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Bailout For AIG Sends U.S. Markets On Another Free Fall Sell Off

Aired September 17, 2008 - 17:00   ET

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


WOLF BLITZER, CNN ANCHOR: Investors react today with horror. For the second time this week, there was a massive selloff on Wall Street. The Dow Jones industrials freefalling, some 450 points on news of a taxpayer-funded bailout of AIG insurance company. That could reach, that bailout, some $85 billion. CNN's Mary Snow and Christine Romans are both working the story.
Let's go to Christine first, because Christine, there's political fallout involving the race for the White House.

ROMANS: That's absolutely right, Wolf. The politics of regulation can be messy and bailouts are very unpopular until doing nothing would be worse.

(BEGIN VIDEOTAPE)

ROMANS (voice over): On Tuesday, John McCain flatly opposed a taxpayer bailout of AIG.

SEN. JOHN MCCAIN (R-AZ), PRESIDENTIAL CANDIDATE: We cannot have the taxpayers bail out AIG or anybody else.

ROMANS: But we heard a different line just a day later. McCain said he didn't want to do it, but.

MCCAIN: There were literally millions of people whose retirement, whose investments, whose insurance were at risk here and they were going to have their lives destroyed because of the greed and access and corruption.

ROMANS: For years, John McCain has worked to limit regulation. Now Wall Street crisis has him casting himself as a champion of smart new oversight of Wall Street. On the trail this week, this from a senator who has long said government should stay out of business.

MCCAIN: They dreamed up schemes that they themselves don't even understand, with their derivatives, credit default swaps, and mortgage-backed securities, they tried to make their own rules.

ROMANS: But McCain voted to loosen rules for financial companies. He voted for the broad deregulation in 1999 that many say planned the seeds of crisis at AIG and Lehman Brothers, the Financial Services Modernization Act, that broke down Depression era barriers between banks, insurance companies and investments.

On stump, his opponents pounced. SEN. JOE BIDEN (D-DE), VICE PRESIDENTIAL CANDIDATE: All of a sudden, it's my goodness, there's greed on Wall Street. My goodness! We need common sense regulation.

ROMANS: Senator Biden knows well the criticism that comes from voting closely with big business. He voted with his home state credit card industry three years ago to make it harder for people to file for personal bankruptcy. But Biden, too, flatly rejected a bailout of AIG just a day before the government stepped in and took over the company.

UNIDENTIFIED FEMALE: Now, Senator, do you think that AIG should be bailed out by the federal government?

BIDEN: No, I don't think they should be bailed out by the federal government. I'll tell you what we should do, we should try to correct the problems that caused this.

(END VIDEOTAPE)

ROMANS: Today, the Obama campaign released a statement on the AIG bailout essentially acknowledging that the move was done to protect the rest of the economy but said we must not bail out the shareholders or management of AIG - Wolf.

BLITZER: All right, Christine, stand by. Want to move on to Mary Snow.

Failing banks and corporate giants, a Wall Street freefall. Experts are wondering what's next? Mary, what is next? You're working on this part of the story. What do we know?

MARY SNOW, CNN CORRESPONDENT: Well, Wolf, we do know there's anxiety among investors that perhaps some commercial banks may be next in line to perhaps fail. But the big question, also, is what will government do if more companies fail?

(BEGIN VIDEOTAPE)

SNOW (voice over): (AUDIO GAP) American International Group but it did little to soothe market anxiety.

ART HOGAN, CHIEF MARKET ANALYST, JEFFRIES & CO: For several reasons, not the least of which is we seem to be bouncing from disaster to disaster.

SNOW: To avert three disasters, the government bailed out Bear Stearns, Fannie Mae and Freddie Mac and now AIG with a $85 billion loan, giving the government a stake in the company.

JEFFREY SACHS, ECONOMIST, COLUMBIA UNIV.: The government is now the main shareholder. This is a nationalization. It's extraordinary that this happens from one day to the next.

SNOW: Many are asking the question, what is the next shoe to drop.

SEN. HARRY REID, (D-NV) MAJORITY LEADER: We are in new territory here. This is a different game.

REP. JEB HENSARLING, (R) TEXAS: I'm somewhat loath to let the federal government run our financial system, our auto makers, and who knows what's next perhaps, our airlines.

SNOW: Congress has already promised a loan program for auto makers of at least $25 billion. The question is, where is the line drawn? One law professor who has been following bailout issues says there are no clear rules.

CHERYL BLOCK, WASHINGTON UNIVERSITY LAW SCHOOL: All these things, it seems to me, we need to have some guidelines ahead of time so we're not just doing this on an ad hoc basis.

SNOW: The government, so far, has come to the aid of companies it said were too big to fail. It did not rescue Lehman Brothers but felt it had to help AIG, because of its vast reach. Some on Wall Street are skeptical the government would have to bail out an auto maker.

HOGAN: Just because General Motors has difficulty competing with Toyota doesn't mean they're too important to the U.S. economy to continue to exist.

