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President & Dems vs. House GOP; Dems: McCain Hurt Negotiations; Obama Ready to Debate

Aired September 26, 2008 - 16:00   ET

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


WOLF BLITZER, CNN ANCHOR: Thanks very much.
And happening now -- we're following breaking news. Optimism amid a potential nightmare. The president and some Democrats are hopeful about reaching a deal on the $700 billion Wall Street bailout. But some members of the president's own party are pushing for a plan that the Treasury secretary says will simply not work.

After changing course to avoid the presidential debate, John McCain changes his mind again about facing off with Barack Obama for the first time. Obama is already at the debate site.

And style versus substance. Ahead of that debate, how might McCain and Obama's personalities help or hurt them?

I'm Wolf Blitzer, in the CNN Election Center. You're in THE SITUATION ROOM.

One high-ranking Democrat puts it this way: House Republicans have mounted a revolt -- a revolt -- against the president's wishes. We're following the breaking news regarding negotiations over the $700 billion Wall Street bailout.

The House Financial Services Chairman, Barney Frank, and other congressional Democrats say President Bush needs to get House Republicans on board if there's any chance of passing it. Democrats and the president are hopeful a deal will be reached soon. Fresh talks were arranged after negotiations broke down last night when House Republicans said they couldn't support what the president and the Democrats want.

Let's start off our coverage with Jessica Yellin. She's up on Capitol Hill, where we're watching what's going on.

There's a meeting either under way already or still going on. What do we know about this meeting, Jessica?

JESSICA YELLIN, CNN CONGRESSIONAL CORRESPONDENT: Wolf, there was supposed to be a meeting under way right now. A whole slew of Democrats showed up to it, and the Republicans didn't show. They say they were upset that it wasn't just the principals who agreed to negotiate, that it was too crowded. So the Republicans want that meeting rescheduled. Democrats say there was clearly a miscommunication, and so they're going to reschedule that meeting for another time, insisting that staff is hard at work hammering this away. This is just the latest hiccup in these ongoing discussions. A lot of fluidity here, not a lot of communication. But what I do know and can tell you is that House Republicans want a few things included that they say could get them a lot closer to signing off on the deal.

I think we have a graphic of that, and I'll tell you some of their principles.

They want this bailout not to be entirely funded by taxpayers. They would like some of that bailout to be funded, at least in part, through some form of an insurance program so that private money is in it.

They also say some of the deal breakers or the issues they really don't like is this idea of having taxpayers invested in this whole bailout so that taxpayers get a return, because they say that means the public is buying a company. They don't believe in that.

And the other piece they don't like is this idea that some of the profits go to an affordable housing fund. They think that's a democratic program. Democrats say that's a process to help homeowners. So they're very far part on those two final points. I can tell you the insurance program, the first thing I mentioned, is something Democrats might be able to stomach, and so might the Treasury.

Now, one of the big questions is, how willing are the Republicans to agree to some kind of negotiated bailout? We talked to Roy Blunt, the man who is going to sit down at some point today and negotiate for the House Republicans. Here's what he said.

(BEGIN VIDEO CLIP)

REP. ROY BLUNT (R), MINORITY WHIP: If there's no real negotiation, there won't be a deal. And virtually all of my colleagues can go home and explain what was wrong in their mind with the deal that was being offered and how just a few additions here and there could have really made a big difference for taxpayers.

(END VIDEO CLIP)

YELLIN: So, in other words, Roy Blunt saying they'd better give or they're walking away from this whole thing -- Wolf.

BLITZER: All right, Jessica. What are the Democrats emphasizing right now, the Barney Franks, the Chris Dodds, the Democratic leaders?

YELLIN: Two points. First, they say this was the administration's proposal. The Democrats made significant changes with the Republicans in the House. They were incredibly close to a deal. They made a lot of improvements. And it was, in their view, John McCain who upset the apple cart.

Here's what is Harry Reid had to say.

(BEGIN VIDEO CLIP) SEN. HARRY REID (D), MAJORITY LEADER: The insertion of presidential politics has not been helpful. I repeat, the insertion of presidential politics has not been helpful. It's been harmful.

(END VIDEO CLIP)

YELLIN: So there's a lot of frustration up here, Wolf. And still, we're waiting to find out if and when that meeting is going to happen.

BLITZER: So, I take it, Jessica, that Congress, which was supposed to go into recess, go into their little adjournment today, that ain't happening by any means. These guys are staying put because now the markets are closed, it's after 4:00 p.m. here on the East Coast, and there's no deal yet, but they're staying where they are.

YELLIN: That's right. A lot of rolling up the sleeves and drinking coffee all this weekend. They will be working through this weekend.

BLITZER: All right. We'll stay in touch with you, Jessica. Stand by.

After John McCain rushed back to Washington for a high-profile meeting over the bailout, some Democrats say he wound up hurting the negotiation process.

Let's go to our White House correspondent, Ed Henry. He's watching the story for us.

All right. What's the view, Ed, from the White House? What are we learning there?

