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The Situation Room

Banking Meltdown; Presidential Race Turns Ugly

Aired September 15, 2008 - 17:00   ET

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

WOLF BLITZER, CNN ANCHOR, THE SITUATION ROOM: All right, Jack. See you in a few moments.
And to our viewers, you're in SITUATION ROOM. Happening now, we're following breaking news. Stocks plummeting, Wall Street suffering its worst point drop since the 9/11 terror attacks, as the banking meltdown produces the largest bankruptcy in American history.

Also, even as the country's financial crisis worsens, the race for the White House takes on an ugly new turn. The candidates increasingly trading charges and counter charges while some of the real issues go ignored.

And women turning out to protest Sarah Palin, in her home state. Why she's putting off some, while raising passionate support in others.

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

But first the breaking news: Wall Street suffers its worst day in seven years, reeling from an investment bank meltdown just hours part today, Lehman Brothers, one of the oldest institutions of its kind, filed the largest bankruptcy in U.S. history. And Merrill Lynch facing financial disaster, as well, was virtually forced to sell itself to Bank of America, as other suitors simply walked away.

And now, the world's largest insurance company, American International Group, AIG, is seeking emergency funding as it struggles to stay afloat. All of this taking a devastating toll on stocks. The Dow Jones average plunging some 500 points today.

Let's go to our Senior Business Correspondent Ali Velshi and CNN's Christine Romans, they're following the breaking news for us.

Ali, start with you. This is bad and a lot of people are wondering, is it over, or is it going to get worse?

ALI VELSHI, CNN SR. BUSINESS CORRESPONDENT: Wolf, it's probably about three-quarters over. Let's put it that way. That's my expression of this.

This is the worst point decline on the Dow since September 17 of 2001, the day the Dow opened after the September 11th attacks. Let me tell you, the market had the entire day to digest the news that you were talking about, about Lehman Brothers. But just in the last hour, news came out from the federal government that they are not going to directly help AIG, one of the biggest insurers in the world. As a result of that, the market started selling off again. It wasn't finished selling when the bell rang at 4 o'clock. It was really trending heavily down, which means we may see that reaction in Asian markets and European markets overnight, and new selling tomorrow morning.

So for those of you looking at your portfolios there's probably more to come, maybe not the best time to lock in your losses if you sell. But there is still more to come on this one, Wolf.

BLITZER: All right, Ali, stand by. We'll be checking back with you.

The turmoil will be one of the first crisis to confront the new president, whoever he may be. Both candidates are speaking out forcefully about what's going on. Let's go to Christine Romans; she's working that part of the story for us.

What are they saying, these two presidential candidates, Christine?

CHRISTINE ROMANS, CNN CORRESPONDENT: Well, Wolf, what we're hearing from Obama is that he wants to tie Wall Street's woes with eight years of Republicans in office and McCain says this will never happen again if he is in office.

(BEGIN VIDEOTAPE)

ROMANS (voice over): One of these teams inherits a Wall Street crises. Each candidate at the top of the ticket says he's the man to fix it.

BARACK OBAMA, (D) PRESIDENTIAL CANDIDATE: We've had policies that have shredded consumer protections, that have loosened oversight, and regulation and encouraged outsized bonuses to CEOS while ignoring middle class Americans. The result is the most serious financial crisis since Great Depression.

ROMANS: Barack Obama pushed his outsider credentials merging his usual criticism of Washington with Wall Street. John McCain praised the Fed and Treasury for not bailing out Lehman Brothers.

JOHN MCCAIN, (R), PRESIDENTIAL CANDIDATE: The McCain/Palin administration will replace the outdated patchwork quilt of regulatory oversight and bring transparency and accountability to Wall Street. We will bring transparency and accountability, and we will reform the regulatory bodies of government. ROMANS: No matter how detailed their dueling economic plans, the next president will have to do some old-fashioned fire fighting first. Daniel Clifton analyzes Washington for Wall Street.

DANIEL CLIFTON, STRATEGAS RESEARCH PARTNERS: We believe this is a defining moment in the campaign. This is a crises, and in crises, leadership rises to the top. So both candidates have the challenge of being able to, one, be a leader in time of crises, but two, fashion a response that's going to make the American voter feel comfortable.

ROMANS: And at the core, the difference in the candidates' approach to fixing the problem, how much government involvement is enough? How much is too much? A nonpartisan think thank breaks down the choices this way.

ROBERT KUTTNER, DEMOS: There are two parts to how you fix this financial crises. One is that you recapitalize a lot of these financial institutions, pump money into them. The other is that you regulate it so it doesn't happen all over again.