(END VIDEOTAPE)

SNOW: And now, Wolf, some think the government won't have to bail out carmakers, back in 1979, the government did have to provide a $1.5 billion loan guarantee to Chrysler. In that case though, Wolf, the government did not lose money on that since Chrysler was able to pay back its debt.

BLITZER: Mary Snow, working the story for us. Thank you, Mary.

Let's check in with Jack, once again. He's got "The Cafferty File" - Jack.

JACK CAFFERTY, CNN ANCHOR: Politics is a popularity contest and if you're keeping count on the blogs, vice presidential candidate Governor Sarah Palin is the belle of the ball. On a single page of an ABC News blog, Palin's name appears 24 times. McCain's twice. Biden's once, Barack Obama's not at all.

It's not scientific, but it is indicative of something bizarre. And she's a big hit offline, too

When Sarah Palin and her running mate John McCain - he's the one running for president, remember - when they appear together, people cram the auditoriums and cheer wildly for her. Then when he speaks, they get quiet and some of them start to file out. Ouch! When they campaign separately, her crowds dwarf his. What's wrong with this picture?

He has all the experience. She has very little. In today's "New York Times," Maureen Dowd, the Pulitzer prize-winning columnist, suggests the Sarah Palin phenomenon is like a trip back to junior high school, where the popular girl is getting all the attention.

The question is this: What does it say about us? All of us that Sarah Palin's attracting more attention than the two men who would be president? Go to cnn.com/caffertyfile and post a comment on my blog.

Remember way back a long time ago when John McCain said that Barack Obama was a celebrity and compared him to Paris Hilton and what is it, Lindsay Lohan and those people?

BLITZER: I do remember that. They did a commercial on that. But she's the freshest candidate out there. We know a lot about the other three men. We don't really know a whole lot about her. So, there's intrigue and there's interest.

CAFFERTY: Yes, apparently.

BLITZER: OK, Jack, stand by. We'll get back to you with the e- mail shortly.

A top Democrat defects.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: I was going to make my decision about who I wanted to be president based on my love of my country more than my party.

(END VIDEO CLIP)

BLITZER: A Democratic National Committee member Lynn Forester de Rothschild was a Clinton supporter and raised lots of money for her. She's here to explain why she's now endorsing John McCain.

Also, life in the hurricane zone. People still struggling to meet their basic needs four days after Ike.

And John McCain getting an edge, but facing a challenge in the tossup state of Michigan. We're there like talking with voters.

Alex Castellanos and Joe Trippi, they are standing by to assess what's going on. Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: CNN's latest polling shows that more than eight out of 10 Democrats who supported Hillary Clinton now back Barack Obama. And Obama has actually increased his support among these voters since late August , when Sarah Palin was added to the Republican ticket. But today the McCain campaign is touting one high profile cross over.

Let's go back to Carol Costello. She's working this story for us. Carol, we're not talking about a typical Hillary Clinton supporter, but a major fundraiser, someone rather prominent in the DNC.

CAROL COSTELLO, CNN CORRESPONDENT: Oh, you've got that right, Wolf. This is a hardcore Hillary supporter with a gazillion dollars, lots of fundraising ability. But some Democrats wonder if her big switch is personal.

(BEGIN VIDEOTAPE)

LYNN FORESTER DE ROTHSCHILD, DNCC PLATFORM CMTE.: John McCain and Sarah (AUDIO GAP)

COSTELLO (voice-over): Meet Lady Lynn Forester de Rothschild, of those Rothschilds. She's no ordinary McCain supporter. She's a member of the Democratic Platform Committee. The body that sets the agenda for the Democratic Party.

DE ROTHSCHILD: I was going to make my decision about who I wanted to be president based on my love of my country more than my party.

COSTELLO: De Rothschild is a long-time friend of Hillary Clinton, according to "The Washington Post", she and her husband, Lord Rothschild honeymooned in the Clinton White House. She threw a book party for Hillary Clinton in 2003, and became a "Hillraiser", a supporter committed to raising oodles of cash to put Clinton in the White House as president or as vice president. That's why is some Democrats say her dislike of Barack Obama is personal.

DE ROTHSCHILD: I feel like he is an elitist. I feel like he has not given me reason to trust him.

COSTELLO: De Rothschild did not use that word elitist at her news conference on Wednesday but Obama supporters have already taken note.

REP. DEBBIE WASSERMAN SCHULTZ (D), FLORIDA: It's a little strange coming from someone who is a titled individual like Lady de Rothschild is, to call Barack Obama elitist. There's some irony there.

COSTELLO: De Rothschild was a self-made wealthy businessman before she married Lord De Rothschild, before lived part-time at the Waddesdon Manor in Britain. But as she wrote in "The Wall Street Journal," "Elitism is a state of mind that cannot be measured simply by one's net worth ..." She wrote Obama's campaign is all about him, Obama supporters say she is way off base.

