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Wall Street Bailout Approved; What Comes After the Bailout?; Outrage Over the Bailout; McCain and Obama On Bailout Legislation; What's Buried in the Bailout?; Examining the Debate

Aired October 3, 2008 - 17:00   ET


WOLF BLITZER, CNN ANCHOR: Happening now, the historic Wall Street bailout plan approved by the House, signed by the president, capping a tumultuous week in Washington, as well as on Wall Street. And we're reading the fine print and uncovering some controversial surprises inside.
Also, one of the most watched political debates in history -- but did Joe Biden and Sarah Palin play loose with the facts?

We've got a reality fact check of this vice presidential face- off. Plus, California a casualty of the credit crisis and locked out of markets.

Will the governor, Arnold Schwarzenegger, now turn to the federal government for billions in emergency loans?

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

Rarely have the wheels of government turned as quickly as they have today. Within just a matter of hours, the House of Representatives approved a revised Wall Street bailout package and then President Bush signed it into law. Now the government is cleared to begin buying up those toxic mortgage-based securities that have driven the country's banking and financial systems to the brink of disaster.

We have our reporters covering all of these unprecedented developments from all angles.

Let's begin with our White House correspondent, Elaine Quijano.

She's standing by over there at the White House -- Elaine, tell us what happened today.

ELAINE QUIJANO, CNN WHITE HOUSE CORRESPONDENT: Well, Wolf, this was a hard-fought win for the Bush administration. But considering the high financial stakes, as well as the still gloomy economic picture, there was no victory dance today here at the White House.


QUIJANO (voice-over): A relieved President Bush thanked his point man on the financial crisis, Treasury Secretary Henry Paulson, minutes before signing the bill.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Mr. Secretary, you and your team have worked incredibly hard.

QUIJANO: Putting pen to paper in the Oval Office, the president made the financial bailout law two weeks after his administration first unveiled its $700 billion financial rescue plan to Congress.

In a remarkable turnaround from Monday's stunning House defeat, lawmakers passed a modified version of the original rescue plan.

REP. ROY BLUNT (R-MO), MINORITY WHIP: So I know we're all relieved to be beyond where we were yesterday.

REP. NANCY PELOSI (D-CA), SPEAKER OF THE HOUSE: We were dealt a bad hand. We made the most of it. I think the American people will benefit from it.

QUIJANO: Afterwards, a grateful President Bush thanked Congress, but also cautioned the bill's effects would not be immediate.

BUSH: Americans should also expect it will take some time for this legislation to have its full impact on our economy.

QUIJANO: And against a backdrop of more bad economic news, that America lost jobs again in September, the president did not offer a rosy economic outlook.

BUSH: It will take more time and determined effort to get through this difficult period. But with confidence and leadership and bipartisan cooperation, we'll overcome the challenges we face.


QUIJANO: Yet with less than four months left in office, President Bush will likely not see the economic picture turn around in the remainder of his term. Last month, the United States lost 159,000 jobs. And some analysts are predicting that the economy is not going to start looking up, Wolf, until well into next year.

BLITZER: Elaine's working the story for us at the White House.

So with the bailout now signed into law, what comes next?

Mary Snow is working this part of the story -- all right, Mary, what should we expect?

MARY SNOW, CNN CORRESPONDENT: No quick fixes, unfortunately. This bailout is seen as just one step in what is shaping up to be a very rocky road ahead.


SNOW (voice-over): Wall Street's reaction to the bailout bill was telling. As soon as the House passed it, a market rally faded.

ART HOGAN, JEFFRIES & COMPANY: It's almost like celebrating when the ambulance finally gets there. You really, you know, it's hard to say oh, the ambulance is here. That's fantastic. Oh, that's right, we really need an ambulance.

SNOW: And the patient has a host of ailments. For one, frozen credit markets causing banks to tighten lending -- an immediate problem. The hope for the bailout package is to thaw that frozen market. But economists say borrowers won't feel it right away.

DIANE SWONK, MESIROW FINANCIAL: Some could be starting to see money as soon as next week. But that's going to be the larger companies first. It's going to be taking longer to get to those really Main Street borrowers.

SNOW: Economist Diane Swonk says borrowing for things like car loans and mortgages may not resume to normal levels until the end of the year or early next year, if we're lucky. She says the first challenge is to undo damage done just in the past two weeks, while the bailout was delayed.

SWONK: The U.S. economy was clearly already slipping and deteriorating before we hit this credit market crisis. This credit market crisis just added insult to injury.

SNOW: Compounding problems, September saw the biggest drop in jobs in five years -- 159,000 -- and economists only expect those numbers to get worse before getting better.

LAKSHMAN ACHUTHAN, ECONOMIC CYCLE RESEARCH INSTITUTE: It's a real perfect storm on the economy in the sense that you have a credit crunch, then you have a U.S. business cycle recession and then you have a global recession.


SNOW: So the big question is when will things start to turn around and get better?

