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CNBC Exclusive: CNBC’s Scott Wapner Interviews Carl Icahn and Laurence D. Fink from CNBC Institutional Investor Delivering Alpha Conference


Following is the unofficialtranscript of a CNBC EXCLUSIVE interview with Carl Icahn, Icahn EnterprisesChairman, and Laurence D. Fink, BlackRock Founder, Chairman and CEO, live fromthe CNBC Institutional Investor Delivering Alpha conference in New York City onWednesday, July 15th.

Following are links to thevideo of the interview on, and

Mandatory credit: CNBCInstitutional Investor Delivering Alpha conference.

SCOTT WAPNER: Gentlemen,please. Watch your step. Come on in. Have a seat. Getting used to this. The endof the day, they go for the left-hander to come in as a closer.

>> I need a hood, theselights. One of those things to --

SCOTT WAPNER: That was agreat conversation we just listened to, and I'm glad to have you here for whatI hope is another great conversation, one I think is overdue and one thatcertainly could not be more timely. I should also say in the spirit of therecently wrapped-up World Cup, knowing what could happen over the next halfhour or so, I have a yellow and red card, and I will not hesitate to use it, ifI have to.

Larry, I begin with you.What, for the record, is your position on activism?

LARRY FINK: There's a rolefor activism, a big role. We're the longest of longest-term investors. $2.2trillion in money we manage on behalf of clients are index funds, so we have toown companies that are -- run and companies that are well-run. We own all thecompanies.

Unlike active investors -- alot of our money we manage active too -- our investors can sell those stocks,if they hate the company. We have to own the stock, whether we like it or not,and so we have a much greater responsibility in working with companies and,hopefully over a long term, working with companies that build the properreturns that we expect from them. And sometimes we will then even agitate, butwe will do it privately and quietly.

The role of activists -- andactivists have played a much larger role. There are good ones and some badones. And according to a study done by Houlihan Lokey, we voted with activists45% of the time, almost 50%. Another 55% against, but I wrote this letter toCEOs, to 800 CEOs in the world --

SCOTT WAPNER: A coupleletters, right?

LARRY FINK: Thispast one was for 800 of them. And we asked management and their board to comeback to us and tell us what is their long-term strategies; strategy related togrowing their company, building their company, Part 1.

Part 2, what is yourlong-term strategy, inorganic strategies, whether it's acquisitions ordivestures; and 3, what is your long-term strategy related to share repurchasesand dividends. That will give us a guidepost to manage and allows them to havea dialogue with those companies. We could disagree or agree with them; but ifwe agree with that strategy, and then all of a sudden, for one reason, we startseeing them buying back more shares, issuing debt against it, maybe high-yielddebt, that may be good for the short-term strategy, but it could be perilousfor the long-term viability of the company.

We will be hostily againstthings like that, so we're just one component of the ecosystem, and everyoneplays a role in it. And there are going to be times in that role where we aregoing to be a quiet partner with the management, if we believe the managementis doing the right thing; and other times, we could be privately pushing,sometimes we could go alongside if an activist is doing things more openly.

And so we're not againstactivists. We believe they play an important role in the ecosystem, and othertimes I believe they activate for a short-term profit and may be impairing thecompany. There are many activists, though, that own shares longer than mutualfund companies, and they are still called activists, so you can't just buncheverybody together; but one thing is interesting, which we have noted, lastyear, $900 billion was spent on dividends and share repurchases. It is going updramatically. I just can't believe we don't have more opportunity to reinvest.

And the key issue is -- and Iknow Carl agrees with this -- if they could invest and earn a better return inreinvesting the company, and sometimes that's what Carl has done in the past,we want you to invest more. Other companies, if they are doing a poor job,well, no, we want you to do something different. So but what I'm worried about,and I'm deeply worried about it -- putting my social hat on -- that we haveseen way too much behavior toward share repurchases and stock repurchases, someof it with debt, some with high-yield debt, which will impair a company and thesurvivability of the company. And more importantly, it could be one of thereasons -- not saying it is the reason. Could be one of the reasons why we havea below trend line economy, but we are not investing for the future as much aswe should.

