This is a rush transcript of "Special Report With Bret Baier" from February 3, 2009. This copy may not be in its final form and may be updated.

BRET BAIER, HOST: President Obama is taking full responsibility for what he called the mistake of nominating a cabinet officer with huge tax issues. The president sat down with "FOX News Sunday" host Chris Wallace late this afternoon.

(BEGIN VIDEOTAPE)

CHRIS WALLACE, 'FOX NEWS SUNDAY' HOST: Mr. President, thanks for talking with us.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Thank you so much for being here.

WALLACE: Did you or anyone else in your administration tell Tom Daschle he had to step down as your nominee?

OBAMA: Well, you know, I'm not going to go into the details of it, but as has been reported, Tom made the decision that he was going to be too much of a distraction to carry out what he's so passionate about, which is health care reform. What I did tell him was that I take responsibility for this mistake.

I mean, I think that Tom took responsibility for the mistake on his taxes. I think it was an honest mistake and I made the assessment — I made the judgment — that he was the best person to achieve health care reform and bring people together.

But, you know, what became clear to me is that we can't send a message to the American people that we got two sets of rules: one for prominent people and one for ordinary people. And you know, so I consider this a mistake on my part, and one that I intend to fix and correct and make sure that we're not screwing up again.

Video: Watch the interview

WALLACE: Well, the reason I ask is because yesterday in this office you were asked whether you supported him and you said absolutely.

OBAMA: Yes.

WALLACE: And it becomes clear from your answer that you played a role in the decision for him to —

OBAMA: No, no, no, no, no. I don't want to — I don't want to misstate the issue here. Tom made the decision here. He called me and indicated this was his decision.

WALLACE: Would you have continued to back him?

OBAMA: Well, I don't want to get into hypotheticals, Chris. Here's what I'll say: I think Tom is an outstanding person. I think this was an unintentional mistake on his part but a substantial one, and there's no excuse for the mistake. He took responsibility for it.

Ultimately, I have to take responsibility for a process that resulted in us not having an HHS secretary at a time when people need relief on their health care costs. And so, you know, this is a mistake, probably not the first one I'm going to be making in this office, but what I'm absolutely committed to doing is fixing it, getting a highly qualified HHS secretary, and then making sure that we start providing some health care relief to families who so desperately need it.

WALLACE: On your first day in office, you signed an executive order on lobbyists.

OBAMA: Right.

WALLACE: That you said marks a "clean break with business as usual."

OBAMA: Yes.

WALLACE: And yet, in less than two weeks, you have signed waivers to allow the hiring of lobbyists to be deputy secretary at the Pentagon, deputy secretary at HHS and chief of staff at the treasury. Is that a clean break?

OBAMA: Well, that's three out of hundreds of appointments that we've made.

WALLACE: That is three of the top jobs that are really important.

OBAMA: Well, but let me say this, Chris. We disclosed these ahead of time. We set a very high bar, and everybody acknowledges that we have the toughest standards not only of people who have lobbied previously and the restrictions on them working in this White House, but also going forward, and those rules will still apply.

WALLACE: Let's turn to the economic stimulus plan and the bottom line question.

OBAMA: Yes.

WALLACE: Will it work? You are taking hits right now from all sides — right and left. Columbia University economist Jeffrey Sachs calls it an "astounding mishmash of tax cuts, public investments, transfer payments and special treats for insiders."

Why not just pull it back, forget about the February 16 deadline and get it right?

OBAMA: Well, I think actually that we are closer to getting it right than all these critics, partly because all these critics —

WALLACE: Alice Rivlin from the left, Martin Feldstein from the right...

(CROSSTALK)

OBAMA: Hold on — hold on a second, Chris. You want me to answer the question?

WALLACE: Yes, sir.

OBAMA: It turns out that all these critics have contradictory suggestions, don't they? Some of them are saying well, it doesn't spend out fast enough, except it turns out that they also want infrastructure projects that might last for four or five or six years.

There is no magic bullet to these situations. Here's what this package does. It provides payments, like unemployment insurance to people who've lost their jobs that are in desperate need of help. And every economist says that that's the smart thing to do because that gets the money out right away. It provides support for people who've lost their health care because they've lost their job. And I think that's the right thing to do for families.

It also invests in green technologies — infrastructure that will lay the groundwork for long-term economic growth. And most of the criticisms that have been leveled and, you know, that you've heard on your show about various pet projects that members of Congress might have put in there, when you tally all those up, amount to less than 1 percent of the entire package.

