This is a rush transcript from "On the Record," June 15, 2009. This copy may not be in its final form and may be updated.

GRETA VAN SUSTEREN, FOX NEWS HOST: Did you hear this? CIA director Leon Panetta says former vice president Dick Cheney wants America to be attacked. What provoked this statement? Well, it all started with former VP Cheney's speech on May 21st. The former vice president said banning enhanced interrogation methods would make America less safe and called it "recklessness cloaked in righteousness."

Well, now CIA director Leon Panetta is taking on the former vice president, telling The New Yorker magazine, "I think he smells some blood in the water on the national security issue. When you read behind it, it's almost as if he's wishing that this country would be attacked again in order to make his point. I think that's dangerous politics."

Well, needless to say, this accusation did not sit well with the former vice president. Former vice president Dick Cheney responded, telling FOX News, "I hope my old friend Leon was misquoted. The important thing is whether the Obama administration will continue the policies that have kept us safe for the past eight years."

Now, we asked Senator John McCain about the Panetta-Cheney showdown. Here's Senator McCain.

(BEGIN VIDEOTAPE)

VAN SUSTEREN: ... joining us.

SEN. JOHN MCCAIN, R-ARIZ.: Thank you, Greta. It's good to be with you.

VAN SUSTEREN: Senator, the big talk in town today is CIA director Leon Panetta in The New Yorker says about Vice President Cheney that Vice President Cheney almost suggests he's wishing that the country would be attacked again in order to make his point. What do you think about the director's statements about the vice president?

MCCAIN: I think the director's statements are totally uncalled for. The director has a big job, and one of them is to try to lift the morale, which is very low over at the CIA. He shouldn't be saying this about a person he's known for many years and knows better. I don't know why he's doing it. He should retract it immediately.

VAN SUSTEREN: Well, it's interesting that Vice President Cheney gave a statement of FOX in which he says, "I hope my old friend Leon was misquoted." Are they friends, do you know? I mean, like -- because, I mean, these are very pointed words in the former vice president's direction.

MCCAIN: Well, this is a big town and a small town, and people get to know each other over the years. Both the Leon Panetta, as chief of staff at the White House, and Dick Cheney is holding many positions, including both of them having been members of Congress, of course they know each other well. And that's why this statement of Director Panetta is so uncalled for and unfortunate. He knows better. He's not a new guy in this town.

VAN SUSTEREN: You know, it's -- Vice President Cheney, or former vice president Cheney, says he hopes he was misquoted, but it goes on a little bit further in which Director Panetta says about the former vice president that Cheney "smells some blood in the water on the issue of national security." So it does seem to be more than just sort of an accidental statement.

MCCAIN: Oh, I think it's less than accidental, and that's why I think that Director Panetta should apologize and retract because, again, he knows better. But look, I didn't agree with the vice president on this issue of interrogation methodology and I strongly disagreed with him. But to question the vice president -- Vice President Cheney's dedication to the security of this nation, is really way out of bounds.

VAN SUSTEREN: Do you think that it's wise, or do you have any problem with the vice president speaking out on issues of national security?

MCCAIN: I think that the vice president is deeply concerned about his reputation and place in history. He thinks that it's being is characterized, and he believes that he was right in the position that he took. I respectfully disagreed over interrogation techniques. But that in no way should bring us into question his integrity, his love of this country and his commitment to its security. And that's what Leon Panetta has done now, and it's totally uncalled for.

VAN SUSTEREN: You think that the director is freelancing, doing this himself, or do you think anyone at the White House agrees with them? Does the president agree with the statements about the former vice president, or is this just something you think that the director is freelancing on?

MCCAIN: I have no idea, Greta. I know that Secretary Panetta -- director of the CIA Panetta is held in high regard around this town. That's why I'm doubly surprised that he would make such comments.

VAN SUSTEREN: In terms of you, sir, do you have any problems or do you have any suspicion that the administration is taking steps that are making us less safe?

MCCAIN: There are policies that I disagree with, but for me to believe that somehow they are willfully doing things that are -- that they know would endanger this nation's security, I just do not accept that. But I do worry when the president of the United States goes to Egypt and gives a speech and does not mention that in several wars, including Desert Storm, including Bosnia, including Kosovo, that American lives were shed and American blood were -- American lives were sacrificed and American blood was shed in defense of Muslims and the ability that they might have to practice their religion and have their hopes and dreams realized.