SCOTT WAPNER: Do you want torespond? What's your beef with Larry and with Blackrock? Because you havesingled him out on a number of occasions by name.

CARL ICAHN: First, I wouldlike to know if I'm one of the good activists, you know. I would --

LARRY FINK: Well, you are agood person.

CARL ICAHN: Larry's a goodperson.

LARRY FINK: We like eachother.

SCOTT WAPNER: You may likeeach other personally, but you don't think Carl is necessarily a good activist.

LARRY FINK: I think Carl hasplayed a great role. He's one of the best historical investors in ourlifetimes, and at times he's played a fantastic role in some companies.

I won't go into othercompanies. We may disagree, but I do respect Carl and what he as done.

CARL ICAHN: What I would say,to start the whole conversation -- and again, I really respect Larry a greatdeal. I want to make it clear. So some of this may come out the wrong way. Ihope it doesn't. I don't think I'll be a good activist at the end of what wesay, but I have to say that I don't agree with what Larry says.

I think he believes what hesays, but even those letters that you write, those letters are sort of, in away, brilliant, because they obfuscate the real issues. The real issue -- yeah,brilliant because --

LARRY: I'm not a politician.

CARL ICAHN: I think they area sales pitch for Blackrock, and that's as simple as that. Going in thatletter, and I have them, but I'm not going to start reading them, butbasically, they're telling these companies hey, look, we'll protect you if yougo out and issue debt, because this is the long-term plan, has to be that youcould acquire, issue debt, go -- which is great for Blackrock, because the moredebt out there, the people buy it, the more investment bankers love it, andBlackrock makes more money.

So what they say is we'llprotect you, go buy debt. Now I agree with Larry, by the way. A lot of thesecompanies shouldn't buy back stock, but these companies with mediocre managers,median income is up 40%, 50% over the last few years. And you have managementsin there that Larry protects, without question, and you have to admit that younow are extremely important with your $4.8 trillion, which is more than a lotof countries have. And you are there and you protect these guys, as long asthey do what you want, which is hey, don't buy back stocks. Go in and literallygo in, almost plan for the future.

Plan for the future is aeuphemism that Larry uses, I think, in those letters to say issue more debt,buy more companies, because how do you plan for the future? These guys will goout and do capital spending, but what about these guys that you want them toissue debt and spend money that have lost $10 billion.

Let's take Motorola. Motorolalost $9 billion, but you wouldn't vote for me when I came in and said let's dosomething about this. We saved the company. Wouldn't vote for me. Can't getthrough to you guys when you vote. So I would say my -- just to say, Larry saidsome nice stuff about me, so if he thinks I'm such a good investor and I have-- we added up today, just for this little discussion, we made over $1trillion, close to $1 trillion. If you look at the capital that went up -- forshareholders.

So great investor, why is heprotecting the companies when I go to be on that board, and I want to be on aboard. We could put two or three people on the board, Larry will say to me. Andyou know we say this, because I go what the hell -- well, yeah; it's not right.Why isn't it right? Control -- you have to talk to some kid.

So I talk to some kid, twoyears ago, from -- maybe he's got a good degree, I don't know. Talk to him, andwell, can we come see you? What are you, Larry Fink? You talk like Larry Fink.The same damn thing. Like okay, I said screw it.


And I added it up. We've beenin ten, twelve proxy fights over the last four years. Maybe -- Larry hasdifferent statistics here, because we were talking -- and the two of us arefriendly. I said -- I think they voted for us maybe two times out of twelve.And I can read the companies off. I have them here. I would say this; that Ithink Blackrock is an extremely dangerous company, okay?


I mean not that Larry isdangerous. He's a good guy. What Blackrock is doing, and I really mean this --and I'll say what I mean. I'm too old to not say what I mean -- that what'shappening is very dangerous in our markets today.

As Larry said, high yieldsare now $1.5 trillion. $450 billion of that is in ETF, what have you. Moreimportantly, they are overpriced, because if you go down and look at the index-- and now I could get into some arcane stuff, but what a lot of these guys do,including Blackrock and the others, is these things -- high-yield bonds, as youknow, if you trade them, are quite illiquid. And therefore, if somebody wantsto buy them, they do what they call CDS. They sell insurance on them. So takethe money they are given, buy five-year treasuries, then they go and they buyinsurance from a guy like me.

