>> rose: welcome to the program. the republican presidential debate at the reagan library in california is being held tonight as we tape this, the debate is just beginning. we'll have full analysis and perspective tomorrow. >> and would you feel comfortable with done all trump's finger on the nuclear codes, it's an issue one of your fellow candidates have raised. >> that is not for me to answer, that is for the voters to answer, i have a lot the faith and common sense of the voters of united states of america. >> mr. trump? >> well, what i am far and away greater than an entertainer is a businessman and that's the kind of mind-set this country needs to bring it back. because we owe 19 trillion right now, 19 trillion dollars. and you need this kind of thinking to bring our country back. and believe me, my temperment is very good,

very calm, but we will be respected outside of this country. we are not respected now. >> i think really there is a sophomoric quality that is entertaining about mr. trump. but i am worried. i'm very concerned about having him in charge of the new clare weapons because i think his response, his visceral response to attack people on their appearance, short, tall, fat, ugly, my goodness, that happened in junior high. are we not way above that. would we not all be worried to have someone like that in charge of the news clear had arsenal. >> governor bush, would you feel comfortable with donald trump's finger on the nuclear code. >> i think the voters will make that determination but i know the next president of the unites states will have to fix an extraordinarily difficult situation, this administration with president obama and hillary clinton has created insecurity the likes of which we never would have imagined. there is not a place in the world where we are better off today than sex and a half years ago. and that requires a steadness steadiness, an

understanding of the way the world works, that wir railroads an understanding of american leadership in the borl. you can't just, you know, talk about this stuff and insult leaders around the world an expect a good result. you have to do this with a steady hand. i believe i have those skills. >> this is-- this is actually what's wrong, this is what is wrong with this debate. we're not talking about real issues. and mr. trump, we don't need an apprentice in the white house. we don't need an apprentice in the white house. we have one right now. he told us all the things we wanted to hear back in 2008. we don't know who you are, where you are going. we need someone who can actually get the job done. you talked about business. >> let me finish. >> no, no. >> in wisconsin you are losing 2.2 billion dollars right now, i would do so much better than that. >> mr. trump, you are using its talking points of the democrats. as you know you failed three times in four inform years when i got elected because it working. we balanced the budget am you want to talk about balanced budget, you took four major projects into bankruptcy over and over and over again. you couldn't take america into bankruptcy that is what

is wrong with the politicians in washington right now. they think we can take a country into bankruptcy. >> every major business leader has used-- i never went bankrupt, as you know, everybody knows. but whens folks of iowa found out the true facts of the job you have done in wisconsin, all of a sudden you-- he was number one now number six or seven. just because he says it, doesn't make it true. >> rose: also this evening, bethany mclean and bill ackman. they talk about her book, shaky ground, the strange saga of the u.s. mortgage giant. it is about fannie may and fred-year mack. >> the solution we think is truly to restore fannie and freddie to what they were 30 and 40 years ago which was very safe businesses guaranteeing the timly payment of interest and principal. why is that important? the u.s. economy is really the only housing finance market in the world where you can bore woe-- borrow money for 30 years at a fixed rate am you can borrow 80% of the value of a home. and that ability to borrow 80% of the value of a home at a very low fixed rate,

you can borrow money, some people less than 4% on a first mortgage on a 250,000 dollar home is what enabled, really enables the american dream of owning a home. and in effect, a very good way to save for retirement. that simple model is what we need to go back to. >> we conclude this evening with salman rushdie, his book is called two years eight months and 28 nights. it is a novel. >> i wait for it to decide me, you know, i wait for the book, i mean i'm in between books. i try all kinds of things and most of them disappear and aren't if i good after 24 hours. but sometimes an idea sticks and i had a couple of things here to start with. i had this idea of genies attacking manhattan which i thought might be enjoyable. >> rose: a consideration of fannie mae and freddie mack and salman rushdie when >> rose: funding for "charlie rose" has been provided by: american express. >> rose: additional funding

provided by: >> and by bloomberg, a provider of multimedia news and information services worldwide. captioning sponsored by rose communications from our studios in new york city, this is charlie rose. >> rose: fannie mae and freddie mac are mortgage companies formed by congress to support the american dream of owning a home. for decades their influence propelled not only ownership but also wall street greed. they were at the centre of the housing crisis. seven years later fannie and freddie remain in limbo as one of the biggest issues left over from the gloomiest days of the global financial crisis. a new book dissects their rise and fall and what might happen next it is called "shaky ground: a strange saga of the u.s. mortgage

giant." >> i'm pleased to be joined by bethany mclean, also here bill ackman, c.e.o. of the hedge funds pershing square capital management. i'm pleased to have both of them at the table. so give me a primer. >> so fannie and freddie are these two companies that were formed by congress, as you mentioned, in the wake of the global financial crisis, the one silver lining was what we might rethink our home ownership and what we might think what to do, what might make more sense. but instead here we are seven years later, the two companies are still in the state known as conservatorship in which they are effectively supported by lines of credit from the government. and run by the government. and we've done nothing. even more frightening, the two companies have, if anything, gotten bigger. they have over $5 trillion of debt backed by home mortgages outstanding. and thanks to a decision by the government, they have no capital to back that up. so in the wake of the crisis the big discussion about

banks has been capital, capital, we need more capital, that is what will make our financial system safer. in contrast, we have these two companies which together are one of the biggest financial entities in the world, with no capital. >> rose: and they've been run with by people with huge political connections. >> they have in the past, yes, yes. they were run by swrim johnson in the 1990s who "the washington post" once called the chairman of the universe. and then frack grains and there was talk before he was derailed by an accounting scandal at fannie mae that he would be the first black president of the unites states. >> rose: so what happened? >> what happened was a very simple relatively safe business that was actually founded, and fannie mae right after the great depression, just basically created a market for home mortgages. you think about the problem with the s & ls they would take in deposits. in the old days the banks had to hold on to those mortgages and if rates went up and down they could find themselves insolvent by virtue of having lent money on a long-term basis at a