(END VIDEOTAPE)

ROMANS: Both candidates have criticized regulation that got us here. Obama would favor more government oversight, not less. McCain has traditionally favored keeping government out of business. Many people, Wolf, frankly, struggling for some historical comparisons and a road map ahead. People looking all the way back to the Great Depression, even the devastating railroad bankruptcies of the 1800s, Wolf.

BLITZER: What a mess. Christine, thanks very much.

So where was Washington while this meltdown was heating up? Brian Todd has been looking into this part of the story. The blame game, I guess you could call it.

What are you learn learning.

BRIAN TODD, CNN CORRESPONDENT: Wolf, analysts are placing that blame on everyone from CEOs to investors to homeowners. And there is plenty of scrutiny of government overseers who didn't ask the tough questions at critical times.

(BEGIN VIDEOTAPE)

TODD (voice over): The scope of this fall, breathtaking. First, Bear Stearns. Now Lehman Brothers and Merrill Lynch, colossals of the investment banking industry that survived the Great Depression have all collapsed within the last five months. Analysts say the warning signs were there for years and they primarily blame the CEOs of these companies for being blinded by profits, loading up on risky subprime mortgages and real estate investments that were not worth what the banks paid for them.

But some say federal regulators were also asleep at the switch. The Federal Reserve Bank, though more responsible for commercial banks than investment banks, had the bully pulpit and could have wavered a warning flag years ago that they were engaging in risky behavior.

Some observers lay much of that responsibility on the leadership of Alan Greenspan, who left the Fed in 2006. After the dotcom bubble burst early this decade, they say, the Fed under Greenspan should have warned the housing marked was on a similar track.

BILL FLECKENSTEIN, AUTHOR, "GREENSPAN'S BUBBLES": The Fed encouraged deregulation and securitization, which made banks and lending institutions think they wouldn't be responsible for the individual mortgage, which helped cause -- which allowed any consumer to get almost an unlimited amount of money.

TODD: Contacted by CNN, a representative for Greenspan said he wasn't available for comment but in a network interview on Sunday, Greenspan did say the government should not try to protect every single institution. But congressional overseers, analysts say, could also have pressured the Fed more, could have asked tougher questions of banking industry leaders, but too heavily announced by them and by quasi-government banks Fannie Mae and Freddie Mac.

PROF. JEREMY SIEGEL, UNIV. OF PENNSYLVANIA: We know with Fannie and Freddie, tens if not hundreds of millions of dollars were spent lobbying Congress to, you know, to curry favor, and as a result, ignore many of the risks that these institutions as well as Freddie and Fannie were taking.

(END VIDEOTAPE)

TODD: A spokeswoman for the Senate Banking Committee was working on a response to that, did not get back to us in time for this story. A spokesman for the House Financial Services Committee says that panel did try to reform Fannie Mae and Freddie Mac but was often thwarted by the Bush administration. The White House says that's a joke. That they tried to reform Fannie and Freddie, but it was Democratic committee leaders in Congress, who often got in the way, Wolf. So, blame game going around a lot here in Washington.

BLITZER: Not surprising and it's going to escalate, as well, Brian. Thanks very much. >

We want to just alert our viewers, we're expecting to hear from Senator Barack Obama shortly. We're standing by for his remarks. We'll go there live once he starts speaking.

Senator Obama getting ready to address his supporters and we think, we're told, he's going to be speaking out on this crisis, this economic crisis, as well.

In the meantime, let's go back to Jack; he's got the "Cafferty File".

CAFFERTY: Thanks, Wolf.

A little more housekeeping here before we get to the question of the hour. We want to welcome a new viewer to the SITUATION ROOM. Meet Jonah Marshall Bonin, this is the brand new son of my producer, Sarah Leader (ph) and her husband Todd Bonin, who produces "Squawkbox" on CNBC. But Jonah is arguably the best producing they've ever done, either one of them. He was born Sunday morning, weighed eight pounds, reportedly didn't give his mother too tough a time in getting here. We wish the Bonin family all the best.

Back to the top story of the day: Former Federal Reserve Chairman Alan Greenspan calls it a once in a century financial crisis. Lehman Brothers, one of the oldest investment banks on Wall Street filing for bankruptcy after it failed to find a buyer; Merrill Lynch being bought out by Bank of America; insurance giant, AIG, the largest insurer in the country desperately trying to raise money in order to stay in business; the stock market cratered today down over 500 points.

Fannie Mae, Freddie Mac already under federal takeover. Their stock is worthless. And Wilbur Ross, a billionaire investor, is predicting we could see 1,000 bank failures in the months ahead.

Change and reform are two words we hear a lot of on the campaign trail. When it comes to our financial system, we need both. And it seems clear that things are going to get worse before they ever start to get better.

Here's the question: Which candidate is better able to handle a once-in-a-century financial crisis? Go to cnn.com/caffertyfile. You can post a comment on my blog --Wolf?