At this point, economists we spoke with, Wolf, say they don't see the economy getting better until the second half of 2009.

BLITZER: More than a year -- about a year from now, basically. That's what a lot of economists are saying.

SNOW: Yes.

BLITZER: And some are even more pessimistic.

SNOW: Absolutely, because they expect, also, the unemployment rate to continue to climb. Already this year, 760,000 people have lost their jobs. And some economists say the unemployment rate could have doubled -- been in double digits had this bailout not passed. But with the passing, they think it could go up to 7 percent next year.

BLITZER: The president warned if it hadn't passed, there could have been a long and deep recession.

All right. Mary Snow working the story. Americans are certainly following this story more closely than at any other recent -- any other story in recent memory, because so many have a stake -- a direct stake -- and so many are so deeply upset and angry.

Our personal finance editor, Gerri Willis, is with us.

You're getting a flood of e-mail on this bailout.

What are you hearing -- Gerri?

GERRI WILLIS, CNN PERSONAL FINANCE EDITOR: Well, I have to tell you, we were giving CNN viewers a voice by having them to respond us at issue one at We got literally thousands of e-mails. You can get the tone of those e-mails by just reading their subject lines -- subject lines like "stop the rescue," "no, no, no, don't bailout" and "jail, not bail."

Let me read you a couple of these e-mails.

From the Walkers in California: "I believe this bailout is a major mistake and that before the year's end, lawmakers will be back wanting something else -- read more money -- to correct the base issues."

Jan in Texas: "The terrorists can relax and go home. Our Congress has taken over their evil mission."

And this from Sylvia in Texas: "The bailout is an insult to us honest hardworking Americans. The added pork barrel items on this financial bill an outrage."

Elsie (ph) says simply: "Shame, shame, shame on Congress." And, finally, we did get some e-mails that actually supported the bill, but they were few and far between. This from Loren (ph) in California. "Everyday Americans need to step back and look at the big picture. The consequences of doing nothing worse than the rescue package." -- Wolf.

BLITZER: You know, also on the FDIC insurance rates, it was 100,000. We're told now by the FDC the law states it will go up to $250,000 per individual account and $500,000 for joint accounts, Gerri. And this will last until the end of 2009. That's going to be a relief to a lot of people who are worried about their funds and their local banks and some of the national banks.

WILLIS: Yes, I think people have to sit back and realize the federal government is standing behind these bank deposits. You don't have to be worried about losing your money, because the federal government will make you whole. If you're bank goes out of business, typically what happens is the FDIC steps in. And over the pace of a weekend, you're put back in touch with all of your financials. And, typically, you can use your ATM cards and bank deposit throughout.

So you're right, the levels of insurance are increasing. But I have to tell you, nobody's ever lost a dime in an FDIC insured account -- Wolf. BLITZER: And Senator McCain has been speaking out about what's happening in the economy. We're going to get that tape and play it for our viewers.

Gerri, thanks very much.

WILLIS: My pleasure, Wolf.

BLITZER: Now what's really in the Wall Street bailout legislation that is now the law?

We're reading the fine print very closely, along with critics, who say it's loaded with pork for special interests.

Brian Todd is standing by with a reality check.

Also, the country's largest state falls victim to the credit crunch. And the California governor, Arnold Schwarzenegger, warns he may have to take drastic action to avoid more drastic consequences in his state.

And was truth a casualty in one of the most watched political debates in history?

Sarah Palin and Joe Biden -- we're fact checking what they had to say right here in THE SITUATION ROOM.


BLITZER: The Republican presidential candidate, John McCain, has just spoken out about the House of Representatives' decision today to pass that $700 billion bailout plan.

Let's listen and hear what he had to say.


SEN. JOHN MCCAIN (R-AZ), PRESIDENTIAL CANDIDATE: I commend the House of Representatives for coming together to pass the economic rescue bill today. I'm glad I suspended my campaign and went back to Washington to bring -- and help bring House Republicans to the table.

I believe that the taxpayer protections that have been added have significantly improved the bill. This rescue bill isn't perfect and it's an outrage that it's even necessary. But we have to stop the damage to our economy done by corrupt and incompetent practices on Wall Street and in Washington.

The action Congress took today is a tourniquet, it's not a permanent solution. Our economy is still hurting -- and hurting badly. Further action is needed and it shouldn't take a crisis to get this country to act and this Congress to act in a bipartisan fashion.

Washington is still on the wrong track. And we face a stark choice in this election. We can go backward with job killing tax hikes, the same old broken partisanship and out of control spending that Senator Obama would have us do, or we can bring real reform to Washington.

My focus is to reform Washington and put government back on the side of working families with tax relief, modern job training, energy independence, more affordable health care and policies that get spending under control. That's how we're going to get America moving again. And that's exactly what I'm going to do.

Again, I commend the House of Representatives for acting today in the best interests of this nation.

Thank you.


BLITZER: All right. Senator McCain speaking just moments ago in Flagstaff, Arizona.