fixed rate. and having deposits that change in price every day. and really what fannie mae and freddie mac have done is create liquidity for mortgages and enabled the establishment of a 30 year prepayable fixed-rate mortgage which became a fixture of the housing market. and that business, their business was basically buying up mortgages from banks. getting up a large enough volume of them and then selling securities backed by those mortgages where they would guarantee the payment of interest and principles. very simply they would buy a bunch of mortgage, chop them up in little pieces and sell bonds backed by those obligations. and they were in the insurance business. and they would guarantee the payment of interest and principles on these mortgages over 30 years. and it made these securities very safe and it made theme securities that would be-- every bank in the world owns fannie and freddie mortgages. every sovereign wealth fund around the world owns these securities. and that was kind of a safe business. what went wrong was they went off-- . >> rose: have you ever owned any of these. >> i have never owned a fannie mae or freddie mac

mortgage. today i'm a shareholder of both companies. companes in conservatorship. but just to carry it forward, that very safe business of guaranteeing the timely payment of interest in principles on first mortgages to middle class borrowers, the management teams decided to get a little more aggressive. and they went into businesses they shouldn't be in. >> hedge fund like businesses. businesses are betting on the prices of securities and arbitraging their-- and then they were pressed by congress to make riskier and riskier, guarantee riskier and riskier loans. >> rose: so more people could own them. >> so more people could own a home. fannie mae wanted something, the able to go into riskier businesses, borrow money and buy securities and the barnie francs of the world wanted them to guarantee riskier mortgages. that combination was a bad recipe going into the financial crisis. and when home prices declined, these entities became insolvent fairly quickly. >> rose: i remember a story, and it is sort of, i'm not sure either of you heard this story but larry summers was on a shuttle. and he was just at the end

of a clinton administration. and he ran into somebody who was part of-- part of the incoming administration. and he basically said, the bush 43 administration, and he said the most important thing you can do is fix fannie mae and freddie mac, that's the most important thing you can do. >> one of the really interesting things is that these companies are widely perceived as democratic companies. but it was actually under the clinton administration that larry summers, treasury first took them on in an official way back in the 1990s. and they, took them on meaning summers began to criticize them publicly and questioned the u.s. government's ties to these companies, therefore weakening them. and it became a huge political brouhaha in washington back in the late '90s. but i think it's fascinating that it was a democratic treasury secretary who first started trying to reduce their power. >> rose: so what are you going to do? what is the solution? >> the solution we think is actually to restore fannie mae and freddie to what they were 30 and 40 years ago, which was very safe businesses gauranteeing the

timely payment of interest and principles. why is that important? the u.s. economy is really the only housing finance market in the world where you can borrow money for 30 years at a fixed rate. you can borrow 80% of the value of a home and that ability to borrow 80% of the value of a home at a very low fixed rate, you can borrow money, at something less than 4% on a first mortgage on a 250,000 dollar loan is what enabled really enables the american dream of owning a home, in effect, a very good way to save for retirement. that simple model is what we need to go back to. and-- . >> rose: how do we get back there. >> the way we get back there is what has happened here is both companies were taken over because they took risks they shouldn't have taken. they didn't have enough capital. ed current management teams which are not part of the political management teams of the past have done a very good job running both companies, since the crisis, rebuilding the capital of both companies. and really the issue, they were headed back in the right direction which is getting out of the risky businesses, guaranteeing good, strong credit quality mortgages.

and then in august of 2012 the u.s. government decided sort of unilaterally to basically take 100%, actually take 100% of the profits of both companies forever. every quarter that fannie mae and freddie mac generate profits which is every quarter basically since 2012, the u.s. government takes out all of the capital institutions as a dividend. and deprives the entity of an ability to recapitalize. and what should happen is number one those dividend -- dividends should top and the government has been repaid 240 billion of the original 150 billion of principal they injected into these entities. the u.s. government made a very large profit, almost a hundred billion dollar profit on the takeover which it should. the u.s. government and taxpayers own 79.9% of these two companies so there is a big opportunity foreign richment for the taxpayer. but they should allow the entities to rebuild their capital. they should not pay any dividends hll they get to a level of capital jamie diamond would call a fortress balance sheet. the u.s. government should get out of the business of owning a housing finance company. very much like the banks.

you think about citigroup during the crisis, the u.s. government did the same as fannie, they injected capital to bolster the institution. they took warrants which is a participation in the stock. in exchange for committing capital and they forced citigroup to rebuild its capital banks. they got citigroup to exit businesses they shouldn't be in, kind of the higher risk businesses. and the u. the u.s. government sold doichb its position, taxpayer exited with a profit and it was restored to a prooif at institution. same thing at aig. same thing happened at jpmorgan, goldman sackses, b of a. interestingly, fannie mae and freddie mac were the only institutions where the government decided after the crisis, four years later to take basically take 100 percent of the profits forever. so it's a unique event in the history of corporate america. >> rose: peak-- speaking of aig, what did you think of the hank greenburg suit in victory even though there was no money involved. >> what is interesting about that, is hank was suing-- . >> rose: explain to people what he did. >> so basically aig was rescued like fannie mae and freddie mac.