BLITZER: Jack, if somebody would have said -- Jack, and you covered the financial world for a long time, Lehman Brothers, Bear Stearns, Fannie Mae, Freddie Mac, and others, American International Group, the largest insurance company in the world, that these companies are either going to go broke or teetering. What would you have said?

CAFFERTY: Obviously everybody's stunned, but when you look back at the greed and avarice that operated during the housing boom and these mortgages that were written for anybody who walked in the front door whether they had change for a quarter in their pocket or not -- I read today that Lehman Brothers has $60 billion in bad mortgage paper.

And you know, it's the greed and the idea that these trick mortgages, these subprime mortgages were a gold mine for the big investment banks that worked for a while. But then when people began to default on the mortgages, couldn't make their house payments, couldn't borrow against the equity in their homes because of the declining price and value of the real estate. Then all of a sudden, these mortgage investments became not worth the paper they were written on.

And it's the old story. There ain't no free lunch. Government's probably got to do a better job of regulating and overseeing these systems. You can't allow these greedy buzzards to go and bundle up all this stuff, peddle it out the backdoor at a premium, as an investment tool, and not figure that someday, the pigeons will come home, or the chickens are going to come home to roost.

This was bad paper from the get-go. These mortgages were never viable. They were always in danger of going into default. And when housing prices topped out, the whole thing began a chain reaction. Here we are. There's more trouble to come. We're not out of this by a long shot.

BLITZER: I think you're right. Well said, Jack. Thanks very much good to have Jack back if the SITUATION ROOM.

She's certainly a polarizing figure among some key voters she is hoping to attract. That would be women, why Sarah Palin may be putting off as many female voters as she is attracting. We'll tell you what's going on.

Also, what would Sarah Palin and John McCain do about the country's worsening financial crisis? I'll ask a top McCain campaign adviser, the former head of Hewlett-Packard, Carly Fiorina, she's here in the SITUATION ROOM, this hour.

Plus, we're live on the campaign trail with the Democratic vice presidential nominee, Senator Joe Biden. He's getting ready to speak at a rally in Michigan. And later, Senator Obama's getting ready to speak. We'll go there live. Stay with us.

(COMMERCIAL BREAK)

BLITZER: Since Sarah Palin joined the Republican ticket, she has improved John McCain's standing with women, but not every female voter certainly agrees with her strong stance on some of the moral issues, moral values, as their called. That's even true in her home state of Alaska. That's where Jessica Yellin has been spending the past several days.

All right, Jessica, you're in anchorage for us. What's Governor Palin's support level among women based on what you're learning?

JESSICA YELLIN, CNN CORRESPONDENT: Wolf, folks here in Alaska, women in particular, are sharply divided in their views of their governor. In fact, a women's protest against Sarah Palin drew the largest crowd Anchorage officials can remember in history here.

(BEGIN VIDEOTAPE)

CROWD CHANTING: Yes, we can! Yes, we can!

YELLIN (voice over): Anchorage police estimated at least 1,500 protesters turned out for this anti-Palin rally declaring electing her would turn back the clock.

UNIDENTIFIED FEMALE: The message is that I'm a woman. I live in Alaska and I do not support Sarah Palin.

UNIDENTIFIED FEMALE: She is anti-abortion. You know, every woman should have the right to choose.

UNIDENTIFIED FEMALE: We have fought so hard to get where we are now to take a step back and take her views, absolutely no, no.

YELLIN: It wasn't just Democrats. Among the more emotional, this woman who says she's a Republican and a born again Christian.

UNIDENTIFIED FEMALE: I feel very strongly that other Christians need to examine their heart, and ask themselves is she really walking in a way that they want to follow.

YELLIN: A few miles away, the passion just as high at a farewell rally for Palin.

UNIDENTIFIED FEMALE: She represents women with morality message. She's pushing the morality agenda.

UNIDENTIFIED FEMALE: There has never been, I don't think, even with Hillary Clinton someone who is as poised and as much of a female role model as Sarah Palin is.

UNIDENTIFIED FEMALE: I don't think she's a feminist. She's a woman doing a job.

YELLIN: On stump, Palin does not shy from her image as a strong women. She sells herself as a barrier breaker.

SARA H PALIN, (R), VICE PRESIDENTIAL CANDIDATE: Alaska, were men are men and women win the Iditarod.

First women can break the glass ceiling for once and for all. YELLIN: You might think that would appeal to women. But Palin is actually doing better with men. The latest CNN opinion research poll shows 62 percent of men have a favorable view of Palin, that's 9 points higher than women. How Palin's reception by women, and her historic candidacy play at the ballot box, is still the big unknown.

(END VIDEOTAPE)

YELLIN: Wolf, another sign of how Sarah Palin has energized the base on both sides is that donations have markedly increased to both groups that support abortion rights and those that oppose abortion rights since Sarah Palin joined the ticket - Wolf.