We're taking a much closer look at some of the fine print in that bailout bill and finding some tax breaks that smell like pork to a lot of the critics.

Let's go to CNN's Brian Todd. He's doing a reality check for us.

You began covering this story yesterday, Brian.


BLITZER: You got some good stuff yesterday. But you're getting more details today.

What are you learning?

TODD: Well, Wolf, there are some tax breaks in this bailout bill that have nothing to do with this financial crisis. And they're also raising eyebrows because of how they got there.


UNIDENTIFIED FEMALE: The motion is adopted.

TODD (voice-over): A bailout bill with the essentials to rescue failed banks and a few things they may not need.

Will a $200 million tax rebate for the Virgin Islands for its rum production bring Bear Stearns out of its hole?

That's one of several tax breaks in the bailout bill that seem extraneous to watchdog groups.

RYAN ALEXANDER, TAXPAYERS FOR COMMON SENSE: It's hard to imagine why those are a priority right now -- why these things need to happen at this moment, when we're phasing a fiscal meltdown.

TODD: But the congresswoman from the Virgin Islands defends that tax break, saying it's not wasteful pork spending. UNIDENTIFIED FEMALE: It's a very necessary and integral part of the revenue that our government spends for capital projects and for other purposes every year.

TODD: The rum rebate couldn't have bought Donna Christensen's vote for the bailout because she's a nonvoting delegate. Christensen says she didn't ask for that provision to be put in the bailout bill.

Neither did the congress members who support tax breaks for wool research and wooden arrow makers. But those are in the bailout bill, too. They had been part of a separate bill that had been stalled over arguments how to pay for the tax breaks.

And some are questioning whether Senate Democrats, led by Majority Leader Harry Reid, shoved those tax breaks into the bailout bill because of the public pressure attached to the bailout.

ALEXANDER: It was the last train leaving Washington. And this is one big bill that will people really want to pass. So they're adding things on it that they want to make sure get passed.

TODD: Some of the extra tax breaks also benefit Reid's home state of Nevada.

Reid has denied being heavy-handed.

SEN. HARRY REID (D-NV), MAJORITY LEADER: But this is good legislation. And I -- I hope that no one thinks I'm trying to jam anyone.


TODD: Senator Reid and other who have supported tax breaks that are not directly related to the bailout don't have a problem with them being in there. They say these things are also economic stimulus. They give tax breaks to working people who need them. And in the broader sense, they contribute to the relief for average Americans that the bailout is supposed to bring anyway -- Wolf.

BLITZER: Brian, thank you.

Brian Todd working the story.

If you hoped for a knockout blow or a glaring gaffe in last night's much anticipated vice presidential debate, you didn't get it.

Still, Senator Joe Biden and Governor Sarah Palin squared off on everything from the war in Iraq to health care reform and the teetering economy.

But do the facts match what they said? Fredricka Whitfield back once again, working the story for us.

All right. They had a lot to say, but not necessarily always precise. FREDRICKA WHITFIELD, CNN ANCHOR: That's right. And a lot of folks were watching, of course, their interaction and how did they look.

But then you have to wonder what about what they said? Did Biden and Palin have their facts straight?


WHITFIELD (voice-over): After polite pleasantries.


WHITFIELD: Gloves off.

PALIN: Barack Obama voted against funding troops there, after promising that he would not do so.

WHITFIELD: The CNN truth squad did some digging. In 2007, Obama was among 14 senators who voted against a war spending plan. But he voted for an earlier version that included a timetable for ending the war -- the same one that McCain voted against.

So Palin's charge -- misleading, according to the truth squad.

PALIN: Can we talk about Afghanistan real quick also, though?


WHITFIELD: There was this moment.

PALIN: The surge principles that have worked in Iraq need to be implemented in Afghanistan, also.

SEN. JOSEPH BIDEN (D), VICE PRESIDENTIAL NOMINEE: Our commanding general in Afghanistan said the surge principles in Iraq will not work in Afghanistan.

PALIN: McClellan did not say definitively that the surge principles would not work in Afghanistan.

WHITFIELD: In a "Washington Post" interview, General David McKiernan, the top commander in Afghanistan, said no Iraq-style surge of forces will end the conflict in that country.

So Biden's response -- true.

When Palin boasted of cutting taxes in Alaska...

PALIN: As mayor, every year I was in office, I did reduce taxes.

WHITFIELD: True. As mayor of Wasilla, she cut the city's property taxes by three quarters, but raised sales taxes by a quarter.

America's health care... BIDEN: John recently wrote an article in a major magazine saying that he wants to do for the health care industry -- deregulate it and let the free market move -- like he did for the banking industry.

WHITFIELD: The truth squad calls that misleading -- saying, yes, McCain wants to overhaul state oversight of health care, but the deregulation he calls for is not as extensive as in the banking industry.

Stretching the truth -- analysts say it's classic debate strategy, not considered much of a risk at all.

