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THE SITUATION ROOM

McCain's Big Problem: The Debate the Economy; Presidential Race State by State

Aired October 7, 2008 - 18:00   ET

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


WOLF BLITZER, CNN ANCHOR: Lou's going to be back.
Happening now, the Dow dies, things are so bad in one credit sector, the government takes unprecedented steps to help major companies stay afloat in the short term. Might your next paycheck come with some help from the federal government?

Lawmakers rail at what Americans see as greedy financial executives. Among the questions, why were AIG employees racking up $400,000 bills at an exclusive resort as their company fail and the federal government had to bail it out?

And the financial guru Suze Orman is here with some practical advice on what you should be doing in this financial rollercoaster. All of this plus the best political team on television.

We want to welcome our viewers in the United States and around the world. I'm Wolf Blitzer. You're in the SITUATION ROOM.

(BEGIN VIDEO CLIP)

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: These are momentous steps being taken to address problems of historic dimensions.

(END VIDEO CLIP)

BLITZER: What the Federal Reserve chairman is referring to is certainly momentous. Today he gave a dire forecast about America's already desperate financial situation.

Ben Bernanke warns the crisis not only darkens the current economic performance, but Americans could see prolonged pain. Investors are running for the doors, they're selling stocks in droves.

The Dow Jones Industrial Average closed down more than 500 points once again today. That's a five-year low. This, despite the federal government's radical steps that will impact millions of Americans, anyone working for big corporations.

Let's go straight to our senior business correspondent, Ali Velshi. He's watching this for us.

That tumble, Ali, as you walk in in the markets, say, you know, Friday they signed into law $700 billion bailout, the market goes down, goes down more Monday, more today, 500 points.

ALI VELSHI, CNN SENIOR BUSINESS CORRESPONDENT: Yep.

BLITZER: A lot of people are saying, what is going on?

VELSHI: And one of the things that is going on is we're trying to loosen this credit logjam. That's what the bailout proposal was supposed to do, didn't work fast, we don't know whether it's working. So today's announcement by the Fed was supposed to help that.

Now the first thing is we saw that late-day selloff of 500 points. And that's a reaction, in many ways, to what we think is going to happen.

Here's the Fed announcement that occurred today. Let me show you how it normally works. There are businesses across America that need short-term credit. They need loans in order to make payroll, buy supplies, things -- just short term money.

And what they would typically do -- they need that money to make these payments so they would go to an investment bank maybe a Goldman Sachs or a Morgan Stanley, they'd say we need $1 billion for two months. Morgan Stanley and Goldman Sachs would go out to big investors. Those might be pension funds, hedge funds, foreign banks and investors. They'd get that money and they'd lend it.

This is the credit market that is -- totally frozen up. So now what the Federal Reserve is doing is they're saying that that money that these companies need for their daily expenses and their supplies and their salaries, that money is going to come directly now from the Federal Reserve.

It's the first time in history the Federal Reserve will be responsible for directly lending America's corporations short-term money. Those are loans for 60 days for which the companies will pay the Federal Reserve interest and then pay them back within 60 days, but that allows companies to make their short-term expenses and that means some of you who were concerned that your companies couldn't raise enough money to maybe pay your salary, for now, at least, we're safe on that front -- Wolf?

BLITZER: Well, people are nervous, Ali, as you know, and many of the viewers out there say greedy financial executives bear much of the blame for this crisis.

Today, executives of one insurance giant were grilled. Lawmakers on Capitol Hill demanded from AIG executives answers about that company's bailout, answers to what some see as shocking symbols of corporate excess.

Brian Todd is working this story watching -- been watching the hearing all day, and you caught up with an executive yourself.

Brian, tell our viewers what happened.

BRIAN TODD, CNN CORRESPONDENT: Wolf, we followed him into the hearing room and asked him some very tough questions about a company trip that is raising a lot of questions on Capitol Hill. From that company trip to executive pay to risky investments, the curtain has been lifted on one of the biggest collapses in this financial crisis.

(BEGIN VIDEOTAPE)

TODD (voice over): Their insurance and finance company was at the center of the meltdown, was bailed out by the Feds for $85 billion. But just days later, according to a congressional committee, some of their insurance salesmen went to an exclusive California resort to the tune of $443,000.

(On camera): Can you tell us why they were there?

ROBERT WILLUMSTAD, FORMER CEO, AIG: No, I don't.

TODD: Were you there, sir?

WILLUMSTAD: No.

TODD (voice over): Former AIG head Robert Willumstad and the man who preceded him, Martin Sullivan, said they never knew about that trip to the resort which has played host to presidents, and said they wouldn't have gone along with it.

REP. CAROLYN MALONEY (D), NEW YORK: I think you should be apologizing to the American people for your mismanagement.

TODD: One of many angry retorts when Willumstad and Sullivan tried to explain why AIG took enormous risk in the bond insurance market.

DAVID SCHIFF, SCHIFF'S INSURANCE OBSERVER: It looked like a safe guarantee, they could say, because all these other layers, they were only guaranteeing the top bit, you know, it would -- of course, on some level you could say that's like guaranteeing just the top of the Titanic.

TODD: When Willumstad and Sullivan blamed the bond insurance bust and other problems on a change in accounting rules...

REP. MARK SOUDER (R), INDIANA: You left your company so exposed that when a little bit of softness came to the economy and it started down and they do an accounting change, people belly up and stick everybody else in America with it, and you're saying, oh, it was the market tsunami, as if you didn't help cause it.

MARTIN SULLIVAN, FORMER CEO, AIG: With the greatest respect, I was not criticizing FAS 157. I was referring to its (INAUDIBLE) consequences.

There were many other reasons that have affected many other companies and many other countries around the world. It's not just the United States.