BLITZER: Thanks, Jessica. Jessica's up in Alaska for us.

In just a matter of weeks, the race for the White House has taken a rather ugly turn with the candidates now spending an increasing amount of time and money lobbing charges and counter-charges at each other. Carol Costello is back. She's looking into this part of the story.

So, what happened?

CAROL COSTELLO, CNN CORRESPONDENT: What happened? Well, I guess you could say the race tightened up. Who knows who will win? And what happens when it's a horse race? Well, politicians apply the golden rule of winning an election and it has nothing to do with the issues.

(BEGIN VIDEOTAPE)

MCCAIN: Senator Obama's party has been ...

OBAMA: They've within talking about lipstick.

COSTELLO (voice over): The ugly is certainly back in 2008. Who cares about real issues when you can lob bombs like these?

UNIDENTIFIED MALE: Truly vial, dishonest smears.

UNIDENTIFIED FEMALE: He's the biggest celebrity in the world.

UNIDENTIFIED MALE: Politicians lying about their records.

UNIDENTIFIED MALE: Legislation to teach comprehensive sex education to kindergarteners.

MCCAIN: I'm John McCain and I approve this message.

COSTELLO: Even Karl Rove who never shied away from going for the political jugular said the McCain camp has gone a step too far. Then again, he said the Obama camp has too, by combating McCain's attack ads with a bomb of its own.

UNIDENTIFIED MALE: He admits he still doesn't know how to use a computer. Can't send an e-mail.

OBAMA: I'm Barack Obama and I approved this message.

COSTELLO: Voters tell me they're angry about the negativity. And didn't both men pledge this campaign would be different?

MCCAIN: I pledge again a respectful campaign.

OBAMA: Let's see if we can just run a positive campaign and not engage in the same old attack strategies.

MCCAIN: And we're also going to prove that negative attack ads don't work either.

COSTELLO: It all sounded so -- noble. So why go negative now? Many analysts say it's simple. It works.

GEORGE LAKOFF, UNIVERSITY OF CALIFORNIA, BERKELEY: Because in the McCain case, it's very clear negativity works. And it's working, so they're going to use it.

COSTELLO: And those angry voters?

LAKOFF: I don't think they mean what they say. If they really were sick of it, they wouldn't be watching the TV. It's that simple.

COSTELLO: Lakoff says a presidential campaign is rarely won on issues. Voters care about five things: values, authenticity, trust, communication, and identification. In a nutshell, if a candidate is like me, I know he'll make the right decision.

LAKOFF: In some ways, it's sad because you can bamboozle the voters with those things. On the other hand, a voter doesn't know what's going to happen two years from now. So it is important to know that a candidate has your values. (END VIDEOTAPE)

COSTELLO: Well, expect the race to become uglier and not just because of the tit for tat coming from the candidates, although that will probably continue, too, but because independent groups are gearing up too, spreading ads not about the issues but about character.

BLITZER: Those are going to be coming out in big numbers over the next few days. And they're going to be even more assertive and more aggressive.

COSTELLO: It's already started.

BLITZER: Yes, I think that's coming up. All right, get ready for that, Carol.

And we're waiting to hear from Barack Obama; he's going to be speaking. We'll go there live in the SITUATION ROOM, once he starts speaking. That's coming up.

Also, there have been new deadly takes in Iraq as the Defense Secretary Robert Gates arrives to oversee a change of command. >

And did text messaging play a role in that deadly commuter train crash near Los Angeles? There are new developments in investigation. Lots of news happening today, right here, in the SITUATION ROOM.

(COMMERCIAL BREAK)

There he is, Joe Biden speaking about Senator John McCain in Flat Rock, Michigan. Let's listen in.

(BEGIN LIVE FEED, IN PROGRESS) SEN. JOE BIDEN, (D), VICE PRESIDENTIAL CANDIDATE: He said he'd change the tone in Washington. That he'd restore honor and dignity to the White House. Well, we saw how that story ended. We saw that how that story ended, a record number of home foreclosures, home values tumbling, and the disturbing news that the crisis we're facing on Main Street is now stretched all the way to Wall Street. Taking down Lehman Brothers, and threatening other big financial institutions.

We've seen eight straight years of job loss; nearly 46 million people without health insurance. Average incomes in America down. The price of everything else from your groceries to your gasoline up. They've skyrocketed.

A military -- a military stretched so thin from two wars, one of necessity and one of choice. And multiple deployments of our troops so that they are in fact, stretched thinner than they've been at any time since the end of World War II.

A nation more polarized than any time I have seen in my career as a United States senator. And a culture in Washington where the very few wealthy and powerful have a seat at the table, and the rest of us are on the menu. That's the Washington they've delivered to us.

