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THE SITUATION ROOM

Ominous Low Point for Stock Prices; Interview With Edward Lazear, Chairman of Council of Economic Advisers; Obama: McCain 'Risky' for Economy

Aired October 9, 2008 - 16:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


JOHN ROBERTS, CNN ANCHOR: Happening now, we've got breaking news for you today. An ominous low point for stock prices; the Dow falling below 9,000 for the first time in five years, now at about the mid- 8,000 level. As markets keep tumbling, the bailout of Wall Street keeps on growing.
Also this hour, John McCain supporters get angry, and we mean really angry. They are openly venting about Barack Obama, the news media, and McCain's slide in the polls.

Plus, Barack Obama is staying focused on his bread and butter issue, the economy, and he is portraying McCain as being out of touch and out of control.

Wolf Blitzer is off today. I'm John Roberts.

You're in THE SITUATION ROOM.

It is another smack over the head with a 2 x 4 for Americans already sick and stunned by the stock market's meltdown. Just moments ago, the Dow Jones Industrial Average closed down about 580 points. The index falling below the 9,000 mark for the first time in five years.

The S&P 500 and the Nasdaq Composite also suffering from a new sell-off. This, exactly one year to the day that the Dow had soared to an all-time high.

Our correspondents are standing by on this breaking story.

First to our senior business correspondent, Ali Velshi. He's here trying to figure out what happened today.

What was going on?

ALI VELSHI, CNN SR. BUSINESS CORRESPONDENT: A couple of very power-intuitive things going on.

First of all, 591 is where we're settling in. We'll probably take another 20 minutes to figure out what the final number was. And that's not the worst of it.

It was far lower during the course of the day. And then, you know, you talked about the fact that we were one year away -- one year ago today was the high that the Dow had hit, the highest point it was ever at, 14,164.53. That was a year ago.

Look at the year you've had. This is the life of your 401(k) and your IRA, all the way today to below 9,000. And guess what? Nobody thinks it's done yet.

This is not the bottom that we're looking for. We've been talking to people who say they are waiting to get all of this volatility out of the market and then they go in and they start buying. But we may still be a few hundred points away from that, maybe as low as 8,000 on the Dow. We're closing at 8,658, roughly about 600 points lower.

Now, something has happened today, two things that have had something to do with this. First of all, there was a ban on the short selling of financial stocks. Short selling is a financial bet that a stock is going to go down. That's been canceled for a few weeks and it started again today. So a lot of these banks are being pushed lower and that's what happened.

The other thing, John, that's happened is that there is word from the Treasury that they might think about investing directly in America's banks. Let me show you how that's going to work.

Basically, what it would be, it's part of this bailout plan. The federal government would give money directly to banks. And in exchange, they would get stock in those companies. A real investment, not just a loan, not like the kind of stuff that's going on with AIG, but they would actually invest in the banks so if the banks actually were to become profitable, which they will at some point, the federal government -- and that means you -- might get some money back.

A few things at play right now. Again, like all of the stuff you and I have talked about over the last few days, unclear how you respond to all of that. Right now there are a lot of experts, and Susan Lisovicz will tell you about this, who are hoping, actually, believe it or not, that this market goes lower with some force, and that signifies a bottom. That's when people pile in and start saying, stocks are cheap, they're at a discount, and they will start going up again -- John.

ROBERTS: The question is, Ali, I guess where is the bottom here?

VELSHI: Nobody ever really knows, but a lot of people were talking and are saying, by the way, you don't necessarily calculate it on the Dow. But if you are looking at the Dow, we're at 8,600. There are some people saying that somewhere between 8,000 and 8,500, depending on the trend, is where you start getting in.

But in order to know that you have hit the bottom, there has to be downward force that is committed. That means a big drop in prices with a lot of people selling.

We're not quite, quite there yet. If feels like we're almost there, but this actually isn't it. And you know, you only know in history, you only know in the rearview mirror when it's hit, but this may not be it. ROBERTS: You wonder how much more committed to selling they could be, Ali, because we're looking here, and in the lower right-hand side of your screen, those numbers are going to change.

VELSHI: They're adding up.

ROBERTS: Right. Down at 634 on the minus side right now. The trajectory was downward toward the close. It was just a few minutes before the close on the upside, then on the downside. Those numbers will continue to change for the next few minutes here.

Let's go to the New York Stock Exchange. Susan Lisovicz is standing by there.

Susan, it was a holiday today for many people. Did that will help to add to what we're seeing there?

SUSAN LISOVICZ, CNN BUSINESS CORRESPONDENT: Well, when you have lighter volume, John, it can exacerbate the moves. But I think that's almost irrelevant given the decisive trend that we've been seeing. And after all, this is the seventh consecutive day all three major averages are down. And most of those days have been pretty harsh sell-offs.

I think what was unusual about this day, in an additional to being Yom Kippur, was that the selling, it seemed to be actually fairly quiet. That is, a 150-point decline, 200-point decline is unfortunately all too common.

What happens in the final hour of trading is that the wheels just came off. And what some traders and analysts tell me is that when the Dow went below 9,000 and when the S&P went below a certain -- S&P 500 went below a certain technical level, all these automatic sell programs kicked in, and it just created a more vicious, much more accelerated, round of selling. And to Ali's point, that's right, a lot of pros are so exhausted from this because the market just keeps going down.

There's been a lot of encouraging news that the government, the Treasury Department, the Federal Reserve are being imaginative, they are being aggressive in trying to jumpstart the frozen credit markets. And the stock market hasn't responded. And there is real damage, psychological damage, to investors and consumers, of course, because this is, after all, our retirement, this is our kids' education. And so it just creates another problem.

But the point is that the selling really kicked in today. I'm not sure anybody's going to call it a bottom because we really didn't have that kind of volume yet. But a lot of people think we're getting much closer given the ferocity of these sell-offs.

ROBERTS: Well, we certainly are getting much closer to the basement than we were before.

Susan, what about this idea of a lot of traders are looking for just a complete purge, just get this all out of the way, get to a level where you can start building again?