(END VIDEOTAPE)

TODD: Then there was the ever-present fight over how much these executives get paid. It happens in every hearing. The committee pointed out that after AIG lost more than $5 billion in the last quarter of 2007, CEO Martin Sullivan asked a special company panel to ignore those losses and its calculations of bonuses.

Sullivan got a cash bonus of more than $5 million. Sullivan said he was thinking of other execs who he said deserved that money and not just himself -- Wolf.

BLITZER: Brian Todd, with that part of the story, thank you.

This financial crisis, certainly, is very personal to millions and millions of Americans. It's having a real impact on their finances. But take a look at this, a new CNN/Opinion Research Corporation Poll shows only 14 percent of Americans have a good understanding of what's happening right now.

Financial expert Suze Orman is back with some more practical advice for a lot of nervous viewers out there. Let's talk about mortgages right now. Folks are having trouble. They're struggling with their mortgage payments. Can they go to the banks, to their mortgage lenders, and renegotiate relatively easily right now?

SUZE ORMAN, FINANCIAL EXPERT: No, they can't, unless they have a really, really high FICO score, that three-digit number that determines the interest rate you will pay on a loan.

The problem is because banks aren't lending, people aren't getting mortgages right now. And if you do get a mortgage, it's only to the very elite few that have a very hi FICO score, lots of income, possible money down.

So people are stuck right now with...

BLITZER: But isn't it more expensive for these banks to throw someone out and get nothing as opposed to working with these people and trying to get some money coming in to the banks?

ORMAN: Bingo. Of course. So what were they thinking months ago, a year ago, when they wouldn't negotiate with these people? Do you know to do a short sell where you are able to sell a home for less than you owe the bank? You have to be late on your mortgage payments, you have to not be responsible.

The banks made it impossible, Wolf, to be able to negotiate with them. I don't care what anybody says, the banks were not open to solving this problem which is why we have this problem now as well.

BLITZER: All right, now, we've lost more than 700,000 jobs this year alone and it looks like there's going to more job losses.

ORMAN: Yes.

BLITZER: People are looking for work. Give us some practical advice. You're laid off from your job, you want to find a new job, and I suspect that the economy is such there aren't a whole lot of new jobs out there. ORMAN: Yes, aren't a whole lot of new jobs out there which is why it's very, very important you hear me all the time talk about this FICO score that I was just talking about in the second there.

BLITZER: Explain what that FICO score is.

ORMAN: FICO stands for Fair Isaac Corporation. It is a three- digit number that goes from 300 all the way up to 850. It is comprised of the information that is on your credit reports. Every single person out there that has a credit card has not only one FICO score, they have three, one for every credit reporting bureau. Equifax, Experian and TransUnion.

The higher your FICO score, the lower your interest rate, the lower your FICO score, the higher your interest rate.

BLITZER: All right. So what is that have to do with finding a job if you're laid off?

ORMAN: I'll tell you. Because a FICO score doesn't just determine the interest rate that you pay on credit cards, car loans and home mortgages, it now determines if a landlord will rent to you and if an employer will hire you. It also determines what your car insurance premiums happen to be.

You have a low FICO score and you have a low FICO score because you've -- been behind on your mortgage payment, behind on your credit card, guess what? You go to get a job, your employer looks at your FICO score, they go, I am not hiring this person because they have a bad FICO score.

So if you are laid off and you have been behind on your credit, you are really going to find yourself in a very, very difficult situation to get another job.

BLITZER: And this information is public like that? Anyone, any employer, prospective employer can find those numbers?

ORMAN: So, yes, what happens is when you go and you apply for a job, many employers will ask if they can check your FICO score, you credit score, you say yes, and they can check it for you.

And you know, you -- every single person should know their own FICO score, because you have to remember your FICO score is made up of the information on your credit report. A great percentage people have incorrect information on their credit report so their FICO scores are actually lower than they should be...

BLITZER: So let...

ORMAN: ... but nobody would know.

BLITZER: You have a bad FICO score. How do you improve it?

ORMAN: You improve your FICO score by, number one, 35 percent of your FICO score is made up of paying your bills on time. Do not -- and I repeat -- do not be late on a payment, because if you are late on a payment, your FICO score goes down.

When your FICO score goes down, given the credit situation that we're in right now, these creditors are actually either revoking your credit cards or limiting your credit and they are then raising your interest rate to 30 percent.

Can they legally do that? They betcha you -- you betcha they can. So you have to be careful to, number one, never be late on your payment and pay down your credit cards, because the more you pay down your credit cards, the more your FICO score increases.

BLITZER: That's very important advice. If you have some cash lying around...

ORMAN: Get rid...

BLITZER: ... maybe don't buy any stocks, but go ahead and pay your credit card bills first.

ORMAN: Yes, which is I've been saying that over and over again, because for those people with a low FICO score, those are the people, in my opinion, that are going to be targeted by the credit card companies to decrease the credit limit that they have, because the banks don't want to be stuck with these people having charged and then they claim bankruptcy or they don't pay it.

As they decrease the credit limit they're also -- by the way that credit score is -- calculated FICO score, they're decreasing their FICO score which will increase their interest rate. So people need to get out of credit card debt.

BLITZER: A lot of useful information from Suze. We're going to have you back. Suze, thanks very much.

ORMAN: Anytime.

BLITZER: Because our viewers have a lot of questions.

The presidential campaign has been getting nasty, but the audience participation in tonight's town hall style debate will change the way the candidates act. Candy Crowley is standing by live. She's got the story.

Some surprises from key battleground states. We have some new poll numbers and may mean that CNN is changing its electoral map. Why it favors who and why. John King is standing by to break it all down for us.

And trailing in the polls, John McCain's fortunes have faded along with the economy. We're looking at what it will take for him to make a comeback.

Stay with us here in the SITUATION ROOM.