ED HENRY, CNN WHITE HOUSE CORRESPONDENT: Well, Wolf, the very latest here is that the deputy chief of staff, Joel Kaplan, is one of a handful of officials who have been working the phones all day. He told us a short time ago that they're getting reports here at the White House of what he says is very good progress on the Hill. But still, no actual agreement, obviously, as Jessica was reporting.

This, despite the fact that the president yet again this morning came out, spoke, was trying to product House Republicans in particular to come along and support his bailout plan. He's just not getting them to come along. And let me give you a dramatic anecdote that tells that story.

Two Democratic sources say that after this meeting at the White House last night fell apart, Democrats, including Barack Obama and Speaker Pelosi, went into the historic Roosevelt Room to sort of plot what they were going to do next, what they were going to say when they came out to the television cameras out here on the driveway. But instead, these two Democratic sources say there was a knock at the door, Treasury Secretary Henry Paulson walked in, and literally got down on one knee and started begging, half jokingly, but begging Nancy Pelosi, don't take the Democrats to the cameras, don't blast these stalled talks. It's going to tank the markets, it's going to only make things worse.

The Democrats agreed, but the point is there was a time around here when this White House could largely get what it wanted on Capitol Hill, especially from Republicans. Those days are long over -- Wolf.

BLITZER: Interesting. The first lawmaker to emerge from that meeting, Senator Richard Shelby, the Republican from Alabama. He came out and simply said no deal whatsoever. I guess no one got down on one knee and begged him not to make a statement to the news media.

HENRY: That's right.

BLITZER: All right. Let's talk about John McCain right now.

He's in Mississippi getting ready for tonight's debate. Earlier, he had said he would not go to the debate if there was no deal. But he's now there getting ready for the debate, even though there's no deal.

What happened?

HENRY: Well, what's interesting is this decision was made so quickly, John McCain, under a lot of pressure to not face charges that he was ducking out of this debate. McCain aides say it was just an hour before he left D.C. that McCain finally made the decision that in fact he was going to go ahead and move to the debate, go there.

In fact, it was made so quick that one person in the entourage was arriving late, and we're told that they were rushed onto the plane. The Secret Service got upset because their bags hadn't been looked at, so they were checking the bags sort of in the aisle as the plane was taking off. It gives you how quickly -- an idea of how quickly this decision was made.

McCain aides say look, there has been significant progress made. That's why he decided to go ahead to the debate. But that's really putting the best face on it.

As you know, in the middle of the week, when McCain said, look, I'm going to suspend my campaign, he said, we need to delay the debate until "we have taken action to address this crisis."

That action has not been taken on the Hill yet. And that's why you have Democrats like Harry Reid saying basically that John McCain blinked.

Republicans are trying to defend McCain on the Hill and saying look, by him coming to Washington and Obama coming to Washington, that focused everyone's attention. But the bottom line is there's still no deal -- Wolf.

BLITZER: Ed Henry watching all of this at the White House.

Thanks very much.

Barack Obama, he's getting ready for tonight's debate, he's getting ready to challenge John McCain.

Let's go to Ole Miss right now. Candy Crowley is getting ready.

I guess you're over there where all the reporters are, Candy, getting ready for this debate. It's only a few hours away from now.

First of all, tell us about Senator Obama's reaction. What is he saying about this stalemate in negotiation over this bailout?

CANDY CROWLEY, CNN SR. POLITICAL CORRESPONDENT: Well, shortly before he left Washington, actually, he seemed to a little bit agree, at least with what John McCain is saying, which is -- he said, well, there has been some progress. They are moving forward.

It did not stop him, however, from kind of dumping on what happened yesterday at the White House.

(BEGIN VIDEO CLIP)

SEN. BARACK OBAMA (D), PRESIDENTIAL CANDIDATE: I'm not sure that it was as productive as it could have been, but I think at this point it's important to just move forward.

(END VIDEO CLIP)

CROWLEY: Certainly not as harsh, Wolf, as other Democratic leaders, but he got his point across.

BLITZER: Candy, what about debate preparations for Senator Obama? How is he getting ready for tonight in the midst of this crisis over the financial markets?

CROWLEY: Well, they did truncate what they had planned. He was, of course, supposed to stay in the Tampa area for most of the week. They had set up kind of a mock set with the podiums. They brought in a former Clinton official who played the part of John McCain. But they never quite got through sort of the entire time the actual debate will take up.

But he has, I'm told, been doing some questions, you know, in the hotel in Washington, some briefings on the plane, that kind of thing. But obviously, it wasn't the totality of what they wanted to do.

BLITZER: Candy, all right.

Candy's down at Ole Miss getting ready for the debate.

Candy, stand by.

Jack Cafferty is here at the CNN Election Center.

Jack, we woke up this morning and for several hours we didn't know for sure whether or not there would be a debate.

JACK CAFFERTY, CNN ANCHOR: There's to deal. I thought he wasn't going to show up. BLITZER: There is going to be a debate.

CAFFERTY: So he's changed his mind.

BLITZER: Yes.

CAFFERTY: There's a reason the McCain campaign keeps Governor Sarah Palin away from the press. I want to play an excerpt from an interview that Palin did with the "CBS Evening News" anchor Katie Couric where she was asked about the bailout package. Listen to this.