(APPLAUSE, CHEERING)

Now, eight years later, excuse my back -- eight -- you've got my back!

Eight years later, eight years later is a familiar ring here. We have another Republican. A nominee who's telling us the exact same thing. This time, he says it will be different. It really will, he says. This time we're going to put country before party. We're going to change the tone, we're going to reach across the aisle. We're going to change the Republican - they're always changing the Republican Party if you notice. We're going to change the Republican party. We're going to change, we're going to change the way Washington works.

Folks, we've seen this movie before. And we know the sequels always worse than the original. So ladies and gentlemen -

(APPLAUSE, CHEERING)

Ladies and gentlemen, if we forget this recent history, we're going to be doomed to repeat it. We're going to have four more years just like the last eight years. Now, look, look, say to your friends, if you really want for more years of George Bush, we've got just the guy for you. Just the guy. You know, just as George Herbert Walker Bush became known as Bush 41, and George Bush, our present president, George W. Bush became known as Bush 43, John McCain can easily become known as Bush 44, if we let it happen.

(END LIVE FEED, IN PROGRESS)

BLITZER: All right, there he is, Joe Biden lashing out at John McCain. Earlier today here on CNN, you saw the Republican vice presidential nominee, Sarah Palin, she spoke live on CNN. You also saw John McCain like on CNN. We're standing by because Barack Obama is about to go live, as well. We're awaiting his remarks, stand by for that.

In the meantime, let's go to Carol Costello, she's monitoring some other important stories incoming to the SITUATION ROOM.

Carol, we heard your report a little while ago. It's getting tough out there. And Senator Biden, Governor Palin, all of them are upping the ante, if you will.

COSTELLO: Oh, yes, they're getting in digs aren't they? And good ones, too.

In other news tonight, we just have this news in, there is more devastating economic news. Hewlett-Packard says it plans to cut more than 24,000 jobs for about 7.5 percent of its workforce over the next three years. Nearly half of the reductions will be in the United States. The company says the move is designed to create greater opportunities for customers while streamlining costs. >

Violent crime in the U.S. is down slightly, in all categories. The FBI released its annual crime report today. Shows that overall violent crime dropped 0.7 percent last year nationwide. Overall violent crime has steadily declined for 15 years until small increases occurred in 2005 and 2006. The new data shows that violent incidents are near a 30-year low. >

And in news around the world, at least 34 are dead after three bombings today in Iraq. Two car bombs exploded minutes apart in central Baghdad. Iraqi officials say 12 people were killed. Later in the day, a female suicide bomber set off explosives in Diyala Province. Iraqi officials say at least 22 people died in that attack. The bombings come as Defense Secretary Robert Gates arrived in Iraq to oversee a change in command of the U.S.-led forces in that country.

Back to you, Wolf.

BLITZER: General Petraeus moving on. General Odierno becoming the new U.S. military commander in Iraq. All right, Carol. Thanks very much.

To our viewers, you're in the SITUATION ROOM. Happening now, meltdown on Wall Street with Lehman Brothers forced into bankruptcy and more than 100 banks still on a watch list, is your money as safe as the U.S. government says it is? We're going to have some answers about what you should be doing, what you should be thinking right now

Also with all eyes on the nation's economy, which presidential candidate's plan could help turn things around? Senator McCain's economic adviser Carly Fiorina will be here to tell us how he plans to address this is financial crisis.

And after Ike, Texas facing devastation from the coast all the way inland. How the U.S. military is helping right now. That's coming up.

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

A huge investment bank's failure and Wall Street's worst day in seven years. All of this as millions of Americans wondering if their money is really safe.

CNN's Mary Snow is working the story for us.

Mary, how concerned should our viewers be right now about their 401(k)s, their savings accounts, retirement accounts? There's a lot of nervousness as there should be.

MARY SNOW, CNN CORRESPONDENT: A lot of nervousness, Wolf, but as far as cash and bank accounts or accounts at brokerage firms that are affected by this current meltdown, your money is safe but the question many people are asking, the FDIC says within a few hours this morning, it took in about 1300 calls alone from worried consumers. (BEGIN VIDEOTAPE)

SNOW: With Wall Street's seismic jolt, Treasury Secretary Henry Paulson tried to reassure a jittery public.

HENRY PAULSON, TREASURY SECRETARY: Our banking system is a safe and sound one.

SNOW: Paulson tried to boost confidence as fears escalated far beyond Wall Street.

ANDY SERWER, MANAGING EDITOR, FORTUNE MAGAZINE: I think the answer to that question right off the bat is yes are your money is safe but I think it's appropriate to sort of re-examine where your money is, how it's allocated.