ROLAND MARTIN, CNN POLITICAL ANALYST, NATIONAL TALK RADIO HOST: We all know the speed limit is 55, but we do 70.

Why? Because we can just stretch it just a little bit.

UNIDENTIFIED FEMALE: Well, you don't want to say anything that's blatantly false, you probably want to avoid that. But to hedge the facts or choose the facts that only work your way, that's what a debate is all about.


WHITFIELD: So, did each accomplish what they set out to do?

Well, likely. Voters are sparring over what they witnessed last night. Well, next it's the presidential candidates' turn, in their second of three debates scheduled to happen next Tuesday. And something tells me, Wolf, no winking.

BLITZER: No winking. No.


BLITZER: There was a wink last night.

All right...

WHITFIELD: Quite a few.

BLITZER: A very famous wink.

WHITFIELD: I lost count, in fact.


Thanks very much, Fred, for that story.

The Pentagon prepared to pay hundreds of millions of dollars to win over Iraqis in a massive publicity campaign. We're looking into the story. You may be surprised what we're discovering.

Plus, a frightening close call recorded by a surveillance camera.

What happened at this gas station? Lots more coming up right here in THE SITUATION ROOM.


BLITZER: You just heard Senator John McCain react to the Congress's decision to pass the $700 billion bailout package, which President Bush quickly signed into law.

Now we're about to get some videotape of Senator Barack Obama responding. Stand by. We'll get that videotape shortly. You'll hear his reaction.

In the meantime, let's check back with Fredricka Whitfield.

She's monitoring some other important stories incoming into THE SITUATION ROOM right now.

What's going on -- Fred?

WHITFIELD: Hello again, Wolf. Well, 81 immigrants in Ohio have become citizens just in time to vote. That's thanks to Democratic Congressman Dennis Kucinich, who pressed for the extradited ceremony so that immigrants could vote in the November 4th election. Fifty-nine of the new citizens immediately signed up to vote, beating a Monday registration deadline.

And seven people were killed in a horrific head-on collision near Montgomery, Alabama. A van transporting applicants for prison jobs collided with a tractor-trailer and burst into flames. All six passengers and the van's driver were killed. The driver of the tractor-trailer was taken to an hospital.

And incredible footage caught by surveillance cameras at a gas station in Upstate New York. A burst of orange smoke and light is seen as a customer is seen struck down struck by a lightning bolt. A great flash also seen from inside the store. Amazingly, the man survived with barely a scratch. Unconscious for about five minutes, he says he felt that current just travel right through him.

And entries from an Israeli astronaut's diary that survived the explosion of the Space Shuttle Columbia are going on display in Jerusalem this weekend. NASA researchers recovered 37 pages of Ilan Ramon's diary in a field near Palestine, Texas about two months after the shuttle exploded. Ramon, Israel's first astronaut, died along with six other crew members in the February 1st, 2003 blast -- Wolf.

BLITZER: I remember that day. It was oh so sad. I'm sure you remember it, as well. A lot of our viewers will remember what a horrible, horrible tragedy.

All right, Fred, stand by.

We're about to get the videotape of Senator Barack Obama reacting to today's decision -- a momentous decision by the House of Representatives to follow the lead of the U.S. Senate and pass the $700 billion bailout legislation. The vote was pretty decisive in the House, even though it had gone down to defeat on Monday in the House of Representatives. President Bush wasted no time. With a matter of only an hour or so, he got the legislation, he sign it had into law and it's about to take -- it immediately goes into effect.

This is what the president wanted, the secretary of the Treasury wanted. The leadership of the House and the Senate -- all of them were on board. Senator McCain, as you saw here just a few moments ago, warmly, warmly -- enthusiastically welcomed this move by the House of Representatives and by President Bush.

He voted in favor of the legislation the other night in the Senate, as did Senator Obama.

And now we're about to get this videotape of Senator Obama's formal reaction. We'll hear how he responds.

And Bill Schneider watching all of this with us, together with Fredricka Whitfield -- Bill, as we wait for the tape to come in from Senator Obama, this is an important move, coming only a few weeks before this election wraps up.

WILLIAM SCHNEIDER, CNN SENIOR POLITICAL ANALYST: Yes, it is an important move because this -- you know, the question is will this really resolve the financial crisis. Nobody really knows. The legislation is meeting with a mixed reception on the part of voters. They're really divided over whether they have to have it or whether it will help or hurt. Nobody really knows. There's a lot of doubt and uncertainty and anxiety out there -- Wolf.

BLITZER: And it's having a huge impact -- the whole economic crisis -- on this election. Because if you take a look at poll numbers, where they were, what, two weeks ago, and where they are right now, there has been a clear and decisive shift in Obama's favor, not only nationally, in our so-called poll of polls, Bill, but also in several of those key battleground states, where the race was very competitive. And not -- at least the snapshots we're getting in some of those states right now not so competitive.

Let's go to the videotape of Senator Obama.