(COMMERCIAL BREAK) BLITZER: Time, about two hours and 45 minutes, the second presidential debate will take place in Nashville, Tennessee, at Belmont University. It's a critical night for both candidates in a different kind of format.

This time the audience will take part in the questioning, and that makes a big difference in how the candidates behave.

Let's go to our senior political correspondent Candy Crowley. She's in Nashville getting ready for the debates.

Candy, what are the candidates have to do tonight?

CANDY CROWLEY, CNN SENIOR POLITICAL CORRESPONDENT: Well, you know, Wolf, what the candidates have to do very much depends on whether they are up, Barack Obama, or down, John McCain, in the polls.

(BEGIN VIDEOTAPE)

SEN. BARACK OBAMA (D), PRESIDENTIAL CANDIDATE: I hope you're enjoying this beautiful weather.

CROWLEY (voice over): Tonight's dynamics are basic. Barack Obama needs to solidify his lead, John McCain needs to break it down. The atmospherics are more complicated particularly for John McCain.

SEN. JOHN MCCAIN (R), PRESIDENTIAL CANDIDATE: What has this man ever actually accomplished in government?

OBAMA: That's what you do when you're out of touch, out of ideas and running out of time.

CROWLEY: Here's the problem. Acidity on the campaign trail is unlikely to translate well in the intimacy of a town hall meeting with undecided voters. Town hall meetings are not about inflicting pain on the other candidates, they're about feeling the pain of the voter.

MCCAIN: I'm grateful that you had the opportunity and Ted took the time and effort to come here and tell us here, because you move me and you move all Americans.

CROWLEY: While McCain has excelled in town hall formats, his performance tonight has to be nuanced, something he does not excel in. McCain has to go after Obama's policies without seeming to go after Obama.

MCCAIN: We're going to have a town hall meeting, my friends, and I guarantee you, you're going to learn a lot about who's the liberal and who's the conservative and who wants to raise your taxes and who wants to lower them.

CROWLEY: The Obama campaign has been busily e-mailing reporters suggesting McCain will go negative and personal tonight.

"We anticipate," said a spokesman, "that McCain will launch his nastiest attacks and continue to lie about Barack Obama's record." It may be less of an anticipation than a wish because the Obama campaign is ready.

DAVID AXELROD, OBAMA CAMPAIGN ADVISER: John McCain doesn't want to talk about the economy, because, essentially, what he's offering is more of the same and it's not selling. The American people know that that's failed and so he's turned to this -- to plan B, which is to throw as much negative out there as possible.

CROWLEY: But if McCain sticks with the economy, then Obama turns to plan B, tie McCain to George Bush's policies.

(END VIDEOTAPE)

CROWLEY: Ask someone in the Obama campaign what they think their candidate has to do tonight, and they'll say be presidential and reach out and connect with middle-class voters, but primarily what they believe inside the campaign, Wolf, is that this night, the focus is on John McCain.

BLITZER: We're going to get back to Candy shortly.

Thank you, Candy.

On the eve of tonight's high stakes presidential debate, we have some brand new poll numbers from key battleground states.

Our chief national correspondent John King is here to break down these numbers. And we're making some changes in our estimates, in our predictions of what's going on on this electoral college map.

JOHN KING, CNN CHIEF NATIONAL CORRESPONDENT: We are, Wolf. And those changes are significant given the night of the second debate, the presidential debate tonight and that we are 28 days from Election Day.

Here's where we stand this morning -- where we stood this morning. Barack Obama at 250 electoral votes. He needs 270 to win.

Here are the changes we're making. First, we'll touch this. One is a takeaway. Our new battleground poll shows North Carolina a tossup. We had it leaning red. We're going to turn that back to a swing state. The gold states are tossup states.

Another -- our battleground poll up in the state of New Hampshire shows Barack Obama pulling away, so we're going to lean that state Democratic. Watch the changing numbers up here. Also in the state of Wisconsin. Barack Obama also building a lead there. We lean that Democratic.

Look how close, Wolf. That would leave Barack Obama at 264 electoral votes. And let me underscore the challenge for you this way. Seven tossup states left, all won by George W. Bush four years ago. And so it was John McCain defending back on his heels in Republican states. And even if he won them all, and Barack Obama leads in several of these states -- even if John McCain won them all -- I'm going to turn every tossup state red for John McCain -- that would just get him above the 270 mark and, again, Barack Obama is leading now in Ohio. Take that away from John McCain, Obama wins.

Very competitive in Indiana in our new poll. If Barack Obama could pull that out, he would win. So we go in to this second debate. I'm going to come back to where we were at the beginning. We go into this second debate with the map tilting and tilting more so in Barack Obama's favor without a doubt.

BLITZER: Now John McCain has been down before. All of us remember he was written off in the primary process. He made a dramatic comeback. Four weeks from today is the election. If he is going to make a comeback right now, where and how would we see this?

KING: Let's switch the map and look at two places. There are many places, but the key thing he has to do is change around the economic dynamic. So let's start in the state of Ohio. This is a state George W. Bush won twice. It is cliche, but true, no Republican has ever been elected without winning the White House, this is how it turns out...

BLITZER: Without winning Ohio.

KING: Without winning Ohio, I'm sorry.

This is how it turned out four years ago, very, very close, Bush with 51 percent.

Wolf, I was just out here in Ashland County. It is a Republican country here. You can sense a shift toward Obama here because of job losses, job losses, job losses. John McCain has to turn it around in places like that small town rural America.

One other place I would watch very closely in the weeks ahead. We just made North Carolina a tossup state. When you come into North Carolina and you look up in here -- watch this from the Republican last time, all that red in here, the little blue up here, and watch to the Democratic primaries -- and you come in this time, the Democratic primaries, Barack Obama did very well up in this area.