SUSAN LISOVICZ, CNN CORRESPONDENT: Well, I mean, this is historically what happens, that, you know, you get to a point where emotion, which is already so much a part of this recent bear market, just completely takes over to a panic type of selling. You really knock stocks down, to what level we're not really sure.

Typically, yes, in the rear view mirror, a day or two later, you'll see it. How will you see it? You'll recognize it by a couple things. One is that buyers will come in.

We've already seen none other than Warren Buffett come in, recognizing there are good names, companies that have real profits and real long track records. He's coming in at good prices and driving his own bargains, but there will be many others that come, too.

But the capitulation is often marked by the market closes at the low, big volume, big point loss, and also a very, very negative breadth. And I think the last time I looked, we saw for every stock that was moving higher here, there were 13 to the downside. That may have changed. It was very negative in the last hour of trading, and it was just accelerating all the time -- John.

ROBERTS: Well, those numbers keep going down, certainly, Susan, as the numbers actually keep up with the sell orders that were put in just before the close there.

Susan Lisovicz for us at the New York Stock Exchange.

Susan, stand by. We'd like to come back to you in just a little while.

Right now, let's go to the White House. Elaine Quijano monitoring the situation there.

What's the administration saying about what happened today, Elaine?

ELAINE QUIJANO, CNN WHITE HOUSE CORRESPONDENT: Well, you know, of course officials are saying they don't comment on individual market fluctuations. That said, after the closing bell I spoke briefly with a senior administration official who says, look, anyone who thinks that these market fluctuations are somehow a grade on the financial rescue plan that was signed into law last week needs toe have patience, because the fact of the matter, this official says, is that the Treasury Department has yet to buy a single asset under this plan.

I talked to an analyst today, John, who said, look, it's like a patient having the medicine but it taking time to work. And that's precisely the message the Bush administration is trying to send right now, that Secretary Paulson and his team are working to get this plan implemented, at the same time President Bush and his aides trying to send a reassuring tone.

One more point quickly. President Bush, in a sign of just how serious the situation is -- I'm sorry, John, the situation is -- the meeting that was scheduled to take place in Washington here, the G-7 finance ministers, that will be taking place as scheduled. But also, at the White House here, President Bush has invited them to come in on Saturday morning to talk about how they can more closely coordinate their efforts in tackling this, what has really become a global financial crisis, John.

So again, the reassuring tone on the one hand from the Bush administration, as Secretary Paulson and his team members try to get this plan in place. At the same time, the president trying to get down to brass tacks, really, and solve the situation to try and stem some of these plummeting markets that we're seeing around the world -- John.

ROBERTS: All right. Elaine Quijano for us at the White House. Elaine, thanks very much.

Let's bring Ali Velshi, our senior business correspondent, back in. Those numbers continue to tick down...

VELSHI: Yes.

ROBERTS: ... a little more slowly than they were. What was the record again? Was it just over 700?

VELSHI: 777, which was a very similar situation two Mondays ago, when, in fact, it didn't look it was that deep at the close, but it dropped so substantially afterwards.

Let me just show you on the wall here for a second, John. You used the word "purge." Susan talked to you about capitulation. Let me show you the pattern of the trading today.

It opened up like this, went down a little bit, up a little bit. It was all over the map all day, up and down. And then look what happened. It just goes off a cliff in the last hour of trading. This has been the pattern for the last seven days.

You know when you're going to know that you have a purge in the market, when you have that capitulation, when it's your opportunity to get in? You're going to see that drop off that happened at the end of the day. You're going to see it up here.

You're going to see massive selling on high volume early in the day, everybody getting out as fast as they can. They're getting the idea that, you know what? I don't want to be in this anymore; I don't have the stomach for it. And then everybody with the stomach for it, all those people who make their money out of the stock market, and hopefully some of your mutual fund managers who were managing the funds in your 401(k), they'll start buying.

You may not see it happen that day, but you're going to see this curve look very different. On the day of capitulation, you're going to feel something a lot stronger. And that's why there are people right now -- you're so close to the bottom, that people are saying, let's get there, let's do it, let's finally have that purge and get to it. Again, I tell you, markets come back months before the end of a recession. The market is usually the first thing to start turning up. You'll still see home prices go lower, you'll still see unemployment increase, but you will see the markets start to come back because they are forward indicators. They like to think a few months ahead of the rest of the economy -- John.

ROBERTS: Ali, you know, Susan Lisovicz was talking about the imaginative and aggressive steps that the government has taken to try to stop the slide. I mean, they haven't been either imaginative or aggressive enough here because it continues. They've thrown just about everything but the kitchen sink at this problem and the trend continues to be downward.

What can stop it?

VELSHI: Yes. And what it is, is, you know, the two are not working in sync. The things that the government's thrown at it, as we discussed yesterday, some of them will take a week, some of them will take a few months, some of them will take up to 18 months. None of them are designed to be working in 72 hours to a week.

So that's what it is; you're going to have to let this market play out, let it hit where it has to it, and started going. The fixes that the government has thrown in are about the economy. Let's draw a line here between stock markets and the economy. They're not one and the same.

ROBERTS: All right. Ali Velshi for us. Thanks, Ali. Stand by. We'll be getting back to Ali in just a little while.

Right now let's go to Poppy Harlow. She's at the Nasdaq, which fell, what, about 5.5 percent today, Poppy?

POPPY HARLOW, CNNMONEY.COM: Yes, we're just settling out the numbers here. The Nasdaq now down 6 percent. The level, 1,635.

Everyone remembers the Nasdaq because it was the worst hit when the tech bubble burst back at the end of 2001, 2002. It fell 40 percent. Well, now it's the worst hit yet again of all the averages. It is down 38 percent so far.

Simply this year, what you have going on here, you have a lot of big tech companies, names like Apple and Cisco and Microsoft, that, A, rely on financial firms for business, and B, they rely on American consumers spending money, that discretionary spending. They are not doing that. The sell-off here accelerating just in line with the Dow and the S&P today, literally falling off in the last hour or so.

