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Breaking News: CNBC's Chief Washington Correspondent John Harwood Exclusive Interview with Sen. Obama on the financial crisis

Kevin Goldman

Interview conducted today in Charlotte, NC and broadcast during CNBC's live special tonight at 8 PM ET, "Wall Street Crisis: Is Your Money Safe?"

Following is the unofficial transcript.

All references must be sourced to CNBC.

Interview: Senator John McCain

CNBC's Chief Washington Correspondent JOHN HARWOOD:

Senator, thanks so much for joining us.

Senator JOHN McCAIN: Good to see you, John.

HARWOOD: You've been briefed on this massive bailout the Treasury's proposing. Should it happen? Should foreign-owned firms be eligible for it?

And will it work?

Sen. McCAIN: I haven't been--I've talked to Secretary Paulson, and I haven't gotten into all the details of it. Obviously the rescue is absolutely called for. But I have focused my attention on two things. One is that I respect and admire Secretary Paulson, but as far as I can dell--can tell, we're placing all those responsibilities in the hands of one person. I think we need to appoint an oversight board of the most respected people in America, such as maybe Warren Buffett, who's a Obama supporter; Mitt Romney, Mike Bloomberg, so that there can be some kind of oversight of, instead of just putting all this responsibility on a person who may be gone in four months.

The second thing is, this CEO executive compensation. I notice at Lehman, aren't bailed out but went bankrupt, that some $2.5 billion in compensation.

If they're bankrupt, where did they get that? But the major point is that no CEO of any corporation or business that is bailed out by us, that is rescued by American tax dollars, should receive any more than the highest paid person in the federal government and in...

HARWOOD: And foreign-owned firms?

Sen. McCAIN: On the foreign-owned firms, there's so much mixed ownership and there's questions about who really runs things and who is there, I'd have to look at that more precisely, and I'm sure that we can sort that out. But I think the major thing is that, as much as I admire Secretary Paulson, we've got to have more people that're respected by Americans. We're sending--we're spending as much or more than a trillion dollars on this. We all know, this is the greatest crisis we've faced, clearly, since the end of World War II.

HARWOOD: What do you say to conservatives in your party who look at the--look at this and say, `Wow, this is a lot closer to socialism than to free market capitalism'?

Sen. McCAIN: I say to them, `I'm with you in spirit, but I remember the S&L crisis, and we had to go in, we created the RTC, and we had to go in and fix these problems.' The Japanese, as we know, had a crisis some years ago. They didn't fix it, and their economy has limped along, as we all know. So this is going to require drastic action. The role of government in our society is clearly that we help Americans who are being hurt by circumstances beyond our control. This is Washington cronyism in excess and Wall Street cronyism in excess that has caused this. Meanwhile, the innocent bystanders are having their very life threatened, or certainly their futures threatened by this crisis.

HARWOOD: You mentioned cronyism and corruption on Wall Street and in Washington, and you've criticized Obama for self dealing here. How do you square that with the fact that your campaign manager, Rick Davis, was involved in some lobbying activities on behalf of Fannie Mae? And secondly, what specifically would you prevent, would you outlaw--what activity would you outlaw in Wall Street to make sure this doesn't happen again?

Sen. McCAIN: Now, on Wall Street, I'd--obviously we need to stop--we need to more--have more transparency. We need to take the regulatory agencies and merge them together in one effective agency. These regulatory agencies, this alphabet soup, was really designed for a different era. We're now in global transactions. We need more transparency. We need to combine the regulatory agencies, and we need to give them some more authority, if necessary, to do so. You know, Secretary Paulson had a package of recommendations sometime ago that basically did not really go anywhere. Maybe we can look at those and other recommendations in the future.

In Washington, I still think that it was the special interest money that went--and Fannie and Freddie money that went, and everybody was involved in this--not everybody, but certainly Senator Obama got next amount of money, except for the two Democratic chairman. His vice presidential search team was headed by Mr. Johnson, and...

HARWOOD: And your campaign manager?

Sen. McCAIN: And my campaign manager has stopped that, has had nothing to do with it since, and I'll be glad to have his record examined by anybody who wants to look at it.

HARWOOD: If this goes through, and it looks like it will, the next president--could be you--is going to have obligations of $700 billion, maybe a trillion dollars, that you hadn't planned on when you were formulating an agenda for--to run for president in the last two years. I asked Senator Obama this morning whether he would alter any of his tax or spending plans in response, he said no. What is your position--is there anything that you would alter in response to this huge, unexpected event, either in terms of changing your plans for tax cuts, for fiscal reasons, or changing your plans for private accounts on Social Security?

