or anyone specifically inside North Korea?

TODD: That's right. As far as the individual hackers we're talking about, Wolf, the footprint, the forensic trail, of course, leads to North Korea, according to the FBI. But one cyber expert says if you have a sophisticated enough hacker, they could be anywhere and they can mask that malware well enough to make it look like it came from North Korea.

You've got a good enough hacker to hack that could have been in South Korea and used malware to make it looked like it came from North Korea.

BLITZER: And the amazing thing about these hackers, you only need a few of them to really do enormous demonstration, you may have 1,000 or 2,000 people working on it but five or six who know what they're really doing they really can cause a lot of damage.

All right, Brian, thank you.

While the attack on Sony is getting all of the attention, the U.S. government has been the target of tens of thousands of cyber attacks over the past year. The U.S. government.

Now in "THE SITUATION ROOM" is Chris Frates of CNN investigations, he's helping us better appreciate this part of the story.

Not just private companies that had been hacked, the U.S. government has been hacked.

CHRIS FRATES, CNN INVESTIGATIONS CORRESPONDENT: Well, that's right, Wolf. And we reviewed hundreds of pages of documents on cyber attacks and security breaches against the U.S. government. And what we found was astounding.


FRATES (voice-over): Every day, the government is under attack. Cyber attack. There were 61,000 hacks and security breaches throughout the U.S. government last year.

TONY COLE, VICE PRESIDENT, FIREEYE: There's an adversary out there whose job, you know, it is to break into our systems. So, you know, somebody is trying 24/7, it's going to get much worse than it is today.

FRATES: The White House and State Department networks were recently targeted. Cyber incidents involving U.S. government agencies are skyrocketing.

That number hit more than 46,000 last year.

DENISE ZHANG, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES: Cyber espionage is increasing at unprecedented rates.

FRATES: In January 2013, hackers hit the Army Corps of Engineers, grabbing sensitive information. They allegedly stole data on the nation's 85,000 dams, including their locations and the potential for fatalities if they were breached.

COLE: People were stealing hard copies of paperwork, you know, and passing it off to our adversaries when we had spies. Today, they can actually do that digitally and take, you know, magnitudes more data than they could in the past.

FRATES: In July 2013, hackers infiltrated the Energy Department, taking the personal data of more than 100,000 people. They lifted information including birthdays, Social Security and bank account numbers.

ZHANG: Government and industry are in a difficult battle against cyber adversaries. There are always very sophisticated actors out there. And for them, we just have to assume that an attack could occur. And so organizations need to be prepared.


FRATES: The government spent $10 billion on cyber security last year. But that can't defend against an employee who's duped into clicking on a malicious link.

As one expert told me, Wolf, there's no good defense against a stupid user.

Chris Frates reporting for us. Thank you very much.

Let's get some more right now. Joining us in THE SITUATION ROOM, CNN law enforcement analyst, Tom Fuentes, the former assistant director of the FBI. Also joining us, Kim Masters, she's editor-at-large for "The Hollywood Reporter" and Christian Whiton, the former State Department senior adviser on North Korean Matters.

Tom, I assume you accept the FBI's bottom line conclusion, the FBI saying that there's enough evidence to conclude that North Korea -- the North Korean government is responsible for these actions, you have no doubt about that?

TOM FUENTES, CNN LAW ENFORCEMENT ANALYST: No doubt. They wouldn't put that out if they had the slightest doubt.

BLITZER: Because usually the FBI hedges a little bit, allegedly, suspected -- because this is flat and firm.

FUENTES: Well, the FBI has this habit of wanting evidence and being able to prove something. And this is another example of that. When they're able to do it, they do it and they say who did it.

BLITZER: And when the president of the United States at his news conference later says there's no evidence, no indication North Korea was acting in conjunction with another country, you accept that?


BLITZER: What about -- what about other individuals, not necessarily a formal nation state?

FUENTES: Now that's possible. And that's, just as mentioned in the previous report, working with organized crime, there were organized crime groups all over the world that are penetrating systems all the time. We've just had that recently with groups out of Russia that attacked, you know, groups here or stores here like Target, Home Depot, banks. But this -- you know, this has caught everybody's attention because it's so prolific and brazen right now.

But this is something that the FBI's been battling and other agencies battling this for 20 years. I was in meetings in 1994 where we were discussing information warfare, the threat of cyber attacks on the critical infrastructure, what to do about protecting it.

The FBI in the '90s established a program called InfraGard which now has tens of thousands of companies that they work with every day to help them look at their systems and keep track of their systems because of what it would do to the United States -- power, water, nuclear facilities, communications most of all.

So those things are -- this is something that the government has been focused on, not necessarily resourced enough over the years, and that's a different battle. But this is not a new fight or a new issue.

BLITZER: It's a huge, huge priority. Certainly it is right now.

Christian, what do you think? Did North Korea do this alone or did they have some other outside partners, actors, individuals, maybe even someone inside Sony helping them?