(BEGIN VIDEO CLIP)

KATIE COURIC, "CBS EVENING NEWS": Why isn't it better, Governor Palin, to spend $700 billion helping middle class families who are struggling with health care, housing, gas and groceries, allow them to spend more and put more money into the economy, instead of helping these big financial institutions that played a role in creating this mess?

GOV. SARAH PALIN (R), VICE PRESIDENTIAL CANDIDATE: That's why I say I, like every American I'm speaking with, were ill about this position that we have been put in where it is the taxpayers looking to bail out. But ultimately, what the bailout does is help those who are concerned about the health care reform that is needed to help shore up our economy, helping -- it's got to be all about job creation, too, shoring up our economy and putting it back on the right track. So health care reform and reducing taxes, and reining in spending has got to accompany tax reductions and tax relief for Americans.

And trade, we've got to see trade as opportunity, not as a competitive, scary thing. But one in five jobs being created in the trade sector today.

We've got to look at that as more opportunity. All those things under the umbrella of job creation. This bailout is a part of that.

(END VIDEO CLIP)

CAFFERTY: Did you get that? If John McCain wins, this woman will be one 72-year-old's heartbeat away from being president of the United States. And if that doesn't scare the hell out of you, it should.

Here's the question: Is Governor Sarah Palin qualified to be president?

Go to CNN.com/caffertyfile and post a comment on my blog.

I'm 65 and have been covering politics as have you for a long time. That is one of the most pathetic pieces of tape I have ever seen for someone aspiring to one of the highest offices in this country. That's all I have to say.

BLITZER: She's cramming a lot of information.

CAFFERTY: There's no excuse for that. She's supposed to know a little bit of this.

You know, don't make excuses for her. That's pathetic.

BLITZER: It was not her best answer. I agree with you on that.

Thanks, Jack. Stand by.

One Republican congressman says no bailout plan should "leave the American taxpayers with the bag." That's from Congressman Eric Cantor. I'll speak with him live. That's coming up. He's one of those deeply concerned about what the president is doing, what the secretary of the Treasury wants to do.

He's leading those Republican who are resisting this bailout package. He's standing by live.

Also at tonight's debate, some people say -- and they're saying this -- that there will be three candidates. There will be McCain, Obama, and something called great expectations. Bill Schneider is standing by live to join us. He'll explain what that means.

And one of John McCain's supporters says McCain made a big mistake by threatening not to attend the debate. That coming from Mike Huckabee, the former Republican presidential candidate, former governor of Arkansas. Is Huckabee right?

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

(COMMERCIAL BREAK)

BLITZER: Decisive negotiations about to resume up on Capitol Hill right now over the fate of that $700 billion Wall Street bailout package. It's very much up in the air even as both presidential candidates get ready to debate tonight only a few hours away, four hours 44 minutes, to be precise. You can see it on your screen.

We're going to watch what's going on, speak with one of the leading House Republicans who's opposed to this package. That's coming up shortly.

(NEWSBREAK)

(COMMERCIAL BREAK)

BLITZER: We're only four hours plus, four and a half hours or so away from tonight's debate. You can certainly engage in your own debate with other viewers when you're watching it on CNN.com.

Our Internet reporter, Abbi Tatton, is here to explain this new element in viewing debates.

Abbi, how does it work?

ABBI TATTON, CNN INTERNET REPORTER: Wolf, this is an address we're going to want viewers to remember for tonight, CNN.com/forum. That's where you can go on and create a badge and weigh in on what you're seeing during the debate, on how the candidates are doing.

CNN viewers are doing it already. CNN analysts and contributors are going to be doing it as well.

Let me show you how to start here.

Creating a badge, this is what viewers have already done, gone online. This is where you create your online profile for CNN's forum. Put in your top issues, join a party that you identify with.

You could start off -- the issues are here, and you basically put them -- your top three. Economy, if that's important to you; energy, if that's important to you. And that's going to create your online profile.

After that, you can go in and weigh in on what you want to hear, what you are hearing as the evening goes on. We've already heard from lots of people who are weighing in on whether this debate should go ahead. A lot of people focusing in on whether this should be foreign policy-oriented. A lot of people we're hearing on the forum already saying they just want to hear about the economy -- Wolf.

BLITZER: Abbi, thanks very much.

The debate coming up later tonight here on CNN.

Let's get back to the breaking news we're following. What's going to happen with the $700 billion Wall Street bailout?

House Republicans aren't happy with the Treasury secretary, Henry Paulson's plan. They're pushing an alternative proposal, one that they say reflects, and I'm quoting now, the free market, pro-taxpayer principles of their party.

Republican Congressman Eric Cantor of Virginia says the House GOP proposal makes sure it's Wall Street that pace for the recovery, not taxpayers. Eric Cantor, one of the leaders among the House Republicans, is joining us now live from Capitol Hill.

Congressman, thanks for coming in.

REP. ERIC CANTOR (R), VIRGINIA: Wolf, good to be with you.

BLITZER: It sounds to me like you've lost your confidence in the president of the United States and the secretary of the Treasury, Henry Paulson.

