This is a rush transcript from "America's Election HQ," September 30, 2008. This copy may not be in its final form and may be updated.

DAVID ASMAN, HOST: McCain is blaming Obama for the failure of the bailout. And Democrats are pointing fingers to McCain. The blame game is just beginning.

But let's back up about a decade for a second. Did you know, that nearly 10 years ago, some folks were already anticipating we would have major problems forcing a government rescue. Here we are now with dealing with this severe economic crisis. They were right, and back in 1999, my next guest predicted exactly this outcome, saying, quote, "If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry," the S&Ls.

Joining me now, Peter Wallison, a fellow from the American Enterprise Institute. He is said to be on the short list to be John McCain's treasury secretary if McCain is elected, and having spoken to him several times, I can understand why.

Video: Watch David Asman's interview

Good to see you again.

PETER WALLISON, AMERICAN ENTERPRISE INSTITUTE: Good to be here, David.

ASMAN: Now, first of all, let's talk about what you said, why this would happen. How did you know that this would happen?

WALLISON: Well, because Fannie Mae and Freddie Mac, these GSEs are backed by the federal government. And if you're backed by the federal government, this market.

ASMAN: Now, they're essentially owned by the federal government.

WALLISON: Now, they're owned by the federal government, just as many of the thrifts had to become owned by the federal government. But when you're backed by the federal government, the market doesn't pay very attention to the risks you're taking. Why should they? They know they're going to be bailed out if you fail.

So, it was obvious to me as they continued their business, with government backing, they were going to be taking extraordinary risks in order to get more profit.

ASMAN: Because they were getting a free ride and there was no downside.

WALLISON: Of course.

ASMAN: For all the risks, they knew they could get bailed out by the government.

WALLISON: And the point here is that we should never set up companies that are completely backed by the U.S. government. There was a lot of denial in Congress and, certainly, at the companies about whether they were still backed, but it was obvious to the rest of the world.

ASMAN: Isn't that, though, part of what we are planning to do? Isn't part of that part of the Paulson plan, that is, we set up a company which would buy up the assets, the toxic assets of these banks and then presumably dissolve it eventually after years of seeing those assets rise?

WALLISON: Yes.

ASMAN: But there's a danger there in setting up another company, isn't there?

WALLISON: Well, no, because this company is not going to be doing business. This company is simply going to be holding.

ASMAN: Oh, buying assets sounds like business to me.

WALLISON: Yes. It will. The difference is that with Fannie Mae and Freddie Mac, they borrow money in the markets and then they buy the mortgages. In the case of this company, they are not there to make profits. They are there simply to hold these assets until the banks recover and then they will start to feed these assets back in to the market.

ASMAN: By the way, before we leave Freddie and Fannie Mac, which are Washington institutions, they became sort of a stepping stone. If you were in a government, you could eventually go out of the government and get a good job at Fannie Mae and make millions.

WALLISON: A very good, a very good job.

ASMAN: It was awful. And taxpayers end up paying for. Are we ever going to see those institutions privatized?

WALLISON: Well, unfortunately, I'm not sure we will, because the way the Treasury Department plan works right now, they're under a conservatorship, and they could return to profitability over time. And then, I'm afraid, Congress, which gets a lot of benefits from Fannie and Freddie, will not want to privatize them.

So, I'm quite worried about that. I thought they should have been put under a receiver and eventually either privatized or liquidated.

ASMAN: They have — how many trillions of dollars worth of mortgages and mortgage assets?

WALLISON: Almost $5.5 trillion worth of guarantees and mortgages.

ASMAN: Well, when you're treasury secretary, it's going to be your headache.

WALLISON: I'm not going to be treasury secretary.

(LAUGHTER)

ASMAN: Right. Peter Wallison, good to see you, sir. Thanks for coming in.

WALLISON: Good to see you, too.

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