The last point I'd make is that many of the critics, what they're calling for are more tax cuts when, in fact, this is already $300 billion worth of tax cuts, and many of the people on the other side of the debate consider many of those wasteful. But, you know, I actually think that Mitch McConnell is right, that we should have some tax cuts in this package. No, this is not going to be a package that makes everybody happy, but the main criteria I have is: Is it going to put people back to work? And I think it actually will.

WALLACE: Is the February 16 deadline firm?

OBAMA: Yes, because nobody disagrees with the idea that if we keep on putting this off, that we're going to end up seeing more months with half a million people losing their jobs each month. We can't afford to wait.

WALLACE: You reportedly told Senate Democratic leaders when you met with them yesterday that you want some changes in the bill. So let's do what we can, sir.

I used to do this with you as a candidate, but I'm going to ask you as president. I would like to do a lightning round of quick questions and answers about specific changes.

Tax credits for people who buy homes or businesses, good or bad?

OBAMA: I think it has some potential and I'm willing to take a look at it.

WALLACE: Federally guaranteed lower mortgage rates?

OBAMA: Our intention has always been that in addition to this recovery and reinvestment act is that we're also going to have a housing bill, that we've also got to fix the banking system, that we're going to have to make sure that, for example, issues like executive compensation for banks that are getting money through the TARP that that's dealt with. I actually agree with Democrats and Republicans that we've got to do more to provide relief to homeowners to prevent foreclosures.

WALLACE: Strip out to "buy American" provisions for steel and iron in the bill which a number of our allies are saying it's too protectionist.

OBAMA: I agree that we can't send a protectionist message. I want to see what kind of language we can work on this issue. I think it would be a mistake, though, at a time when worldwide trade is declining for us to start sending a message that somehow we're just looking after ourselves and not concerned with world trade.

WALLACE: Since you became president, you have warned Republicans, "You can't just listen to Rush Limbaugh and get things done."

OBAMA: Now, how do you know that's a quote?

WALLACE: Well, I read it in the media.

OBAMA: Yes.

WALLACE: Did you not say anything about Rush Limbaugh?

OBAMA: Well, you know, I just want to make sure — I'm not sure that was the exact quote. So —

WALLACE: All right. Let me throw another one at you and you tell me whether this is an exact quote.

OBAMA: All right.

WALLACE: You were widely quoted when you met with the House GOP Caucus saying, "Go ahead, feel free to whack me. I'll watch FOX News and feel bad about myself."

Did you say that?

OBAMA: That one, I did say.

WALLACE: Perhaps — let me just raise the possibility.

OBAMA: Yes.

WALLACE: Are you a trifle thin skinned?

OBAMA: No, no, no. I said it in good humor. I think everybody understood that that was a joke.

No. I think, you know, Chris, I think it's fair to say that I don't always get my most favorable coverage on FOX, but I think that's part of how democracy is supposed to work. You know, we're not supposed to all be in lockstep here, and you've always been very gracious to me and —

WALLACE: I don't know if it improves or hurts my stock at FOX, but thank you.

OBAMA: It may hurt it.

(END VIDEOTAPE)

BAIER: Fresh off his interview in the Oval Office, Chris Wallace now joins me.

Chris, it's been a tough couple of days for this administration, and it's only Tuesday. What's the mood there at the White House?

WALLACE: Well, the thing that's interesting, that the reason that he did an interview not only with us, but with all the other networks, it was a five network rotation, was because he wanted to sell his stimulus plan. He did not expect that he was going to have to answer in the beginning of every interview questions about Tom Daschle and that whole mess-up, as he said, "screw-up" in his Cabinet.

What struck me is how in only two weeks he seems so utterly confident, that he wears the mantle of the presidency lightly. He kids around. He talks a little trash, but at one point at the end and we didn't run this clip, I said to him, what's the biggest surprise about the demands of the office? He said that every decision you make is big. Every decision you make affects people's lives and he talks specifically about writing letters to the families of young men and women who were killed in Iraq or Afghanistan.

And to just punctuate that, as soon as our interview ended, one of the staff came up to him and said, "Mr. President, you're wanted in The Situation Room" and off he headed.

BAIER: Yes. And today, did you sense the gravity of this, the fact that this nomination has been withdrawn? He was very good friends with Tom Daschle, obviously.

WALLACE: Well, yes, but you know, the politicians and you've seen this with all the presidents you've covered, they're tough guys. I think what upsets him the most is the idea I've got a big agenda, I've got to work on the economics, I've got to work on health care reform, and having to answer your questions and deal with this, and it will be all over the media tomorrow, slows down his agenda. That was his big concern.

BAIER: All right, Chris. Thanks.

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