CANTOR: Absolutely not, Wolf. I think what we're all about here in Washington right now is trying to work as quickly as we can, as thoroughly as we can to try and come up with a piece of legislation that can be brought to the floor of the House as quickly as possible. There's no question that I think one thing that unites both sides of the aisle is we recognize the severity of the situation in our markets and we want to do something now.

The other point that I think really unites both Republicans and Democrats is, we want to make sure that the taxpayers who have been living by the rules across the country are not left paying the tab. And that's what is underlying our proposal here today. And we're working very hard to try and share that with as many members as possible to see if we can get some support behind it.

BLITZER: But the core principle that both the president and the secretary of the Treasury have come up with, you said flatly to that core principle that there should be this purchase of these illiquid loans, as they're called, this bad paper. That core principle you say is terrible.

CANTOR: Well, Wolf, no, we don't, because what we say is, first of all, we ought not take as the first resort the taxpayer dollars. What instead we should do is look at those assets out there that are insurable.

There are plenty of these assets that are so beyond assessing their risk that we're going to have to purchase. But for those classes of assets that have a track record in terms of their default rates, those mortgage-backed securities that we can predict their performance, the government can provide insurance there. That insurance can be paid for by a premium by the people who own those assets.

BLITZER: But you heard the secretary of the Treasury basically say, and correct me if I'm wrong, that's not going to work.

CANTOR: Well, I don't understand how that doesn't work when you have Ginnie Mae, you have Freddie and Fannie Mae, insuring half the mortgages in this country. Of course it works. The government knows how to insure mortgages.

Again, it doesn't work -- I think he is correct in saying it doesn't work when you have these exotic slice-and-dice instruments that include not only mortgages, but they include car paper and god knows what else. You cannot predict, I don't think, in any legitimate or valid way the risk of those securities. And we will have to go in and purchase those. And frankly, once the taxpayer have those in their possession, they will benefit at the end of the day, and there will be a return for the taxpayer.

But first things first. Let's not turn to the taxpayers. Let's have the investors on Wall Street, frankly, who own these assets pay for the premium, pay for the government guarantee so we can get our markets going again.

BLITZER: Do you know, Congressman, where Senator McCain stands on this specific issue, this House alternative proposal that you and your colleagues are putting forward?

CANTOR: Well, I'll tell you, Wolf, I met with Senator McCain this morning, and he has come to town to try and push things along. He understands that we've got to have a deal. He understands the consequences of our inaction are unacceptable. And I know that before he left for the debate tonight, he said that if we do not and have not finished our work, that he that will be back to try and work with us to make sure that we can.

BLITZER: But do you know where he stands right now? Is he with you? Is he on your team?

CANTOR: Well, I think you're going to have to ask Senator McCain or his campaign for his position on our proposal.

BLITZER: We tried, but aren't getting a clear answer. I was hoping maybe you did.

CANTOR: But what I can tell you, Wolf, I know that Senator McCain would say the principle of putting the taxpayers first and protecting taxpayers is of the utmost importance.

BLITZER: Congressman Cantor, good luck to you and good luck to everyone negotiating this deal. A lot at stake, as you know. Thanks very much.

CANTOR: Absolutely. Thank you, Wolf.

BLITZER: The White House rivals take center stage tonight at Ole Miss after days of uncertainty about whether tonight's debate would even take place. Barack Obama and John McCain will face off after all.

We're looking at what each one needs to do to come out ahead with the voters.

Plus, Obama's known for his polished speak skills, McCain for his foreign policy expertise. But will the public's great expectations for tonight's showdown trip them up?

We're watching all of this and we're watching the breaking news in Washington. Will there be a deal or won't there?

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

(COMMERCIAL BREAK)

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

Happening now: a power failure by the president, as House Republicans balk at Mr. Bush's $700 billion bailout. Why can't he sway over fellow Republicans?

Political high drama over the economy, but tonight's debate is supposed to be about foreign policy. What do the candidates need to say on that? We will ask our Baghdad correspondent, Michael Ware. He's here.

And I will be talking to Pakistan's new president about the war on terror. He has a direct message for Washington about straying across the Afghan border into Pakistani territory.

I'm Wolf Blitzer. You're in THE SITUATION ROOM. The American public has some high expectations for Barack Obama in tonight's debate showdown with John McCain. But will that prove to be a pit -- a pitfall for the Democrat?

Let's go to our CNN senior political analyst, Bill Schneider. He's at the debate site in Oxford, Mississippi.

So, the two candidates tonight -- we will end up with two candidates in tonight's debate; is that right, Bill?

WILLIAM SCHNEIDER, CNN SENIOR POLITICAL ANALYST: No, actually three. And the third is the one to beat.

(BEGIN VIDEOTAPE)

SCHNEIDER (voice-over): John McCain and Barack Obama will be competing with a third candidate named "expected." They will both be struggling to do better than expected.

What's expected? We asked voters which candidate they expect to do a better job in the debate. The answer? Obama, by a 25-point margin. Obama is considered an accomplished and skillful speaker. But he has to be careful not to lose the audience.

JOHN FEEHERY, REPUBLICAN STRATEGIST: The worst-case scenario for -- for Obama is that he comes off as distant, professorial, that he doesn't answer questions, that he's vague, that he doesn't really come -- speak directly to what the American people want.