they injected a billion plus of cap tag on onerous terms, high coupon, they took 79. -- >> they pretty much got what they wanted. >> the government took a huge pound of plesh out of-- flesh out of i,aig. they paid back that money and became a public company again. by ask what we expect to happen, which should happen with fannie mae. and freddie mac. hank was not happy with the terms of the bailout and sued saying this was really an illegal appropriation. >> rose: and nobody thought he had a chance of votes the. >> he won but ultimately got in j das which is sort of a-- victory but what is interesting here is-- by the way my position is we are shareholders of fannie mae and freddier and suing the u.s. government on behalf of all of the common stockholders and preferred stockholders to reverse this 2012 transaction. we are not fighting the original bailout. so hank attacked the 2008 takeover and the terms. we're saying those terms are onerous but we can accept those terms. what we're on swrekting to is four years after the crisis it wasn't enough for the government to get a 10% coupon, get their money back

and own 80% of both companies. the government decided to take the remaining 20%. >> rose: when say we, you mean you on behalf of dns -- >> approximatelies of shareholders, fannie and freddie, we get calls, el e-mails, people in retirement that own 5,000, 10,000 shares of the companies. >> rose: what is in it for you. >> i manage a fund. our investors benefit if the stock price increases. and you know that somehow we make a living. >> rose: what do you think of this. >> well, i think that the u.s. government needs to do something about the fannie and fred-year swachlingts i think every person out there should care about this. because it isn't just homeowners with mortgages who are impacted. it's investors. it's our relationship with global entities, global foreign banks who own big chunks of these securities. but these securities are like water. they move flew the global financial system and if there is a disruption and fannie an freddie suffer big losses and have to take billions of dollars from taxpayers there could be a disruption in all of these markets. so i want, i want a solution. i am a little less sanguine than bill that there is nisly a big payoff for

invests in this. but i have come to believe that despite all the problems with fannie mae and preddiest's business model, it is a little like winston's churchill old quote about democracy, the worse thing in the world was the possible exception of everything else that has been proposed. and i still have not heard an idea, when you really start to think through what is the alternative. they're all worse. >> rose: president obama described the dysfunctional business model of fannie and freddie, heads we win, tails you lose. >> that can be fixed, that is really just an issue of capital. if you think about the maj banks in this country, they all have explicit guarantees from the u.s. government. every major bank, the depositors have a guarantee from the u.s. government that is a huge subsidy. banking system. every bank, ef relarge bank has the potential for the government to step in and save it there is a financial crisis, there is a bit of an implicit bank stop behind every major financial institution what has the government decided to do toed res that problem. they force the banks to hold more capital. and what we believe is a fannie and freddiest have -- we put guardrails on them. we stop them from going into the high risk businesses

that put them off the ledge. we require them to hold multiples of the capital that they are required to hold in the past. you can make it extremely remote that the taxpayer ever has to step in and save both companies. the good news is that if you let fanniest and freddiest recap palize by just generatedding, just with the profits they are generating, in four or five years we believe they will be worth something like half a trillion dollars. the taxpayer will own 80% of those companies, so there is 400 billion of common stock owned by the taxpayer that can be used for education, infrastructure, deficit reduction, if you let these entities continue to exist. and will there really is no viable alternative to fannie and fred-yearment that is why they are where they are. the problem is you've got the largest, this is the largest financial institution in the world, if you combine them, operating with zero capital. because each quarter the government takes out, sweeps out 100 percent of the profits. >> rose: this is the remaining big issue with respect to the 2008 crisis. >> this is the only piece of unfinished business. >> can you imagine if jpmorgan were operating every quarter with no capital. so if they suffered a loss

they were done for. they had to get a bailout. >> rose: if they got a profit they had to turn it over. >> to the government. now bill had a great line for what this is yesterday, but i will let you say it. >> i don't even remember. >> you called it stalinesque. >> rose: yeah. >> state controlled. >> it's literally the 2012 transaction is literally the government taking priv at property without compensation. that is constitutional stuff. >> so what did you think of dodd frack. >> look, what is interesting is i think the original securities laws that were put in place after the great depression were really good. the issue is more an issue of enforcement of the law than needing more laws. i have actually-- i read the dodd frack bill when it came out in whatever thousand plus -- >> you had a free week, did you? >> but the problem with bills and laws that are thousands of pages is you know there is enormous complexity. i would not want to be jamie die manned. i would not want to be ryan

moynihan running a major financial institution. >> rose: so the laws are complex, are the standards of liquidity and leverage reasonable. >> i would say the banking system is a vastly better place than it was ten years ago. >> rose: and those standards have been in place in 2007 and 8, we wouldn't have had the crisis? >> i think-- i think we would be less likely to have the crisis. >> rose: lehman brothers would have been less. >> the basically principleses you don't need a thousand pages, hold more capital exit risky businesses. the problem with dodd frack is the complexity and regulatory overlap of all the institutions and it can lead to some bad-- . >> rose: almost kind of go back to where we were in terms of what you can do and what you can't do. >> after the great depression there was a big backlash, the secs with basically created and introduced a lot of good law put into place. and the problem is, you know, 70 years went by and people stopped enforcing the rules. an important point about --

dodd frack because everybody pretends there is an alternative to fannie and freddie which is get the above the of the housing market let's have private money, to finance money. that private money is the big banks. and so despite what dodd frack does, and despite the argument that dodd frack now prevents this issue of too big to fail and makes it so the big banks can fail, if you take all the mortgage risk in the country and put it into the banking system, those banks can to the be allowed to fail. so it effectively undoes dodd frack and just is a different version of having a government backed housing system. it's not private capital in the way that there is they were tense that it would be. >> see, i agree that you want the housing finance system supported only by private capital. but the-- you can't do that denovo with a blank sheet of pip and build a business from scratch. what you can do is fake tan fannie and freddie that have mae 1935, freddie mac since the late 60s. you could take these entities that now have enormous scale an scale