And I think what is very interesting is what Ali said about the timing of the sell-off. It is traders wanting to get rid of their stocks at the end of the day because they don't know what's going to happen overnight. They don't know what will happen between this time Eastern in the afternoon and 9:30 Eastern tomorrow morning, when the market opens. And I also think what Susan said about Warren Buffett making an $8 billion investment in the market within the last two weeks, that should have shored up a lot of confidence. He's a very wise man, a renowned investor. And that did not shore up confidence, and people aren't even looking to him anymore.

It's an incredible sell-off. And here we are, the worst hit that we've been in years for the Nasdaq.

ROBERTS: Anybody talking about a bottom there yet, Poppy, what it would take at the Nasdaq?

HARLOW: You know, it's interesting. That's the whole problem. So many traders I talk to say if we could even see a bottom, then we'd have some sort of comeback here.

I did speak with someone on Monday who said that he thought we'd see a rally off of this, that it was oversold, that these tech stocks were way oversold. But we haven't seen any kind of relief rally whatsoever.

Some people calling for a bottom of 8,500 for the Dow, but Nasdaq really is worse hit. And I have not seen anyone definitely say that tracks the Nasdaq closely that they see a bottom here anytime soon.

ROBERTS: All right, Poppy Harlow for us at the Nasdaq. Poppy, thanks so much. Let's go back to Susan Lisovicz at the New York Stock Exchange.

You know, Susan, you spend all day down there at the New York Stock Exchange. You talk to a lot of professionals. But what about small investors? What about people who have a lot of their money in a 401(k), invested -- you know, tied to the S&P? What kind of shape are they in? How much money have they lost in those retirement accounts in the last couple of weeks?

LISOVICZ: Well, I mean, we're talking about -- if we look at the overall, the biggest index of them all, something we don't mention that often, the Wilshire 5000, I think yesterday at the close I got a note that said there was $1.3 trillion lost in the Wilshire just from the previous six sessions. This is real money that is lost, you know, in just in six days' time. That is real money if you were going to go cash out.

But psychologically, of course, it's much more important because, John, this is -- again, this is something that can really impact your spending. And the economy is already decelerating. So it's a real problem, and that's why I think that the Bush administration has been so sensitive to what's been happening here.

ROBERTS: All right. Susan Lisovicz at the New York Stock Exchange.

You see those numbers on your screen, down 678 points. It appears to have stabilized, doesn't look like it's going to go lower. About 100 points off the historic one-day point drop for the Dow. Let's go back to the White House. Edward Lazear is the chairman of the Council of Economic Advisers. He's the president's chief economic adviser.

Mr. Lazear, you've been throwing everything but the kitchen sink, as I was saying to our Ali Velshi just a couple of minutes ago, at this problem. It continues. The Dow continues to go down. The markets continue to lack a tremendous amount of confidence.

What will it take to stop the bleeding here?

EDWARD LAZEAR, CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS: Well, I think it will take the actual actions rather than the promises of the actions. You know, we're in a situation right now where we need to act quickly, but we also need to get things right. And so it took us a while to get here, it's going to take us a little bit of time to get out of this thing. But we need to get things going, and get things going very quickly in order to make sure that individuals, investors have confidence in the financial sector and in the market in general.

The one thing that we're seeing right now that concerns us is that these problems are broadly based. This is no longer just the financial sector. We're seeing it in all sectors right now, and that reflects the fact that investment and capital is the lifeblood of American business.

So that's where we're focused. And we're going to get it done quickly, and it will work, but it's going to take a little bit of time.

ROBERTS: So when you say it's going to take a little bit of time, what are we talking about here? Because each day that goes by and we see these huge point drops, the value of people's retirement, savings accounts go down by 5, 8 percent, I mean, there are many people who are down more than 30 percent now in their retirement investments.

LAZEAR: Right, absolutely. Well, you know, we're not talking months, we're talking days to weeks. And certainly a very short period of time.

Now, many things have already been initiated. As you know, the Fed took some pretty dramatic steps yesterday, but that, too, takes a little bit of time to get going.

They announced the program, but it will probably take them a week or so to get it up and running. Just the administrative aspect of it takes a little bit of time.

These things will help. But again, you know, you've got to get it right. You don't have an infinite number of dollars of resources. You've got to make sure that you spend your resources wisely, and these are taxpayer dollars.

So we are constantly aware of getting things going quickly, but also making sure that we do the right thing for the American public. ROBERTS: Hey, Mr. Lazear, I want to bring in our senior business correspondent, Ali Velshi. He's here in the studio with me in New York. He's got a couple of things he'd like to run past you.

VELSHI: Mr. Lazear, thanks for joining us.

We've been flooded with phone calls and e-mails about what isn't working in the system. And we've heard from you and we've heard from the president. We've heard from Mr. Paulson, we've heard from Mr. Bernanke. And every time one of them speaks about this, these markets go down further because these generalities about it will work are not working for the American public.

Can we have a specific example of what is being worked on? Because the only news we really have about what is being worked on was the fact that the government extended AIG yet more money yesterday. I'm just telling you because our viewers are so confused as to what's going on here.

Can we get an explanation as to what it is we're working on that is actually going to solve this problem? Because you've been given the $700 billion authorization. What is happening with it?

LAZEAR: OK. Well, there have been a few specifics that already have been announced. Again, I go back to the Fed's action, which I think is extremely important and quite significant in terms of restoring the commercial paper market.

VELSHI: But sir, I just want to interrupt you. That's not part of the $700 billion...

LAZEAR: No, that's not.

VELSHI: ... nor was the Fed's decision to loan companies money that was made on Monday. What we don't have -- we have Neel Kashkari, who's been appointed to operate this. He won't agree to any of our interview requests.

Why can't the American public find out how you are planning on spending the $700 billion? It's a simple question.

LAZEAR: Well, again, as I said, because we're in the process of planning it and completing the plans. We can't announce what we're doing before we actually have the details laid out.