And if he can do that again, up into Raleigh/Greensboro area, turn out the African-American vote, and also get the while upper income professionals who work in the medical community up here, if he can switch North Carolina, something Bill Clinton tried to do twice, and he couldn't, but John McCain has to put North Carolina in solid Republican territory so he can fight it out in Nevada, in Colorado, and other states where the demographics are changing in the Democrats' favor.

BLITZER: Helps explain why they gave up on Michigan and moving their money and their resources or people to these others states which they're desperate to win.

KING: Almost no room for error now for John McCain. He has to turn around the fundamentals, which is the economic (INAUDIBLE).

BLITZER: John is going to be with us throughout the night as well.

A major court decision on the Guantanamo Bay detention camp. A group of prisoners might be released any day now right into the United States. We're going to tell you what is going on.

And this election might come down to those undecided voters. You can see exactly how they're reacting in the debate in real time. We're going to preview our focus group and a lot more right here in the SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Susan Roesgen is monitoring some other important stories incoming to the SITUATION ROOM right now.

Susie, what's going on?

SUSAN ROESGEN, CNN CORRESPONDENT: Got a lot of different stuff going on, Wolf. First of all, the government's star witness in the corruption trial of Senator Ted Stevens finished his testimony and perhaps ended his longtime friendship with the senator.

Stevens is charged with trying to hide gifts worth more than $200,000 from an Alaskan pipeline tycoon. The day in court began when the judge accusing a government lawyer of giving secret signals during the cross-examination. The lawyer denies any wrongdoing.

A closer look at the planet closest to the sun from beamed in photos from a U.S. spacecraft. They show parts of Mercury's baron surface that have never been seen. Hundreds of pictures of craters, volcanic eruptions and a round basin more than 80 miles wide. The Messenger spacecraft is hoped to become the first to enter Mercury's orbit.

And another warning about children and over-the-counter cough and cold medicines. This time it comes from the drug companies themselves. Those companies now say that that parents should not give those medicines to kids under 4. And that comes after pediatricians said that those drugs may be ineffective and unsafe.

Last week, health officials released similar findings, but they warned parents against giving children any adult medicines instead -- Wolf?

BLITZER: Good advice. All right, thanks very much, Susie, for that.

Can John McCain come from behind? The economy, certainly, has been a drag on his campaign. How he can turn things around? We're watching this story.

Barack Obama's campaign says he's the underdog in tonight's debate, but he's on top in the polls. Is there a contradiction? The best political team in television is standing by live to take a closer look.

(COMMERCIAL BREAK)

BLITZER: To our viewers here in the SITUATION ROOM, happening now, the pressure is certainly on John McCain as we count down to tonight's debate. He's behind in the polls. What he needs to do in tonight's town hall meeting to wipe out Barack Obama's lead. We're watching the story.

The Obama campaign is trying to portray him as the underdog. Why they are lowering expectations. All of this plus the best political team on television.

And they're the ones with the power to sway this election. That would be the undecided voters. We're with them tonight, we're gauging their reaction to the debate.

I'm Wolf Blitzer, you're in the SITUATION ROOM.

The presidential debate just a couple or so hours away. It follows another devastating day for investors as the Dow Jones Industrials drop another 500 points. More emergency action by the Federal Reserve, and a promise for President Bush that the economy will get better, but for now American businesses and consumers are getting desperate.

CNN's Dana Bash is working this story for us.

Dana, John McCain certainly trails in all of these polls. The economy, obviously, a very important factor. Do his political fortunes rest with the economy?

DANA BASH, CNN CONGRESSIONAL CORRESPONDENT: You know -- absolutely. And you can't -- you don't find anybody inside the McCain campaign, frankly, who will say otherwise. You know, but I just got off the phone with one of McCain's advisers, Wolf, who said that the overriding goal for John McCain tonight and the big challenge is really one thing, and that is to convince voters, in a polite way, that Obama is unknown, even naive, and would make things worse.

(BEGIN VIDEOTAPE)

BASH (voice over): At the first debate, John McCain started on the economy with an I-feel-your-pain moment.

SEN. JOHN MCCAIN (R), PRESIDENTIAL CANDIDATE: I've been not feeling too great about a lot of things lately. So have a lot of Americans.

BASH: But that was it. He then veered into talk of earmarks and spending levels and many Republicans winced -- not the way to connect with voters' woes.

McCain advisers tell CNN prep for tonight's debate has focused heavily on trying to step up McCain's empathy and link it to his policy ideas.

More of this.

MCCAIN: I'll get the rising cost of food and gas under control. I'll help families keep their home and help students that are struggling to pay for college.

BASH: But McCain aides admit his big problem now is the direct correlation between Wall Street's meltdown and his slip in key states.

Take Florida, for example. In early September, 49 percent of voters listed the economy as the most important to them and McCain had a 7 point lead over Obama. A month later, the percentage of those who called the economy the top issue spiked to 60 and suddenly, a reversal. Now Obama has an 8 point lead.

One top McCain adviser admits to CNN coming back to Washington to push for the economic bailout "wrapped him back around George Bush, politically devastating."

Many supporters say detangling himself from the president tonight is paramount.

REP. TOM DAVIS (R), VIRGINIA: That's the elephant in the living room in this race. You've got to reassure economic voters that a John McCain is going to be OK, that he's got his own vision, that it's not necessarily George W. Bush's vision.

(END VIDEO TAPE)

BASH: Now, we've heard several worried Republican strategists recently suggest McCain should come up with a big, bold new idea. But one of his senior advisers I talked to rejected that as "panicky" and insisted that they do have plenty of policy ideas that should sell. The challenge has been, though, the message -- and, really, the messenger -- Wolf.

That messenger is their candidate, John McCain.

BLITZER: Yes, that's true, Dana.

And, you know, you've been to a lot of these John McCain town hall meetings. But this one is going to be different.