SEN. BARACK OBAMA (D-IL), PRESIDENTIAL CANDIDATE: I'm glad to see that we finally got this dealt with.

Two things are important now.

Number one, that the administration uses the authority that it's been given wisely. So we have to make sure that Secretary Paulson and others are structuring the purchase of these -- the purchase of these troubled assets in a way that protects taxpayers. That's very important.

The second thing we have to do is we've got to make sure that homeowners are benefiting. Now, the treasurer has authority to work with the modification of mortgages to prevent foreclosure. He's supposed to come up with plans to do that. I want those plans on tap quick, so that we start getting some relief to homeowners out in neighborhoods.

And the final thing is understanding that even if this rescue package works exactly as it should, it's only the beginning, it's not the end, because we still have 150,000 new people who have lost their jobs this month -- 750,000 since the beginning of this year. We still have a health care system that's broken. We're still overly reliant on oil from the Middle East.

And so we've still got the structural problems. The fundamentals of the economy aren't sound. And we're going to have to do a lot of work moving forward.

So, if we can stop the bleeding with this package, implement it effectively and then move forward to deal with the broader problems on Main Street, then, hopefully, we can start getting our economy back on track.

QUESTION: Now, did you have a conference call with some freshmen Democrats who voted no to the original package (INAUDIBLE)?

OBAMA: I did. I did. The...


OBAMA: I think they had a press conference. You know, there were a number of members of Congress who had voted no that I talked to. And I think more than anything, what they wanted some assurance of was that this was not $700 billion going to a few banks, but that, in fact, that it is designed to ensure that the credit markets are working for Main Street -- that we don't have a collapse.

They also, I think, wanted to hear from me as potentially the next president, who's going to be implementing some of these policies after January 20th and wanted some assurance that, in fact, on the foreclosure provisions -- preventing foreclosure, assuring that homeowners are helped and that taxpayers are getting their money back, that I felt comfortable that this would not prevent me from being able to do those important tasks.



OBAMA: All right.

Where are my flowers, there?


BLITZER: All right. So there you saw the Democratic presidential candidate, Barack Obama, reacting to the decision today by the House to follow the Senate's lead and pass this legislation, which has now been signed into law by President Bush.

And to our viewers, you're in THE SITUATION ROOM.

Happening now, California, meanwhile, is running out of money.

Could it also need a multi-billion dollar bailout from the federal government?

We'll tell you what the governor, Arnold Schwarzenegger, said in a letter to the Treasury secretary.

No big slip-ups no big surprises. So who won the one and only face-off between Sarah Palin and Joe Biden? We'll show you what the polls are saying right now and also which vice presidential candidate was "more likable"? You might be surprised.

And PR push in Iraq; what the Bush administration planning to do to spend on pro-American publicity in the Iraqi media and why. Hundreds of millions of taxpayer dollars about to be spent.

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

Before last night's first and only vice presidential debate of this election, some conservatives were calling on Sarah Palin to pull herself off the republican ticket. But did she change people's minds with her performance against Senator Joe Biden? Let's go back to our senior political analyst Bill Schneider. He's still in St. Louis work the story for us.

What did we learn from the polls about those who were watching this debate and how they reacted, Bill?

WILLIAM SCHNEIDER, CNN SENIOR POLITICAL ANALYST: Well, one thing we learned is when it comes to hiring someone for a very important job, likability isn't everything.


SCHNEIDER: When people vote for president or vice president, they're hiring someone for a job. Do you hire the person who's more likable or the one who's better qualified?

SEN. HILLARY CLINTON (D), NEW YORK: We don't need to have a beer with the next president. We had that president.

SCHNEIDER: In our CNN poll conducted by the Opinion Research Corporation, we asked debate watchers which candidate was more likable, Joe Biden or Sarah Palin? Answer, Palin.

GOV. SARAH PALIN (R), VICE PRESIDENTIAL CANDIDATE: There's a shout-out to all those third graders at Gladys Wood Elementary School.

SCHNEIDER: But viewers were impressed by Biden's clarity and intelligence, for instance, when he took aim at President Bush's modest policy.

SEN. JOE BIDEN (D), VICE PRESIDENTIAL CANDIDATE: He insisted on elections on the west bank when I said and others said and Barack Obama said big mistake. Hamas will win. You'll legitimize them. What happened? Hamas won.

SCHNEIDER: Who did voters think was more intelligent? Biden by more than 30 points.

Palin calls herself a hockey mom, someone who can relate to ordinary voters.

PALIN: Let's commit ourself, just everyday American people, Joe six pack, hockey moms across the nation.

SCHNEIDER: Biden is a long-time Washington insider. Can he relate to ordinary voters?

BIDEN: Look, the people in my neighborhood, they get it. They get it. They know they've been getting the short end of the stick.

SCHNEIDER: Apparently he can. Biden edged out Palin as more in touch with the problems of ordinary voters.