As a result, I personallythink the illiquidity increases. So these high yields are extremely illiquidand extremely overpriced.

In the index, CDS index, ifyou look at them, which is amazing to me, if you studied them -- I bet that youdon't really know this. Not saying because you don't follow things, but it'ssort of an arcane question -- 70% of these high yields, which some of them gotrisk in them. These things have risk, yet they are selling at 2.5% yield.

SCOTT WAPNER: You're notreally blaming Larry for concerns that you have --

CARL ICAHN: Not blaming Larrypersonally, no. I am blaming Blackrock. I absolutely --

SCOTT WAPNER: Let's let Larryrespond, please.

CARL ICAHN: I would like toanswer -- I don't blame him in the sense of doing something nefarious. I blamethe whole situation -- I have don't blame Larry for making money. That's hisjob. Blackrock should make money. That's what they do. I think the letter is abrilliant obfuscation; but what I am saying, the situation is extremelydangerous in this country. And what is going on because of Blackrock -- let mefinish it, because I really want to say what I'm saying. I'm not saying theyare bad people. Blackrock sells the concept of liquidity. You pay more -- whenyou go in, go into an ETF with Blackrock, you are paying more basis points thanyou are at Vanguard.

And it adds up to, just onthe passive stuff -- a dumb machine that tells you at the end of the day,here's a lot of money. Go buy the index. A dumb machine. The State could do it,like the God damn highway, and they could use the money to help the homelesspeople, you know.

SCOTT WAPNER: I got to getLarry --

CARL ICAHN: I want to justtell him what I'm saying. Liquidity. They sell liquidity. There is noliquidity. That's my point, and that's what's going to blow this up. And nowI'll -- I don't think --

SCOTT WAPNER: Where do Ibegin? I was going to say that when you -- let me talk about Carl'scharacterization of the letter. And you know what, Larry? Why don't you talkabout the genesis of the letter. I don't think a lot of people know where thegenesis of the letter came from, from a conversation that you had with CEOs,and why you wrote this letter in the first place.

LARRY: Well, I was at ameeting where there was an announcement that day -- another activist wasattacking a company I was with. I saw that one CEO, who was the target, left;but I must say, I saw many other CEOs quite worried, and they were probablythinking about deviating from their long-term planning. I said -- my targetactually was the CEOs to focus on their long-term strategy and their plans; andtwo, my other issue was I truly believed the CNBCs of the world empoweractivists, because they use their platform on media, where most CEOs don't, totalk about how they are going to change the specifics of a company.

And I just became -- Ithought the narrative was too asymmetric. And so we wanted to write a letter toput more pressure on companies to do the right long-term thing, and we wantedthem to communicate to us and all shareholders how they are going to have astrategy to build long-term value for shareholders, including share repurchasesand things like that.

And I would totally disagreewith Carl's characterization. Feedback has been terrific. We have had betterdialogue with more companies worldwide than we have ever had before. We have --so we are more engaged, and that's our responsibility, representing ourclients. Money, to be more engaged with more companies. And so we are startingto see what I would call better behaviors.

Let me talk about Carl'sphone call, about my two-year graduate from some university. It is veryimportant for us to have the highest fiduciary standards as possible. I am not,unlike Carl, an investor. I used to trade a lot and, more importantly, it wouldbe wrong for the CEO to get involved in any one situation, because I am not thetrader, I'm not the portfolio manager, I'm not the team.

So we have developed atBlackrock more people to focus on proxy issues than any firm in the world. Wehave this whole process that's separated from the office of the CEO. I will, ifI get the phone call from a Carl or get a phone call from a CEO, I will say Igot the phone call; can you respond.

And they may not beimmediate, they may not be able to do all that, because they are working with alot of companies. That's the process. And I believe we have a stronger processas any firm in the world today.

