This is a rush transcript of "Special Report With Brit Hume" from July 14, 2008. This copy may not be in its final form and may be updated.

(BEGIN VIDEO CLIP)

HENRY PAULSON, TREASURY SECRETARY: Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.

REP. BARNEY FRANK, D-MASS., HOUSE FINANCIAL SERV. COMMITTEE CHAIRMAN: I don't think you can point to any bad decisions by Fannie Mae and Freddie Mac and say that's what caused them to be in trouble. They're in trouble because the housing market is in trouble.

(END VIDEO CLIP)

BRIT HUME, HOST: Well, what do you know? The federal government has decided it's going to make some credit available, and large amounts of it, if needed, to Fannie Mae and Freddie Mac in case the declining home values and unbelievable numbers of mortgages that they both hold that are the underlying assets get them into trouble.

And they will not, these two behemoths, be allowed to fail.

Some more thoughts on all this now from Mort Kondracke, executive editor of Roll Call, Nina Easton, Washington bureau chief of Fortune magazine, and the syndicated columnist Charles Krauthammer, FOX News contributors all.

Before we start, it seems a word might be in order about someone we all here at FOX and all here on this panel certainly regarded as a friend and someone we admired and had great affection for, and that is, of course, the late Tony Snow — Charles?

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: I wasn't an intimate of his, but I was a colleague for many years, and he was simply extraordinary.

He was a man in full. He had everything. He was smart. He was witty. He was very kind. He was elegant, well spoken. He was principled, and in the end, he showed us how courageous he was. I think he is one of the finest people I have ever known.

NINA EASTON, WASHINGTON BUREAU CHIEF, FORTUNE MAGAZINE: Courageous and upbeat, and just the way he approached both a difficult job at the White House, being under fire, and a difficult battle with cancer, he was always so — I know we have used the term "happy warrior" too much, but I think that he was such an upbeat, kind, always very generous with advice kind of person. And I will miss him deeply.

MORT KONDRACKE, EXECUTIVE EDITOR, ROLL CALL: I completely agree with Charles. He was one of the finest people I have ever met.

He was totally decent. He had not a cynical bone in his body. He was always cheerful, always cheerful, in the face of his grave illness. And talk about an inspiration to everybody, he was it.

HUME: You know, it's sad that he leaves us so early and died so young, but even when he was alive, this is a guy who could do so many things. He was so talented. He was athletic. He was musical. He wrote beautifully. He spoke eloquently. He had a multitude of interests and a profound depth of knowledge, a curiosity about everything, plus this tremendous devotion to family, love of baseball and everything else.

There really never was enough Tony to go around for all the things that were his opportunities and his responsibilities.

All right — let's talk a little bit about what the federal government has done today. We at FOX decided that "bailout" didn't really apply, that this was a "backstop," maybe — Mort.

KONDRACKE: It's rescue.

Look, this is George Bush, this housing plus credit crisis is George Bush's second Katrina, and he is very lucky, and the whole country is lucky that instead of "browning" at FEMA the way we had at Katrina that we now have Hank Paulson in the Treasury and Ben Bernanke at the Fed, who leap into these situations — Bear Stearns was the first one, Fannie Mae is the second one — and rescue the whole financial system, for all we know.

I mean, we don't know for sure that the collapse at Bear Stearns would have collapsed the whole financial market, but it might, and similarly with Fannie Mae.

HUME: You know, Nina, the perception is bound to take hold that what's happening here is that your tax money and mine and everyone else's is being put at risk here to save these two big fat companies.

Some conservatives will object because the company's management has been dominated by very prominent Democrats over the years. Is that a fair charge?

EASTON: And one of whom was going to run Barack Obama's vice presidential pick campaign, Jim Johnson, which got nixed.

HUME: The search, yes.

EASTON: It's interesting. I have to say this is the most interventionist bunch of free marketers since the last Republican administration when we — you saw $120 billion bailout of the S&L industry.

HUME: Is this a bailout?

EASTON: I think Mort is right. I think it's a rescue. And I don't mean to be flip, because if I was at the controls like they are, you know, I understand that argument that they are trying to tamp down a crisis in the housing market, and a crisis in the economy, basically.

But let's step back a second. Last fall, the Treasury Department came out with this whole plan that was brokered together to do this plan for these structured investment vehicles as a way to get banks to get rid of their bad assets. Nothing came of that, but once again, that was the Treasury stepping in with the private sector.

Secondly, Bear Stearns, brokering — lending money to J.P. Morgan to purchase Bear Stearns, which was just a fairly astonishing intervention in the market. And now this. You know, you take all of this together, and this president is going to write a legacy —

HUME: Right or wrong move.

EASTON: We'll see.

HUME: All right — is taxpayer money at risk, or not?

EASTON: Tax payer money is definitely at risk — absolutely.

HUME: How so?