SNOW: For money in banks, the federal deposit insurance corporation says 9 percent of banks are well capitalized. Still after 11 banks failed this year and 117 remain on a list of troubled banks, the FDIC is making a push to educate consumers that FDIC insurance covers deposits up to $100,000 per account.

SUZE ORMAN, PERSONAL FINANCE EXPERT: Those depositors have never lost one penny in the 75 years of the FDIC. Good to know in times like these.

SNOW: The FDIC Sandra Thompson says the agency's consumer hotline has been flooded.

SANDRA THOMPSON, FEDERAL DEPOSIT INSURANCE CORP: We try to clarify that most people keep their money at commercial banks and those deposits if they're in the limits are insured by the FDIC.

SNOW: What about money in brokerage accounts at investment banks like Lehman Brothers? The Security Investor Protection Corporation or SIPC says they're safe because brokerages have to keep customers' assets separate from their own.

STEPHEN HARBECK, SECURITIES INVESTOR PROTECTION CORP.: That cash and securities that belong to customers cannot be used in Lehman Brothers' business and segregated from the assets and from the creditors of the brokerage firm itself.

SNOW: And for investments in things like retirement accounts, "Fortune" magazine's Andy Serwer says now is a good time to re-examine them.

SERWER: Know exactly what you own. Is your cash really cash or is it some sort of bond fund that's a hybrid that's actually more troublesome than you think.

(END VIDEOTAPE)

SNOW: And Andy Serwer adds that much of this crisis, Wolf, began with sophisticated investors getting tangled up in investments they didn't know what they held. Bottom line, he says, learn from those mistakes and don't repeat those mistakes and get a handle on what exactly your investment is holding.

BLITZER: The stakes are so important. People are learning a lot about what they should be doing with their money. Mary's in New York for us. Thank you.

The death toll rises in one of the worst U.S. commuter crashes in decades and now disturbing new reports that text messaging may have played a role.

Also, McCain campaign economic adviser Carly Fiorina, she weighs in, who's to blame for the turmoil? And what will Senator McCain do about it?

Plus, scenes of utter devastation in Texas. We'll go live to the hurricane zone as the U.S. military joins the massive rescue and recovery effort.

Remember also, we're awaiting Barack Obama. He's getting ready to speak. We'll go there live once he starts talking.

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

(COMMERCIAL BREAK)

BLITZER: Carly Fiorina, a top economic adviser to Senator McCain. We'll be speaking with her. Wait until you hear who she blames for this economic mess. It's not just democrats. There's a republican involved, as well we'll be right back.

(COMMERCIAL BREAK)

BLITZER: Plunging stocks, failing banks, a grim financial picture. One that the Obama and McCain campaigns are being forced to confront now.

And joining us now a senior economic adviser to the John McCain campaign, Carly Fiorina. She's a former chairman and CEO of Hewlett- Packard.

Carly, thanks very much for coming in.

CARLY FIORINA, MCCAIN ECONOMIC ADVISER: Great to be with you, Wolf.

BLITZER: Did you ever in your wildest imagination believe that Lehman Brothers, Lehman Brothers, Fannie Mae, Freddie Mac, all of them are on the verge of collapse? Lehman Brothers going down, filing bankruptcy, did you ever think that would happen?

FIORINA: Well, it is unprecedented. There's no question. But in an odd kind of way, it is not unpredictable. We have seen over the last six to 12 months but particularly the last six, Wall Street mis- assesses risk, place overly complex financial bets on the assumption that housing prices could only go up. Fannie and Freddie have had a pattern of fraud abuse and deception very frankly and we have had a regulator in the SEC that in many ways has been asleep at the switch. So while it's shocking, I think we could have seen some of this coming.

BLITZER: So you say former Congressman Chris Cox, the chairman of the SEC, the Securities & Exchange Commission, has been asleep at the switch?

FIORINA: Well, I think it's very clear that we have in Washington a patchwork of regulatory agencies. The regulatory framework was designed 70 years ago, basically. The SEC has not had stringent oversight into these very complex financial instruments. In some cases it wasn't their fault because they were completely off balance sheet. But on the other hand, someone should have been asking how is risk being priced and it's clear across the board, risk was mispriced and now the American people and the American taxpayer are the ones being hurt.

BLITZER: Senator Obama made it clear that he's not necessarily blaming Senator McCain for this mess but he is blaming Senator McCain and the republican philosophy for this mess. They've been in power for the last eight years in the white house. Obama says, "It's a philosophy we've had for the last eight years, one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else. It's a philosophy that says even common sense regulations are unnecessary and unwise and one that says we should just stick our heads in the sand and ignore economic problems until they spiral into crisis."

Why should anyone believe that Senator McCain and vice presidential nominee Sarah Palin will change what has been an eight- year republican economic strategy?