SCHULTZ: Lady De Rothschild's endorsement, I mean, that's very nice, but what matters is that working families, working women support Barack Obama.

COSTELLO: Obama supporters point to an endorsement from Lilly Ledbetter from Jacksonville. A woman whose failed Supreme Court fight has come to symbolized women still do not enjoy equal pay for equal work.

(END VIDEOTAPE)

COSTELLO: The McCain camp wasted no time, though, this morning they issued a news release touting de Rothschild's defection - Wolf. BLITZER: Carol, thanks very much. And Lynn Forester de Rothschild is here with us in THE SITUATION ROOM.

And we're going to get your reaction. This was a surprise because you've been a Democrat for a long time. You love Hillary Clinton. And she says don't vote for McCain and Palin. Why did you decide to cross over?

DE ROTHSCHILD: Let me just go back to your piece, if I may, for a minute.

BLITZER: You may.

DE ROTHSCHILD: It is true, I am married to a wonderful, wonderful man whose name is de Rothschild.

BLITZER: And he's a baron.

DE ROTHSCHILD: He's a knight.

BLITZER: He's a knight, OK.

DE ROTHSCHILD: But not to quibble.

But I grew up in a middle-class family in New Jersey. My parents worked two jobs to put four children through college, law school, and medical school. And we were told the American dream could be ours, because we live in a great country. And have I lived the dream.

BLITZER: Because what they're saying, the Obama people, you just heard that congresswoman suggest that Lady Baroness de Rothschild, who is that to be talking about elitism when you are, obviously, among the elite right now.

DE ROTHSCHILD: See, this is so sad when the Democratic Party plays the class card and they try to divide America. And they try to say that somehow, my opinion is less worthy than another person's, because I have this wonderful life. I have a wonderful life. I want John McCain and Sarah Palin in the White House so other people can have that wonderful life.

BLITZER: Because a lot of Clinton supporters, know -

(CROSS TALK)

Can I call you Lynn?

DE ROTHSCHILD: Yes, of course

BLITZER: OK. A lot of Clinton supporters say, you know, on so many of the issues, that you supported, worked really hard for Hillary Clinton and the Democrat, the McCain/Palin ticket is opposite of what you believe in, on some of the social issues. For example, I assume on gay rights or abortion rights, or sex education in schools, some of these issues you feel comfortable with McCain and Palin? DE ROTHSCHILD: See, the Democratic Party tries to take those issues as wedge issues. There is no had question that John McCain and Sarah Palin are going to take away the right to choose, or they're going to take away gay rights. That's not what they're there for. They're there for ordinary Americans. The people who they are, and the people who they fought for. That's why I support them.

BLITZER: But you supported abortion rights for example?

DE ROTHSCHILD: I support abortion rights.

BLITZER: Are you concerned that the Supreme Court justices that he would nominate could remove Roe versus Wade?

DE ROTHSCHILD: No, I am a graduate of Columbia Law School. A woman's right to choose is in the Constitution. The Democratic Party puts the choice issue around women's neck like a noose. We are the only ones who can protect you. It is protected. We've had eight years of George Bush and choice has gotten nowhere.

Stop using that issue to scare people into voting for the Democratic Party. It's not necessary. We need the best people who have the most integrity, the most care for basic American values.

BLITZER: And so is your vote, a vote for McCain and Palin, or simply a vote against Obama, who you obviously don't like?

DE ROTHSCHILD: No, that is -- first of all, I don't not like Obama.

BLITZER: But you said critical things about him.

DE ROTHSCHILD: I said critical things about him because I don't think he should be president in this election. I enthusiastically admire and actually revere lives that John McCain and Sarah Palin have lived.

BLITZER: So you're definitely, like Joe Lieberman, in that McCain camp.

DE ROTHSCHILD: I am.

BLITZER: No regrets. What kind of reaction are you getting from your friends in the DNC, and from Hillary Clinton and her supporters? Have you spoken to Hillary Clinton about this.

DE ROTHSCHILD: No, of course, I haven't. I haven't spoken to Hillary Clinton and I'm sure a lot of people are mad at me. But do I care more about my country than my party and I certainly don't care about my status.

BLITZER: So, does this mean you have to resign from the DNC?

DE ROTHSCHILD: I'm resigning from the platform committee, today.

BLITZER: But you're still a registered Democrat? DE ROTHSCHILD: I'm going to stay a Democratic. You know, Ronald Reagan might have said right. The Democratic Party left me, I didn't leave the Democratic Party.

BLITZER: Lynn Forester de Rothschild, thanks for coming in.

DE ROTHSCHILD: Nice to see you.

BLITZER: You're going to get a little grief. You know that?

DE ROTHSCHILD: I know.

BLITZER: All right.

DE ROTHSCHILD: I'm getting it all the time, particularly from the likes of you, the liberal elite.

BLITZER: Stand by.

DE ROTHSCHILD: You're the elite, not me.

BLITZER: All right.