economies and a track record and experience and geographical diversification and make them public companies again, owned by the public. and as long as the capital base is large enough, you can make an extremely unlike leigh that the government or taxpayer has to be involved in housing. the government's involvement should be regulation and oversight, not risking taxpayer money on housing. you can get there with the current system. >> rose: does any other country in the world have a system like we do? >> no other country has a system like we do. and there is no other country besides tinny denmark that has what americans have come to think of as a birth right which is a 30-year fixed-rate fully prepayable mortgage that is enabled by our system. you will hear this argument, well, other countries do it differently. and their rates of home ownership are better than ours. why can't we do it differently. there are two problems with that. one is that other countries aren't as diverse geographically or in terms of the income spreads as we are. and the other is that in europe banks essentially finance the housing market there. when the crisis came in 2008, europe had to bail out its

banks. so again, there is this idea that other companies don't have the government involved but when a crisis hits, government's involved. >> if i could just mention, having talked about this 30 year mortgage, why don't we get rid of the 30 year mortgage. the problem with that is the entire, the bulwark of the housing system in the united states say 30 year mortgage, what enables someone 289, 32 years old, save some money, put down a down payment, to buy a home and know that they are not going to get stuck in five years having to refinance an obligation that comes do. this he have 30 years where they can pay off a mortgage. if rates decline they can refinance at a lower rate. and that instrument is created enormous wealth in the country and it supports the value of the housing market. if you get rid of it, which no one is actually in favor of in the congress that i have heard of, you destroy the housing market and the economy with it. >> rose: last winter you said that freddie mac an francis p. maglio were the most interesting risk/reward that i'm aware of in the capital markets now. >> what i mean by that is if

you buy the common stock today, i believe the only solution to the problem is for these entities to be effectively privatized again. and that scenario, the investors of fannie mae and freddie do very, very well. the good news is the taxpayer. >> do you believe that that in fact will be the solution that takes place and you believe it's a safe bet to bet on that idea. >> i don't want to make an investment recommendation. >> i'm not asking for an investment recommendation. i'm asking about you in terms of what you do. >> we think it is a very attractive risk/reward. it is more likely than not that that is the outcome. you've got political risk, legal risk. you've got regulatory risk, you've got leverage. you've got a lot of complexity. i would not call it a safe bet. i think it is a very interesting one. >> i'm a little less sanguine on this. i think it's a great example of political disruption in washington that we haven't done anything yet. and i'm not as optimistic that our political system is going to do anything until there's a crisis. and my fear is that if there is a crisis, the government will lurch. and we'll end up with instead of a responsibleably

thought out carefully planned system, will lurch to some sort of solution that may not be a solution at all. and so i wish the government would take the luxury of fixing the roof while the sun is shining. and do something while the market seems relatively steady to put us on stable ground for the next bunch of decades, instead of waiting until there is a crisis and hitting the panic button. >> let me talk about the economic-- big banks are doing -- big banks i think are doing decently well, interesting to see what the federal reserve actions mean for the house of big banks. >> rose: takes place tomorrow. >> i think there is a lot of-- i think there is a lot of question bses what their business model is going to be going forward. >> rose: big banks within uh-huh. >> rose: and what businesses they are in. >> and what businesses they are in and whether the trading businesses can ever make as much money as they did in the future, as they did in the past, i'm sorry. >> rose: explain to us why it matters to most of americans whether the federal reserve raises the interest rates or not. >> well, tomorrow is sort of an indication of what the

federal research thinks of the state of economy. >> rose: right. >> if they defer the decision to raise rates. >> rose: you are still worried. >> they still have concern. actually part of me says that a small increase in rates would be viewed quite favorfully. >> rose: by the investment community. >> basically saying that the government, the federal reserve believes that the economic strength of the economy is such that we can-- i mean again a 125 basis point increase inity ras is not material in any way but it sends a message that we're now beginning to-- we have finally recovered from the crisis which i think is a positive. >> rose: actually we're leer to talk about a book. let me make one recommendation. i didn't write it so i can give it more objectiveitiness this is quite a good back. half the problem with fan-year and freddie is that no one in the congress, in the government, probably in the country, very few people understand what these institutions do, what happened, et cetera. this is a little book, takes two hours to read. >> rose: where it began. >> it costs $11, probably the best $11 you will spend. i will give a plug for bethany. >> thank you. >> rose: you will take all the plugs within i will absolutely take all the plugs t is a tough topic, you know, it's funny

because-- . >> rose: you tackled tough financial topics all the time. >> these two companies page up so much of the machinery of our lives, they are part of almost every american's daily lives even though people don't realize it. and i feel like it's something we should understand and think about. instead of just letting special interests in washington dictate the outcome without anybody understanding what is really happening. until there is another crisis. and then everybody will say why weren't-- why didn't we do things differently. >> rose: let me go back to my question, sorry with big banks what about hedge funds? i mean they have been a real -- examination of the success of hedge funds and questioning of hedge funds. >> i think it is like any other-- . >> rose: and profitability has slipped dramatically and are you one of the shining stars. >> i think-- . >> rose: but even you had a-- . >> bad pont. >> fortunately we don't judge ourselves on a monthly basis an hopefully our investors don't do the same. >> rose: why did you have a bad month in august. >> we own great businesses. the stock market dropped, meaningful amount and you know in the short term, even great-- even berkshire hathaway is going to-- buffett stock is down a