Related to Carl'scharacterization of ETFs for a second, ETFs create more price transparency thananything in the bond market today, especially high yield. To trade ETFs everyminute of the day, you have to have a valuation of every bond, to trade it; butthe most important thing, and this is why most people don't understand how ETFsoperate, it trades like a stock. There has to be a seller for every buyer.

So the reality, ETFs and thebond market actually -- and the Federal Reserve study on this that confirmedthat it actually enhances transparency and liquidity in the bond market. I'mnot going to suggest whether high-yield market's rich or cheap, but the actualETF process enhances liquidity.

So when you compare that thea mutual fund, a mutual fund gets, throughout the day, orders from theirclients, whether it's a buy order or sell order, and it's after 4:00 the marketcloses, everything's done at once. That has much more issues related to howthat is handled than the continuous buying, matching buying and selling of ETFsevery day, whether it is a stock, a pool of stocks or pool of bonds; but thecharacterization that it creates -- that bonds are mispriced, that -- there'smore demand, obviously, so I'm not going to characterize whether it's cheap orrich. There's going to be some credits that are not mispriced and some that areprobably enormously mispriced, but in every academic study, it shows that ETFsare actually creating more liquidity and more transparency, and --

SCOTT WAPNER: I want to getback to the --

CARL ICAHN: What Larry saidis not untrue, as he said it. Those facts are true, but the fact -- here's theproblem. I'm not here to single out Blackrock. Blackrock is there to make money.That's what Larry does. Does a great job at it. That's not the issue here. Theissue is, obviously, for every seller, there's a buyer. So sort of obfuscation.You want to buy an ETF? There's a guy selling the ETF. How the hell do you buyit? So why is that good or bad? I don't know why they have to say that. Sort ofknown. Hey, I'm going to buy something, you are going to sell it. Otherwise, Ican't buy it.

So that is like a little --which I don't mean to be that critical, but it's like your letter. Let me gointo what I'm saying, that the ETFs right now are sold where you got 2 trillionof these things hanging out there somewhere in the world. What I am saying,very dangerous -- in this country, 2 trillion.

What I'm saying to you isthat here is the major problem in it, okay, that -- and this is why Blackrock,I'm critical of what is going on. You have management people sitting out here,all over the country, saying look, close them, or even an insurance company oreven -- we can't make any income. We need income.

So the wealth management guylooks, says you can buy high yield. They don't even know what you mean. Whatare the risks? Well, Blackrock had a great name, $4.7 trillion. That's prettygood. And we could buy one of their ETFs. Okay, that sounds good. Why not?

They don't know the price.They don't understand what the risk is. They buy that. And now they keep buyingit. Blackrock is sort of a name on there. And this is one of the problems youhad in '07, where you had brand names on a lot of these housing things; butworse than that, they believe -- and wealth management guys believe there isliquidity here.

Here's what's going on inthis country. Let me give you another statistic; that there used to be -- newissues every year, $700 billion, $800 billion of high yield; but the bankerswould own 40% of those. They would have them in their portfolios. $350 billionof the $700 billion would sit there. That was a great buffer. If anythingreally happened, if -- with the high yield, if it was a critical thing, Greeceblew up, that's not even that bad, but something worse would happen, okay.Everything starts pouring in to sell. There's $350 billion of them sittingthere, and the banks would buy them.

Today, you have this year 1.5trillion bonds in this country, not all high yield, but 1.5 trillion will besold. The banks own 40 billion only. It's gone down from 50% to 4% or 5%. Andthe Volcker Rule on July 21st comes out, and it will be worse. The Volcker Ruleis good. Banks should not be a last resort to sell. Banks should not have --I'm not here to criticize the Volcker Rule, but what it is bad for and what weare going to is we are going to a cliff.

I was telling my daughter, myTwitter thing, here's a great cartoon. You get this party mobile, and everybody,they're all having a drink. And in the drink, they're all having this drink,having fun. And you know who's pushing that thing? They're pushing it. It'sLarry Fink and Janet Yellen, pushing that. And they're pushing the God damnthing, but it got even better --

>> I don't think that'sfair.

