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CNBC TRANSCRIPT: FORMER FDIC CHAIRMAN SHEILA BAIR SPEAKS WITH CNBC’S SCOTT WAPNER TODAY ON “FAST MONEY HALFTIME REPORT”

WHEN: Today, Wednesday, July 25, 2012

WHERE: CNBC’s “Fast Money Halftime Report

Following is the unofficial transcript of a CNBC interview with former FDIC Chairman Sheila Bair. Following is a link to the video of the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000105296

All references must be sourced to CNBC.

SCOTT WAPNER: OUR TOP STORY. A CALL TO BREAK UP THE BIG BANKS BY NONE OTHER THAN SANDY WEILL, THE MAN WHO FOUNDED THE FINANCIAL SUPERMARKET. THE FORMER CHAIRMAN AND CEO OF CITIGROUP MAKING THAT STUNNING COMMENT ON CNBC THIS MORNING. HERE WITH HER FIRST ON CNBC REACTION TO SANDY WEILL'S COMMENTS, SHEILA BAIR. SHE RAN THE FDIC DURING THE FINANCIAL CRISIS AND SHE JOINS US ON THE "FAST LINE." MISS BAIR IT IS GREAT TO HAVE YOU BACK ON THE "HALFTIME" SHOW. THANKS SO MUCH FOR JOINING US.

SHEILA BAIR: SURE. I’M HAPPY TO BE HERE.

WAPNER: YOUR REACTION TO SANDY WEILL THIS MORNING IS WHAT?

BAIR: FLABBERGASTED. IT'S A LITTLE IRONIC, I MUST SAY, GIVEN THE FACT HE AND HIS INSTITUTION WERE IN THE LEAD IN PUSHING FOR THE REPEAL OF GLASS-STEAGALL AND THEN, OF COURSE, CITIGROUP IS A POSTER CHILD FOR TOO BIG TO FAIL IN THE BAILOUTS DURING THE 2008 CRISIS. SO IT IS TRULY IRONIC. BUT OBVIOUSLY I AGREE WITH HIM. I THINIK, AS I'VE SAID REPEATEDLY ON YOUR SHOW AND OTHERS, THAT I THINK THESE BANKS ARE TOO BIG TO MANAGE CENTRALLY. THEY'RE TOO BIG TO REGULATE AND THEY DON’T PRODUCE GOOD SHAREHOLDER VALUE EITHER. THERE'S A LOT OF VALUE TO BE HAD IF THEY WERE BROKEN UP.

WAPNER: WHAT DO YOU THINK IT MEANS TO THE CONVERSATION THAT SANDY WEILL HAS NOW JOINED IT? IT'S ONE THING FOR YOU TO SAY SO, IT IS ONE THING FOR A POLITICIAN ON CAPITOL HILL TO SAY SO. BUT AS YOU SAID, SANDY WEILL IS IN MANY CASES THE FATHER OF THE FINANCIAL SUPERMARKET. SO WHEN HE JOINS THE CONVERSATION, IS IT A GAME CHANGER?

BAIR: WELL, I HOPE SO. I THINK THERE'S A LOT OF MOMENTUM BUILDING AND RECOGNITION. THIS JUST MAKES SENSE FROM PRETTY MUCH EVERYBODY'S PERSPECTIVE. SO I DO, LIKE I SAID, I THINK IT'S A LITTLE LATE. I WISH HE'D HAD THESE VIEWS BACK IN THE LATE '90s. BUT OBVIOUSLY I AGREE WITH HIM. AND I THINK IT WILL MAKE PEOPLE PAY MORE ATTENTION THAT THIS REALLY IS A REALISTIC OPTION AND IT IS THE BEST WAY TO GO, AGAIN, FROM THE MARKET'S PERSPECTIVE AS WELL AS FROM THE GOVERNMENT'S PERSPECTIVE.

WAPNER: WHAT ABOUT FROM THE SHAREHOLDER'S PERSPECTIVE? WHAT WOULD A SHAREHOLDER GET OUT OF A BREAK-UP OF THE BIG BANKS? YOU MADE THE COMMENT BEFORE THAT, I BELIEVE IT WAS IN AN ARTICLE THAT YOU WROTE, THE SHAREHOLDERS HAVE AN INTEREST IN DEMANDING THAT BIG BANKS BREAK APART, YOU SAID IN THE PAST.