lot. why? you know, people panic. they sell stocks. but it's not-- what our business is owning assets that will increase in value on a long-term basis. an in the short term the stock market moves up and down. >> rose: but aren't a lot of pension funds getting out of-- . >> probably the option. >> they are moving in. >> some are are. >> i think-- are they alone in terms of that. >> i don't think of hedge funds as an after-- hedge funds is basically a manager without et gos a compensation structure which includes a percentage of the profits. as a result of that, profit share, it attracts a lot of people to the industry. but there are hedge funds that bet on commodities. >> rose: stop there. because i mean you are saying it also gets a percentage for managing the assets too. >> that's correct tk. it's a very profitable business model and therefore it attracts people who want to compete in this industry. but there's a full continuum of talent in the industry. >> rose: but is it changing? >> it is changed only so far as this was a boutique, you know, 25 years ago, hedge

funds were small, they were a couple hundred. the amount of capital management was very small. today it's a couple trillion dollars of capital and hedge fund managers tend to be, not all, we take a much longer-term approach. much more short-term oriented. tend to be more trend followings these are trends. >> rose: tend to be more traders. >> if i may, just to make one very high level point about let's talk about the middle class for a moment. >> sure. >> as it relates to what bethany has written about. what is interesting, if you think about last ten or 10 years, the price of almost, the common things that people need, so the price of clothing, the price of fuel, the price of computing, the price of basic goods and services for your middle class working class person has actually come down meaningfully. we have had a meaningful deflation in the price of most things you need to live a good life. that is partly why even though there has been very little real wage increase, people have not been, there hasn't been a revolution. despite that. the risk, however, is really

the only asset i think at risk of really appreciating dramatically over the next 10 or 20 years where the middle class gets left behind is the roof over your head. because if you don't own a home, you are subject to renting an apartment and rents have been increasing at very high rates. five, six, seven percent per anum. so the ability to own a home and control your cost of housing for the next 30 years, or until retirement, and actually build a nest egg with this a set, is a very porn thing. that is why why is fannie and fred-year important, they have enabled people to own homes in america. and that's why this is such an important issue. >> and then-- . >> okay, go ahead. >> i was going to say, this ties into your question about hedge funds though, it is an interesting thing. because there are other hedge funds-- who are suing the u.s. government over the handling of fannie and fred-year. the criticism is these guys are out to line their own pocket, out for investors. if you think about it in a different way, it takes someone with a lot of money and a lot of power to sue the u.s. government. and i think it's fantastic that we have a group of people who are willing to

shine a light on the government's actions. i applauded hank greenberg for bringing his aig suit. because the government's actions in a time of crisis should be scrutinized and the government's actions after a crisis is passed should be scrutinizeed. >> rose: to realize -- >> i think that could be the case in this, in this as well. but that is actually a value, the transparency that hedge funds, wealthy investors can provide is actually a huge value. i think. not some bad thing that we should be seeking to get rid of. >> rose: is -- >> that say different topic. that one, that one i might come down on a different side on. >> rose: but i remember when after in the-- as we began to deal with the crisis, i mean smart people would come to this table and they would say the indicator i'm looking for is for the housing market to regain its growth. when we began to see movement in new construction, then i'll know that the economy is beginning to gain

traction. >> i think those are so indicators the federal reserve ising laing at, janet yellin was looking at and deciding on rates. the housing market is a huge part of the economy. you think it's not just home construction but it's the furniture you buy, the carpet, the moving, and also it's one of the few places where a middle class person today can make a real living, in construction, without a college education. >> rose: right. >> and so construction is very important for the economy generally. >> rose: but is the idea that, you know, invest in your home because it will always get better it will always grow, that equity will always be higher than it is what you invested. is that idea. >> it is certainly not dead. and i would say since the financial crisis went, you know, you had a kind of stable increase in the value of homes around the country over a 75 year period of time. and then you had a massive acceleration in the value of homes in a several year period of time fueled by basically no money down, crazy forms of financing.

and that blew up because it was a bubble. and then the whole housing market reset at a much lower value. and i think the benefit of becoming a homeowner today is you are buying in at much lower cost. and i think it will be a good investment like it has been in the past over the next 10 or 20 or 30 years, unlike the stock market where people react emotionally too the stocks go up and down, they often sell at the wrong time. the beauty of a home is at a minimum you have an asset you can live in. you know the cost of, and in the meantime you can rebuild equity, you have almost a of built in savings plan as your mortgage comes in and you pay brins approximately each month. a very good way for the average person to put away money for retirement. >> you are a financial writer and not a economist, i think. >> that is correct. >> rose: what is the impact of what is going on in china? what impact are we looking to unfold in the economy global economy because of china's slowing down of growth and real efforts on that government to try to do something even some people judge too much.

>> right, i think it's a big risk and i think it's a big overhang for the global economy just how bad is the situation in china. an there have been some very smart people who have argued over the years that the situation is quite a bit worse then anybody wants to let on. the numbers are not necessarily true. and that they, if we had a meltdown fueled by a real estate boom, in 2008, they're going to have a meldown fueled by an unsustainable real estate and construction boom the likes of which the world has never seen. and i think that say big risk for the global economy. you are already seeing it, obviously, in commodity prices. and it's frightening. it's an overhang. you know, it's nice to believe that those economic world we live in is secure after the global financial crisis. but it's still a scary place. >> rose: you? >> i'm pretty bearish view on china. i think the stated growth rate of 7 percent, i think is overstated. i think it's a very leveraged economy. i think the chinese did not handle their both the rapid increase in the stock market in promoting margin leverage,

encouraging retail investors to invest. and i think the-- . >> rose: . >> and then the subsequent collapse, you have the stock markets down 30, 40% and the chinese approach as been literally to arrest and attack and go after everything from short-sellers to anyone who sold a stock, there is nothing more frightening to an investor to be in a market where the stock market is down 35% and are you told are you not allowed to sell. and so i just think the-- i have enormous respect for the chinese, as an incredibly entrepreneurial intelligent people. >> rose: and huge economy. >> and a huge economy, very important for the global economy. but i think they really mishandled the stock market. and right now they're trying to manage their currency and manage their economy. and it's a very difficult thing to do. >> rose: and by the dns. >> by the way they are a big owner not on of u.s. treasuries but fannie and feddie mortgage-backed securities. >> are they selling some of those u.s. securities. >> i don't think they are selling it. i think it's a threat, it's an overhang. >> rose: my impression was they were.