CARL ICAHN: Let me finish mycocktail, and then you can yell at me. You are pushing this thing -- somebodyshould have said this in '07. We should say it. This party thing is going.Janet wants -- she wants to put the brakes on it. Larry says no.

The people in the party areyelling no, no, don't touch those drinks. This is fun. They are moving towardthis cliff, see. And the cliff is there. And this thing is going to go overthis cliff. And you know what's going to destroy -- they are going to hit ablack rock. That's right. That's what -- not criticizing you. You do what youhave to do.

>> I don't think that'sfair characterization, Larry.

>> I don't care if youthink it's fair.

>> You're a goodinvestor, but you're wrong again. You're just dead wrong.

CARL ICAHN: I have been wronga lot. Okay. So tell me where I'm wrong, though.

>> We only have 13minutes. I could talk for an hour now.

>> Well, we got Cruz.

>> Great. I don't knowwhere to start, but I found it humorous. It was a good fantasy. Maybe aTwitter, but the reality is, the capital markets are the capital markets. Idon't control the capital markets. The whole world controls the capitalmarkets.

Your characterization of thecapital markets and bond market is somehow accurate related to the VolckerRule, and Dodd-Frank changed our capital markets. The banks are not playing abuffer rule anymore. They don't have their balance sheet embedded with a lot ofsecurities.

At the same time, we arefortunate in our society that we have now a capital market that's doing much ofthe financing. That's why this economy has grown much faster than Europe,because they have a smaller capital market. All the changes you have seen inChina, that is because they have a weak capital market.

So the capital market hasplayed a fantastic role for society to allow people to access equity and debt.We have don't have the buffer, and this is why we have been advocating moreexchanges, more public exchanges for bonds. That's what's necessary, but yourcharacterization of ETFs as the issue, it's just flat-out wrong. You don't evenhave -- the process of what ETFs do is wrong. It is just a tool for buyingexposure. And so to characterize ETF that way, I would be happy to spend timewith you over lunch -- I will pay -- and teach you about ETFs, but yourcharacterization is wrong.

CARL ICAHN: Let him pay.

>> No. I'll pay. And Idon't know where else to go, but -- talking about activism.

CARL ICAHN: I was going totalk about the whole thing. I really feel strongly -- should have told him.

>> I disagree with yourcharacterization, you know.

SCOTT WAPNER: Do you think --back to activism, do you think there are bad activists out there?

CARL ICAHN: Yes, I do.Absolutely correct. By the way, I agree with Larry on I don't agree with theshort-term stuff, and I think it is really bad. I think a lot of these guys doit. They're not bad people. Friends of mine, but they got a big fund and theywant to see every quarter. That's bad. I don't want to show every quarter.

And I agree with Larry,though: A lot of these companies should not buy the stock back. That doesn'tmean everyone. Seriously mean it. If a company has a great deal of cash, doingvery well and -- like Apple, they should definitely buy the stock back; but youshouldn't just buy stock for the sake of buying stock because an activist isbothering you.

And Larry is right on theshort-term thing. Good activists want to hold this for long times. Now, thereare other guys that just want to push the damn thing, start a proxy fight,scare the hell out of the board, and that's where Larry is good, because hesays don't worry about it. I'm going to save you, but that doesn't mean thatyou're right not to hold these guys accountable. A lot of them like you and sayyou are a great man --

>> But they voted withthe activists half the time.

CARL ICAHN: Not for me, theydidn't. Mine, they didn't vote for me. I'll bring a forensic guy in.

>> Not my numbers.When, Larry, is an activist good?

LARRY FINK: That's ageneralization, when they're good and when they're bad.

>> When should theytarget a company?

LARRY FINK: You're narrowingit to activists. All shareholders have a fiduciary responsibility and theresponsibility of making sure they are maximizing return on behalf of ourclients, who entrusted us with their money. And so whether you're a provider ofindex products or active mutual fund or active pension fund or money that Carlis managing, your job is to perform as highly as you can.

And if you need to dosomething with a company that the board has been inadequate in pushing themanagement team to transform the company, or even sell the company, if they'renot going to be a net survivor, then that could play a role; but as Carl said,what we are more concerned there is a growing network of activists who have nowfocused on more short-term proxy harassment, that they are in for one or twoyears or spiking up the stock, and if we're going to hold the stock for tens ofyears, we are left with the garbage.