BAIR: WELL I DO. THE MEGA BANKS, THEIR SHARE PRICES TRADE AT VERY STEEP DISCOUNTS TO THEIR TANGIBLE BOOK VALUE. THEY DIDN'T REALLY DELIVER GOOD SHAREHOLDER VALUE EVEN PRIOR TO THE CRISIS. THEY REALLY ARE -- YOU JUST GET A LOT OF MANAGEMENT INEFFICIENCIES BY TRYING TO CENTRALLY MANAGE INSTITUTIONS THAT ARE INTO THIS MANY DIFFERENT BUSINESS LINES. SO I DO BELIEVE THAT A SUBSTANTIAL SHAREHOLDER VALUE COULD BE UNLOCKED IF THEY WERE BROKEN UP. AND I WOULD LIKE THE MARKETS TO LEAD THIS. I HAVE ALWAYS SAID THAT. I THINK WHERE THE GOVERNMENT CAN PLAY A POSITIVE ROLE IS TO FORCE THESE INSTITUTIONS TO COME UP WITH BREAK-UP PLANS, PUBLICLY DISCLOSE THEIR LEGAL STRUCTURES AND HOW THEIR LEGAL STRUCTURES ALIGN WITH THEIR BUSINESS LINE. SO IF YOU WANT TO BREAK OFF THE INVESTMENT BANK OR THE COMMERCIAL BANK OR THE DERIVATIVES MARKET MAKER OR THE INSURANCE UNIT, YOU HAVE THE INFORMATION THAT YOU NEED TO DO THAT. I WOULD LIKE SHAREHOLDERS WORKING WITH THEIR BOARDS AND MANAGEMENT TO MAKE THE DECISION. I THINK THAT'S THE BEST WAY TO DRIVE THIS. BUT THERE’S CLEARLY A GOVERNMENT INTEREST AS WELL. THERE ARE REAL QUESTIONS ABOUT EVEN THE BETTER-MANAGED MEGA BANKS. WHETHER THEY CAN ADEQUATELY BE ON TOP OF ALL THE RISK THAT THEY ARE TAKING IN THESE VERY LARGE COMPLEX INSTITUTIONS.

WAPNER: WHICH BANKS SHOULD BREAK UP? WHO ARE WE TALKING ABOUT?

BAIR: WELL, THE TOP THREE IN THE U.S. OBVIOUSLY ARE JPMORGAN CHASE, CITI AND B OF A. I THINK REALLY WITH ME IT'S MORE COMPLEXITY THAN SIZE. BUT THEY ARE IN VERY, VERY – A LOT OF DIFFERENT BUSINESS LINES. AND MANY OF THEM ARE VERY VOLATILE AND HIGH-RISK. AND I THINK -- I'M NOT A STOCK ANALYST, BUT JUST LOOKING AT THE BASIC NUMBERS, THEIR SHAREHOLDER VALUE IS NOT VERY IMPRESSIVE. SO THAT'S WHERE I WOULD START, CERTAINLY IN THE U.S. YOU KNOW, I THINK IT IS MORE COMPLEXITY THAN SIZE, TOO. I DON'T REALLY WORRY ABOUT A BANK, EVEN A LARGE BANK THAT TAKES DEPOSITS AND MAKES LOANS. YOU GET IN TROUBLE MAKING LOANS, TOO. BUT THOSE KINDS OF RISKS ARE MUCH BETTER UNDERSTOOD BY INVESTORS, EXAMINERS, MANAGERS. AND SO I THINK THEY ARE APPROPRIATE FOR DEPOSIT-TAKING INSTITUTIONS. BUT PARTICULARLY, DERIVATIVES MARKET MAKING, SECURITIES MARKET MAKING, TRADITIONAL INVESTMENT BANKING, THESE ARE ALSO ARGUABLY, IN MANY WAYS, SOME OF THE TYPES OF THESE ACTIVITIES HAVE ECONOMIC BENEFIT, TOO. BUT THEY ARE HIGHER RISK, THEY ARE LESS PREDICTABLE AND THERE'S REALLY BEEN A STRONG TRADITION OF NOT USING INSURED DEPOSITS TO SUPPORT THAT KIND OF ACTIVITY. AND WE ENDED IN IT THE LATE 90’s AND WE SHOULD PROBABLY THINK ABOUT -- AS SANDY WEILL SAID THIS MORNING, WHETHER THAT WAS REALLY A GOOD IDEA PROBABLY WAS NOT.

WAPNER: RIGHT, I MEAN LOOK. THERE ARE THOSE WHO WILL MAKE THE ARGUMENT THAT THE STRUCTURE OF THE BANKS IS NOT AT ALL WHAT CAUSED THE FINANCIAL CRISIS. IT'S NOT THE INVESTMENT BANKING SIDE, BY AND LARGE, THAT CAUSED THE FINANCIAL CRISIS. IT WAS SIMPLY TOO MUCH RISK TAKING FROM A BANK STANDPOINT IN TERMS OF LENDING. IT WAS THE COLLAPSE OF THE HOUSING CRISIS AND THAT WAS AT ROOT OF THE FINANCIAL CRISIS AND IT WOULDN'T HAVE MADE A DIFFERENCE HAD THE BANKS BEEN BROKEN UP AT THAT POINT.