CHRISTIAN WHITON, FORMER STATE DEPARTMENT SENIOR ADVISER: Well, the FBI and the president seem to be pretty clear that it was just North Korea. But frankly North Korea has helpers consistently in its electronic warfare. And those helpers are China and Russia, and possibly cooperation with Iran. So even if those governments weren't specifically involved in this attack, nonetheless they are part of helping North Korea, which I think just goes to show that we can't purely be on the defensive against all of these countries.

They have to be on the offensive. There has to be some plausible retaliation for this. And unfortunately, I don't think we're going to see one from Washington.

BLITZER: Well, what do you want to see?

WHITON: I want to see basically electronic warfare focus back at them. We should seek to disrupt the communications or electronic systems in Pyongyang and if Chinese or Russian companies were involved, then we should covertly target them. Just simple denial of service attacks just to show that there is some consequence.

But if you go back and look through successive administrations, not only the one I served in but also the Obama administration, we always talk tough after North Korea does something. When they sank a South Korean ship in 2010, we said we're going to hold them to account. When they tested a third nuclear device in 2013, the president said that we had to have a swift and credible response.

And every time, as soon as the headlines changed, we let them off the hook. And I think that's going to happen now. And we do that to our own peril. They're going to come and hit us again.

BLITZER: Kim, you heard the president say today he wished Sony had talked with him before deciding to pull the movie. The Sony CEO later telling Fareed Zakaria they spoke with senior advisers in the White House. But they had to pull the movie because the distributors out there, major movie theaters around the country, they didn't want to show the film. Your analysis?

KIM MASTERS, EDITOR AT LARGE, THE HOLLYWOOD REPORTER: I think Sony sort of danced around until the theaters finally refused to show it. And then they sort of pulled it from nothing. There was no place to show it. He's -- he, Michael Lynton, the CEO of Sony's entertainment operations here, is correct about that. I mean I think it's absolutely remarkable to see Michael Lynton from Sony saying Obama has it wrong. But it is correct that, you know, they didn't pull it from anywhere because there is no place to put it.

BLITZER: Kim, the group behind the cyber attack issued another new statement, sent it out to senior Sony executives last night, essentially demanding that the company erase any trace of the movie's existence. Here's what they said, among other things.

"We want," excuse me. "We want everything related to the movie, including its trailers, as well as its full version, down from any Web site hosting them immediately."

What's the likelihood Sony will comply with this latest demand?

MASTERS: It seems right now like Sony is, you know, trying to have it both ways. They're saying, if somebody would come to us and be willing to stream it, we would stream it. But at the same time, I haven't heard about any pirated copies or bootlegged copies or copies online or anything that suggests that any piece of this movie is getting out there beyond the promotional stuff that's already been released.

BLITZER: At least one trailer, though, is out there online, if you want to find it, you can watch it. That's already --

MASTERS: Right. So they would -- I guess they want it -- yes.

BLITZER: Yes. They obviously are even sensitive -- MASTERS: Yes. That's old. That is old.

BLITZER: To that one trailer that all of us, at least a lot of us have seen.

Is this a matter of insurance? You don't collect the insurance if you go ahead and you release it?

MASTERS: There's a lot of discussion about whether Sony can do better on a bookkeeping basis by declaring the movie a total loss as opposed to, you know, getting some sort of revenue out of it. But either way, it's going to be like a drop in the bucket of the damage that's been done. I mean, Sony has had so much damage from this.

Let's say the movie cost $100 million. And they write that down, there's hundreds of millions more involved in trying to mop up the mess from this attack. They've got now four class action lawsuits filed against them. And they've got their relationships in Hollywood. You know, everybody's pointing fingers. George Clooney is calling them out. Sean Penn is calling them out. There's all kinds of controversy. Did Sony cave? No, Sony says, we didn't cave.

I mean, it's become almost theater of the absurd with this -- what I argue is, you know, a very ill-judged decision to make a movie with -- you know, Kim Jong-Un in it in the first place, named and identified as a sitting head of a foreign state. No other studio would have done it. Sony did it. And now they're paying a horrible price. And the whole country is being pulled into this horrible display of suppression of freedom of expression and an international incident.

BLITZER: If somebody would have said at the beginning of the year, the president would have a news conference at the end of the year and most of it would be dominated by Sony Pictures and North Korea, we would have said, what?

All right. Kim, thanks very much for joining us. Kim Masters, joining us. Christian Whiton and Tom Fuentes, guys, thanks very much.

Up next, more on the breaking news. We'll speak live with the North Korea expert who actually consulted with Sony about the film entitled "The Interview." He's actually seeing the movie.


BLITZER: We're following the breaking news today. Sony Entertainment CEO telling CNN, and I'm quoting now, "We have not caved." That's a direct quote. Even though President Obama says Sony made a mistake in cancelling the release of its comedy film entitled "The Interview." The FBI is pointing directly to North Korea as the source of the cyber attack on Sony Pictures.

With us now is Bruce Bennett. He's the North Korea expert at the Rand Corporation.