There's been some activistswho have said to some large U.S. companies, cut your R&D by $10 billion.And I'm not going to cite it, because -- but there are a number of them. Quitefrankly, if you cut the R&D, the stock would go up dramatically; butaccording to his or her scientists in these few cases, and we sat down withtheir scientists, if they cut their R&D, their future product line --

CARL ICAHN: In a lot ofcases, you're right, but a lot of cases -- you have a CEO like Motorola, notcutting his R&D blew up $9 billion. Like the crazy uncle in the garage, hebuilt a damn motor that didn't work. Spent $12 billion, then the board gave hima bonus when he left.

LARRY FINK: We are trying todo our best job at --

CARL ICAHN: It is not ageneral thing.

LARRY FINK: I was referringto one specific case.

CARL ICAHN: Yeah, I'm sureit's true. And you are very right. I'm not here to defend -- activism isactivism. There's a lot of problems with it, but the other problem that you arenot touching on with this high yield --

LARRY FINK: Back to highyield.

CARL ICAHN: I don't want tosay -- so what you do is say okay, the CEO, he wants to make money. That's whathe does. That's why the median is up so high. So he is short-term in manycases. That's the guy you should be yelling at.

LARRY FINK: That's what myletter is addressing: What is your long-term planning? If we see them spikingup share repurchases, issuing high yield and --

CARL ICAHN: The short-termthing, very dangerous, is okay, I won't buy it back, but what they are doingtoday, they are going out at a very low rate, buying another company,overpriced, and buying that company. And it will be good for a year or two.Then all of a sudden --

LARRY: We voted againstM&A activities -- you look at the --

SCOTT WAPNER: Does it troubleyou, Carl, that companies now are spending a greater percentage of their cashflow on buybacks and dividends than they were, say, five years ago and, at thesame time, spending much less of it, and declining amount of it on innovation,on --

CARL ICAHN: Innovation is ageneral word. There are a lot of CEOs that don't have the capability ofinnovating correctly, and those are the ones that should been thrown out. Yougot to do it. You are the guy that owns all the stock. You are the guy, okay.

Okay. You should tell them,if you tell that guy, hey, what the hell are you doing here? Building a Goddamn thing in the garage over there, spending $20 billion, they aren't going tolisten to me. Maybe a little to me, but most of them are not going to listen tome. Believe me -- that's what you should be doing.

>> We are doing that.We are doing that more than --

CARL ICAHN: If I call youtomorrow, tell you five companies -- tell them they are really screwed up,would you tell them that?

>> I will listen toyou, and I will bounce that idea off the people, but my researchers maydisagree with you. Set it up.

SCOTT WAPNER: Let me ask you,Larry, another question, then I want to get to a couple things in the marketbefore we go. You cite the statistic of 45% of the time voting with theactivists, which may surprise Carl. It may surprise some other people. I don'tknow.

As the largest asset managerin the world, many times the biggest shareholder in some of these companies, isit fair to ask whether you should be more vocal so that numbers like thataren't surprising, that people know when Blackrock takes a stand in a proxyfight?

LARRY: My responsibilities tomy investors in those products, it's not to be a public advocate. Our job is totry to maximize a return on behalf of then, and that is what we try to do everyday. Sometimes we do it well. Other times we don't do it as well as we should.

CARL ICAHN: What does thatmean, not to be a public advocate?

LARRY FINK: We don't have tobe a public advocate, because of our scale, to have a conversation. So we canbe -- we can have a conversation -- we are having conversations, we are workingwith management, when we believe that's the proper strategy. And we arediscussing issues when we may have disagreements with management.

So I believe we have elevatedour responsibilities in a serious way over the last five years, since we tookover BGI. I believe, as an industry, we have raised the standards as to what isa fiduciary responsibility of an investment manager owning stock on behalf ofyour clients. And we will continue to be in deep dialogue with companies whenwe have issues.