BASH: Very different. What he is used to in these town halls in New Hampshire and beyond is spending a lot of time with these voters, throwing the microphone back into the crowds, spending five, six, seven minutes going back and forth.

He can't do that tonight. So that is definitely what leads him to his comfort zone in these town hall meetings. But what he's working with them -- on, I'm told, with his advisers is really keeping it short, keeping it crisp. He's got two minutes, so he's got to make his point and he's got to make it in a very tight, succinct way.

BLITZER: Yes. At his town hall meetings, there's no stopwatch. At this one, there will be.

BASH: No.

BLITZER: All right, thanks, Dana, very much.

Let's get to our senior political analyst, Gloria Borger, she's here; our senior analyst, Jeff Toobin; and our other senior analyst, David Gergen.

A lot of senior analysts.

GLORIA BORGER, SENIOR POLITICAL ANALYST: We're all seniors.

BLITZER: They're all part of the best political team on television.

JEFFREY TOOBIN, CNN SENIOR LEGAL ANALYST, "NEW YORKER" MAGAZINE COLUMNIST: Seniors.

(LAUGHTER)

BLITZER: David, what does McCain need to do tonight to turn this thing around?

DAVID GERGEN, CNN SENIOR POLITICAL ANALYST, FORMER PRESIDENTIAL ADVISER: Win. I mean he has to -- this is one of the last two big opportunities he has to change the momentum in the race. So for both men, it's important. For McCain, this is a critical debate. It's a critical moment.

And the whole idea that they would -- Dana Bash was just reporting that they wouldn't come out with some big new idea, oh, give me a break. You know, they came out with a big new idea with Sarah Palin. They came out with a big new person. They threw the big -- the long pass.

He went back to Washington. He did a big moment. He's got to be opportunistic tonight about policy. He's got to come in and talk about the economy and show that he not only has important new ways to solve the problem, but they're different from what George W. Bush has.

BLITZER: At the last debate, he said he was going to consider freezing government spending...

BORGER: Right.

BLITZER: ...with the exception of defense, national security, the entitlements -- freeze government spending. Barack Obama didn't think that was necessarily a good idea because it would ruin some programs that are really necessary to grow and expand with the population.

I heard Sarah Palin today said they were going to freeze spending if elected, so she went a little bit further than him.

Is that a bold enough idea?

BORGER: No, I don't think it is. And neither is cutting earmarks.

That's, what, $18 billion?

He's got to have a plan. He's got to come in there with a plan. And, also, he has to differentiate himself from Barack Obama. He's going to portray Obama as too liberal to govern in this time of crisis. But, you know, this crisis is not theoretical, it's real. And the voters out there are going to judge which person is the one who can govern them and get them through these tough times.

BLITZER: But, Jeff, given the nature of the negotiations that came up with these ground rules for how much time they have, how much interaction they can get, the opportunity for "direct exchanges" between Barack Obama and John McCain tonight -- fireworks, if you will -- they're limited.

TOOBIN: It's going to be much more stilted, I think, than the last debate, which was actually pretty -- pretty free-wheeling.

I think the Obama campaign has been in this silly game of managing expectations, has been exactly wrong. The format favors Obama. It doesn't favor McCain. The format says that McCain can't control anything. It is all about Obama being able to do exactly what he did last time. I don't think Obama has any advantage...

BORGER: It's all about Brokaw.

TOOBIN: ...any disadvantage at all.

BORGER: It's all about Tom Brokaw picking the questions, honestly.

TOOBIN: Yes.

BLITZER: He's going to -- they've gone through, everybody knows -- everybody -- the questions have been reviewed by Tom Brokaw. And he's the one who picks the questions from the audience, as well as from the Internet.

GERGEN: That's right.

TOOBIN: But he's had thousands of questions to pick from...

GERGEN: But this isn't...

BORGER: That's right.

TOOBIN: ...so he can basically do anything he wants.

BORGER: So he shapes the debate.

(CROSSTALK)

GERGEN: But this could also make it a little bit more random, and I think that plays to McCain's strength. McCain, if he comes in with his traditional sense of humor and he's relaxed, as we saw at Saddleback, he can beat Obama in a debate. He's strong enough to do that. He did not win the first debate. He's got to come back and win this one.

But I must tell you, I think it has to be in the realm of ideas. And the idea of freezing spending, that's exactly what you don't do in a recession. You do need a stimulus in a recession. You need the government to spend and not hold back, sort of a Herbert Hoover like kind of a proposal.

(CROSSTALK)

TOOBIN: But the difference from Saddleback is that we are now in the midst of a major crisis...

BORGER: Right.

TOOBIN: ...where there's really only one issue on the agenda. Saddleback, he got to talk about all sorts of different things.

GERGEN: I agree with that.

TOOBIN: Now, he's got to have ideas about the economy that really resonate with people.

BORGER: And he can't talk for an hour, you know.

BLITZER: Right.

TOOBIN: Right.

BORGER: At Saddleback, you could just go on and on. And, you know, that was his issue set at Saddleback. That was...

BLITZER: And it was pretty clear that at Saddleback...

BORGER: ...social issues...

BLITZER: ...both of the candidates had a pretty good idea what the questions were going to be in advance. I think that was pretty obvious.

And in this case, they can guess what the questions might be...

BORGER: Right.

BLITZER: But they obviously won't know what the questions are.

Stand by, guys, because we're going to continue this conversation.

You've probably heard a little about the big news from some of the toss-up states -- why Barack Obama is pulling ahead right now. We're going to discuss that.

And how can you tell whether the candidates are actually telling the truth? We'll fact check live for you.

Stay with us.

You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: He's leading in the polls, but Barack Obama's campaign is trying to portray him as the underdog going into tonight's debate.

We're back with the best political team on television.