>> there is an enormous amount of pressure on the chinese currency am so you have chinese people trying to get their capital out of the country. an economy deteriorating. an expectation on the part of investors that the chinese will have to let their currency depreciate, to count act that they are-- . >> rose: 2% depreciating t probably needs to be 20 or 30%. but the response to that basically is selling u.s. dollar assets, probably fannie mae and freddie mac securities u.s. treasuries and buying the chinese juan to buy the currency, they are consuming their financial reserves doing that. >> rose: i get the impression that you are here because of your strong feelings about fannie mae and freddie mac and not to talk about pershing square. >> i'm happy to talk about pershing square. >> rose: we wanted to focus on this. where is the herbalife deal. >> so since i was on your show which was quite awhile while ago when the topic came up. >> rose: explain to them what the deal is. >> the short story here is,

we have a -- >> no pun intended. >> bethany is a well-known among other things to are poxing the enron fraud. >> rose: an amazing book. >> and we have a short position in herbalife, a new york stock exchange company that we believe is operating a pyramid scheme now for 35 years which is kind of an incredible fact. a company that as a result of our publicity around the company, shining a spotlight on the business, numerous public presentations we've made, the ftc has launched a formal investigation. the department of justice launched a formal investigation, probably six or seven attorneys general have ongoing investigations. and the sec has an investigation. i think the frustration on the part of investors, actually and the media, jonah wrote an important column where he contacted the federal trade -- former co-author, contacted the ftc in the last two days and he said you know, look, you just shut down a pyramid scheme called vema which is many herbalife distributors left at the time of our presentation and went to vema, another pyramid

scheme. you shut down vema yet herbalife is still around. please tell me what the difference between herbalife and vema. define for me a pyramid scheme. which should be again for the federal trade commission which is responsible for protecting consumers from pyramid schemes they should be able to tell a reporter for "the new york times" a pyramid scheme. they refused to answer the question on the record. they said i'm sorry, we have no answer for you is what he said in the article. so i think the problem we is is whether it's a legislative problem or the ftc is not a strong a regulator as it should be, this company needs to be shut down. it is effectively identical. and substantively to the company, smaller companies they've shut down. and i think it will eventually happen. >> it would be a huge payday for you. >> our investors make a lot of money. i've committed to give away 100 percent of any profits i make personally. but it will be good for my investors and funds pore sure. >> rose: thank you for coming. >> thanks for having me. >> glaet to see you. >> rose: other than at tennis turn the, shaky ground, the strange saga of

the u. u.s. mortgage giants francis p. maglio and freddie mac, bethannee thank you. we'll be right back, stay with us. salman you were dee is here, one of our most acclaimed and influential writers working today. he has written 12 nofls, four works of nonfiction and a collection of short stories. he won the booker prize for second novel midnight's children. he was knighted by queen elizabeth in 2007 for services to literature. his new book is called two years eight months and 28 days it is his first, his first novel for adults in seven years. i am pleased to welcome him back to the table. welcome. >> hi, how are you, good to see you. >> good to see you. >> the last book is a memoir. >> three years ago, memoir. i have been doing this ever since. in fact, i just worked out which kind of spooked me. when somebody asked me how long did it take to you write this book, i started working it out. and it worked out to be more or less exactly two years -- >> so somehow it took me a thousand and one nights that

is what it is. >> how do you decide what you want to write. >> i wait for it to decide me, you know, i wait for the book, i mean in between books, you know, i try all kinds of things and most of them disappear and aren't any good after 24 hours. but sometimes an idea sticks. and i had a couple of things here to start with. i had this idea of genies attacking manhattan. which i thought might be enjoyable. and i had this image of this man who is a gardener, suddenly becoming unstuck from the earth, you know, if you are somebody who spent your life nurturing the earth, you know, and the things that grow in it and you suddenly wake up one day and you discover you are an inch off the ground. that's the shock. i thought maybe, i thought maybe it could be like a little kafka story of somebody waking up and suddenly they are a cockroach. and unexplained med more to sis. i thought maybe initially it would just be his story.

and then it grew outwards from there. >> you also said you get sick and tired of telling the truth. >> that was a memoir. i spent all that time trying, ok i ever wrote, like 650 almost pages. >> rose: was it cathartic for you. >> it was a bit, it was a little bit like getting a monkey off pie back and drawing a line on the past. so if anybody ever wants to hear about those ten years, read this 650 page book. and then you will be sick of it, lick i have. >> and really by the time i had finished it, i wanted to be the person to tell that story and i toll that story. and then i i thought, you know, i'm going to go back to the thing that first made me want to be a writer which was to write fantastic tales. because i came out of an indian tradition in which you grow up surrounded by fantastic tales. and i thought maybe i'm going to bring that tradition over since i'm, you know, i've been living here for what ever it is, almost 16 years. i thought i would bring it over here. >> rose: is one easier than the other? >> nope, no, i mean, in is