SCOTT WAPNER: Carl, let'stalk about the market for a second, the equity market. Is it going to be higherat the end of the year than it is today? Yes or no, and why?

CARL ICAHN: I have no idea. Idon't mean --

SCOTT WAPNER: You have saidthat you are negative about the market.

CARL ICAHN: I don't know inthree or four months, but something much more dire, I think we are heading tothat cliff I talked about; but I can't tell you when we are getting to thatcliff. I don't think anybody can.

We have the same problem Isaw in '07. And in '07, I did the same stuff with the CDS. I talked about it,but never got as vocal as I am now, because I don't have you to get me on theseprograms, get me into these things.

Next time, relate to Larrywhat we're talking about, but it's okay with me. But the trouble with thishigh-yield thing, and I keep saying it is, that's the -- the problem, I think,in the market is going to be two-fold, but it really emanates from that.

>> Unless the equitymarket goes --

CARL ICAHN: I don't agreewith that, by the way. I think that a great deal -- I'll tell you where thehigh yield is going down. Even if the equity is good, my opinion, that what'sgoing to happen is, as interest rates go up, there are a lot of people outthere that don't understand.

So these people go tococktail parties, this and that, Mr. Jones. Wow, you're stupid. You are making1%, 2%. I am making 5.5%. And my wealth manager is so smart; do you know my HYthing, one of your ETF things with the stock, they don't understand they ownthis stuff, wow, but it's gone up for me. I just made 10% on it.

So now they're making extra.Some of the interest rates go up. Forget even the market. The high yield -- theinterest rates are starting to go up. Market could go up. We don't know. Thenthey go to the cocktail party, and the wealth manager says he just made all thismoney, up 12%. Sell the high yield. Sell it, because -- Janet Yellen is tellingyou it will go down. She's telling you she's raising interest rates. Sell itand buy treasuries or buy stocks.

So it could be the opposite.Stocks go up, high yield gets killed. When it gets killed and when there's arun, there's no one to buy the stock. No one out there to buy that -- I don'tknow what ramification that could have, but I am saying --

>> The housing marketwas based on leverage. There's no --

>> I disagree with thatcharacterization. First of all, higher rates, highest interest rates, which Idon't think we'll see that much higher, higher interest rates are going to movemore money into the bond market, not less, okay.

Most insurance companies are-- their duration of their liabilities are longer than their assets. You havepension funds, you also have a transformation going on in the contributionmarket, where we are using more target date -- as we're all in this roomgetting older. As you get older, you have a higher concentration of fixedincome, so the reality is, demographically, there's going to be a greater needfor high yield, for fixed income.

Secondarily, as interestrates move higher, more and more pensions are going to immunize or defease.They are going to lock in the higher rates. Great demand for long stuff,because they don't want the volatility in the defined benefit plan. They willsay I will defease it, when we have seen that in a large way in the U.K., wheremost companies have defeased their pension liabilities.

The reality is, if we havehigher rates, there's going to be more demand. I am not suggesting retail, whoowns maybe a high yield product, will they -- should they sell if they have ahigh -- that may happen. We don't see rates moving up that much.

We believe the FederalReserve will begin raising rates in September. It will be modest. We can'traise rates that much, because we still have another year of ECB, aggressivelybuying. We can't afford, as a country, having the dollar much more appreciatedor competitiveness is only going to deteriorate more, which puts a clamp onrates.

I'm not here to suggest --are some credit markets overpriced? Sure, but I don't see -- you are going tohave failures, like you always have, but you can't relate '07 to now, because'07 was predicated on dramatic amounts of leverage at the consumer level. Weall know about to the leverage in the banking system, leverage insingle-purpose corporation. You don't have it. There's less private capitalleverage today than there was than we have seen in tens of years.

So you don't have thatfundamental. That is not to say you aren't going to have failures at a specificcompany and high yield is going to be impaired; but the characterization thateverybody's going to be running out of fixed income, I'll take that at anytime.

CARL ICAHN: Disagree, but letme say one thing; just I'm a simple guy. I look at things simply, reduce it toa simple question. Let me ask you, why should anybody -- in the next year, youwill admit, there's going to be defaults from the oil companies, high yield --a lot of high yield oil companies in your index. There's going to be a bunch ofdefaults. That will come.

