This is a rush transcript from "On the Record ," August 21, 2008. This copy may not be in its final form and may be updated.

GRETA VAN SUSTEREN, FOX NEWS HOST: The final sprint at the White House is beginning. Senator McCain and Senator Obama should listen very closely right now. Karl Rove is here, and he knows presidential politics better than anyone. Karl joins us live here in Washington.

KARL ROVE, FOX NEWS CONTRIBUTOR: I hate to break it to you, but they're probably not listening to us right now.

VAN SUSTEREN: I hope they are. I hope they are.

You wrote an article in the "Wall Street Journal" today, and basically tips for the two candidates, how they can win. Let's start, let's take one at a time. What would it take for Senator Obama to win? What does he have t o do?

Watch Greta's interview with Rove: Part 1 | Part 2

ROVE: His biggest task, which he's got to address at the convention, is to reassure people that he's up to the job. There have been a spat of polls recently that say the race is close and it's neck in neck.

But even more dangerous for Senator Obama is that those polls indicate that people have deep doubts about whether or not he has the experience and the ability to be president. And you cannot win if you have nearly half the people saying he's not even up to the job.

At the end of the day, most presidential races consist of two candidates, each of whom has 70 percent or 80 percent of the American people saying they're up to the job. Senator Obama doesn't even have in one of the polls 50 percent, and in most of the polls just over 50 percent.

VAN SUSTEREN: How do you do that? How do you convince the American people you're up to the job?

ROVE: Well, stop doing what you're doing, which is to run a campaign that is entirely opposite of what got him into this race.

He got into the race as an inspiring new figure, and now he has turned into a petty, nasty politician, calling his opponent ignorant the day before he went on vacation, and conducting himself like a conventional politician, which is not what he set out to be.

The other thing is that you need to do is show a there there. I think the American people are wondering outside of a passion about withdrawing from Iraq and a passion about celebrity-hood, is there anything really there?

Is this a guy, as I said in my column, who's intellectually lazy and doesn't do his homework, or is this somebody who has some issues about which he cares, issue on which he is willing to break with the orthodoxy of his party, issues where he is willing to do something that is unpopular and convince people that it's the right thing to do.

And so far we haven't seen that.

VAN SUSTEREN: Senator McCain, what does he need to do? I'll ask the same question. What does he need to do?

ROVE: He's got a more difficult problem, in a way.

It is easy to reassure somebody, like Obama has to do, than it is to persuade people, and Senator McCain needs to persuade people that he has a vision for the domestic economy, for the domestic issues facing America.

The American people are enormously comfortable with him on the international scene. Every poll has shown that he has by wide margins a very strong lead in this regard. They trust him as a commander in chief.

They want to know does he care about and know something about my problems with my job, my kids' education, my health care, the security of my community and my neighborhood, the coarseness of the culture that I worry about how it's affecting our children and our society.

And they've got to know that he's connected with them on this.

VAN SUSTEREN: Do they know that Senator Obama has? I mean, on the flip side, how does Senator Obama, if he's established that, how has he established.

ROVE: Well, he's not established it. But Senator McCain in an odd way has to reach out on the domestic side. Because first of all, as a Republican -- and the natural sense about Republicans is they're good on security, they're good at keeping you safe, they're good at cutting taxes, they are good at holding down spending -- but they're not as good as the other part, the Democratic Party, on caring about your jobs or caring about your health care or your education or your, you know, the coarseness of the culture is one they generally do well on, but it's one where they need to prove themselves in every election.

The second thing he needs to do is he needs to share more of himself. The last Saturday on FOX, on the Saddleback conversation, was a very powerful -- we had very powerful, moving and deeply moving glimpses into the character of John McCain. He was crisp, sharp, and at times very emotional. But they need to see more of it. Not mawkish, not in a maudlin sort of way. It needs to be true, authentic and quick, but they need to see it.

And finally, Senator McCain needs to show that he is a maverick and remains a maverick. He's going to accept the nomination of the Republican Party and become the de facto leader of the party in the fall campaign. At the same time, he needs to say , look, I am who I am. I have an independent streak and I'm going to govern as president in a bipartisan fashion, like I've acted in the United States Senate.

VAN SUSTEREN: So how does he do that? How does he show he's a maverick?

ROVE: Well, I don't know. One way is to say here are some prominent Democrats that I'm going to have in my cabinet. And second of all, he's already going to do one thing, which is apparently have Joe Lieberman speak at the convention, which is a powerful way to show bipartisanship. The two of them are very close. They've traveled the world together. They've worked on a number of issues, domestic and international, together. I think it's a very, very powerful statement.

VAN SUSTEREN: And for Senator Obama? It seems that he's sort of - he's not as popular as he was before. He's come down a little bit.

ROVE: He hit his peak. He won the nomination on the third of June and then peaked in mid-June and has been in steady decline since then.

McCain has not been moving up. McCain has just stayed where he is, moved up a couple of points, but it's Obama who has been coming down, and whose image is declining.