harder. >> rose: because it has to come out of your emergencyation. >> yeah, if you are writing a memoir, you know the plot. you know, and you know all the characters. >> rose: but here too you can do interesting things because you have a table but it's also dealing with contemporary issues. >> exactly. you're trying to take a kind of sense of what is going on in the world and try and make it into, you know, take -- from the base metal of it's alchemy, you take the base metal of the world and try to turn it into gold. it was very interesting, very enjoyable to do, actually. >> rose: what are you addressing. >> well, obviously at the centre of the book is what is called a war of the worlds in which these supernatural beings are attacking the earth and we have to defend ourselves. i think it is a time of extraordinary conflict. but i think beneath that, i think it's a time of great uncertainty. the thing that happens in the book is that all sorts of characters like the

gardener who coming up stuck find that very strange things are happening to them. and it's called the time of the estrangements. a and what i found is that is a way of saying that we live in a time in which i think many people feel the world has become very strange. you know, it's changing. it's very, very high speed. in all kinds of unexpected and sometimes not at all attractive direction. and i think many people feel we don't know what is going on except that the old rules, what we thought were the kind of rules of the world, don't seem to apply any more. and we don't really know what the new rules are. >> rose: but you also say it is a series of love stories. >> yeah, i mean, there is a whole sequence of love stories in it. which starts off with, well, at the heart of the book is the woman who is the main character is this gin princess. who loves human beings, unlike others of gin who don't. but she does and in fact she starts off in the novel by falling in love, the gin live almost forever. so they are very, very long lived.

she claims to remember the dinosaurs. which may or may not be true. but anyway she lives a really long time. and in the 12th century on one of her visits to this world, she falls in love with a philosopher in spain. really historically existing figure who is known in the the west of abaroe, but in the arab world is ibna rush which which is where my name came from because my father admired him so of that he changed our family flame to honor him, so rushdie comes from that. so i became interested in him for that obvious reason. anyway, she falls in love with him because, and i did too, in a way because in his time, he was the progressive voice. he was the philosopher, he was trying to shift the way people thought in the direction of reason and logic and science and tolerance and away from blind faith. and you know, he had his problems too.

>> rose: there are many interesting things here in terms of you are here for kind of a union of reason and unreason too. >> yeah, because you know, unreason, i mean it's not-- it's too easy to say reason is good and unreason is bad. because out of that irrational self, i mean comes like what i do for a living. come the arts, you know, they do come out of a marriage of the rational and irrational. and that's what in his famous etching, guyer was trying to say, he was trying to say when these two things come together, they create marvels, they are the parents of the arts. when they are separated, they bring forth monsters. >> rose: i mean, the -- trying to introduce logic too, he did not. >> yes. >> sort of the -- >> yes, hes with-- cominging to of science. >> he was a great admirer of arist otel and his commentaries in arist ots el afterwards became incredibly significant in european fort,

you known, philosophers like thomas a a quineas and the italian renaissance humanists were very influenced by him. >> you say another of the interesting thing, observation is that you have made is that terrorism is a very attractive to especially men who have real problems with sexual relationships. >> well, it's a kind of joke. but it's a joke with a little edge, i think. >> rose: because of what-- because of how they have-- how they have-- drawn the -- >> if you live in a world where you are you know, you are broke and you have zero prospects and you feel put upon and it's easy for you to believe that that is somebody else's faults, and. >> then somebody comes along with-- somebody comes along with an argument that he will have everything you want. >> here is a gun and will you have women because we will provide them for you. >> yes. >> you know. >> in the next life. >> no, even in this life. >> even in this life, actually part of isis. >> yes, they-- the thing that baffles me which i don't get is why the women go.

i can see why the guys go. >> rose: you mean i would assume it's all the sort of simple reasons, it is to belong to something, some sense of feeling a connection somewhere, some romance. >> and the propaganda is very good. >> the lure is propelled forward from maybe unreal is also -- >> so here you have got n this case, i decided to turn it into a supernatural war but clearly it's an attempt to say something about you know, the world we're in. >> rose: what is next though? >> after this? >> rose: yeah. >> i don't know quite yet. i mean i do shall did -- one of the things i think is that i have always felt a little regret that i hadn't written more short stories. i had one book of short stories and a few other thinging. but i feel, right now i've got four or five files going with stories of different lengths, some of them are only so far a couple of pages long and some are 15

or 20. but i want to, i just think i might write some stories for a bit. >> rose: so you have three or four stories going at the same time. >> at the moment, i do, yeah. >> rose: do you do that normally in your life, have you had that. >> no. >> rose: i would think that would be very difficult. >> i'm a very bad multitasker. i am-- . >> rose: you need a focus. >> i'm a one thing at a time guy. >> rose: but are you doing this now. >> i'm doing it because it is incould of fun. also because this is a passage, you know what a book tour is like. not that many silent days to yourself. an it's not a time to begin a big project. but it's a time when i can squeeze in a few little things. >> rose: are you thinking about big projects. >> i've got one. i've got wla think is a-- i don't know what it is yet. i will come back and tell you. >> rose: you don't want to know or you don't want to disclose. >> no, no, it's not formed yet. i have parts of it. >> rose: it is beginning to feel like it might emerge. >> i feel like, sometimes you have the feeling that there is a fish on the line, you know, but you-- don't quite know what the fish is or how big it is. >> rose: it hasn't surfaced yet, it is a struggle. >> but it's down there.