That doesn't mean that we're not working night and day to try to get these things done. I assure you that we are. But it's also true that you have to do it right. And if you announce something and it turns out to be the wrong thing, you do damage, and we're not about to get into a situation where we want to create any more damage.

The situation right now is sufficiently -- as you know, sufficiently problematic, sufficiently extraordinary, that we have to make sure that we get everything right. And that's exactly what we're doing right now. So... VELSHI: OK. Well, I'm going to ask you if you it will please ask Mr. Kashkari to come and talk to us, because we would like -- the American public have asked. They would like to know what he's working on. And we'd like to extend that invitation to him. If he's going to solve this problem, we want to know what he's working on.

LAZEAR: Well, I'll pass the word on to him.

VELSHI: Thank you.

ROBERTS: All right. Mr. Lazear, before we let you go, John Roberts one more time.

What about the idea of the Treasury Department taking a partial ownership stake in banks here in the United States? Are you going to do that, and when might you start?

LAZEAR: Well, that's one of the tools that is available to Treasury, and it's something that is being considered right now. It's being considered primarily for the reason I think that your guest asked me about, which is that this is not just a situation of liquidity, which is something that the Fed handles. It's also a situation of getting capital into the sector that helps grow the economy.

So we have to figure out ways to do that. We've got to figure out ways to make sure that investments go to businesses large and small so that they can allow employment to grow, allow the kinds of growth that we see that allows consumption to grow. And all of those things are very important. That's where we're headed and that's what we're trying to do right now.

ROBERTS: Does it look though as if this is something that you will be doing?

LAZEAR: Well, again, you know, I don't want to be too specific, and the reason I don't want to be too specific is because I don't want to say something that turns out not to be true. There's still some variance on what we're considering.

But we do have the broad authority to do that. And it is important to inject capital into the system. The question is, how do you inject capital into the system?

We're going through those details right now. But again, it's not going to take a long time to do this. The markets will be reassured in very short order.

ROBERTS: All right. Edward Lazear, the chairman of the Council of Economic Advisers, the president's right-hand man on the economy.

Thanks very much for being with us today. We appreciate it, sir.

LAZEAR: Thank you. A pleasure.

ROBERTS: Jack Cafferty is off today. Barack Obama is trying to hit the McCain campaign right where Americans live. The Democrat pressing ahead with a new line of attack. What it all means for your mortgage and for the campaign.

Plus, are voters in crucial battleground states being shut out of the voting process? Disturbing new reports about that.

And the economy is taking sits throw on the battle for Congress, but perhaps not in the way that you might think.

You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

ROBERTS: As stock prices plunged dramatically even further today, Barack Obama is pressing his economic attacks on John McCain. The Democrat is barnstorming across the battleground state of Ohio, staying focused on the issue that has put the wind at his back.

CNN's Suzanne Malveaux is live for us in Dayton, Ohio, this afternoon.

Suzanne, economic pain runs deep in Ohio right now.

SUZANNE MALVEAUX, CNN WHITE HOUSE CORRESPONDENT: Absolutely, John.

Barack Obama is actually in the lead in this critical state of Ohio, and aides believe it could come down to Ohio or Florida in determining who wins the White House. Barack Obama is going into the belly of the beast here on Dayton, on to Cincinnati, McCain country. But he believes he can chip away at those social conservatives, as well as the Independents, by focusing on the economic crisis here in Ohio.

(BEGIN VIDEOTAPE)

MALVEAUX (voice-over): Barack Obama in overdrive, kicking off his five-city Ohio tour kissing babies and keeping on message.

SEN. BARACK OBAMA (D-IL), PRESIDENTIAL CANDIDATE: Well, I've got news for John McCain. This isn't about losing a campaign. This is about Americans here in Dayton who are losing their jobs and losing their homes and losing their life savings.

MALVEAUX: The economy is center stage in the make-or-break state of Ohio, where unemployment is 7.4 percent, the sixth highest in the nation. Dayton's mayor says 33,000 have lost jobs in her area over the last seven years. Obama promised if he was president, he would put them back to work.

OBAMA: ... to create five million new green jobs over the next decade.

MALVEAUX: No Republican has won the White House without winning Ohio. So Obama is here to make sure he holds on to his slight lead. He believes focusing on the economy will get him to the finish.

Obama slammed McCain's latest proposal for the government to buy bad mortgages back at full value, saying it would end up costing taxpayers billions and reward lenders' bad behavior.

The campaign released a new ad on cable TV to emphasize the point.

(BEGIN VIDEO CLIP)

NARRATOR: Putting bad actors ahead of taxpayers? We can't afford more of the same.

(END VIDE0 CLIP)

MALVEAUX: McCain defended his plan as a costly but necessary fix.

OBAMA: Don't be hoodwinked by his ads. Don't fall for the okie- doke.

MALVEAUX: But Obama is increasingly portraying McCain as deceptive, out of touch and out of control.

OBAMA: It's called the old bait and switch. What he gives with one hand, he'll take away with another.

He thinks we won't notice. Well, I've got news for John McCain. We do notice, we know better. We're not going to let him get away with it.

(END VIDEOTAPE)

MALVEAUX: And John, really the tone and the language at Obama's rallies has really changed and is dramatically different. We hear Obama going after McCain over honesty and truth worthiness, so whether or not he is really going to help the American people -- John.

ROBERTS: Suzanne Malveaux for us, live from Dayton. Suzanne, thanks so much for that.

A strong taste of voter anger at a McCain/Palin campaign rally in Wisconsin. Have a look at this.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: I'm mad. I'm really mad. And what's going to surprise you, it's not the economy. It's the socialists taking over our country.

(END VIDEO CLIP)

ROBERTS: The Republican supporters are getting more vocal and frustrated as the election gets closer and McCain slips in the polls.

CNN's Ed Henry traveled with the McCain campaign to Wisconsin. Ed, an awful lot of hostility in that crowd today.

ED HENRY, CNN WHITE HOUSE CORRESPONDENT: Well, John, Republican voters right now are really fired up. They're not shy about telling us in the media that they think we should be tougher on Barack Obama. But what was interesting today is they also vented some frustration at John McCain, saying he needs to crank this up another notch.