(LAUGHTER)

BLITZER: The race for '08. It will come down to a few battleground states and both campaigns are fighting tooth and nail out there. We'll talk to voters in one key state as well as political gurus, Alex Castellanos and Joe Trippi, they are standing by.

Plus the latest details on the terrorist attack on the U.S. embassy in Yemen; a brazen assault with a very deadly ending. Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Carol Costello is monitoring some other important stories incoming to THE SITUATION ROOM, right now.

Carol, what's going on? >

COSTELLO: Wolf, a federal grand jury in Miami has indicted 16 foreign nationals and corporations on charges of illegally exporting potential explosive components to Iran. The indictment alleges the materials were eventually used to make IEDs that were found in Afghanistan and in Iraq. Most of the suspects are Iranian nationals. >

The U.S. says a deadly attack on the American embassy in Yemen has all the hallmarks of an Al Qaeda operation. According to U.S. officials, Islamic militants, disguised as Yemeni forces, opened fire outside of embassy gates today. There were also several explosions, at least one of them from a car bomb. And embassy spokesman says one suspect was wearing a suicide vest. Ten police and civilians and six attackers were killed.

A presidential pat on the back for the former top U.S. commander in Iraq. Today at the White House President Bush thanked General David Petraeus for serving in Iraq with quote, "distinction and honor."

Yesterday, in Baghdad, the general handed over his command to General Ray Odierno. Petraeus' next assignment, head of central command overseeing U.S. military operations across the Middle East.

The U.S. Navy has intercepted a submarine-like boat near the coast of Costa Rica. You won't believe what was inside: 6.5 tons of cocaine. The 70-foot vessel was found yesterday in international waters and towed away by U.S. frigate. Officials say the self- propelled, semi submersible vessel is capable of traveling thousands of miles -- back to you, Wolf.

BLITZER: Carol, stand by. We'll get back to you shortly. >

The storm is gone, but the chaos goes on in Texas. Long lines for basic necessities, thousands turned away from their homes and now a growing public health threat. >

And we're also on the ground in a critical tossup state, Michigan. We're talking with voters there finding a new edge for John McCain. But a new challenge, as well

Plus, those glasses are now the hottest thing in eyewear. We'll meet the man behind Sarah Palin's signature specs. Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Joe Trippi and Alex Castellanos, they are here. We're going to talk politics. What's going on? There's drama out there today. Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: To our viewers, you're in THE SITUATION ROOM.

Happening now: Battleground Michigan, Republicans are enjoying fresh enthusiasm in the traditionally blue state. What's behind the surge and can they steal it from the Democrats?

Also, devastation and growing desperation right now in Texas. Four days after Hurricane Ike, many evacuees are simply being told they could not go home. And many more are being forced to rely on the government for basic necessities. We'll have a live update. We'll go there.>

And celebrity fundraiser Barbra Streisand on stage with Barack Obama. No cameras were allowed at the event, but we have a video that leaked and we'll show you what happened. We'll also tell you about the big money haul, as well

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

The Republican presidential ticket is enjoying a fresh rush of enthusiasm in a critical tossup state, Michigan. The question is this -- can that enthusiasm counter the state's grim economic realities? Let's go back to Dana Bash, who is in Grand Rapids right now, watching the story.

You've been talking to voters. You're getting ready to hear another rally over there. What are you discovering, Dana?

DANA BASH, CNN CORRESPONDENT: Well, actually, this is going to be, Wolf, a town hall meeting in a hour and a half. And it's going to be the first time Sarah Palin takes questions from voters. Republicans say that about 4,000 tickets were put up online, they were snatched up immediately. They are thrilled about the fact that they do say that Sarah Palin at least brings some undecided voters in the door, but what they say, they really admit that what John McCain and Sarah Palin say about the economy will determine whether they stay.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: Hello. My name is Jason.

UNIDENTIFIED MALE: Hi, I'm calling on behalf of the Michigan Republican Party.

UNIDENTIFIED MALE: John McCain for president.

BASH (voice over): They're suddenly burning up the phone lines at Republican headquarters in Grand Rapids.

UNIDENTIFIED FEMALE: I'm calling tonight to ask you a couple of quick questions.

BASH: New energy thanks to new volunteers like Katrina Nava, here because of Sarah Palin.

KATRINA NAVA, MCCAIN CAMPAIGN VOLUNTEER: Once I found out Sarah was going to be on the ballot, with McCain, I wanted to be out there and I wanted to help.

BASH: Southwest Michigan is Republican territory. Any McCain victory depends on big GOP turnout here.

GREG MCNEILLY, MICHIGAN GOP STRATEGIST: It has to equal or exceed all the historic Republican levels that have been accomplished here before. Sarah Palin helps him do that.

BASH: Michigan Republicans like Greg McNeilly think they have a shot at winning for the first time in two decades

MCNEILLY: Governor Palin sends a signal that the McCain ticket is a little bit more like us. She's got that great Midwestern accent, sounds like she's from Upper Michigan.