FIORINA: Because for one, John McCain has been saying for at least a year, but more and more vocally over the last six months that the regulatory oversight in Washington has been a failure. Secondly, he has called for more vigorous regulatory oversight, but third and most importantly, I would remind Senator Obama, as he has perhaps forgotten, that it is a democratic-controlled congress over the last two years, the most important years of this crisis, that stood by and let Fannie and Freddie get out of control.

And so before he so blithely casts all the blame on President Bush and by the way, I think John McCain has been clear in saying that the Bush administration shares in some of this blame particularly around the SEC, Obama needs to remember that the democratic controlled congress who have a great deal of say over what happens with Fannie and Freddie let that situation get out of control.

BLITZER: All right, but you earlier blamed a republican Chris Cox, the chairman of the SEC, for allowing this collapse of Lehman Brothers and this mess on Wall Street to go forward.

FIORINA: I don't want to place all the blame at the feet of the SEC. That would not be appropriate. Wall Street shares a good deal of the blame.

But I do think it is absolutely appropriate to say that democratic-controlled congress did not do enough to intervene in Fannie and Freddie and the SEC did not do enough to oversee the risks that were being bourn by firms like Lehman or Merrill Lynch or others. I think both statements are true.

BLITZER: Even today, even today, John McCain speaking in Florida said the fundamentals of the U.S. economy are strong. And he's being hammered by the Obama campaign saying how can this man be so out of touch with what's going on, people are so nervous about their life savings, their 401(k)s. They see a meltdown, Merrill Lynch, Lehman Brothers. How can he say the fundamentals of the U.S. economy, Carly, remain strong?

FIORINA: First of all, he didn't. Once again, the Obama campaign is doing about what they did with the -- remember the hundred year war ridiculous comment? They chopped off the beginning and the end of his statements. John McCain was very clear today in saying the economy is in crisis.

He was also, however, equally clear in saying this is not about the American worker or the American small business. Our workers remain the most productive in the world. Our workers remain the most entrepreneurial and innovative in the world. Those are the fundamentals of the economy.

However, he went on very quickly to say the economy is in crisis, not because the American worker hasn't done their job. It's because regulators and Wall Street executives haven't done their job, and oh, by the way, the democratically controlled congress that oversees many institutions hasn't done their job either.

BLITZER: Carly Fiorina, we're going to play that entire chunk where he uses those words, the fundamentals of the economy are strong, remain strong and we'll let the viewers decide the context of what he meant. But we'll play that whole excerpt here in THE SITUATION ROOM. Thanks very much for joining us.

FIORINA: Thank you.

BLITZER: And as promised, we want to show you exactly what Senator McCain said about the economy today. Here in his own words, raw and unfiltered.

(BEGIN VIDEO CLIP)

SEN. JOHN MCCAIN (R), PRESIDENTIAL CANDIDATE: You know that there's been tremendous turmoil in our financial markets and Wall Street. And it is -- it's -- people are frightened by these events. Our economy I think still the fundamentals of our economy are strong, but these are very, very difficult times. And I promise you, we will never put America in this position again. We will clean up Wall Street. We will reform government.

(END VIDEO CLIP)

BLITZER: All right, there you have John McCain speaking in Jacksonville, Florida earlier today. We're standing by to hear from Barack Obama. He's getting ready to address a rally. We're told he's also going to be speaking on this financial mess that's going on. Stand by. We'll go there live once he starts talking.

Also, hurricane aftershock; Texans shake their heads at the extent of the damage from Hurricane Ike. It's becoming clear right now. We're going to show you what's left behind on Galveston Island.

And something we've all been warned not to do, that would be text messaging while driving. Is that what caused a train engineer to crash outside L.A.?

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

(COMMERCIAL BREAK)

BLITZER: Remember, we're standing by to hear from Barack Obama. That's coming up. We're awaiting the start of his remarks on the financial mess that's unfolding right now.

But there's other news we're watching. Federal officials investigating Friday's deadly train crash want to review cell phone records to see if an engineer on that train blamed for running a red light was actually texting. The number of dead from Friday's crash has now risen to 26.

Let's go to CNN's Thelma Gutierrez. She's watching this investigation for us.

All right. Thelma, what are you hearing?

THELMA GUTIERREZ, CNN CORRESPONDENT: Well, Wolf, I can tell you that right now, NTSB investigators are looking into the phone records to see what in fact that engineer was doing at the time of this crash.

Now, in addition to that NTSB investigation, Senator Barbara Boxer is also calling for an emergency hearing to look into the cause of the crash.

(BEGIN VIDEOTAPE)

GUTIERREZ: Friday evening, the Metrolink 111 is packed with commuters heading home unaware they're on a collision course. Federal investigators say it appears the Metrolink engineer ran a red light and crashed through steel switches on the tracks.

But why? Federal investigators are looking into several reasons, including allegations the engineer who was killed and whose name has not been made public, may have been text messaging moments before the fatal crash.