(BEGIN VIDEOTAPE)

HENRY (voice-over): At a dramatic town hall in Wisconsin, John McCain was confronted by Republican voters wondering how he could be losing to Barack Obama and urging McCain to get tougher with his opponent.

UNIDENTIFIED MALE: And we're all wondering why that Obama is where he's at, how he got here. I mean, everybody in this room is stunned that we're in this position.

HENRY: The questioner angly suggested the media is giving Obama a pass on questions about his ties to former terrorist Bill Ayers, sparking wild applause from the raucous crowd.

(APPLAUSE)

SEN. JOHN MCCAIN (R-AZ), PRESIDENTIAL CANDIDATE: The point is Senator Obama said he was just a guy in the neighborhood. We know that's not true. We need to know the full extent of the relationship because of whether Senator Obama is telling the truth to the American people or not.

HENRY: His running mate, Sarah Palin, who has been highly selective about the interviews she grants, attacked the mainstream media for not pressing Obama.

GOV. SARAH PALIN (R-AK), VICE PRESIDENTIAL CANDIDATE: I am like you, and I wonder, too, when will the questions be asked and when will we get the answers?

HENRY: But another voter pointedly urged McCain to stand up to Obama.

UNIDENTIFIED MALE: It is absolutely vital that you take it to Obama, that you hit him where it hurts. We have the good Reverend Wright. We have -- we have all of these shady characters that have surrounded him. I am begging you, sir. I am begging you, take it to him.

HENRY: Unlike the Ayers question, McCain did not jump on the Reverend Wright. He instead offered only a general promise to scrutinize Obama. And perhaps mindful of the danger of the town hall meeting looking too angry, reminded supporters they also need to present a positive agenda.

MCCAIN: Yes, I'll do that, but I also, my friends, want to address the greatest financial challenge of our lifetime with a positive plan for action. (END VIDEOTAPE)

HENRY: Now, McCain aides say this will be their line of attack from now until Election Day, raise questions about Barack Obama's candor not just on the William Ayers controversy, but also on issues like the economy, like Iraq, health care, you name it -- John.

ROBERTS: All right. Ed Henry for us -- Ed, thanks so much for that.

You're in THE SITUATION ROOM.

And happening now: the national debt too high to count. The famous national debt clock has run out of numbers, as the debt soars above $10 trillion. A new clock, by the way, is in the works. We are going to tell you how high that one will go.

And luxury bailout? Insurance giant AIG is getting a second huge infusion of cash from the Federal Reserve. But will executives call off an extravagant company retreat?

Wolf Blitzer is off today. I'm John Roberts. You're in THE SITUATION ROOM.

Well, it's not what's supposed to happen -- well, it's not what's supposed to happen in a democracy and a nightmare to voters everywhere. You try to register to vote or you actually go to vote on Election Day and you're told you can't. Could voters be shut out of their right to vote?

CNN's Brian Todd joins me now.

And, Brian, this is a very real concern for a lot of people.

BRIAN TODD, CNN CORRESPONDENT: It certainly is, John. We are told that some states are really struggling to upgrade their voter databases in time for Election Day, a struggle that is compounded because voter registration is such a huge issue this year.

(BEGIN VIDEOTAPE)

TODD (voice-over): By most accounts, record numbers of voters will turn out on November 4, but many of them may be turned away. A "New York Times" investigation finds tens of thousands of voters have been taken off the rolls or blocked from registering by methods that the paper says appear to violate federal law. The reports caught the candidates' attention.

MCCAIN: You have seen, these are serious allegations, my friends, and they must be investigated, and they must be investigated immediately, and they must be stopped before November the 4th, so Americans will not...

(CHEERING AND APPLAUSE)

MCCAIN: ... will not be deprived of a fair process in this election.

TODD: "The Times" reports, the problem has cropped up in at least nine states, including six considered so close, they could go either way, the swing states of Colorado, Indiana, Ohio, Michigan, Nevada, and North Carolina.

According to the paper, the shutout of voters doesn't appear to be coordinated by one party or the other. And it doesn't look like anyone intentionally broke the rules. But experts say the situation could present a nightmare on Election Day.

DOUG CHAPIN, PEW CENTER ON THE STATES: If there's a problem at the front of the line, and there are 10 people in line, it's an inconvenience. If there are 100, it's a problem. If there are 1,000, it's a crisis. And given the level of interest we're seeing in this election, we may have our share of crises on Election Day.

TODD: In some states, according to "The Times," officials seem to be improperly using Social Security information to verify new voter applications.

And it says that, in at least two states, they're removing voters within 90 days of the election, not allowed, according to "The Times," unless voters die, are declared unfit, or tell state officials they have moved. Officials say voters who are shut out can cast provisional ballots. The problem with those?

ROSEMARY RODRIGUEZ, U.S. ELECTION ASSISTANCE COMMISSION: Those aren't always counted. So, we're encouraging all voters to check their status in advance of the election.

(END VIDEOTAPE)

TODD: We contacted officials in all nine states cited by "The Times." In Colorado, Indiana, Michigan, Georgia, and Louisiana, officials denied that anything improper was done. Officials in Alabama and North Carolina did not get back to us. And Ohio officials said they're looking into it.

And, in Nevada, they told us, Social Security and driver license numbers had been mistakenly entered into wrong templates in computers. They say that problem has been resolved. And they say no one will be shut out in Nevada on Election Day -- John.

ROBERTS: Well...

TODD: We're going to be looking for a lot of these problems around the country, though.

ROBERTS: Yes, we will keep watching it closely, too, to see what happens on Election Day. Brian Todd for us from Washington -- Brian, thanks for that.

It's not your parents' voter registration drive. This election, young voter groups are using technologies, from Facebook to video games, to register millions of voters. Internet reporter Abbi Tatton is follow this story. How is this drive working out, Abbi?