Here's from a memo that Bill Burton, the national press secretary for the Obama campaign, put out: "In order to change the dynamics of this race, we anticipate that McCain will launch his nastiest attacks and continue to lie about Barack Obama's record and his vision to fundamentally change our country. When it comes to sheer format, we enter today's debate the decided underdog."

Jeff, what do you think about that...

TOOBIN: What I think about...

BLITZER: ...lowering expectations.

TOOBIN: What I think about that is oh, please.

(LAUGHTER)

TOOBIN: You know, I mean this -- first of all, we shouldn't talk about expectations at all. I think it's just a totally phony subject.

But the format favors Obama because McCain cannot dominate this. I just think it's a silly statement. And the thing that really favors Obama is that it's very hard to be nasty in front of ordinary folks.

BORGER: Yes.

TOOBIN: People are going to be asking questions about their own problems, not about Bill Ayers...

BLITZER: All right. I want to move on...

TOOBIN: Not about Rezko.

BLITZER: I want to move on and talk about some of these new CNN/"Time" magazine/Opinion Research Corporation polls.

In Indiana right now, normally a reliably red state, McCain is at 51 percent, Obama is at 46 percent.

Another reliably red state, North Carolina, 49 Obama, 49 McCain.

And in Ohio -- no Republican has ever been elected without carrying Ohio -- Obama is slightly ahead, 50 percent to McCain's 47 percent.

If you're looking at those three states, if you're McCain, you've got to be worried.

GERGEN: Oh.

(LAUGHTER)

GERGEN: I mean you just look at the latest -- what, it's about up to 264 now, isn't it?

BLITZER: Yes.

BORGER: Right.

BLITZER: In our estimate.

GERGEN: You know, that Obama is either ahead in or leaning toward Obama. He's only six short. So -- and he's playing -- every state that's up for grabs is a Bush state, (INAUDIBLE) Bush state.

BLITZER: You're from North Carolina.

GERGEN: I am from North Carolina.

BLITZER: Is it realistic that Obama could carry North Carolina?

GERGEN: It's possible. And I thought he was smart to go spend a couple of days in Asheville before the debate...

BLITZER: Preparing for the debate...

BORGER: Well...

GERGEN: Yes. And to keep going back there and so -- but McCain is having to go in. And Kay Hagan is running against Elizabeth Dole in the Senate race. Kathy Hagan is a Democrat...

BLITZER: It's a very close race there.

GERGEN: It's a close race, but Hagan has got a -- you know, Elizabeth Dole is in a very competitive race.

So I think it could -- there could be a surprise in North Carolina. And it's unlikely, but there could be a surprise.

I think Virginia looks much -- much more promising for Obama. That would be a big win, too.

BLITZER: It would be a huge win for Obama.

GERGEN: Yes.

BORGER: You know, what he's doing is he's making McCain go back to the states that should be reliably red...

GERGEN: Right.

BORGER: ...and spend money that he doesn't have to spend in states where he shouldn't have to spend it.

GERGEN: Yes, right. I think that's right.

BORGER: And so -- and it's...

GERGEN: I think what's happening here is Obama is...

BORGER: ...he's got them all...

GERGEN: Obama has run a very strategic campaign. McCain has run a very tactical campaign.

BORGER: Right.

GERGEN: And the strategy that Obama has been executing is starting to pay off now. You see the big registration numbers. You see things starting to fall into play just about the way Hagan...

BLITZER: Do you believe...

GERGEN: (INAUDIBLE).

BLITZER: Do you believe all that, the fact that there's all these new registered Democrats -- a lot of young people, African-Americans, they've come out in North Carolina and Virginia, these other states, and they're really going to make a difference?

TOOBIN: The numbers are staggering. You're talking about differences of hundreds of thousands between Democrat and Republican registrations in all of these big states. Now, that's not really reflected in the polls yet.

And so the question is, are the polls simply wrong and not reflecting it or is this just the normal ebb and flow of new registrations?

BORGER: Right.

TOOBIN: I don't know.

BORGER: And just because...

TOOBIN: I think it's a really hard question.

BORGER: ...you're newly registered, doesn't mean you're actually going to go out and vote. And that's what...

TOOBIN: But why would you register and not vote?

BORGER: It happens all the time.

BLITZER: Well, a lot of people registered in the...

BORGER: It happens all the time.

BLITZER: ...primaries because they were enthusiastic about Hillary Clinton, for example...

BORGER: Right.

BLITZER: ...and they might not necessarily be enthusiastic Democrats for Barack Obama.

BORGER: It happens very often.

TOOBIN: Does it, really?

GERGEN: Yes, but...

BORGER: It happens very, very often.

(CROSSTALK)

TOOBIN: In a presidential year?

BORGER: Yes. Yes.

GERGEN: That's why this debate becomes so important, though.

BORGER: (INAUDIBLE).

GERGEN: He's got to reverse those numbers in North Carolina and Indiana and places -- for McCain. He -- you know, if he can get the momentum going the other way, you'll see those states turn redder in the next two weeks. But if he loses the debate again tonight, you know, it gets just harder and harder to get up the hill.

BLITZER: Do you think?

BORGER: I do. I think it does. And I think the big thing, going back to registration for a moment, is young voters have never voted in greater percentages than older voters in this country.

BLITZER: Ever?

BORGER: Ever, ever, ever.

TOOBIN: Yes.

BORGER: They're poised to do that in this election.

BLITZER: That would be amazing. That would be amazing.

BORGER: That would be amazing. It would be historic. And it, of course, would be to the benefit of Barack Obama and could hand him the White House.

TOOBIN: And every four years, we hear about the youth vote. Howard Dean was going to mobilize the youth vote.

BORGER: Right.

TOOBIN: John Kerry was going to mobilize the youth vote.

BORGER: Rock The Vote.

TOOBIN: Never -- it never happened yet. But maybe this year, maybe it will.

GERGEN: And we also see the near seniors in this economic climate, the near seniors are starting to move toward Obama. And that's pretty unusual. That is a huge difference.