But like no other state, the sagging economy trumps all. Michigan has the country's highest unemployment rate. 8.5 percent. At Scott's Barber & Beauty Shop, Palin's persona doesn't matter to undecided voters like Deb Bryce.

DEB BRYCE, UNDECIDED MICHIGAN VOTER: I like Palin, but -- you know -- liking her and what is she going to do for us is two totally different things.

BASH: Bryce, works three jobs to scrape by. She voted for George Bush twice.

BRYCE: I'm really thinking I'm going Democrat this time. I have no money in my back pocket, nobody has jobs. I have all my kids living at home, so they have place to live.

BASH: Kurt Reiner is undecided too and has a nagging question about McCain.

KURT REINER, UNDECIDED MICHIGAN VOTER: Whether or not he really understands what people are going through now.

BASH (on camera): What makes you say that?

REINER: Just, you know, it just makes me wonder. I have my doubts.

BASH (voice over): He's willing to listen but wants specific solutions.

(END VIDEOTAPE)

BASH: And what that undecided voter, and what many others, told us is that they are hearing too many broad strokes, too much rhetoric, and not enough specifics on how these candidates are going to fix the economy. And they said that, Wolf, about both John McCain and Barack Obama -- Wolf?

BLITZER: Michigan is truly a critical state for these candidates. Thanks, Dana. We'll be standing by to hear what the candidates actually say behind you.

Let's discuss what's going on in the battle for Michigan and elsewhere. Joining us, Republican consultant Alex Castellanos and Democratic strategist and CBS political contributor Joe Trippi. Joe Trippi to the left of your screen. Alex is to the right of the screen, just to make that clear.

How worried are you, Joe, that Michigan, given Sarah Palin's factor, could actually go Republican this time?

JOE TRIPPI, CBS NEWS POLITICAL ANALYST: Well, she's definitely added some excitement to the McCain team, but the problem still you is, in fact, the last three days with more economic woes and people having more economic fears than they've had before, it's a tough road to who for John McCain in Michigan. It's going to be tight but right now I still give the advantage to Obama.

BLITZER: Because workers are really suffering, Alex, in Michigan as you know. There's unemployment. There's really almost a state of depression in parts of that state. And when you ask that Ronald Reagan question, are you better off now than you were four or eight years ago, a lot of people in Michigan are going to say they're not better off. ALEX CASTELLANOS, REPUBLICAN CONSULTANT: And that's a pretty powerful question, Wolf. It really is. I think the week ahead is actually, Joe's right, it's going to be a tough week for Republicans and I think for this reason for the McCain ticket because George Bush was receding from this election. This election, the Republicans were being defined more by John McCain and where he was leading than George Bush and what he was.

Now with this economic meltdown this crisis, George Bush is back center stage. Questions are being asked, did the administration do what it should have, and the more George Bush is part of this election, as much respect as I have for the president, frank lit less it benefits the Republican ticket. McCain has got fortunately for McCain, you know, he's the fact of change as opposed to the theory of change.

When you ask voters who's a doer and a talker, McCain is seen as a man of action and results. So that's where McCain's got to drive that message.

BLITZER: Do you agree with that assessment, Joe?

TRIPPI: I think it gets down to again more of the same versus change. It's easier for Obama to make the more of the same argument when you have this kind of fear out there and angst on the economy that's just been added on the last three days. Again, it's bringing George Bush to the floor again and it's about the failed economic policies, easier to make that case for Obama.

BLITZER: Do they have, the Obama campaign, I want both of you to weigh in on this the ground game, if you will, the organizers, the ability to register new voters, younger voters, African-Americans, elsewhere to really make a difference? Joe, first to you.

TRIPPI: Well, that's what I think is the big advantage for Obama. All these marginal states, swing states are very tight that, organizational advantage he has can make up one, two, even three points in a state like Michigan or Ohio. So I think again, the excitement that Obama has, the organization he has on the ground could be the advantage that makes up the difference in places like Michigan.

BLITZER: Because the Republicans always had an excellent ground game as we say in 2000, 2004 in bringing out that base. Alex, what Sarah Palin has done, what McCain himself couldn't do is unify the party and get some real spark, some enthusiasm out there among that conservative base.

CASTELLANOS: It's fair to say, Wolf, if the Republicans haven't had that kind of ground game frankly because there wasn't that much excitement out there. Palin has changed that. She is a symbol of the change that John McCain can bring to Washington. Again, McCain had a big choice. Washington establishment vice presidential pick or someone from the outside to change a broken system of government. And people I think saw that McCain was willing to take a big risk to change Washington. She's not just a vice presidential candidate. She is his message that has energized Republicans in Michigan. Macomb County, working class blue collar Reagan Democrats, the rule is as Macomb goes so goes the nation.

BLITZER: Joe ,you're one of the best strategists out there. What advice would you give the Obama campaign? How do you deal with Sarah Palin?