SCHNEIDER: McCain faces a different risk.

FEEHERY: For McCain, his biggest danger is that he's not sharp, that he stumbles over a few words, that he gets his facts wrong, because I think, then, people will say that he's too old for the job.

SCHNEIDER: Obama should have the advantage on issues. Most voters say they agree with Obama, but not McCain, on the issues that matter most to them.

Those are domestic issues, like the economy and health care. Voters rate Obama better than McCain on domestic issues. But the first debate is supposed to deal with other issues.

SEN. JOHN MCCAIN (R-AZ), PRESIDENTIAL NOMINEE: This Friday, Senator Obama and I are going to have a debate. It's going to be over foreign policy.

(CHEERING AND APPLAUSE)

SCHNEIDER: McCain is rated higher on foreign policy issues, like Iraq and terrorism.

Debates are also about personal qualities, like empathy and leadership. Which candidate has the advantage on those? Neither. On personal qualities, Obama and McCain are rated about the same.

(END VIDEOTAPE)

SCHNEIDER: The first debate normally has the biggest audience and the biggest impact.

But, you know, Wolf, I think they will be a lot of interest in next week's vice presidential debate as well.

BLITZER: Next Thursday night at Washington University in Saint Louis, Ole Miss tonight. There will be tens of millions of folks watching.

All right, Bill, thanks very much.

Given the public's high expectations for tonight's debate, what is the best strategy for Barack Obama and John McCain?

Let's go to CNN's Brian Todd. He is in Washington, and he has been doing some studying of these two candidates.

What do they need to do in tonight's showdown, Brian?

BRIAN TODD, CNN CORRESPONDENT: Well, Wolf, on national security and on the economy, which will come up tonight, they have both got strengths they need to steer the audience toward, weaknesses they need to cover. And, with so much on the line now, neither can afford a major misstep.

(BEGIN VIDEOTAPE)

TODD (voice-over): Kids, have a seat. The heavyweights take the stage in a debate now seen as white-hot in its importance. This forum was supposed to focus on foreign policy and national security. But, given the bailout brawl in Washington and the calamity that provoked it...

RUBEN NAVARRETTE JR., COLUMNIST, "SAN DIEGO UNION TRIBUNE": Everybody wants to talk about the 800-pound gorilla in the room. That's the economy, the economic crisis.

TODD: If that happens, Republican strategists say it puts pressure on John McCain to make up for the perception that he's weaker on the economy.

TODD HARRIS, REPUBLICAN STRATEGIST: It's going to be critical during tonight for John McCain to literally reach into the camera and touch average working voters and let them know that, when he's president, he's not going to raise taxes, that he's going to make sure that Main Street's values prevail on Wall Street.

TODD: Another GOP strategist told us, McCain may struggle if he's asked too many specific about the crisis, and that he will do best to hit home his record against wasteful spending and earmarks.

As for Barack Obama, adviser Robert Barnett says, his pressure is clear: Counter the lack-of-experience label. ROBERT BARNETT, OBAMA CAMPAIGN ADVISER: I think that Barack Obama will want to show the viewers and the listeners that he, is in the foreign policy/national security context, prepared to be president.

TODD: A tall order against McCain, who will hit on his own Senate experience and support for the Iraq troop surge. Obama will have to counter perceptions that he's aloof, and explain his foreign policy strengths in a streamlined way.

BARNETT: It is very difficult to explain a complicated issue, let's say, about policy with Iran in 30 seconds. Don't try it at home you. You might get hurt.

(END VIDEOTAPE)

TODD: Now, both men also have visual and stylist challenges. Obama has got to avoid coming across as condescending as well. That's gotten him in trouble in this campaign.

McCain has to hold his temper in check, not show any signs that he's angry, even when he's not speaking. Wolf, you will recall some notorious cutaway shots in debate history, George Bush Sr. looking at his watch in 1992, Al Gore sighing repeatedly in 2000. You know as well as I do, Wolf, those kind of things can really kill a candidate in these debates.

BLITZER: Those come back to haunt those candidates big-time.

All right, let's go to Capitol Hill right now.

Nancy Pelosi is speaking to -- with reporters. Barney Frank is along with her.

Let's listen in.

(JOINED IN PROGRESS)

REP. NANCY PELOSI (D-CA), SPEAKER OF THE HOUSE: ... that will be signed by the president. And we will be working through the weekend to achieve that end.

We're well-served in those negotiations by the chair of the Financial Services Committee, Congressman Barney Frank. Under his leadership, much change has been made to the legislation that was initially proposed last week by the administration.

As many of you know, last Thursday, we were informed in a very grim meeting in the speaker's office about the state of the markets, and the need for Congress to intervene. Two days later, the administration sent over its proposal. And we were quite stunned to see a $700 billion price tag, on top of a bill that gave very expansive authority to the secretary of the treasury, without very much protection for the American taxpayer or homeowner, much oversight, or much upside for the taxpayer. Because of the work be of Barney Frank, working in a bipartisan way, those principles of, while we stabilize the market, to protect the taxpayer, to have forbearance for homeowners, to have a equity position for the -- for the taxpayer, to get some of the upside of what upturn there might be in these financial institutions, for us to have reform for CEO compensation, all of these were addressed, and these four principles were accepted by President Bush in his speech the night before last.