In the mid 50's for favorables, and unfavorables in the high 30's, -- or low 30's, and now he's dipped to favorables in the 40's, and the unfavorables are climbing towards 40.

This is not a trajectory that he should be on. He should be way ahead right now, and the fact that this is a horserace says something about the fall.

Now, having said all that, the convention, if it's a halfway decent convention, is going to give him a bump. Every candidate gets a bump out of the convention. And he's well positioned to get the bigger of the two bumps.

There's an interesting study done by a Professor Tom Holbrooke at the University of Wisconsin, Milwaukee. The candidate who has the convention first gets a bigger bump. Obama has the first convention.

And the candidate who's underperforming expectations, that is to say the candidate who is running behind when everybody thinks he should be running behind gets the bigger bump.

VAN SUSTEREN: Karl, stand by. We have much more after the break.

And, coming up, how ugly can this contest get? The two campaigns spent the day slamming each other. Did Senator McCain really lose track of how many houses he owns?

And is Senator Obama's relationship with a convicted felon coming back to haunt him? We're going to tell you.

(COMMERCIAL BREAK)

VAN SUSTEREN: Things of getting downright nasty on the campaign trail these days. It all started yesterday when Senator McCain said this in an interview with "Politico."

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: . . . Houses to you and Mrs. McCain have?

SEN. JOHN MCCAIN, (R) PRESIDENTIAL CANDIDATE: I think--I'll have my staff get back to you. I'll have them get to you.

(END VIDEO CLIP)

VAN SUSTEREN: Senator Obama saw an opening and went on the attack.

(BEGIN VIDEO CLIP)

SEN. BARACK OBAMA, (D) PRESIDENTIAL CANDIDATE: Someone asked John McCain "How many houses do you have?" And he said, "I'm not sure. I'll have to check with my staff," true quote.

If you don't know how many houses you have, then it's not surprising that you might think the economy was fundamentally strong.

(END VIDEO CLIP)

VAN SUSTEREN: Not to be outdone, the McCain campaign shot back at Senator Obama with a new TV ad, and they went for the jugular.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: Barack Obama knows a lot about housing problems. One of his biggest fundraisers helped him buy his million dollar mansion, purchasing part of the property he couldn't afford.

From Obama Rezko got political favors, including $14 million from taxpayers. Now he's a convicted felon facing jail.

That's a housing problem.

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

(END VIDEO CLIP)

VAN SUSTEREN: We continue now with FOX News contributor, Karl Rove.

Who wins this one and where is this one going?

ROVE: Well, nowhere good.

Look, Senator Obama deliberately misstated the--he said that was a true quote, that John McCain couldn't remember how many houses he had.

Remember, the question from Mike Allen of Politico was how many houses do you and your wife own? Mrs. McCain is a wealthy woman. She owns a number of not only homes, some of which, for example, her elderly aunt lives in, but investment properties.

And so Senator McCain has filled out forms on which that information is. But he can't recall how many are considered houses, how many are considered investment properties. He's filled out a form in the past.

But it would be better if he had said, well, "We've got x and y." The fact that he hadn't created this problem.

However, having said that, this is not wise for Barack Obama to pursue, because it does open up the question of Rezko.

It does open up the question of how did you buy a house for cheaper than the market price, and then either the day after or that day Rezko buys the next-door lot at full price, and then sells you a part of it so that you can have as big a yard as you want to have, and this guy is a dirty guy on the way to the federal pen? What the heck were you doing doing deals with a dirty crook?

VAN SUSTEREN: Well, he said it was a bone-headed thing that he did. Every who buys a house tries to get the best deal. And even in the trial of Rezko they said that there was no suggestion that Senator Obama had done anything criminal.

ROVE: I grant that. But here's the point, why bring up an issue where you have to then begin defending your dealings with a guy who's on his way to the federal pokey who's now going to be sentenced one week before the general election?

Not only that, but remember the indignation that Senator Obama had when he said "They're attacking my wife. I'm never going to attack Cindy McCain." Well, the issue is what does Cindy McCain own? These homes are not Senator McCain's. They're Senator McCain's and Mrs. McCain's, bought with her money.

So he has now done what he said was absolute--he was horrified. There's going to be article out, an interview out with him out here this next month, where he just says don't ever attack my wife. He's now attacking John McCain's wife.

And most important of all, this is not the kind of campaign Barack Obama said he was going to run or needs to run in order to win. The people who are enthusiastic about him said he's something new and different, and this is just old-style conventional politics.

VAN SUSTEREN: I've got 15 seconds. So who shot the first shot on this one?

ROVE: Well, clearly, Barack Obama. Senator McCain gets asked a question by the media. He, Obama, had every chance to let the media carry this forward. Instead he jumps into the middle of it.

And, look, he doesn't look attractive. He's not good at being what he is, a conventional politician. He's best when he tries to rise above it.

VAN SUSTEREN: Karl, thank you, and we're going to have an exciting next couple of weeks. Thank you, Karl.

ROVE: Yes we are, yes. You bet.



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