From a general-election standpoint, this would virtually guarantee McCain a win. Sure, it would further depress GOP base turnout -- but it would entirely negate Obama's bipartisan/independent/bring-the-country-together-schtick appeal, would peel off most "Reagan Democrats" from Obama, and would induce a fatal swoon in the media to coronate McCain as the Ultimate Straight-Shootin'est Mavericky Independent of All Time. And the race thing? Fatal. Combine all that with the general populations familiarity and comfort with McCain and Clinton (in increasingly troubled times, low-info voters go with the familiar over the risky), the general election
Furthermore, beyond the bipartisan appeal, Clinton and McCain complement one another in ways that any other GOP candidate wouldn't with McCain. Clinton and McCain also respect and like each other as colleagues and individuals. And there's about a centimeter separating them on foreign policy.
Clinton's been laying enough tile in McCain's kitchen (and echoing McCain's criticisms of Obama, and vice versa) that she could entirely credibly accept McCain's offer. And yes, I've phrased that in such a way as to imply that maybe there's been some sort of intent behind her nice-making with McCain; it wouldn't surprise me in the least if there had been exploratory discussions between the two camps.
And while a certain segment of the GOP base would see such a move as a betrayal, I think McCain could successfully pivot this off of the aborted Kerry-McCain-ticket talks in '04 as McCain turning the tables and "topping"/co-opting the Dems.
As for governance ... yes, a McCain-Clinton administration would be an unmitigated disaster -- the absolute worst aspects of Bush-Cheney, but taken to even more ridiculous extremes.
Clinton would surely think that she could Cheney her way into power (which is the biggest reason I think she'd actually accept the offer); while McCain surely thinks he could control her. It would be Bush's militarism, secrecy, and dim-witted ignorance plus Bill Clinton's triangulation/DLC centrism, paternalism, unmanaged staff infighting, and lack of focus married to overly broad ambitions.
But I really don't see a realistic scenario where a McCain-Clinton ticket would lose to Obama-anyone.