And we were pleased with that progress, again, in addition to reining in the expansive authority that was drawn for the secretary in the original legislation. So, in the course of this week, we have made great -- a great deal of progress. I would not include yesterday among the days where we made progress, because there was an intervening -- an intervening event that set us back, took time.

And now we're back on track. We invite any proposals. As I have said to the secretary, while we do not agree with your original bill, your core proposal about the buying of the illiquid paper, is one that you have preferred, studying many options. As long as other proposals do not interfere with that, the success of your proposal, I think that you should have the -- the latitude to accept any and all proposals.

I do not include in that, though, a reduction in taxes, a reduction of the capital gains tax that is proposed by the Republicans. But there are provisions in their proposal that I have said earlier in the week, if the secretary -- I don't see why the secretary could not accept some of those among the options he has to choose from, in order to strengthen these institutions, in order to bring stability to the markets, in order to turn around our economy.

We -- as I said, we will be in until -- as long as it takes. And we hope it doesn't take long, because of the markets need a message for us, that we're acting with deliberation, and -- and -- and that we understand that time is important.

With that, I'm pleased to yield to our distinguished chairman of the Financial Services Committee, Mr. Frank.

REP. BARNEY FRANK (D), MASSACHUSETTS: The encouraging news today was that we had two negotiating sessions involving the Senate Democrats, the House Democrats, and the Senate Republicans, at which the House Republicans declined to participate, one yesterday morning, one yesterday evening.

As of this morning, I received a phone call from the whip, Mr. Blunt. I think he called others as well. And he did send staff to the meeting that began early this afternoon.

And I'm told the staff has been participating. And it's in a negotiating and discussion session, the premise of which is that we're going to be using the core of the Paulson plan. As the speaker said, the Paulson plan, we, on the Democratic side, said, look, you may be talking about only buying up bad debts and having auctions.

We thought taking equity was very important. And he's agreed to that, probably because that's, we think, the best way to get upside, the best way to get upside for the American people. So, adding insurance as an option, the speaker has been saying that for a couple days. Senator Obama said it. That's never been an issue.

We assume, from their participation -- well, let's put it this way. There would be no point in participating in this negotiation if you weren't prepared to accept the basis of the Paulson plan. And that really, at this late date, is the only thing that's going to be able to -- to get through.

We have also been talking among ourselves, on the Democratic side, but also with the secretary of treasury and with the Republicans, about some principles that are important to us, as the speaker mentioned, curtailing excessive executive compensation as the price of getting any short-term here assistance for the federal government, an upside to the taxpayer in the form of warrants, so that people who are getting assisted by this -- you know, look, we're doing this to assist the whole economy.

But do you that in part by helping, inevitably, some people who are directly involved. We want warrants, so that, if they return to profitability, we -- we get some of that. We also have agreed that you're not going to get $700 billion all at once, without any -- any restrictions.

Now, we are still discussing the specifics of those. but Treasury has agreed to all three of those, executive compensation restrictions, warrants to get some money back, and some level of tranche.

We have some differences between us about how to do it. In the end, this is going to be the congressional amendment. It's the administration's bill, the Paulson plan sent up by the president, but we will put some changes in it.

There are some things that are already agreed to. Very significant oversight, that is already in the bill. And we have that. The bankruptcy issue remains a controversial issue. You know, it's not a secret that Senator Obama has said that he's not for it. And...

PELOSI: No, he's for it. He just don't...

(CROSSTALK)

FRANK: He doesn't want it in this bill, that he does not see how we can get it in this bill. And I have to say, we will -- a number of other things that will have improved it will be in here.

So, what I hope now will happen is in we will have -- there are five parties that -- that have to work on this, the Bush administration the secretary of the treasury, and the four caucuses, Democratic and Republican, House and Senate.

I just want to add one thing. People have said, well, pass it with just one group or another. That would be a grave mistake. This is a very serious policy step that the American government is taking. It's a fundamental shift in many ways about the relationship between the public sector and the private sector, although, hopefully, it will be temporary.

It depends for its success on the restoration of confidence, in part. If this were presented in a partisan way, if one of the political parties in either of the houses looked like they were saying no, if one of the presidential candidates appeared to be kind of trying to undercut it, not only does it become hard to pass. It makes it hard to work, because something that is not more broadly supported isn't going to accomplish the goal.

So, that's where we are. And we hope, over the next -- today, tomorrow, to -- to work this out.

I do want to add one other thing. People have said, well, are you doing it too hastily? I guarantee you -- and you can see this on the faces of the extraordinary men and women who are our staff who are working so hard and so creatively -- there will be as many hours put into this bill as get put into just about any other bill. Sadly, they have all been compressed into about nine days.

But this bill is getting a very thorough set of -- set of studies.

PELOSI: If I may...

(CROSSTALK)

BLITZER: Barney Frank is the chairman of the House Financial Services Committee. And Nancy Pelosi is the speaker of the House.