ABBI TATTON, CNN INTERNET REPORTER: John, this is the election where you can start the voter registration process on an Xbox, thanks to a partnership between Rock the Vote and Microsoft targeting video gamers who use the Xbox 360. You can request the materials straight there from your console.

It's part of an effort from these young voter groups to target the people that they want to register to vote on the Web sites, on the platforms in which they spend their time.

On Facebook, log on and you can fill out your voter registration information without even leaving the Web site. Go on to MySpace, and you will find a coalition of youth voter groups who have started the Ultimate College Bowl, encouraging people to register, young voters at their colleges, so the colleges can compete with one another to win prizes, to see who has registered the most voters.

Rock the Vote says that this is working, they have had over two million people registered this election. That's almost double the number from 2004.

These groups are nonpartisan, but you can look around the Web sites that they're targeting and see that -- just compare Barack Obama's support on, say, Facebook to that of John McCain, and you can imagine who this might favor -- John.

ROBERTS: All right. Abbi Tatton -- Abbi, thanks so much.

Economic hard times are helping the Obama campaign, but it appears to be a different story for Democrats in Congress.

And the changing of the guard at the White House. Will the transition threaten America's security? Former Bush homeland security adviser Fran Townsend is standing by.

(COMMERCIAL BREAK)

ROBERTS: Of course, voters will be thinking about their economic future when they cast their ballots in November. Should you see another stimulus package soon?

House Speaker Nancy Pelosi says she thinks so and she is suggesting she that may haul Congress back from its recess to vote on one.

Listen to what she said yesterday.

(BEGIN VIDEO CLIP)

REP. NANCY PELOSI (D-CA), SPEAKER OF THE HOUSE: With all that's happened in the past few weeks, it probably has to be more like $150 billion to invest in our economy, to create jobs, to help the states, to help men and women across the country. So, it -- it's a -- we may have to go back into session before the next Congress to get some of this accomplished. (END VIDEO CLIP)

ROBERTS: Pelosi surely hopes to increase the Democrats' control of Congress after the November 4 election.

CNN's Tom Foreman is watching this.

And what are her chances of seeing that happen, Tom?

TOM FOREMAN, CNN CORRESPONDENT: Well, you know what, John? I don't really know, because we're getting really mixed signals about how the economy is going to impact this overshadowed race. We're paying so much attention to the presidential race, the race for the White House, but the battle for the House and Senate is clearly heating up.

(BEGIN VIDEOTAPE)

FOREMAN (voice-over): The financial crisis from Wall Street to Main Street could affect the fight for control of Congress.

The Democrats currently have an advantage of 235 seats to 199 seats, with one vacant. Now a CNN/Opinion Research Corporation poll suggests, the race for those seats is tightening up. Fifty-two percent of likely voters say they would support the Democratic Party's candidate, with 47 percent backing the Republicans.

That five-point lead for the Democrats is down from a 14-point lead just last month.

KEATING HOLLAND, CNN POLLING DIRECTOR: Once you see a majority of one party voting for a bill and a majority of another party voting against the bill, it's pretty clear who's got their fingerprints on that bill. That's the Democrats.

FOREMAN: But the poll also suggests that, while most Americans do not like the job congressional Democrats are doing, they still like what the Republicans are doing even less.

AMY WALTER, EDITOR IN CHIEF, "THE HOTLINE": No matter what they seem to be trying to do to distance themselves from the president, distance themselves from the current financial problems, it still sort of sticks to them.

FOREMAN: The financial crisis could also impact the Senate, where one-third of the 100 seats are up for grabs. Each party controls 49 seats, but the two independents side mostly with the Democrats, giving that party control of the chamber. Senate Democrats are aiming for 60 seats, which would give them the first filibuster- proof majority in 20 years.

WALTER: Democrats today have a better chance getting to 60 than they did three weeks ago. At the same time, I would still argue that nine -- that's the number -- nine is still a tough number.

(END VIDEOTAPE) FOREMAN: You see Amy wrestling with the math here, John.

The problem is, the Democrats still have an edge in all the numbers, but, as those polls suggest, the momentum on this might be shifting a little bit to the Republicans. People don't seem to want to give it to them, because they're saying you're one of the parties that got us into this mess. But, at the same time, they're saying the Democrats aren't getting them out fast enough.

Just for clarity, for everyone out there, 60 votes is what it takes to stop a debate, to stop a filibuster. If you don't have that, then somebody who opposes a measure can get out there and just talk and talk and talk about whatever they want, and you can't stop them. If you have 60, you can stop them.

However, I can also say, if you're an adult in this country and you're under the age of 40, this is leading toward, if the Democrats could do this, something you have never really seen in your life, which is all of these powers lined up, the House, Senate and White House. And that can be a steam roller to do all sorts of things, if they can all agree.

So, a lot of mixed signals right now, John. And we will just have to see how it plays out.

ROBERTS: All right, Tom Foreman, thanks very much.

President Bush is getting ready for his exit, and he is preparing to turn the White House keys over to the next president, whomever that may be. Today, Mr. Bush signed an order that will make it easier for Barack Obama or John McCain to take over. The directive hopes to ensure a seamless transition.

We want to talk more about that with Fran Townsend. She is the former homeland security adviser to President Bush.

Fran, good to see you.

Why is the transition so critical this year, compared to 2000 or 1992?

FRANCES FRAGOS TOWNSEND, CNN NATIONAL SECURITY CONTRIBUTOR: Well, you know, there was a transition coordinating council that was in place in 2000.

But the fact is, government has changed. And, in a post-9/11 world, when they passed the intelligence reform and antiterrorism act in 2004, it basically gave each of the majority party's candidates an opportunity to begin to work on the transition before the election. And, so, this was -- this really is an executive order meant to facilitate that.

ROBERTS: Now, you and I were chatting about this earlier, off camera, Fran, and you suggested that this really has to start in earnest the day after the election, on November the 5th. Why? TOWNSEND: Well, that's right, because what you don't want to do is wait until there's an inaugural parade, and the new president's marching down before anybody begins to put in place the sort of -- the sort of procedures in case there is an emergency.