>> rose: writing skills can-- could you take you, in your own life experience, could you take a bright young young person who was very much observant, very much interested in the world around them, perhapsed even spiritual to a degree in the broadest sense of that. and make them into a good writer. is there a way or is there some-- essential quality that one must have. >> there is a thing you can teach and then there is a thing you can't teach. >> rose: so what are they? >> what can you teach is craft. i mean a lot of writers can be taught how to do better. >> rose: right. >> and you know, how to make your sentences sharper. >> rose: what is that, making the sentences sharper. >> paying attention to form, making sure that the shape of the book tells the story. >> rose: command of language,

all of that. >> no, the things i think you can't teach is that i think everybody who is really exceptional writer has some very personal relationship with the english language. if you think about hemingway or joyce, you immediately know that it's hemingway or joyce when you pick up a page, you know. >> rose: do you see it in conversation? >> not always, no. and i don't believe hemingway spoke like that. >> rose: i don't either. >> i don't think he did. but i think there is-- certainly for me i know that when i'm sitting down to write, my mind works in a way that it doesn't otherwise work. you know, that the kind of noises that come out of my head and on to the page just in the act of writing, are different. i mean i don't write in the way that i am talking to you, you know. another thing happens. and i think that's the kind of magic thing. and i think that, if you've got some interest, i mean like raymond carver, anybody you can think of, you have

very particular relationship in the language. the other thing you said earlier, that is very hard to teach is-- . >> rose: that is actuallying i was going to say that point. i think writers have also the best writers have this marvelous sense of recall for experience and observation. >> and how people talk. >> yeah they mick imhow people-- himming how people talk. one of the things i said, when you write a page of dialogue with two people talking, talking to each other t should be possible not to say who is talking. not to say "he said, she said". just from the way they talk you should know who is talking. >> and i mean i always start. >> an interesting idea. >> with all these people, all my characters, one of the ways i start with the characters is to think how do they talk, are they talkative, are they tas i turn. do they use bad language. how big is their vocabulary. you know, once you made a number of decisions about how a person talks, you really know a lot about that

person. i think for myself, i have been a verbal person all my life so i ten to be able to articulate and say and express myself better this way than sitting and saying yeah, one sense tenz-- sentence after another. >> it's very dismt i actually think i'm quite a verbal person and i enjoy expressing myself in dialogue like this you know, but writing is the hardest thing i know how to do. and especially when it's a book like this which is supposed to feel, you know, the great italian writer named what he considered to be the great literary virtues. and amongst them were qualities like swiftness and likeness, which are very hard to do. if you want to write a book that reads as if it is light, that reads as if it goes quickly but actually has depth to it. that is the hardest thing i know how to do. >> how do you do it? >> well, you do it and then it's thoughtful and you make

it better and it's still quite awful and then event -- eventually you crack it. >> by the time your books go to the editor do they need much editing. >> they don't need much but i don't show works in progress it's too fro gill. but when i get to a point where i'll not improving it, then i get interested in what people say. >> primarily your easyitier. >> editors but also-- . >> rose: people that you trust, their judgement and they will be honest. >> what you need is people to tell you the truth. you don't need people who pat you on the back and tell you you are wonderful. you need people without say i got board in that bit or got confused over here. or i wanted more explanation. >> rose: exactly. >> that is what you need. and i am not saying i always do everything that people say but it's very useful guidance. and if two or three people who read it is a the same thing, then they are right. >> so if you hear it three or four times they are on to something. >> yeah, then fix it. >> and you know how to fix

it you find out how to fix it. >> the greatest publishing editors always have the brilliance that they would be able to put their finger on the problem. they would say problem here, but they wouldn't tell me how to fix it. >> they just say this is the problem. >> here is the problem. >> so the here is the problem, this is what you do, they say this doesn't work. >> yeah, you know, i got snarled here. you lost me here. >> you go away and find out how to fix that, that is your job. >> how long does it take you to write a book northerlyally. >> you know. >> and is a memoir different. >> it is faster, no question. i mean i talk to other people, i talked to martin amous, he said he thought it was about twice as fast writing a memoir as writing a novel. >> rose: twice as fast. >> i think he's about right. the memoir, it is very long, it's over -- -- by far the longest book i wrote and it just poured out. just came rushing out of me like a torrent continues had been contained. >> like a damned up flood, just came. this takes long. i mean look,. >> rose: you sit at a

typewriter and just go. >> well, the case of the memoir i had a lot of journals and so on, so i had records to help me. but the novelty you don't have anything, you've got nothing until you make it up. and i mean i've three times in my life taken five years to write a book. satanic versus, they took five years, the-- took four years. >> that is 25 years already. >> yeah, i mean, some like -- took a year, furry took a year, this one took two years, eight months, 28 nights. >> the issue that got you brought some of terror to your life is now sort of, as wide and as-- unimaginable. >> it's everybody's problem now, you know what i mean. and that's sad but true. >> it's everybody's problem. >> it is on the highest t is at the top of consideration. >> yeah. and i think almost all of us will think about it at some

point every day. if we're at all plugged into what is going on in the world. >> good to you have here. >> very good to be here. >> rose: book is called two years eight months and 28 nights, a novel, salman rushdie, thank you for joining us, see you next time. >> for more about this program and earlier episodes visit us yen line at pbs.org and charlie rose.com captioning sponsored by rose communications captioned by media access group at wgbh access.wgbh.org

>> funding for charlie rose is provided by american express. additional funding provided by: >> and by bloomberg, a procedurer of multimed why news and information news and information services worldwide

man: it's like holy mother of comfort food.ion. kastner: throw it down. it's noodle crack. patel: you have to be ready for the heart attack on a platter. crowell: okay, i'm the bacon guy. man: oh, i just did a jig every time i dipped into it. man #2: it just completely blew my mind. woman: it felt like i had a mouthful of raw vegetables and dry dough. sbrocco: oh, please. i want the dessert first! [ laughs ] i told him he had to wait.