Mr. Bennett, thanks very much for joining us. Sony hired you as a consultant on this movie. You saw the controversial scenes. I take it you advised them to leave the ending alone. Walk us through your thinking. Why did you do that?

BRUCE BENNETT, CONSULTED INFORMALLY WITH SONY ABOUT MOVIE: Well, first of all, you have to be careful. I was not hired to do anything. The president of Sony Pictures Michael Lynton sits on the Rand Board of Trustees. Rand asked me to talk with him as a favor, as a slight effort, and so I took a look at the film. I told them that I thought that it was coarse, it was over-the-top in some areas, but that actually I thought the depiction of Kim Jong-Un was a picture that needed to get into North Korea.

And I figured that once it made it on DVD it would in large numbers get into North Korea. And there are a lot of people in prison camps in North Korea that need to take advantage of a change in thinking in the North.

BLITZER: So you thought maybe if this DVD was circulating illegally in North Korea that could have an impact on the regime there? Is that your thinking?

BENNETT: Over time. It's not going to change things immediately. But the elite in North Korea aren't happy with Kim Jong-Un. He's purging people right and left, and far extreme of what his father did. He's inducing instability in the country. And so you never know what's going to change things.

BLITZER: Describe that -- I guess it's a -- I haven't seen it, the controversial scene involving Kim Jong-Un and the assassination or whatever.

BENNETT: And it's not an assassination by any definition I'm familiar with. In the movie, the reporters from the U.S. interview Kim Jong-Un and embarrass him severely on international media and in front of the North Korean people. He therefore goes after them to kill them and they flee and eventually get in a tank, thinking they're safe.

He attacks them with an attack helicopter, firing rockets and machine guns at them, and they finally say wow, wait a minute, we're in a tank, we can respond and they fire a tank round at his helicopter and that does him in. So this is an act of self-defense. Hardly an assassination.

BLITZER: But is it clear that this is obviously satire or a comedy or something along those lines, right?

BENNETT: Oh, yes. Because they get to that decision as sort of hit the head, oh, yes, well, we can actually do something about this.

BLITZER: I understand also -- correct me if I'm wrong -- you had a conversation or at least one conversation with a senior State Department official, maybe the envoy for North Korea human rights to consult with him about what was going on. Is that right?

BENNETT: Yes, and the situation there when I saw the movie, I knew the State Department needed to find out about it. And so he's a friend. I informed him about the movie, and he took the standard government approach. We don't tell American industry what to do unless it's going to seriously endanger Americans. None of us thought that was necessarily going to happen. So he said look, this is a Sony choice.

BLITZER: Listen to this excerpt from the exclusive interview that our own Fareed Zakaria had with the Sony CEO, Mr. Lynton. I want you to listen because I want your reaction.



FAREED ZAKARIA, HOST, FAREED ZAKARIA GPS: Would you make the movie again?

MICHAEL LYNTON, SONY ENTERTAINMENT CEO: Yes, I would make the movie again. I think, you know, for the same reasons we made it in the first place. It was a funny comedy. It was a -- it served as political satire. I think we would have made the movie again. I -- knowing what I know now, we might have done something slightly differently, but I think a lot of events have overtaken us in a way that we have no control over the facts.

ZAKARIA: And you're saying you still want the public to see this movie?

LYNTON: We would still like the public to see this movie, absolutely.


BLITZER: Do you think it's going to be released? What do you -- what do you know about this? And should it be released based on everything that has happened over these past few months?

BENNETT: I think it should be released. Again, I think Kim Jong-Un was most concerned about it getting on DVD and getting into his country. Because once his elites see it, it is going to have some effect and it's not going to be good for him. So I think that's what in the end they were really trying to stop by stopping the release of the film. I think it's going to be hard business wise to get organizations to agree to show it because of the cyber threat.

But I think from a political perspective, Kim Jong-Un's point is internal politics. If we want to have a proportional response, we have to respond with internal politics.

BLITZER: I suppose you, like so many others, including me, are stunned by how this story has -- this situation has escalated.

BENNETT: Oh, absolutely. But look, it was going to happen sooner or later. Some other country or North Korea were going to take this kind of action. And now we have to decide, are we going to diddle around and not take action or are we going to take serious action and really convince these people from a deterrence perspective not to do it again?

BLITZER: Bruce Bennett of the Rand Graduate School. Thanks you very much, Mr. Bennett, for joining us.

BENNETT: Thank you.

BLITZER: And a reminder, you can see Fareed Zakaria's exclusive interview with the Sony Entertainment CEO Michael Lynton in full later tonight on "AC 360" 8:00 p.m. Eastern, 5:00 Pacific only here on CNN.

More breaking news coming up next. The exploding controversy over Sony's decision to cancel the release of its new comedy "The Interview." President Obama and the Sony Studio CEO, they are now publicly at odds.

And we'll also hear from President Obama, he's just been sitting down for an exclusive one-on-one interview with CNN's own Candy Crowley.