They say they're making progress in their discussions with Bush administration officials, including the secretary of the treasury, Henry Paulson. But they're complaining about the Republicans, especially Republicans in the House of Representatives, who are not necessarily on board right now.

In fact, as you heard from Eric Cantor, the Republican congressman from Virginia, just a little while ago live here in THE SITUATION ROOM, they're far from these so-called core principles that the Democrats and the Bush administration now seem to be edging closer towards.

There's a lot of the work that has to be done. And the -- the leadership says they're going to stay in Washington as long as it takes to get this done, but the clock, clearly, is ticking.

Stand by. We're going to have more on this breaking news story.

Also coming up in our "Strategy Session," Paul Begala and Kevin Madden, they will watch what's going on, and they will assess the latest.

A huge mistake, that's how one -- one-time McCain rival Mike Huckabee describes Senator McCain's threat to pull a no-show for tonight's first presidential debate. Was it? And, in Washington, the sense of urgency to throw Wall Street a lifeline is palatable. But what do the Wall Street experts think about all of this? Mary Snow working that story -- lots of news happening today right here in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: You're looking at these pictures from the campus of Mississippi, Ole Miss, Oxford, Mississippi. These are live pictures you're seeing right now. That's where the debate is getting ready to take place in four hours and 11 minutes. We're counting down to tonight's big debate.

Did John McCain make a big mistake by threatening not to participate in tonight's debate, then reversing course? Mike Huckabee says he did.

Let's discuss in our "Strategy Session."

Joining us, our CNN political contributor the Democratic strategist Paul Begala, and Republican strategist Kevin Madden, a former Romney spokesman.

Do you agree with Mike Huckabee, that the way John McCain handled this participation in the debate was a mistake?

KEVIN MADDEN, FORMER ROMNEY CAMPAIGN NATIONAL PRESS SECRETARY: Well, this wasn't a win, but it's a big mistake only if John McCain plays -- pays a big price.

And I think that, after tonight's debate, there's going to be a whole entire new conversation, a whole new dynamic to this race. And John McCain could be sitting in the driver's seat after tonight, if he shows that -- if he shows that he's the best presidential -- if he's the best candidate on all the big issues.

BLITZER: And foreign policy is his area of expertise.

PAUL BEGALA, CNN POLITICAL ANALYST: It is. And he has a great opportunity now to shift the focus. That's why Huckabee is right. It was a mistake to put the debate at risk.

I think Kevin's right, though. In 39 days, nobody is going to walk in the voting booth and say, gee, I can't quite decide, but I'm going to vote against McCain because, a month ago, he almost delayed a debate, right?

But here's the risk. He is starting -- McCain is starting to look erratic. He's a very tactical guy, anyway, but he's running in part on experience. I'm the solid, steady guy, right? I have 30 years of experience in Washington.

Well, the Palin thing was very tactical. And I think it's kind of blowing up in his face strategically. It was tactical when he said the economy is fundamentally sound. Now he says it's in a crisis. It's tactical when he blows off the debate. And he looks like a guy who panics in a crisis.

BLITZER: We keep hearing this from Democrats. And the word they use, as Paul...

MADDEN: Is erratic.

(CROSSTALK)

BLITZER: ... is erratic.

MADDEN: I must have heard that word, talking with Democrats, probably...

(CROSSTALK)

BLITZER: ... from the Obama campaign.

MADDEN: Right.

BLITZER: I pressed them. And I asked them, when you used the word erratic, that's a -- it's got a poisonous connotation there. What are you saying?

And he referred, as Paul did, to the notion, you know, he was for -- he -- he pointed out that the fundamentals of the economy were good. Then, the next day, he said, not so good. The AIG bailout wasn't a good idea. Then it was a good idea.

Is that erratic?

MADDEN: This is going to be the frame for the next 30 days. They're going to try and paint John McCain as somebody -- when he makes the argument about judgment and experience, they're going to say, no, that, in fact, that he's not really a maverick, he's somebody ready to shake up the status quo, but, instead, he's there to press all the wrong buttons.

But I think the American public right now is very -- is very tried and fed up with the way Washington has worked. So, John McCain has actually gone, and, again, he's taken on probably the most unpopular institution in America right now, which is Congress. And I think that is the frame that the McCain campaign has to get back to, that he's...

BLITZER: What's better, as a strategist, from the narrow political -- forget about what's good for the country, but -- even though that's the most important issue that we're worried about when the bailout is concerned -- what's better from McCain's perspective, deal or no deal?

BEGALA: I think -- I think, ultimately, he needs a deal.

Now, he may take a deal and vote against it. It's hard to imagine, actually, him opposing it, and it still passing, because I think, if he opposes it, the Democrats will walk, and it will blow the whole thing up. But if -- if Kevin's right, and he's got a good point -- running against Washington would be a very good thing -- harder for McCain, 26 years in Washington, 134 lobbyists helping his campaign.

But if you're going to do that, you don't rush back to Washington and inject yourself in the middle of this thing. And, look, I have talked to -- of course, it's the Democrats. They don't like him anyway. But you talk to Democrats on the Hill. And they're furious. And I think you saw Speaker Pelosi in her comment.