The constitution says, the qualifications for vice president shall be the same as those for president. Did viewers think Biden is qualified to be president? Absolutely. 87 percent. Did they think Palin is qualified to be president? Not so much. Most viewers said she's not.

So in the end, who did viewers think did the better job in the debate? Biden by 15 points.


SCHNEIDER: When voters hire someone to do a job, their top priority is not to hire someone just like them. Their top priority is to hire someone who can get the job done.


BLITZER: Bill Schneider in St. Louis, thank you.

Sarah Palin and Joe Biden were at the debate last night and the debate was all about the top of the democratic and republican tickets, Barack Obama and John McCain. How did their running mates do in defending them and going on offense?

For some analysis, I'm joined by democratic strategist, Julie Menin, and republican consultant, Alex Castellanos.

Guys, thanks for coming in. Julie, welcome to THE SITUATION ROOM.

Let's talk about the democrats first. How did Biden do from your perspective in not only making the case for Barack Obama but more importantly, going on the offense against John McCain?

JULIE MENIN, DEMOCRATIC STRATEGIST: I think he did a great job going against John McCain because on the two issues that the American voters care about, the economy and the war in Iraq, he did an excellent job attacking John McCain on the economy, he really talked about the years and years of republican deregulation that have caused this economic debacle, and I would just add that Palin's retort was a non sequitur. She started talking about energy and tax cuts having nothing to do with the issue at hand.

The second issue was the war in Iraq, the $10 billion a month that we're spending there, the fact we have failed policies, the fact that the McCain camp doesn't have an exit strategy and that McCain has even alluded to possibly being there for over 100 years.

BLITZER: How did Sarah Palin do in defending John McCain and going on offense against Barack Obama?

ALEX CASTELLANOS, REPUBLICAN STRATEGIST: I think Sarah Palin had a tough job last night. She not only had to go on the offense she had to gain standing. There have been a lot of questions raised about Sarah Palin the past few weeks. She met the test first and I think she did a pretty good job, you know, post people would think maybe energy and gas prices and tax cuts, how much money have you in your pocket have something-to-do with the economy. So in talking about those things, I think that's what the first half of the debate was about. She actually won I thought the first half. It was tougher for her on the foreign policy.

BLITZER: How do you explain that last night she came across and she was coherent, she was giving good answers. She knew the subjects basically. She was on top of her game as opposed to the interviews with Katie Couric where there was sort of gibberish going on.

CASTELLANOS: Wolf, this TV thing is harder than it looks sometimes. I can tell you that. But you can take I think bites from any interviews if you interview someone long enough and everyone can have a bad day. The campaign trail is tough. They get tired. Last night, people got to see both candidates who I thought did well. I thought Biden was a little old looking, cranky. His forehead, his eyes were kind of dark for some reason. She was I thought much more accessible, connected with folks. But more importantly as you were saying earlier, she went on offense. Change Washington. Washington's not going to fix itself.

MENIN: How would she really change Washington? Let me interject for a minute. How can she say she's changing Washington when the top of the ticket is someone who's been there for 26 years?

CASTELLANOS: He's been fighting to change that for a long time. That's what the maverick is. That would be their case.

MENIN: I would dispute that. But the format of the debate was interesting. I do think it played better for Sarah Palin than the Couric and Gibson interviews because she was able to run out the clock. Able to skim the surface and there weren't follow-up questions that were able to probe at a deeper level of her understanding.

BLITZER: Joe Biden was a gentleman. He could have pounced on a few occasions but he held back. Was that smart because he would have come across as overly aggressive and mean spirited. MENIN: That's right. When she couldn't pronounce the general and said McClellan, he could have corrected her.

BLITZER: Assuming he knew it was General McKiernan.

MENIN: Yes, I think he knew that and he was very smart not to interject. It made him seem more stately. He didn't want to have a Rick Lazio moment in the debate.

BLITZER: Rick Lazio when he ran against Hillary Clinton in New York state, he crossed into her territory and that was seen as overly offensive.

CASTELLANOS: But I think Biden was generous and that played to his advantage. I thought she was actually very warm and inviting and connecting with folks. Hey, may I call you Joe. I thought she set a good tone there.

BLITZER: How significant are these reports that Senator Obama, if he's elected president, would consider holding over some republicans, Julie, for example, the secretary of defense, Robert Gates and maybe even the secretary of the treasury Henry Paulson and ask them to stay over in an Obama administration?

MENIN: I think it's tremendously exciting and it's really a sign of how Obama transcends partisan politics. Looking at picking two republican Stalwarts such as Gates who was skeptical about the surge in the first place and someone like Ken Paulson, he's picking the best and brightest, looking at democrats, independents, republicans and it might be a harbinger of a more nonpartisan or are bipartisan spirit moving forward.

BLITZER: At least maybe that first year, some stability if you will at the department of defense and the department of the treasury. What do you think about that notion?