EASTON: Because the implicit guarantee behind Fannie Mae and Freddie Mac is now an explicit guarantee. They're not going to let it fail.

HUME: But what would have to happen, though, is that they would have to make the loans and they would have to fail anyway and not pay them bank. Do you think there is a chance of that?

EASTON: I think there is absolutely a chance of that.

KRAUTHAMMER: There is a small chance that the whole portfolio is at risk. Probably smaller elements of it are. But it was done because it had to be done. You can't run the risk of a run on these two institutions that essentially hold, in the end, half of American mortgages. It would have been a crisis of unseen proportions.

But what Paulson has done and he is intent on doing is bailout the system and the bondholders but not the shareholders. You buy stock, you are playing roulette. You could lose. Shares are of these two institutions are low and dropped again today, but the bonds were sold today, which means it functions. It continues to actually act in the system.

The system remains functioning, but you might be hurt if you hold stock, as happened with Bear Stearns. I think it was exactly the way to go about it.

HUME: OK, next up, Iraq, Afghanistan, Obama, and McCain. Stay tuned.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

SEN. JOHN MCCAIN, PRESIDENTIAL CANDIDATE: Senator Obama is wrong when he said it wouldn't succeed. He was wrong when he said we lost the war, and he is wrong today when he says that Iraq is not the central battleground.

(END VIDEO CLIP)

HUME: What Senator McCain is reacting to there is an op-ed article in The New York Times today by none other than Barack Obama himself, who writes, among other things, and I quote, "As president I would pursue a new strategy, and begin by providing at least two additional combat brigades to support our effort in Afghanistan.

I would not," he goes on, "our military bases, our resources, and our foreign policy hostage to a misguided desire to maintain permanent bases in Iraq."

So, Barack Obama appears to believe that the effort in Iraq is undermining the more important and more central to the war on terror effort in Afghanistan. Some thoughts on this now from our panel-Mort?

KONDRACKE: They are both making big speeches tomorrow on Afghanistan and, I guess, Pakistan, because you have to include Pakistan, because it is the central problem of the Afghanistan problem, because that's where the Taliban is holed up along with Al Qaeda.

We know at least some of what Obama is going to are recommend- 10,000 more troops. It is going to be fascinating to see if he gets elected president what the left will say if he is engaged in a big war, which Afghanistan will become according to his policy — you know, whether they will stick with him.

But what I gather that McCain is going to say tomorrow is that we need a counterinsurgency strategy and a unified command in Afghanistan in order to cope. I don't know what he is going to say in terms of the number of troops.

One other point — crucial to this whole thing is the drug trade. Right now, the Taliban is collecting almost $8 billion a year in revenues from opium and hashish, which is almost as much as General McCeernen has to spend for the NATO force.

EASTON: This argument, Barack Obama's argument about Afghanistan, is, frankly, nothing new. Both he and Democratic allies have been making this case for months, that Iraq has forced us to take our eye off of Afghanistan.

But now he is, in fairness, he is bolstered by military commanders who say, look, the rise of Al Qaeda is in that area —

HUME: Al Qaeda or Taliban?

EASTON: No, Al Qaeda — in the Pakistan border areas, as well as Taliban threats within Afghanistan are posing a threat to the U.S., a, and, b, we're concerned that we don't have the troops.

HUME: Posing a threat to the U.S. in Afghanistan or here?

EASTON: Mullen said to the U.S.

And he also made the point that we don't have the troops, we're strained, we don't have the troops that we really need to get the job done in Afghanistan.

So that does bolster Obama's argument. But it's interesting because he was completely wrong, one would argue, on the surge in Iraq, which enabled him now to say that we can start withdrawing troops because —

HUME: Because we're going to have a surge in Afghanistan.

EASTON: To have a surge in Afghanistan.

And I think Mort's point is very interesting — how are his leftist allies in the U.S. going to react to a surge in Afghanistan?

KRAUTHAMMER: Obama is trying to solve a political problem he has on Iraq. He took a position two years ago when the war was in jeopardy for evacuation.

Essentially under his proposal and at the time we would have been out of Iraq already by March of this year, which means we would have had Al Qaeda control of half of Iraq, Iran in charge of the other half, possibly a genocide on our hands, and a catastrophe. And he opposed the surge.

He understands that conditions have changed, but he doesn't want to change his position. He tried a tentative attempt at that about two weeks ago when he spoke of withdrawal not just on a timetable, but, as he said for the first time, in reaction to stability in Iraq, which means withdrawal, you would slow it down if it destabilizes what is now emerging as a successful central government in Baghdad.

So he used the word "stability," and the minute he did a couple of weeks ago, the attack from the left was just enormous.

This op-ed today is a reaction. He is backing away. He doesn't speak up stability. He talks about a mission to end the war — not win the war, but end the war — which is what his left want to hear. I think he has decided that would jeopardize his candidacy if he actually had a realistic policy on Iraq.

He is going to stay with end the war no matter what.

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