BAIR: RIGHT. WELL, I THINK YOU'RE RIGHT. THERE WAS A LOT OF BAD LENDING GOING ON. MOST OF IT WAS NOT BEING DONE BY INSURED BANKS. IT WAS BEING DONE BY NON-BANK ORIGINATORS, WHO WERE BEING FUNDED BY THE SECURITIZATION ENGINES OF THE BIG INVESTMENT BANKS, AND AS WELL AS YOU KNOW, CHASE AND CITI WERE PROVIDING A SUPPORT FOR THAT AS WELL. SO IT WASN'T BEING DONE INSIDE INSURED BANKS. IT WAS BEING DONE BY THIRD-PARTY ORIGINATORS. BUT THE TRADING OPERATIONS WERE FEEDING THAT. THEY WERE PROVIDING THE FUNDING FOR THIS BAD LENDING TO GO ON. SO I THINK THE OTHER PROBLEM IS, IS THAT WITH ALL THE STRUCTURED PRODUCTS THAT WERE OUT THERE, THAT THE SYNTHETIC PRODUCTS THAT WERE DERIVATIVE OF THESE UNDERLYING MORTGAGES, THAT'S WHAT REALLY GOT US INTO TROUBLE. IF IT HAD JUST BEEN THE HUNDREDS OF BILLIONS OF MORTGAGE LOSSES, WE PROBABLY COULD HAVE HANDLED IT. BUT THAT WAS MAGNIFIED IN TRILLIONS OF TRADING LOSSES BECAUSE OF ALL THE SYNTHETIC DERIVATIVE INSTRUMENTS THAT WERE PRICED OFF THE PERFORMANCE OF THOSE MORTGAGES.

WAPNER: IN THE ARGUMENT AS TO WHETHER THEY SHOULD BE BROKEN UP AND EVEN PART OF SANDY WEILL'S COMMENT, ANOTHER COMMENT THAT HE MADE THIS MORNING ON "SQUAWK BOX," I WANT TO GET YOUR REACTION TO -- BECAUSE I FOUND IT PRETTY INTERESTING. HE SAYS -- AND I'M GOING TO QUOTE AND PARTLY PARAPHRASE HERE, SO FORGIVE ME. “OUR WORLD HATES BANKERS,” HE SAYS. “THERE'S SUCH A FEELING AMONG PEOPLE, REGULATORS, POLITICIANS AGAINST THE BANKING SYSTEM AND THAT'S NOT GOING TO CHANGE ANYTIME SOON,” HE SAID. THAT WAS ONE OF THE REASONS WHY HE THINKS THAT THE TIME HAS COME TO BREAK UP THE BANKS. I'M JUST WONDERING, IS THAT REALLY A GOOD REASON TO PUSH FOR THE BREAK-UP OF THE BANKS, SIMPLY BECAUSE SENTIMENT IS SO OVERWHELMINGLY NEGATIVE AGAINST THE FINANCIAL SYSTEM AROUND THE WORLD?

BAIR: NO, I DON’T THINK THAT'S A GOOD REASON. IT CERTAINLY DOESN'T FACTOR INTO MY THINKING ON THE RIGHT APPROACH TO THIS PROBLEM. BUT I THINK BANKERS ARE UNPOPULAR RIGHT NOW BECAUSE THEY'VE DONE A LOT OF DUMB THINGS. AND THEY'VE DONE -- THEY OR AT LEAST THE TRADING DESK HAVE DONE A LOT OF UNETHICAL, IF NOT BLATANTLY ILLEGAL THINGS. AND NATURALLY, THE CULTURAL PROBLEM AND THE PERCEPTION THAT THEY ARE JUST MANAGED FOR SHORT-TERM PROFIT, THAT THEY WILL HAVE SUSTAIN FOR CUSTOMERS. THEY DON'T CARE ABOUT LONG-TERM CUSTOMER RELATIONSHIPS. THOSE KIND OF BUSINESS PRACTICES, I THINK MORE THAN ANYTHING, THAT DRIVED THE RESENTMENT. AND THEN, OF COURSE, THE BAILOUTS – SO YOU KNOW PEOPLE FEEL THAT THERE IS THIS CULTURE IN BANKING AND THEN WE HAD TO BAIL OUT ALL THESE LARGE FINANCIAL INSTITUTIONS. NOT ALL OF THEM, BUT SOME OF THEM. CITIGROUP WAS AT THE TOP OF THE LIST. THAT IS GOING TO CREATE RESENTMENT, PUBLIC RESENTMENT. BUT I DON'T THINK – YOU KNOW, POLITICALLY THEY MAY BE MORE VULNERABLE BECAUSE OF THAT. BUT THAT IS NOT THE REASON WHY I THINK THEY SHOULD BE BROKEN UP. I THINK THEY SHOULD BE BROKEN UP – AND AGAIN, I’D LIKE TO SEE THIS DRIVEN BY THE MARKET, BECAUSE THEY'RE JUST TOO BIG AND COMPLEX TO MANAGE. YOU DON'T GET GOOD MARKET EFFICIENCIES BY HAVING THESE VERY LARGE INSTITUTIONS. YOU GET BETTER EFFICIENCIES, LESS CONFLICTS, LESS RISK TO TAXPAYERS IF YOU HAVE A SMALLER, MORE SPECIALIZED INSTITUTIONS THAT ARE FOCUSED ON CORE BUSINESS LINES.

WAPNER: SHEILA BAIR, FORMER FDIC CHAIRWOMAN, IT IS GREAT TO TALK TO YOU AGAIN. LOOK FORWARD TO SPEAKING TO YOU AGAIN SOON, SHEILA.

BAIR: NICE TALKING WITH YOU. THANK YOU.

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