(CROSSTALK)

TOOBIN: I've never heard that word before, the near seniors.

(LAUGHTER)

TOOBIN: That's got...

GERGEN: When you get a little older, Jeff.

(LAUGHTER)

GERGEN: You'll be very familiar with it.

TOOBIN: I don't want to associate myself with that phrase.

BLITZER: I love that phrase.

All right, guys. You're not going anywhere. Stand by.

On our Political Ticker, during the debate, you can react to real time analysis from the best political team.

Alex Wellen, our deputy political director for digital content, is here to show us how you can do that.

Where do they begin -- Alex?

ALEX WELLEN, DEPUTY POLITICAL DIRECTOR FOR DIGITAL CONTENT: Wolf, the best political team will be on the Ticker right here. This is where you'll find Candy Crowley, Bill Schneider, the best political team live blogging the whole time.

The other thing on the Political Ticker I want to show you -- whoa, nice and big -- fact checks -- what the candidates are saying. And we're going to be fact checking those in real time and holding them and keeping them honest.

Also, one other place I want to talk to you about is the forum. We talked about this place to debate the debate. We're getting all kinds of comments, of course, on the economy.

But let's look at this badge. Livia (ph) -- and I can annotate this here -- Livia wrote -- she's an Obama supporter, but she says she's a part of the Independent Voters League: "social issues, economy and Iraq. Here's what she wants -- and we've heard this many times before: "I want specifics. I want to know exactly who and what I'm voting for."

And it continues to go on there, they're tired of the rhetoric, tired of the arguing. And that is exactly the kind of thing that our audience is going to be looking for.

So we want you to go the CNNPolitics.com or CNN.com/forum, get your political badge and weigh in tonight -- back to you, Wolf.

BLITZER: All right, Alex.

Thanks very much.

Undecided voters reacting to tonight's debate in real time, showing what they like and what they don't like. We're going to be checking in with them.

Plus, details of a secret mission to move nuclear waste and why it's now back in the United States.

Stay with us.

You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Let's check back with Lou.

He's getting ready for his show that begins right at the top of the hour.

What are you working on -- Lou?

LOU DOBBS, HOST, "LOU DOBBS TONIGHT": Well, Wolf, we're going to have a lot of fun tonight, coming up at 7:00 p.m. Eastern here on CNN.

Much more, of course, on tonight's upcoming presidential debate. Both campaigns are promising a lively debate tonight. That will be in stark contrast to the first one.

Will Senators Obama and McCain actually focus on the issues that matter most to voters?

Will they tell us where they really stand?

Tonight, I'll be joined by former Governor Mitt Romney for the McCain campaign and Senator Claire McCaskill for the Obama campaign. I'll be asking them why in the world these two men are talking directly and honestly with the American people about their economic plans.

We'll also have a special report on Obama's links with the 1960s radical, William Ayers, a founder of the Weather Underground terrorist group. We'll also be telling you about the critically important issues the candidates have avoided to this point, issues that include, of course, our illegal immigration crisis, the exporting of American jobs and the apparent objective of destroying middle class workers in this country through so-called free trade.

And tonight, the Federal Reserve announcing new measures to tackle the economic crisis. But the Dow Jones Industrials, after that bailout, plunges another 500 points.

Where does it end?

We'll be talking about that and reporting to you on the very latest.

Join us at the top of the hour, for that, all the day's news and more, from an Independent perspective -- Wolf, back to you.

BLITZER: A full hour coming up with Lou.

DOBBS: You bet.

BLITZER: Thanks very much.

We'll see you in a few moments.

Susan Roesgen is monitoring some other important stories incoming into THE SITUATION ROOM right now -- Susie, what's going on?

ROESGEN: Well, a federal judge, Wolf, ordered the government to free 17 Chinese Muslims from Guantanamo Bay and let them go in the U.S. immediately. The judge says it would be wrong to keep those detainees who are no longer considered enemy combatants. They were actually cleared for release four years ago, but the U.S. government was afraid that they would be tortured if they were sent back to China. The judge says the group must be out of Guantanamo Bay by Friday. The federal government wants to get an emergency stay to stop the order.

And U.S. officials say Germany has returned more than 20 pounds of dangerous uranium. Nuclear security officials say the spent fuel, which was used in research reactors, was secretly transported and is now in a holding site in South Carolina.

In the last year, by the way, Argentina, Portugal, Romania and Germany have turned over nearly 115 pounds of spent nuclear fuel.

And federal agents have found more than 300 suspected illegal immigrants at a South Carolina poultry plant. The agents swept the grounds, ordering everyone to show identification. The company had been investigated for months. And this comes on the heels of a Mississippi plant -- a raid there in August, which was the largest in history -- Wolf.

BLITZER: Susie, thank you.

How will undecided voters react to tonight's presidential debate?

You can track it moment by moment, actually, second by second, with CNN's dial testing graph.

Let's go to Soledad O'Brien.

She's going to be talking to some uncommitted voters out there -- all right, Soledad, tell -- walk us through the process, because viewers are fascinated by those lines they're going to see at the bottom of their screen.

SOLEDAD O'BRIEN, CNN CORRESPONDENT: It is so interesting. And once again, we're back with our panel here at Ohio State University and also back with our professors from SMU, who are crunching the data that they'll gather tonight.

We've got the panel, which is roughly divided -- a third registered Independents, a third registered Democrats, a third registered Republicans. And, again, the thing they have in common is that they are all persuadable -- meaning they haven't yet made up their minds about who they're going to vote for.

So once again, they've got this, which is the perception analyzer. And it's really simple to use. This dial down on mine now is dialed down to one.

If the candidate is talking and what he is saying is not resonating with me, you know, you dial it down. If you like what you're hearing, the way it works is you just push it to the right, you dial it up. It goes up to 100.