Sen. McCAIN: Well, let me answer your second question first. I've said, if someone voluntarily wants to invest their money that--their tax dollars, that's their own--that they should be able to--allowed to do that if they want to do that. If a young worker wants to. That's being portrayed as some kind of privatization. I mean, that's just outright distortion. And I still believe that young Americans ought to have, if they seek to, to be able to, in a voluntary fashion, to give--put some of their money into accounts with their name on it. And obviously that would be very restricted and have a lot of parameters associated with it.

On the first question, which--excuse me, I was focusing so much on the second question, the first one was about tax cuts.

HARWOOD: Is there anything else you would give up? Would you give up tax cuts because we couldn't afford them with this huge expense for bailout?

Sen. McCAIN: About tax cuts, yeah. I think anything that has the effect--that has the effect of a tax increase would be very dangerous and harmful to our economy at this time. If we tell the Americans, no matter at what level, that we are going to increase their taxes, such as a capital gains tax increase, such as any of the others that have been proposed by some, I think it would be a serious error. Look, it's still about spending. It's still about the fact that we've allowed government to grow by 40 percent, greater in the last seven years, greater than any great society.

HARWOOD: And you're spending--Washington's getting ready to spend another 700 billion, so...

Sen. McCAIN: We're going to--we're going to...

HARWOOD: ...can you still preserve all your tax cuts in that circumstance?

Sen. McCAIN: It's--we've got to make our economy grow, and nearly half to preserve--not have anything that has the effect on our economy of tax increases. This is an increase argument, not to increase taxes.

HARWOOD: Would you concede then...

Sen. McCAIN: So I would not at all support anything that is perceived as a tax increase.

HARWOOD: Would you concede then that you could not achieve your goal of balancing the budget in your first term with this huge bailout?

Sen. McCAIN: Not at all. I believe we can still balance the budget. I think that it's--that it is restraint of spending, and I think it's growth of government and the economy--and the recover of our economy. And anything you do that would have--take more money from the American people who are hurting more now I think would be a serious mistake.

HARWOOD: In the last week, you said initially that the fundamentals of the economy were strong.

Sen. McCAIN: And let me stop you right there. The American worker is the strongest, the best, the most innovative and the most productive, and they'll bring America back. And anybody who disagrees with that, I respect their disagreement.

HARWOOD: Late in the week there was a magazine article in which you cited financial deregulation as a model for health care reform.

Sen. McCAIN: Mm-hmm.

HARWOOD: So my question is...

Sen. McCAIN: (Unintelligible).

HARWOOD: ...why shouldn't average Americans...

Sen. McCAIN: Sure.

HARWOOD: ...look at that and say, either that you're instincts on the economy are out of step with theirs...

Sen. McCAIN: Mm.

HARWOOD: ...or even headed in the wrong direction?

Sen. McCAIN: Sure. What I was saying is that we can--you can go to an ATM anyplace in America, in any state in America. I want Americans to be able to get health insurance in any state in America. Right now, the citizens of the--my state of Arizona can't go outside the state of Arizona and get their health insurance. Of course they should be able to. So, again, I believe that--I'm a Teddy Roosevelt Republican. Teddy Roosevelt was the first one that took on the big trusts, first time we began to have regulatory agencies.

He said, unfettered capitalism leads to corruption. I've always agreed with that. I...

HARWOOD: Still a deregulator?

Sen. McCAIN: Of course. I don't--Americans don't want increased regulations on their lives. They want to lead their own lives as much as they can. I spoke out against--I argued against the excesses of Fannie and Freddie. I spoke out against corporate greed years ago. I've continuously done so against my own party and against others. And I haven't always made Wall Street happy over the years, and that's just a record. As far as I know, Senator Obama has never spoken out against any of these. He never spoke out against Fannie and Freddie and their practices. He never spoke out about some of the excesses on Wall Street, and I certainly did. So it's very clear. My record is very clear.

HARWOOD: Last question. Given the gravity of this situation, certainly we saw a lot of official Washington and ordinary Americans frightened by what they were looking at the other day. Can you really tell the American people that someone with Governor Palin's background and expertise is the best partner for you to attack an economic crisis as president?

Sen. McCAIN: Absolutely. She has cut taxes, she's reformed government. We have to reform government. This crisis is a product of Washington and Wall Street excess and corruption. It cries out for reform. She's a reformer.

She has a clear record of reform. So I think she is ideally suited. Rather than--frankly, her record, I think, argues in this crisis more for her candidacy rather than less.

HARWOOD: Senator, thanks so much for talking with us.

Sen. McCAIN: Thanks, John.

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