TRIPPI: I think they begin to take the fight to McCain. This isn't a fight between Barack Obama and Palin. It's between Barack Obama and McCain. And it's to challenge McCain's assertion he's the reformer here. You cannot give that reform change argument to McCain. That happened coming out of the GOP convention. Obama started to do that with these ads now talking about the lobbyists around McCain, taking it to McCain on reform and pushing back on him that will leaving Palin out of it. That's what he's got to do.

BLITZER: You saw our new CNN "Time" magazine Opinion Research Corporation poll numbers, Alex, and it shows it's about as tight as it could be in Florida right now. It's even tight in North Carolina. Right now, Obama slightly ahead in Ohio. You know, and correct me if I'm wrong, no Republican has been elected to the White House in a long time if that Republican doesn't carry Ohio. Has there been, because of the bad economic news in recent days, a boost for Obama?

CASTELLANOS: You know, I think Republicans had the momentum coming out of their convention, the Palin pick, they had momentum going. I think now the ball, frankly, is back in the Democratic court. And I think Obama has an advantage now. The smartest thing for Obama to do, I wouldn't even mention John McCain. I'd be talking about George Bush and do we want more of that for four years. Leave McCain alone and just run against -- because Bush is now back center stage in this election.

BLITZER: What do you think, Joe?

TRIPPI: I think that's good advice, too. I think it's tying McCain to Bush although I think there's a problem for Obama. He's trying to be a post partisan candidate by taking it to Bush. He risks seeming partisan. And so these swing voters, that's not the place to go. Go for the high ground. Go for change. And I would take it a little bit more to McCain.

BLITZER: If you get hit, you got to hit back.

TRIPPI: Definitely.

BLITZER: You can't always take the high road.

TRIPPI: Definitely, but don't get pulled in to a partisan debate. That hurts Obama more than McCain.

BLITZER: All right. Joe, Alex -- Guys, thanks for coming in.

Four days after Hurricane Ike and the dire situation for many evacuees isn't getting any better at all. We'll go there live for a report on the simmering frustrations.

Also, Barack Obama raising big money in Hollywood. No cameras were allowed inside but we have a leaked tape that's come out. The candidate and some of his celebrity supporters. We'll show what you we know right here in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Let's go to eastern Texas right now where the death toll from Hurricane Ike is now at least 16. Authorities are warning of a growing public health risk on Galveston Island where the storm first made landfall. Residents who evacuated the island are being barred from returning to check in on their homes and other properties and even to survey the damage. Authorities say they're prepared to impose martial law to force those still on the island to leave.

Meanwhile in, nearby Houston and other hard hit areas, tens of thousands of people, tens of thousands of people are lining up for food, water, and other supplies. And businesses are desperately trying to recover.

Let's go to Susan Roesgen. She's on the scene for us.

Susan, what's the biggest concern we're facing right now where are you?

SUSAN ROESGEN, CNN CORRESPONDENT: Wolf, I think it's the recovery of the businesses. I'm here at the Kemah Boardwalk Amusement Park. This is about 45 miles drive time from Houston. It's right on the coastline and it's a 3 million tourists a year kind of business. This amusement park is an incredible economic engine for the entire Texas coastline.

Look what Hurricane Ike did. It brought a 17-foot wall of water and for instance, Pharaoh's Fury here lost its head. It's behind the police tape now before it gets swept away. Just about every single ride at this amusement park, all eight restaurants, the inn, the shops here, everything was damaged. And again, this brings in three million tourists a year, 363 days a year. So this is one of many businesses that have to recover.

And as you mentioned, many residents in the Houston area have to recover, too. They're still facing those long lines for gasoline, for food, for water, for ice. They're lining up for help. And once again, the federal agency in charge of supplying a lot of those things, FEMA, is taking a lot of heat. Homeland security director Michael Chertoff was here in Houston today and said he is not going to let any FEMA employee get lazy.

(BEGIN VIDEO CLIP)

MICHAEL CHERTOFF, HOMELAND SECURITY SECRETARY: Those whose butts need to be kicked will feel it in their butts but I'm not going to get into a public discussion. I think everybody here is working hard. Occasionally, you do run into someone who stands on ceremony for some reason or you know, just somehow doesn't get focused in part. What I want to do is if there is a hitch or glitch or we need to achieve some clarity in terms of exactly what the process and the allocation and responsibilities is, that's what I'm here to do, just as the county judge and mayor do that in their own jurisdiction. Everybody's working hard. I have no criticism of anybody's intent. We want to make sure we streamline the system as much as possible.

(END VIDEO CLIP)

ROESGEN: And while businesses try to recover on their own as they are here at the Kemah Boardwalk Amusement Park where they're going on their own now trying to get the rides up again so they can get tourists back here, get some money flowing again.

Michael Chertoff said today he believes that most FEMA employees in this area are very aware of their reputation after Hurricane Katrina. They're try hard to do an exemplary job and they feel the criticism most of all and believes they're going to do a better job even though they are getting some criticism. People think things aren't going fast enough -- Wolf?

