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Shelia Bair Concerned About Euro Zone Recession

Former FDIC Chair Sheila Bair said Thursday she believed Europe was heading into a recession, but she sounded confident that the U.S. financial sector would be able to weather the storm.

“I think Europe is going into recession. I think that’s going to have an adverse impact on our economy. I think the housing market is still very troubled here. There’s still a lot of uncertainty about litigation risks. So I think banks are healing,” she said in an exclusive “Fast Money” interview.

Bair, who chaired the FDIC from 2006 to 2011 and was a member of the Basel Committee, echoed recent sentiments by JP Morgan Chase CEO Jamie Dimon about the possibility of a Greek default having “almost zero” impact on U.S. banks.

“A Greek debt default I don’t think would be a major event so long as it’s cordoned off from any kind of collateral damage with the other sovereigns that are having distress right now,” she said.

Bair credited European Central Bank President Mario Draghi for his efforts.

“I think there are going to be some adverse, long-term ramifications by all these generous lending programs that he’s providing,” she said. “But, frankly, he’s doing what he needs to do to stabilize that banking system there and prevent any kind of a sudden financial crisis.”

European banks, she added, needed to raise more and new capital, “as opposed to gimmicks and asset-sells or constricting credit availability.”

“They need to build up those capital cushions as much as possible or their economic conditions and credit contraction is going to be even worse,” she said.

Bair, who recently wrote an op-ed article titled, “Why It’s Time to Break Up the ‘Too Big to Fail’ Banks,” reiterated her point about larger financial names.

“Even pre-crisis, if you look at the common metrics for share value performance, they didn’t really compare very well to the larger regional banks that had a singular focus of taking deposits and making loans — or for that matter, Wells Fargo, which has also delivered solid returns just by sticking to the basic business of banking,” she said.

Several challenges still face U.S. banks, from the housing market to litigation risks, but Bair said banks are “healing.”

“Because we propped up the larger, inefficient institutions instead of letting the market correct, I think the financial sector — and the banking sector in particular — is still a little too big. The pie is not really getting bigger, and the more competitive, better-managed banks are going to be taking market share from the weaker institutions,” she said. “Yes, it’s stable – much better than it was in 2008, clearly, but I think there are some challenges, and I think that we have a financial system that’s a bit bloated.”

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Trader disclosure: On Feb. 2, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; J. Najarian is long CME; J. Najarian is long CBOE; J. Najarian is long CIGX; J. Najarian is long APPL calls spreads ; J. Najarian is long RIMM calls spreads; J. Najarian is long GS calls spreads; J. Najarian is long XLF calls spreads; J. Najarian is long CROX calls spreads; J. Najarian is long FIO calls spreads; J. Najarian is long NBR calls spreads; J. Najarian is long RRC calls spreads; J. Najarian is long WLT calls spreads; J. Najarian is long RSE calls spreads; J. Najarian is long GGP calls spreads; J. Najarian is long GDX calls spreads; J. Najarian is long GDXJ calls spreads; Cortes is long treasuries; Cortes is long SO; Cortes is long MO; Cortes is short crude; Cortes is short CAD; Cortes is short FSLR; Grasso is long AVAV; Grasso is long ASTM; Grasso is long BA; Grasso is long D; Grasso is long LIT; Grasso is long MHY; Grasso is long MO; Grasso is long PFE; Grasso is long PRST; Grasso is long S; Grasso is long XLU

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