CASTELLANOS: Well, Obama's got a political problem. He is change but what he is not safe. He's unknown. He's untested. He's new, young, left of center. He hasn't captained a boat in stormy seas. If you're change? What do you want to do, prove you're safe and say you're going to keep some of the people is very smart politically. If he starts to get a western white house in Crawford, Texas, we'll start to worry.

MENIN: I think the American public is sick of partisan politics. We will see that in congress as absolutely approval ratings and saw it last week with the house republican mutiny where they basically 12 house republicans didn't vote for the bailout and blamed politics and Nancy Pelosi's speech.

CASTELLANOS: Get to improve the bailout bill but republicans don't. That's partisan.

BLITZER: Ed Rollins here said a little while ago, McCain has to do something drastic. Another hail Mary, shake things up. Do you think he does? CASTELLANOS: I think things are getting tougher for republicans now, not because of anything the campaign has done or not done, but the economic problems have brought, you know, the republican brand downhill again. This is Wall Street. Republicans, Bush economy. This is a tough time. So yes, I think it's time for McCain to get much more aggressive and talk about, look, do we want to give Washington democrats in congress and the democratic president a blank check.

BLITZER: Guys, Alex, Julie, thanks for coming in.

The credit squeeze hits home in California. The governor Arnold Schwarzenegger warning that the golden state, get this is fast running out of money. Wait till you hear how many billions it may need from the federal government just to keep going and paying the bills.

And Joe Biden and Sarah Palin have something in common along with many other Americans. Their sons will both be serving in Iraq. Some say the children of high profile VIPs should not be in a war zone. We're taking a closer look.


BLITZER: A sobering sign of just how bad the credit crunch is right now, the state of California says it has been locked out of credit markets now for ten days. And Governor Arnold Schwarzenegger says it may have to borrow billions of dollars from the federal government just so cover day to day expenses.

CNN's Thelma Gutierrez is joining from us Los Angeles with more on this very alarming story.

What's going on, Thelma?

THELMA GUTIERREZ, CNN CORRESPONDENT: Well, Wolf, I can tell you the governor says he saw this coming. The state can only borrow money if it has a budget in place but the California budget was just signed last Tuesday, 85 days late. By the time they were ready to go to the credit market as they normally do around this time of year, the market was shut down. So the governor sent out a warning to the feds.


GUTIERREZ: It was an unusual virtually unprecedented move by a say the to put the federal government on notice. Thursday, California governor Arnold Schwarzenegger sent Treasury Secretary Henry Paulson a letter warning that California might need an emergency loan of up to $7 billion. The state is not able to get short-term loans it normally relies on this time of the year.

GOV. ARNOLD SCHWARZENEGGER (R), CALIFORNIA: Something that happens every year and other states do it also. The only thing is that right now, because liquidity has dry up, doesn't exist, so therefore, it's very hard to get that loan. If we can't get that loan through the normal course, we will go to the federal government and ask for help. GUTIERREZ: Schwarzenegger says California is buckling under pressure, caused by the housing crisis, the global credit freeze, and the loss of tens of thousands of jobs.

SCHWARZENEGGER: $7 billion, that's the amount that we knew that we needed, you know two, months ago. That's the amount we know we need now. So there's nothing new with the amount. It's just that we need that money and cash is running out.

GUTIERREZ: That means the state may not be able to make payroll next month to teachers, law enforcement, hospital workers and others. Not a pretty picture according to UCLA economist Dan Mitchell.

DAN MITCHELL, ECONOMIST, UCLA: In this case, if we will went without our loan for some significant period of time, there would be a lot of people who would essentially get I.O.U.s and they would have to try to take those I.O.U.s to their bank and hope that somebody would give them a loan for that period.

GUTIERREZ: A scary thought for city maintenance workers. This man worries he won't be able to pay his bill with an I.O.U.

UNIDENTIFIED MALE: We go somewhere else.

GUTIERREZ: Already 20,000 layoff notices have gone out to California teachers. Next year, more may face the same fate. Sacramento County employee Kim West worries city and county workers may also feel the impact.

KIM WEST, STATE EMPLOYEE: I would be very upset and I'm upset now because I'm getting the indirect effects of it and I wouldn't be able to afford my home or provide for my family.


GUTIERREZ: Governor Schwarzenegger is holding a special meeting next Wednesday to see what the state might need to do to prepare for a worst case scenario if they're not able to raise money within the next several weeks before their cash reserves are depleted.


BLITZER: What a nightmare. Thelma's in Los Angeles for us.

California, by the way, is one of 15 states facing budget shortfalls, some as high as 7.5 percent. As a consequence, many of them are laying off state workers up to 33,000 according to union estimates. In all, U.S. states are facing a cumulative deficit of $40 billion this fiscal year. Three times last year's shortfall.

The financial crisis may be unfolding on the world stage but it's having a very real impact on almost all of us, the extent we may not even realize yet.

Let's go to our special correspondent Frank Sesno looking at the story for us, especially affecting things like credit cards and student loans.

You teach at a major university and you can see what's going on. Can't you, Frank?