This video was posted on YouTube. It's a video tribute to the engineer. The NTSB is looking into local TV reports about the people who say they received text messages around the time of the accident. KITTY HIGGINS, NTSB: We have been in contact with those young men and their families. They've been fully cooperative. We're working with them, and we are going to be obtaining records from their cell phones and from the cell phones of the deceased engineer.

GUTIERREZ: It's against Metrolink policy for engineers to use cell phones or any other electronic devices while they're working. The NTSB says investigators have searched the wreckage and did not find a cell phone belonging to the engineer. And while text messaging is one theory as to what may have caused the crash, the NTSB says they haven't ruled out anything including whether or not the signals were operating properly.

(END VIDEOTAPE)

GUTIERREZ: A 50-year-old man has also died as a result of injuries, and that brings the death toll up to 26. Wolf?

BLITZER: Thelma Gutierrez, what a horrible story. Thanks for updating your viewers. I know you'll stay on top of this for them.

On the trail in the battleground state, we're waiting for Barack Obama to speak in Pueblo, Colorado. That is a battleground state. We'll go there live once we see him. You're looking at videotape right now.

Also, we'll talk to Lou Dobbs. We'll get his take on this financial crisis. What he thinks -- what he thinks might be needed to turn things around for all of us.

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

(COMMERCIAL BREAK)

BLITZER: Let's go right back to Jack for the Cafferty file.

Jack?

JACK CAFFERTY, CNN CORRESPONDENT: The question this hour is which candidate is better able to handle a once in a century financial crisis which is what former Fed Chairman Alan Greenspan is calling the current situation on Wall Street.

Claire writes from Florida, "Obama has way more credibility than McSame. He wasn't instrumental in voting for the legislation that put us in this mess. Put the blame where it belongs, on the republicans in congress who gave Bush and Cheney free rein in everything. They all got to go now."

Wayne writes, "McCain said today fundamentally the economy is in good shape. What planet is this guy living on? It's just sickening."

Terry writes, "It's embarrassing for me to admit I'm a republican. McCain/Palin represent everything wrong with politics. Considering he doesn't know how many homes he owns, yeah, I believe it. I'm voting for Barack Obama, a democrat, for the first time in 30 years. I'll take the critical thinking top of his class Harvard guy over the old guy that graduated at the bottom of his class."

Michael and Diane in Phoenix, "The last once in a century financial crisis in this country was the great depression run by republicans with the republican president. He didn't know much about the economy either. It took a democrat to get us out of that one and it looks like it may again."

And Jim in Gender, Colorado, says, "My vote is for McSame. We have a strong and vibrant economy. We have a strong and vibrant economy. We have a strong and vibrant economy."

If you didn't see your e-mail here -- is that you, Wolf?

BLITZER: Yes.

CAFFERTY: You didn't see your e-mail here, go to my blog at CNN.com/CaffertyFile and look for yours there among hundreds of others. We have gotten thousands of e-mails today. People are frightened. This is -- this is big-time stuff.

BLITZER: Good to have Jack Cafferty back. Thanks. Stand by.

Lou Dobbs is standing by to weigh in on this financial meltdown we're all following. Lou will join us right after this.

And we're also standing by to hear from Barack Obama. He's about to speak live about the financial meltdown. Stick around.

(COMMERCIAL BREAK)

BLITZER: Let's check in with Lou Dobbs.

Lou, what do you think? You've been watching these markets for a long time. Are we at the beginning, the middle, or the end of this crisis?

LOU DOBBS, CNN ANCHOR: Well, I can tell you only this. We're not at the beginning. Where we are in terms of the duration is just about anybody's guess. Everyone I've talked to in this town feels the same way, that it's impossible to look out and see it end or a conclusion right now. The reality is that the market today, even though the Dow Jones Industrials lost more than 500 points, the worst one-day point loss since September 11th, the reality is the markets handled the turbulence today fairly well. You know, but, of course, that is no guarantee of anything to come. But at least there is a sense that the federal government and this administration for the first time is getting hold of the issue and dealing with it intelligently, rationally and responsibly.

BLITZER: Do you have confidence in them?

DOBBS: I do not. But at this time, I don't have confidence in the leadership of Wall Street either. And the real issue is can they continue to mature in their responsibility? I have to give secretary Paulson and his team credit because for the first time, they've sent a strong signal that the federal government is through with the bail-out business as it was in the case with Bear Stearns. Whether or not that continues to be the case with the huge insurance firm AIG, so long as they maintain that position, they will be strong and will be moving us toward a resolution. If they falter, if they weaken and put forward more federal money, there's no telling where this thing ends.

BLITZER: All right, Lou, we'll see you in one hour. Lou Dobbs, thanks very much.