BLITZER: Susan, thanks very much. Our heart goes out to all those folks especially on the coast of Texas.

Ike's impact is also being felt by drivers around the country. Gas prices are edging higher and higher for the eighth straight day. The average price for a gallon of regular unleaded now stands at slightly more than $3.85 a gallon. Disruptions to refineries from the hurricane are being blamed for much of the rise. Gas prices are still below their July highs but they're nearly 40 percent higher than a year ago. The recent surge has come as oil prices have actually been slumping but oil shot up $6 a barrel today after hitting a seven-month low yesterday. We'll watch this part of the story for you as well.

The McCain campaign is strictly limiting her statements to the news media but that's not stopping vice presidential nominee Sarah Palin from making a strong fashion statement. We'll explain.

And a top John McCain aide says the four nominees on the two main presidential tickets are not qualified to run a Fortune 500 company. The comment as you know tracked a lot of attention but how controversial is it really?

Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: There are new developments in the controversy hanging over John McCain's running mate. It involves the probe into whether or not governor Palin abused her power as the governor at one point during her time in office. CNN's Jessica Yellin is in Anchorage and has the latest. Jessica?

JESSICA YELLIN, CNN CORRESPONDENT: Wolf, the state attorney general has sent a letter to legislators involved in the inquiry saying the governor will not participate nor will her staff and all those people who are subpoenaed by the inquiry plan not to participate. Now, the letter says that the governor does not think the inquiry is valid but it also says that these staffers are loyal employees and the inquiry places them in the difficult position of choosing to support either the governor's decision to take this to a different group, a personnel board she appoints, or to follow what the state legislators want to do, and the letter says that this puts these employees in an untenable position of making them decide where their loyalties lie. That's a quote. It does not, however, Wolf, challenge the legality of the inquiry overall.

Now in addition to this, a group of five state lawmakers has filed a lawsuit challenging this inquiry all together saying that they believe this has been prejudged. That it is not impartial. They even used the word McCarthyite. Note that this is one group of Republican lawmakers against other Republican lawmakers in the state because it's a bipartisan inquiry. And in addition, Wolf, a group of private citizens has filed suit saying that they don't want taxpayer money spent on this inquiry.

Now just a reminder, this inquiry was voted for unanimously by a bipartisan group the governor originally agreed to participate. But that was before she was placed on the ticket with John McCain. Her campaign staff here in Anchorage says she has absolutely nothing to hide, just doesn't want this to go before that particular inquiry board -- Wolf?

BLITZER: Jessica Yellin has been reporting from Alaska for us over the past several days. Thanks, Jessica, very much.

On a much lighter note right now, they're the hottest thing in glasses. That would be thanks to the woman who made them famous, the governor, Sarah Palin. CNN's Kyung Lah introduces us to the man who designed them.

(BEGIN VIDEOTAPE)

GOV. SARAH PALIN (R-AK) VICE PRESIDENTIAL CANDIDATE: Hillary left 18 million cracks in the highest, hardest glass ceiling in America.

KYUNG LAH, CNN CORRESPONDENT: That's not the glass that's grabbing headlines in the fashion world. It's the glasses governor Sarah Palin wears. There's a run on the rimless pair so a part of her image.

PALIN: There you go.

LAH: They're a must have for any Palin parody, this one from Saturday Night Live. The new fashion craze, the stylish hit means a two-month wait if you live in the U.S. and overdrive for the Japanese company that makes them trying to keep up with worldwide demand.

We can't keep up says Sotaro Masugana, the company who sells them. They have sold more in two weeks than in the entire year. Even the Japanese are getting in on the craze.

I saw Palin's glasses and came to buy them says Hideo Haruyama. And on first try, he was sold. He will have to get in line, because everything is back ordered. This is the man behind the design, Kazuo Kawasaki, a Ph.D. in medical science and he designs robots and artificial hearts and his own titanium wheelchair and glasses blending medicine with a flare for fashion.

Other political heavyweights have worn Kawasaki's designs before. Colin Powell actually wore this rimless design, but it is the Sarah Palin glasses and the mad rush to have a pair all your own that has caused a frenzy, and he says he didn't expect it. I am so surprised he says, but her wearing them is good for business. But he is hoping that the spectacles are limited to a fashion spectacles.

I hope that Americans voters will be smart and pay attention to tissues and not vote on image or any glasses and maybe the fashion appeal of a pair of glasses is something that voters can agree on.

Kyung Lah, CNN, Tokyo.

(END VIDEOTAPE)

BLITZER: Let's check in with Jack. I don't know if you've noticed, a lot of women are starting to wear glasses all of the sudden, Jack. Have you noticed?

CAFFERTY: I have nothing to say. Nothing.

The question this hour is what does it say about us, us, that Sarah Palin's attracting more attention than the two men who would be president, and I offer the preceding two minutes of the program as testimony to the kind of thing I am talking about.