And, so, this executive order permits them to work with -- each campaign, both campaigns -- to work with the FBI, not going through the White House. The White House has no visibility into who they're asking to be cleared or the numbers that they're asking to be cleared to work on the transition process before the election. The FBI is committed, by the way, to having those clearances done in advance of Election Day.

ROBERTS: Now, I don't want to jinx the process, but, when we look back to 2000, we didn't know the results of the election until 34 days later. What if a similar situation like that were to occur this year? What would that do to this process of handing over the homeland security transition, which was -- as you said, is incredibly important in this post-9/11 era.

TOWNSEND: Well, that's right. John, I'm with you. I hope we don't have that situation.

But, if we were, because both sides will have people cleared in, they -- both sides could continue to work until the results of the election were clear.

ROBERTS: All right. So, regardless of whether or not this is decided on November the 5th, as long as both sides agree to start the process, it will get done in an orderly fashion?

TOWNSEND: That's exactly right. And I'm -- my understanding is, both campaigns have identified people to get those clearances and to work on the transition process. Nobody is saying, on either side, who those people are, but those people are in the process of getting clearances.

ROBERTS: You know, something else, Fran, that you and I have talked about in our communications back and forth is this idea of whether or not there may be an attempted terrorist attack on the United States between now and the inauguration, or shortly thereafter.

You know, you're still in contact with all of your folks there on the Homeland Security front. What are they saying? What are your worries here?

TOWNSEND: Well, as you can imagine, John, you go back to 1993, the first year of the Clinton administration, 9/11, the first year of the Bush administration. And look at Gordon Brown. In the first 72 hours of his taking office, there was the Glasgow attacks at the airport there.

And, so, while they tell you there's no specific information as to a threat related to this time period, we would -- they would be foolish to assume not knowing means there isn't one. And, so, I think that all the planning, all the indications are that they are planning for the transition like there may be an attack...

ROBERTS: So...

TOWNSEND: ... even though they don't have specific information.

ROBERTS: ... how concerned are you that there will be an attack?

TOWNSEND: Well, I -- I think what we know is, bin Laden and al Qaeda really take this period of time seriously. I think that's worsened, frankly, by our current economic situation.

Remember, when 9/11 happened, the impact on the economy was dramatic. And we had a budget surplus, and we weren't deployed in Iraq or Afghanistan. Given where we are now, with budget deficits and the economic condition, al Qaeda watches these things. And this is a period of time of vulnerability because of the transition.

I think we -- all Americans and the government have to be on a real alert, looking for signs that al Qaeda could be planning something.

ROBERTS: If I were to ask you for a percentage likelihood of an attack, what would you say?

TOWNSEND: I would tell you I know better than to put percentages on those sorts of things, John.

I think the most important part to this is, everybody, both campaigns and the administration are focused on being as prepared as is humanly possible in the event of something happening.

ROBERTS: Fran Townsend, former homeland security adviser to the president of the United States, currently CNN contributor -- Fran, it's good to see you. Thanks for being with us today.

TOWNSEND: Thanks, John.

ROBERTS: Stand by for our "Strategy Session" and Barack Obama's charge that John McCain's mortgage bailout plan is dangerous. Is that a fair charge, or is it false?

And is he a hero to strapped homeowners or a vigilante to the Bankers Association? The sheriff who's taken the mortgage mess into his own hands.

(COMMERCIAL BREAK)

ROBERTS: Barack Obama is taking aim at John McCain's new plan for the federal government to buy up and renegotiate home mortgages.

Joining me today for the "Strategy Session," Democratic strategist and DNC adviser Jamal Simmons, and Republican strategist Kevin Madden.

Good to see you, gentlemen. Thanks for being with us.

(CROSSTALK)

ROBERTS: Kevin, on the campaign trail, Barack Obama targeting John McCain and his mortgage bailout plan, the $300 billion plan that he announced on debate night, saying it's going to taxpayers millions of dollars and potentially reward bad behavior.

What do you say?

KEVIN MADDEN, FORMER ROMNEY CAMPAIGN NATIONAL PRESS SECRETARY: Well, look, I think the intent here for John McCain is good. And this is an idea that he wants to essentially secure the markets. He wants to make sure that there's reassurance for a lot of these people in the credit markets.

And he eventually wants to take care of people who can -- who want to keep their homes. The intent with John McCain here is good. The way this was rolled out, the way it was explained, was not. That's been the problem.

ROBERTS: Right.

MADDEN: And that's why it's opened himself up to criticism from Barack Obama.

ROBERTS: You know, even the conservative publication "The National Review," Kevin, said that they had problems with this. Their problem was that it might reward ruthless borrowers, people...

MADDEN: Right.

ROBERTS: ... who have a home, and when the home goes below the value out of the mortgage, they just toss the keys to the mortgage company, and get out.

But, Jamal, Barack Obama is making a different point here, that, on Tuesday night, Senator McCain suggested that they -- that this new plan would force lenders to devalue the mortgage. Now the suggestion seems to be that they would buy the mortgage at face value...

JAMAL SIMMONS, DEMOCRATIC STRATEGIST: That's right.

ROBERTS: ... which would cost taxpayers a lot more money.

SIMMONS: That's right. The original bill, which was much closer to the Dodd-Frank bill, was going to take 90 percent of the market value, current market value of the house. This bill is face value, 100 percent, which means, if you have done any kind of fraudulent practice, you are going to get bought out by the federal government, as a lender, and then the taxpayers will take on that liability.

It just doesn't seem like this is the kind of plan that we want to be pursuing right now. And the other part of this is, this is more of that sort of John McCain erratic strategy, where, one day, he says, I'm going to suspend my campaign and go to Washington to fix it. Then it blows up. And we ought to put the debate the back, but he shows up at the debate anyway. Then he puts out a plan on Tuesday. Something's wrong with it. They try to fix it in the middle of the night. They come back. We have got a new plan.

Come on. We need some consistency from John McCain, because we're going to need consistency from the next president.

ROBERTS: You know, a lot of this is, who do you trust?

