I'll let Wikipedia tell the story:

The Iran-Contra affair was a political scandal which was revealed in 1986 as a result of earlier events during the Reagan administration. It began as an operation to increase U.S.-Iranian relations, wherein Israel would ship weapons to a moderate, politically influential group of Iranians opposed to the Ayatollah Khomeni; the U.S. would reimburse Israel with those weapons and receive payment from Israel. The moderate Iranians agreed to do everything in their power to achieve the release of six U.S. hostages, who were being held by the terrorist group Hezbollah. The plan eventually deteriorated into an arms-for-hostages scheme, in which members of the executive branch sold weapons to Iran in exchange for the release of the American hostages, without the authorization of President Ronald Reagan. Large modifications to the plan were conjured by Lieutenant Colonel Oliver North of the National Security Council in late 1985. In North's plan, a portion of the proceeds from the weapon sales was diverted to fund anti-Sandinista and anti-communist rebels, or Contras, in Nicaragua. While President Ronald Reagan was a supporter of the Contra cause, he did not authorize this plan, nor was he aware that the funds were being sent to the Contras.

After the weapon sales were revealed in November 1986, Ronald Reagan appeared on national television and stated that the weapons transfers had indeed occurred, but that the United States did not trade arms for hostages. The investigation was compounded when large volumes of documents relating to the scandal were destroyed or withheld from investigators by Reagan administration officials. On March 4, 1987, Reagan returned to the airwaves in a nationally televised address, taking full responsibility for any actions that he was unaware of, and admitting that "what began as a strategic opening to Iran deteriorated, in its implementation, into trading arms for hostages."

John McCain was in Congress during the 1980s, in fact he was moved up to the Senate in 1986, so surely he couldn't have forgotten about this. Iran-Contra was the biggest scandal of the Reagan administration. They traded arms to Iran in the hopes that the Iranians and Hezbollah would release U.S. hostages. John Kerry, who was one of the lead Senate investigators into Iran-Contra, should be the go-to man for the Obama campaign on this.

Regarding the 1981 release of hostages, McCain also misses the facts. Again, from Wikipedia:

In 1979, Iranian students took hostage 52 employees of the United States embassy in Iran. On January 20, 1981, the day Ronald Reagan became President, the hostages were freed following the Algiers Accords.

Who negotiated the Algiers Accords? Warren Christopher and the Carter administration. Ronald Reagan had nothing to do with it.

Unless...John McCain is accidentally giving credence to the "October Surprise" conspiracy theory.  You know, the one that say the Reagan campaign secretly negotiated with Iran to prevent the release of hostages until Reagan took office?

The October Surprise conspiracy was an alleged plot that claimed representatives of the 1980 Ronald Reagan presidential campaign had conspired with Islamic Republic of Iran to delay the release of 52 Americans held hostage in Tehran until after the 1980 U.S. Presidential election. In exchange for their cooperation, the United States would supply weapons to Iran as well as unfreeze Iran's monetary assets being held by the US government.

Jimmy Carter had been attempting to deal with the Iran hostage crisis and the hostile regime of the Ayatollah Khomeini for nearly a year. Those who assert that a deal was made allege that certain Republicans with CIA connections, including George H. W. Bush, arranged to have the hostages held through October, until Reagan could defeat Carter in early November, and then be released, thereby preventing an "October surprise" from the Carter administration in which the hostages would be released shortly before the election. The hostages were released the day of Reagan's inauguration, twenty minutes after his inaugural address.

No matter how you interpret McCain's remarks, they are completely out of step with history. This needs to get major play now, and the only way that will happen is if we raise a ruckus.

[Cross-posted at Old Man McCain]