FRANK SESNO, CNN SPECIAL CORRESPONDENT: It's remarkable, Wolf. I think we need to stop talking about Main Street and start talking about my street because this is the most kind of personal affect that I've seen. I think it's a game changer. I think it's a game changer for the way people are looking at candidates in this election. Yeah, I spoke to a student yesterday who was saying he is still waiting for Sallie Mae to process his student loan and doesn't know where it is. He's worried if he doesn't get his money, he won't be able to stay in money. I said that on the air earlier this morning. I was back on campus this afternoon. Be who saw it came up to me and said I'm so glad you said that. I got my money now but was afraid I wasn't going to get it. This is a level of anxiety among young people who have never experience that had before. Put that next to the 79-year-old worried about their 401(k) they're trying to draw from or people in the midget like you and me who still have to worry about that. This my street business affects your house, your car, everything. That's a very substantial and significant change this time around.

BLITZER: Frank teaches at George Washington University. How is it going to play out in presidential politics? We're only a few weeks away from the November 4th election.

SESNO: So when you listen to these candidates and I saw Bill Schneider talking about whether you want be you like or be who you think is competent, this idea of style and substance, the mix between the two of them shifts in favor of substance because you bring to the table your concerns. You bring to your table, the table, your personal experience. And it's through that prism that you're listening for these answers. Are these candidates saying things that are credible, that sound like it could actually change the world I'm living in, that could my accounts or my job or my community safer and community safer and more secure? That is the impact. Maybe one reason why Obama is seeing the bump in his numbers and McCain has yet to see it.

BLITZER: Frank Sesno, thank you very much. He is our special correspondent.

It is the war for the Iraqis hearts and minds on the defense department may have a new weapon to win over Iraqi support for their government's own contractor, and we will tell you how the Iraqi news media and the U.S. may be teaming up, and it will cost the taxpayers hundreds of millions of dollars.

And take two for the bailout bill in the House of Representatives. It passed, but will it put some members of congress's political futures at risk? Stick right here in THE SITUATION ROOM.


BLITZER: Wanted -- some uplifting news stories about Iraq for Iraqis. According to today's Washington post, the U.S. defense department will pay $300 million to U.S. contractors in Iraq to try to generate pro American and pro Iraqi government publicity. We go right to the Pentagon correspondent Barbara Starr who is working the story for us. But $300 million when you talk about $10 billion a month spent in Iraq may not be a lot, but it is $300 million. So what is going on?

BARBARA STARR, CNN PENTAGON CORRESPONDENT: Well, Wolf, we have confirmed it. Some people call it publicity and some call it down right propaganda. The U.S. offering contractors to produce videos and entertainment programs and news articles and media products as they say in the business to try to convince Iraqis to support the Iraqi government and the U.S. mission in Iraq and catching a lot of people by surprise, of course, because you know, the U.S. has been there for some time and some of this type of work has been done, but supposedly the U.S. mission is drawing down now. It has been a tact tick that they have used, but there is a lot of controversy about it and a lot of questions about whether it is really appropriate, because the bottom line, none of the material will be labeled brought to you by the U.S. military, but it will all appear to be something that emerged in the Iraqi media.

BLITZER: Why aren't they spending their own money to promote themselves as opposed to U.S. taxpayers' spending money for this propaganda purpose?

STARR: Well, a good question, Wolf, to which there is no good answer. The U.S. military has long just believed that it has to counter al Qaeda and all of the insurgent elements using the internet and making their own videos that are so capable of using the internet age to communicate their ideas so that the U.S. feels it has to fight back online. This is their effort to do it, but it is very controversial.

BLITZER: And expensive, too. Thank you, Barbara.

Pork inside of the Wall Street bailout. Lou Dobbs is looking over the plan, and he will share his thoughts with us coming up.

Also, a new unemployment report underscoring just how bad off the economy is and how Wall Street is responding to all of this. And plus, the next vice president will have a son serving in Iraq and the president as well. Do their children belong in the war zone?


BLITZER: Lawmakers passed it and President Bush signed it into law, but some critics say that the bailout bill is overflowing in pork. Lou is keeping an eye on this. Are the critics right? What do you think?

LOU DOBBS, CNN ANCHOR: Well, it depends on the critic, but overall, anyone who thinks that spending $850 billion of taxpayer money to bail out Wall Street rather than focusing on middle-class working men and women in this country would be absolutely correct. What we have witnessed is a rush to judgment, fear mongering from the congressional leadership and the democratic congressional leadership and the republican white house and we have had a spectacle of all of the so-called leaders to talk down the economy and the markets. It is my opinion unconscionable.

BLITZER: The president signed it into law and the markets still went down today, are you surprised?

DOBBS: No, I am not. I have been saying since this issue came up that it is entirely the wrong approach. It is targeted at the wrong institutions and targeting at Hank Paulson's friends instead of people who deserve the money and we have every apparatus in place to deal with the crisis as it is styled. We have yet to determine what is this crisis and how does it work?