And all that information is then fed directly into the computers, which are being monitored right over there in this perception analyzer. And that will calculate what you will see on the air as a graph that will go up and down. And you can literally, as you see, Wolf, can second to second what is resonating and what is not resonating with the 30 some odd folks who will be in this room. They've just started to arrive and we're bringing them in behind me very, very shortly.

Now, keep in mind, a couple of things about the State of Ohio and the reasons why we are here.

One, Ohio is a swing state, meaning they could go either way in this election.

Two, a bellwether state, too. It means that they tend to vote with the winner.

And, also, the issues here in Ohio are the same issues that are resonating with voters around the country. Ohio has lost nearly a quarter million jobs -- manufacturing jobs -- over the last eight years. And they rank sixth -- sixth highest in unemployment in the nation. So they are struggling with some of the same issues that we're seeing across the country, of course.

And economy is what they want to talk about -- issue number one, as they say.

Last time, we had a panel listening to the presidential candidates have their debate. They felt that there weren't specifics, that nothing was really connecting with them coming out of the mouths of those candidates. So it will be interesting to see, Wolf, this time around, if they feel like there's something resonating. And we'll be able to track that second by second -- the phrases, the words and the issues, as the candidates talk tonight -- Wolf.

BLITZER: And a little bit more than two hours from now, the debate will begin.

Soledad, we'll be checking back with you throughout the night.

With the dramatic losses on Wall Street, investors may have to start counting their money using a new denomination -- the zero dollar. Jeanne Moos is standing by with a Moost Unusual report.

(COMMERCIAL BREAK)

BLITZER: The Wall Street madness is making a lot of people just plain mad.

CNN's Jeanne Moos has a Moost Unusual report.

(BEGIN VIDEOTAPE)

JEANNE MOOS, CNN CORRESPONDENT (voice-over): Don't just use your fingers to counts your losses, it's time for the finger-pointing.

Why look at your 401(k) statement and scream...

(VIDEO CLIP)

MOOS: ...when we can scream at each other?

(BEGIN VIDEO CLIP FROM "THE O'REILLY FACTOR," COURTESY FOX NEWS)

BILL O'REILLY, HOST: Stop the B.S. here. Stop the crap.

REP. BARNEY FRANK (D), MASSACHUSETTS: Please...

O'REILLY: Come on, you coward. Say the truth.

FRANK: What do you mean coward?

O'REILLY: You're a coward.

FRANK: You're (INAUDIBLE) you're talking...

O'REILLY: You blame everybody else.

(END VIDEO CLIP)

MOOS: The financial meltdown has everyone feeling like a guy in network. (BEGIN VIDEO CLIP FROM "NETWORK," COURTESY MGM)

UNIDENTIFIED MALE: I'm as mad as hell.

(END VIDEO CLIP)

MOOS: Members of Congress are acting mad as hell as they grill company execs.

UNIDENTIFIED FEMALE: I think you should be apologizing.

UNIDENTIFIED MALE: It's just so disgusting.

UNIDENTIFIED MALE: Clean up its own dirty cesspool.

MOOS: Make that whirlpool.

UNIDENTIFIED MALE: AIG spent -- listen to this one -- $23,000 at the hotel spa.

MOOS: A week after AIG was bailed out with $85 million in taxpayer money, the company spent $200,000 on rooms at a luxurious resort. AIG says it was a recognition event for high performing sales agents who were not even AIG employees.

UNIDENTIFIED MALE: When it comes to pedicures, facials, manicures, the American people are paying for that...

UNIDENTIFIED MALE: I agree. I agree. I'm just trying to...

UNIDENTIFIED MALE: And they're very upset.

MOOS: Regular folks were upset down on Wall Street.

(on camera): Who are you mad as hell at?

UNIDENTIFIED FEMALE: I'm mad as hell at Bush.

MOOS (voice-over): George Washington would be agog at the carnival atmosphere as the Dow plunges.

UNIDENTIFIED MALE: You're all a bunch of whiners. Go get a second job.

MOOS: He's playing Treasury Secretary Hank Paulson as part of a protest against the bailout and the companies being bailed out.

UNIDENTIFIED FEMALE: I am mad as tell.

You know, how do you sleep at night?

The truth is, we know, on fine French linens, right?

UNIDENTIFIED FEMALE: And taxpayers are the ones take it up the (EXPLETIVE LANGUAGE). MOOS: No wonder Washington's face looks like this on a joke dollar circulating on the Web. And then there's the more serious zero dollar being handed all by artist Laura Gilbert (ph).

(on camera): I got mad. I'm losing a lot of money. But I don't know who to be mad at.

UNIDENTIFIED FEMALE: Oh, I could tell you.

MOOS (voice-over): She blames the financial wizards who pedaled bad mortgages.

As for the zero dollar...

(on camera): What are you going to do with that?

UNIDENTIFIED MALE: I'm going to frame it, of course, the same way that I've been framed.

MOOS (voice-over): We decided to try and spend ours.

(on camera): Will you give me a soda for a zero dollar?

UNIDENTIFIED MALE: Me?

MOOS: A hot dog for a zero dollar?

Hey, I don't suppose you'd give me a fruit shake for a zero dollar, would you?

UNIDENTIFIED FEMALE: I would do it for you.

MOOS: Would you?

UNIDENTIFIED MALE: Yes.

MOOS (voice-over): There's nothing like a bargain after losing thousands -- a three buck razzle-dazzle fruit shake from a zero dollar.

(on camera): All right, here's your zero dollar.

UNIDENTIFIED FEMALE: Thank you.

MOOS: Thank you.

(voice-over): Jeanne Moos, CNN, New York.

BLITZER: And I'll be back in one hour for complete coverage of tonight's debate.

Let's go to Lou.

He's standing by to pick up our coverage -- Lou.