And, Jamal, today, John McCain leveled an attack against the Obama campaign, saying that he was the second biggest recipient of campaign contributions from Fannie Mae and Freddie Mac. Who he is to be talking about a solution here?

And we checked with the Center For Responsive Politics. That's a true statement.

SIMMONS: So, on the one hand, you have got somebody who perhaps has taken donations from Fannie Mae and Freddie Mac. John McCain's current team of advisers who are running his campaign were lobbyists for Fannie Mae and Freddie Mac.

John McCain is getting his advice on how to handle this problem from people who used to work for Fannie Mae and Freddie Mac. This is -- at the end of the day, Americans want to know, what are we going to do next? And that's the place where John McCain is coming woefully short, because you can't -- can't tell what he will do next, because he may change his mind tomorrow.

MADDEN: Jamal, it's the -- John McCain is the one who's actually put together a plan. It's John McCain that's gone out there and showed leadership at a time of crisis.

Barack Obama hasn't put together a plan. How can we criticize John McCain, when he's actually gone out there and taken action? Where's Barack Obama's plan? What is his plan to move the economy forward?

SIMMONS: Well, here's...

(CROSSTALK)

MADDEN: He's not dealing with specifics. He's only dealing only vagaries.

SIMMONS: Well, here's what...

ROBERTS: At the town hall meeting today, John McCain was asked whether he would investigate and prosecute people who are responsible for the subprime mortgage crisis. He suggested that, yes, he would conduct investigations, and people who were found responsible would be prosecuted. And then he added this. Let's listen.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: And when you have Obama, Pelosi, and the rest of the hooligans up there to run this country, we got to have our head examined. (INAUDIBLE) you, who are representing us, and we are mad.

(END VIDEO CLIP)

ROBERTS: Sorry, that -- that was actually the wrong sound.

(LAUGHTER)

ROBERTS: The sound we were supposed to play was, he said: "Senator Obama, a year ago, said these kinds of subprime loans are fine with him, and the fact is the same people that are now claiming credit for this rescue are the same ones who were willing co- conspirators and causing this problem. And that is -- you know their names. You will know more of their names. Congressman Barney Frank and Senator Chris Dodd are two of them."

Kevin, this idea that he said that Senator Obama said that the subprime loans are fine with him would seem to be a misquote. Senator Obama said that, while subprime lending started off as a good idea, greed got in the way and then perverted the whole thing.

MADDEN: Well, look, you know, I'm going to put on a cold-hearted analyst hat here. And I think that, when the American public are looking at this debate, they do not want to see blame-mongering and finger-pointing. They really don't.

They really want to see a way forward. They want to see somebody who's going to take us out of this mess, out of this chaos, and instill confidence back in the markets. So, I think there's a lot of back and forth. Who's got more lobbyists? Who's got more donations?

But, ultimately, the American public -- the person who wins this -- and I think Jamal will agree with me -- is going to be the candidate who points the way forward. So far, John McCain is the only one that's done that.

ROBERTS: You know, Jamal, the sound that we actually played there was from a very angry voter at this campaign event that Senator McCain had, a tremendous amount of anger there. They're pointing fingers at the Obama campaign, talking about liberalism, talking about socialism.

Karl Rove has suggested that, if John McCain wants to close the gap here, that's exactly the sort of upset that he needs to engender in the electorate. Might this be working for him?

SIMMONS: You know, I have got to tell you, John, I am particularly concerned about this tap-in to this anger, because you start to hear things coming out at these rallies that are really -- I don't even want to say them again on television about Barack Obama and about some of the other people around.

John McCain has got to be a responsible politician here. I understand we're going to have differences. I understand he's going to raise questions. But when people threaten the life of another presidential candidate, I feel like the -- the one standing on stage ought to say something about that and quell some of that anger. So, I would like to see John McCain show some leadership when it comes to this topic, exactly, and really kind of calm those crowds down a little bit.

ROBERTS: Kevin, real quick, is this getting out of hand?

MADDEN: Well, look, I think there's always going to be anecdotal evidence that there's a couple yahoos that show up at campaign rallies, both Democrat and Republican.

At the end of the day, it's about the swing voters and how you're going to reach out and message those swing voters.

ROBERTS: Right.

MADDEN: The candidate who does the best job of instilling confidence in those swing voters on the economy is the one that's going to win.

ROBERTS: Gentlemen...

SIMMONS: John, one more point before we go.

I just want to make sure, if John McCain thinks that whatever is going on with Barack Obama is such a big deal, that he's such a risky strategy for the United States, he should say it to Barack Obama's face at the debate next week.

ROBERTS: All right.

Jamal Simmons, Kevin Madden, it's good to see you. Thanks for coming in today. Appreciate it.

Well, making up is not so hard to do during a campaign year. John McCain gets a major endorsement. But it comes from a group that has previously been at odds with some of his positions.

And you know that executives from insurance giant AIG spent lavishly at an exclusive resort right after the government stepped in to bail out the company. Did you know that they planned another one?

And you may remember that national debt clock ticking up and up and up. Well, it's maxed out. What to do about it?

(COMMERCIAL BREAK)

ROBERTS: On our "Political Ticker" today: The National Rifle Association is officially endorsing Republican presidential candidate John McCain.

NRA leaders planned stops today in Pennsylvania, Missouri, Colorado, and Nevada to make the announcement. The endorsement comes despite some friction between gun-rights lobby and McCain over campaign finance restrictions and gun show rules. The NRA says, despite those differences, the two agree on many issues that are important to the group. You're in THE SITUATION ROOM.

And happening now, breaking news: Stocks plunge for a seventh consecutive session, huge losses across the board, with no end in sight -- everyone now wondering, when will the markets hit bottom?

Also, allegations of fraud on a massive scale, thousands of voter registration forms now in doubt, one grassroots group facing some very serious questions.

And Sarah Palin's husband breaks his silence on the scandal dogging her campaign -- details of what's in Todd Palin's affidavit on alleged efforts to fire an Alaska State Trooper.

Wolf Blitzer is off today. I'm John Roberts.