Mark writes: "Governor Palin is a real feminist phenomenon. She has broken into the old boy's club and done it by doing the job instead of just talking about it. But she didn't try to imitate a man while doing so. This flies in the face of many American feminists and they hate it. Despite her flaws, she is genuine and decent and not pretentious. The coffee houses intelligentsia hate that. It's these very same attributes that draws her to middle America."

John in Florida writes: "By us, I hope you mean the news media. I doubt anyone else is interested in Palin. You guys are causing all of the problems in her regard." We cause all the problems with everybody.

Paul writes: "It says we're shallow and stupid and an infantile bunch of American idol watchers who ought to be taking a little more seriously the responsibility of choosing the leader of the free world."

Rob in Indiana: "Very easy, Jack. People realize a vote for a 72-year-old candidate with a history of health problems is very possibly a vote for the vice president, and that happens to be her. Oh, and it does not hurt that he has the personality of a thumb tack."

John in Levittown, New York, "I think her 80 percent popularity with Alaskans has something to do with it. She is likable and the first thing she did was clean up her own party. Someone must be truly special to have such backing. I defer to ordinary Alaskans. They know her much better than anyone." Bill writes, "Alaska Barbie's popularity? It says that we'd rather talk about Brittany, the economy, two wars and a failed president and the bleak future. Is that a bad thing? I don't think. Her popularity is sort of like watching to watch E.M.T.s at the scene of a bad car accident."

And Frank writes, "Since she has been on the ticket, I haven't heard McCain remind everybody that he was a P.O.W. Now that is change I can live with."

If you didn't see your email here, you can go to my blog at CNN.com/CaffertyFile and look for yours there among hundreds of others.

Are there a lot of people who want to buy glasses like yours, Wolf?

BLITZER: Well, I haven't heard about it, but we will check on that, Jack. I want you to hear this next story that's just coming in. Standby for a second.

Let's go right to Carol Costello. We are getting a story that I take it is causing a lot of buzz and fierce reaction and very angry reaction from the McCain camp. What do we know here?

COSTELLO: Absolutely. Sarah Palin's e-mail account was hacked into, some of the personal e-mails are appearing on a website. The McCain camp has now confirmed that it is indeed true and an investigation is under way. I will read you a quote from this is from Rick Davis who is McCain's campaign manager. He says, "This is a shocking invasion of the governor's privacy and a violation of the law. The matter has been turned over to the appropriate authorities and we hope that anyone in possession of the e-mails will destroy them. We have no further comment."

Abbi Tatton has been looking into this all day, Wolf. She's going to have much more information in the next hour, but as I understand it, the secret service is spearheading the investigation and usually the FBI, but since Sarah Palin is on the Republican ticket, the secret service is leading the charge.

BLITZER: All right. We will stay on top of this story for the viewers. Thank you, Carol, very much.

Also staying on top of the troubled economy and it is stealing the spotlight out there on the campaign trail. What is the fallout for the candidates from this financial mess? Also, Barack Obama, Barbara Streisand and a major fund-raising event.

Stay with us. You are in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Barack Obama supporters shelled out thousands of dollars to at the end a Hollywood fund-raiser last night featuring Barbara Streisand. Our internet reporter Abbi Tatton actually has video of the event. If it was closed, how did we get it, Abbi? What's going on?

ABBI TATTON, CNN INTERNET REPORTER: Wolf, it's on YouTube of course. Closed to TV cameras, there was some media there, but back to back Hollywood fundraisers last night. Some of the tickets went for $28,000. At one of the events, the headliner as you said Barbara Streisand.

UNIDENTIFIED FEMALE: The next president of the United States, Barack Obama.

TATTON: This video was captured by Louis Taton who was attending the event posted on YouTube showing Barack Obama hugging Streisand and cheers from the crowd. Yesterday, John McCain mocked Barack Obama for heading to the fund-raiser with what he called his celebrity friends, but on the video, you can see that Barack Obama on stage was careful to strike a serious tone saying that the hurricane, the economy and the financial crisis meant that he was in no mood for a celebration, and still the fund-raiser had a desired effect with $11 million as a whole last night for the Obama campaign and the biggest one-night total they have had.

BLITZER: All right, Abbi. Thanks very so much.

I want to check in with Lou. He's got a show coming up in an hour. So, Lou, is it a good or bad idea for taxpayer money to be used to bail out AIG?

LOU DOBBS, CNN ANCHOR: Well, it is a terrible point in fact. I have been trying to assess this over the course of the past twelve hours or so. We have got to draw a line here and it was apparent at least 24 hours ago that Henry Paulson, the secretary of the treasury, had drawn such a line. We have reached a point now where this government, this so-called bunch of free marketeers in the Bush administration, they are nationalizing American industry and Wall Street in a rapid rate and no end in sight. Wolf, this is absolutely - their intent is of course good, they mean to help. But the result is going to be, I think, ultimately very destructive.

BLITZER: And Lou is going to have a whole lot more on this in one hour. We'll see you then, Lou. Thank you.