VAN SUSTEREN: I don't -- I don't think that -- at least, I don't know of anyone who thinks that would they willfully do anything to jeopardize our national security. I guess I'm curious as to whether you think, though, that the Obama administration's policies, you know, accidentally or misguided or whatever, put us at greater risk.

MCCAIN: Well, if you disagrees with policies, obviously, there are consequences to the policies that you think are wrong. But that does not make me question the integrity or the patriotism of this administration. But I think we should have far more firm action taken against North Korea. I think right now, the president should be saying that we will respect the rights of the Iranian people to determine their own future. This election should be canceled because it was obviously a rigged election. And it's shameful and we should be funding immediately Radio Free Iraq. Fardar (ph) I believe is the proper pronunciation of it, Fardo (ph), and we should be taking actions to impose further sanctions on the Iranians.

VAN SUSTEREN: The world is watching as these protests are going on right now in Iran after this election. Care to sort of think where we're headed on this? Because I think we're all sort of pins and needles. There have already been at least one death in the protests. But how -- when you look -- when you watch this, what are you thinking?

MCCAIN: Well, I'm thinking that the Iranian people have risen up and are strongly contesting what they believe is an election that deprived them of their rights. They are a very sophisticated society. And by the way, it's Radio Free Iran, not Radio Free Iraq. And I think we should express in every way our support of their demands for basic human rights.

VAN SUSTEREN: Their more moderate candidate, who -- not Ahmadinejad, but the more moderate candidate who is challenging the election -- if there is a new election and if he is elected, what does that mean to us, and what does that mean to the Middle East policy, do you think? And I realize everything is so fluid when it comes to the Middle East.

MCCAIN: Sure. First of all, I think we ought to understand who's really in charge, and that's the extremist clerics in Iran, OK? And this candidate was screened by them before he was allowed to run. He has a record that's not too stellar, although certainly, compared to Ahmadinejad, it's probably better as far as his platform is concerned. And we'll have to see what happens.

What usually happens in this kind of situation, at least in the short term, is that they are repressed. And I hope that that won't happen. We should add our voice to a chorus that says, Let them have a free and fair election.

VAN SUSTEREN: North Korea, the U.N. voted sanctions last week. What -- if you were president of the United States, how would our policy be different towards North Korea?

MCCAIN: Well, first of all, there were looping holes -- there were loopholes in the resolution as far as China and Russia is concerned and the enforcement of these sanctions on North Korea. Second of all, I would sit down or certainly have conversations with the Chinese and tell them this is a major issue in our relationship. The Chinese are the ones that can affect North Korean behavior because they have their hand on the throttle of the North Korean economy. This is a very dangerous business that they are in. And I would also work much more closely with the South Koreans and with the Japanese on trying to bring this kind of adventurism to a halt. It's very dangerous.

VAN SUSTEREN: You talk about North Korea -- I mean, about China having their hands on the throttle with the North Koreans' economy. What about our own, though, because they own so much of our debt? Are we sort of weakened in our ability to sort of push them into taking a stronger line with North Korea because they own all our debt?

MCCAIN: No, I don't think so. I think that we haven't put enough emphasis on this in our relationship with the Chinese. There are certainly plenty of channels of communications. The Chinese are in a bit of a quandary. They don't want North Korea to fall because they would have millions of refugees. The don't want a united Korea. But at the same time, they should realize that proliferation of nuclear weapons, of continued progress in the direction that the North Koreans are headed, poses a threat to the stability of the entire Asian -- of Asia.

VAN SUSTEREN: You talk about the proliferation of nuclear weapons, but it's not just North Korea. Isn't Japan going to get a pretty hungry appetite for a nuclear weapon the more North Korea, you know, test fires these missiles and the more their technology advances? And isn't that another problem for China?

MCCAIN: Absolutely, and the Chinese should realize that. I don't -- I cannot imagine the Japanese sitting idly by while the North Koreans continue to progress in the directions which they are moving in.

(END VIDEOTAPE)




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