Now, when that starts coming,you look at Corporate A, look at A-rated corporates. A-rated corporates today,many of those high yields, you are getting 2% less. So say yields go up alittle bit. So why should any human being with any sense at all, to get theextra 2% in the high yield, buy a high yield, when they could buy a CorporateA, and not take the risk of losing 40% of --

>> Carl, I don't tellanybody what to own. And more importantly -- most high yields are owned byinstitutions, not by mom and pop. They are matching liabilities. They may havean impairment, and you may be right. You will have that, but it's not '07 byany way of the imagination.

CARL ICAHN: I can't predict-- you got an '08 again. I am saying that we are -- I don't know where it ends,but there's definitely a great risk out there, in what this high yield is doing,because it's so big. $1.5 trillion out there.

>> Then you have to bebearish on equities, because it will have a follow-up effect.

CARL ICAHN: Probably will.

>> You didn't sellNetflix because you thought the stock market would continue to go up and up.

CARL ICAHN: That was avaluation. I didn't sell it because I was bearish or bullish on the market --Larry is right. If what I'm saying will happen, the market will fall, but I'mnot telling you that next month or next year.

They will go together, in myopinion, but I can't tell you here -- I'm really saying I'm bearish on themarket, but I am very bearish on the high yield.

>> I couldn't help butnotice, Netflix was up 10% today on an earnings --

CARL ICAHN: Most of the time,I always sold too early or too soon. I made all this money selling too early ortoo soon. You are never going to get the top. Once in a while you get it, likeVegas, but not what I do.

I buy, try to buy them cheapand sell them. I will show you my portfolio. Sold too soon or sold too late.It's happened.

SCOTT WAPNER: Last question:Yellen, the Fed chair, was on the Hill today. Does he raise rates this year?

>> She's been sotransparent about what her intentions are. She frames out where she believesthe U.S. economy will be, talks about unemployment. And if that happens in thenext three months, she is raising rates.

Do we believe the economy'son a fairly positive track? Yes. Do we believe that will mean she'll raiserates? Probably yes. It is certain, as we could say after listening to her andevery other governor, they want to raise rates, but they are going to bedata-dependent, and I believe she -- it's going to be data-dependent.

If you believe the economy ison a fairly stable path, that we are going to have somewhat rising employmentand we are going to have a GDP of 2.75 or 3% in the second quarter and we havethe same type of actives in the first part of the third quarter, she is raisingrates; but she can't do it that often or that high, because we are living in aglobal society right now. We are interdependent. Europe has its issues, we havethe Greek issues, we have China. So we have all these issues. And she's going-- she mentioned that in her speech today. We'll see.

I would like to see her raisingrates, because I want -- I think if we start normalizing interest rates in apattern way, we'll avoid Carl's worries, because it will create, over a slowperiod of time, more normalization of rates. You will have the idiosyncraticproblems, which might be the oil sector, as you suggested; but if they do itwell, we don't have to have a U.S.-based problem.

My worry is if there's goingto be a problem that creates systemic risk, it's not in this country, which maycreate the high yield issue you suggested or something else, but --

CARL ICAHN: Why take thatrisk? Why take --

>> We are going tocontinue this conversation maybe by the bar, because the bar is open. Thankyou. And Lord knows, I need a drink.

>> Thank you very much.Appreciate it. I just don't know where to begin, but let me begin by saying athank you to all of you in the audience for being here today.

And before you scoot off,there's one more bit of information I want to share with you. I want to thankour partners, on behalf of CNBC, at Institutional Investor. I want to thank youin the audience for being with us for this fifth iteration of Delivering Alpha.

I imagine that many of youwonder what I have on these cards. I want to show you what I have on thesecards, because I want -- because that is what is coming up now. And to conductus to that, on behalf of CNBC, I want to thank our sponsor -- no sponsor Iwould like to thank more than the sponsor of our cocktail hour and DarrenPierce, Global Investment Manager at Mellon, here to help us do that.

>> Thank you.

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