BLITZER: She just alluded to -- they would have been closer to a deal if they wouldn't have that -- what -- whatever she used, word she used, spectacle of the presidential candidates...

(CROSSTALK)

MADDEN: Paul makes a great point. And this -- at the outset, a lot of people said, look, Washington, D.C., is quicksand. This is a better argument to be made on the economy in places like Cincinnati and Detroit than it is Washington.

And that has probably been the strategic mistake that John McCain -- McCain has made in the last 48 hours.

BLITZER: Because he says, right after the debate, he's coming back to Washington to get involved in these negotiations.

MADDEN: Well, I think, at that point, there will be a deal. And John McCain is going to look at this very much the way he did the surge, which is, it's a very tough decision, but it's the right decision. And he's going to reap the political rewards when the markets start to respond, and the country moves forward.

BLITZER: Because, if there's no deal, and the -- the -- the dire scenarios that the president of the United States laid out the other night...

MADDEN: If -- if there's no deal in 48 hours, and we get to the markets open on Monday, and there's more bad financial news, Washington, everybody in Washington is going to start paying a price again.

BLITZER: Do you agree?

BEGALA: I do.

I think that the first deadline to look at is Sunday night, when the Asian markets open. A lot of people on the Hill, all of a sudden -- guys like me who don't know anything about the economy -- all of a sudden are schooled on when the markets open where.

BLITZER: So much of this impacts -- I mean, yesterday, the president had the meeting at 4:00 p.m. Eastern, when the markets closed.

This morning, at -- right after 9:30, after the markets open, he's out there making a brief speech, saying, you know what, we're going to get a deal. Just be patient, because the legislative process isn't always pretty, the way it unfolds.

All right, guys, we have got to leave it right there. But we have got a long night ahead of us, a good night. It's going to be fascinating to watch this debate.

(CROSSTALK)

BEGALA: Pop the popcorn, man.

(LAUGHTER)

BLITZER: I don't know about the two of you, but I can't wait.

Pakistan wants the United States to stay out of its territory. Its new president also has a message for Osama bin Laden. He's here. That's the Pakistani president, not Osama bin Laden. President Zardari, I sat down with him today, and we discussed. You're going to hear what he had to say.

And the U.S. says, they are enemy fighters with the blood of innocent Americans and others on their hands. So, there's more than $100 million in reward money for some al Qaeda and Taliban terrorists.

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

(COMMERCIAL BREAK)

BLITZER: On our "Political Ticker" coming up, words of praise for THE SITUATION ROOM from the floor of the United States Senate. Stand by for that.

(COMMERCIAL BREAK)

BLITZER: On our "Political Ticker" today, THE SITUATION ROOM is getting a little bit of due out on the Senate floor.

Listen to this from Senator Barbara Mikulski of Maryland.

(BEGIN VIDEO CLIP)

SEN. BARBARA MIKULSKI (D), MARYLAND: We need a situation room not at CNN. We need an economic situation room at the White House. I ask the president, while all this hubbub is going on at Capitol Hill, I ask the president to be the commander in chief of the economy.

(END VIDEO CLIP)

BLITZER: All right, getting a little publicity on the Senate floor, Jack. Not too bad.

CAFFERTY: She knows how to get her sound bite on CNN.

BLITZER: Yes.

CAFFERTY: My guess is, they won't play it on FOX, though.

BLITZER: No.

CAFFERTY: No.

The question this hour: is Governor Palin qualified to be president?

And the question is predicated on a -- on just a disastrous interview that Ms. Palin did with Katie Couric over at CBS.

Bit writes in Alabama: "As conservative columnist Kathleen Parker states -- quote -- 'Only Palin can save McCain, her party, and the country she loves. She can bow out for personal reasons, perhaps because she wants to spend more time with her newborn. No one would criticize a mother who puts her family first.'"

Larry writes: "No. But I feel sorry and embarrassed for Sarah Palin. McCain has sucked her into an 'opportunity' that is akin to a subprime mortgage situation on a house she can't afford."

Ron writes, "Finally, somebody in politics has appeared that can make George W. Bush look like an intellectual."

Andrea in Nova Scotia: "As an American, living in Canada, I cannot agree with you more about Sarah Palin's sorry, sorry, sorry interview with Katie Couric. The real question here is, what was John McCain thinking?"

Rachel writes: "Absolutely not. McCain ought to be ashamed of himself for making such a joke out of the presidential election. Palin's interview with Katie Couric was the most pitiful thing I have ever seen."

It really was.

"If she really loves her country, she needs to dismiss herself from this election. It would just be the right thing to do."

Tom writes, "Sarah Palin makes Dan Quayle look like a genius."

Laurie in Eau Claire, Wisconsin: "No, she's not qualified to be president. But 'Saturday Night Live' would sure appreciate it if she was."

If you didn't see your e-mail here, you can go to my blog, CNN.com/caffertyfile. Look for yours there, among hundreds of others.

We got 12,000 e-mails in the last 45 minutes on this Sarah Palin thing.

And, by the way, at 6:00 Eastern time, we will take a look at whether Joe Biden was such a great idea -- Wolf.

BLITZER: Jack, thank you.

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

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