Stephanie Pomboy: Will Student Loan Defaults Trigger The Next Credit Crisis?

**Stephanie Pomboy** (0:00)
Good morning, how are you?

**Adam Taggart** (0:01)
I am great, Steph. And you may remember last time we talked, we got so into the topic material that we didn't have any time for live Q&A. So folks, if you're watching, we will do our best to bring your questions in this discussion as quickly as we can get there. We do though, Steph, have some good wood to chop here. You pinged me the other day saying, hey, we're seeing some stats showing some real stress now in the student loan borrowers whose student loans have finally gone back into repayment. And the new Trump administration has said, hey, we mean business. You guys actually have to start paying this stuff back.
This topic builds on a warning that was delivered by Anna Wong, chief economist for Bloomberg Economics, who I interviewed about a month ago or so. So I want to tie that in. But why don't we start here with student loans? And I guess with the big question, which is how material is this? Because I have heard from some that they think that actually this time around, student loans might be the match that lights the fuse of the next credit crisis or at least credit event. What are your thoughts?

**Stephanie Pomboy** (1:15)
Well, I mean, I guess that as you know, and your audience knows having listened to my broken record that I am, my primary concern has been on the corporate side. And while I've obviously been concerned about the elevated levels of credit card and auto loan delinquencies and the real clear stress evident in the low-end consumer, in fact, I think the average consumer is in recession and has been in recession for a long time. And we've gone through all of my data on that from real retail sales, etc., etc.
So I've acknowledged those concerns but never thought that they were significant enough to be the flame that lights the entire thing on fire, from forgetting what urine and allergy was. But anyway, I was looking for the corporate sector on that side more. But this is obviously a key problem, the consumer being a critical driver of the economy. But more importantly, it's an area where there's been enormous complacency. So at least in the corporate sector, we've seen this real wave of bankruptcies that has captured people's attention. And there is a recognition that there are segments of the corporate sector that are highly vulnerable to continued high interest rates. And so I think that even though that's not as evident as I would like to see it be in credit spreads, for example, when you think about the situation of bank balance sheets, for example, their exposure to that weak corporate credit is really more through their loans to the non-bank financial institutions like private equity and venture funds, et cetera. But on the consumer side, obviously, they're very exposed. And that is on top of the commercial real estate holdings that they have that are pretty crappy. I'll use that word. It's an economic jargon. I apologize. And then, of course, they're sitting on roughly 500 billion in unrealized losses on their high quality treasury and agency security. So the last thing, I guess, my takeaway is the last thing the banking sector needs right now is to be reserving for losses on their consumer loans.

**Adam Taggart** (3:38)
Right.

**Stephanie Pomboy** (3:39)
And, you know, I think we actually talked about the two weeks ago when we chatted that Jamie Diamond had talked about, he had just been interviewed. And I think I made the observation that he characterized the credit backdrop as being really fine. You know, he didn't see any real risks to their loan portfolios coming from either the consumer credit space, and he specifically characterized the consumer as strong. I think that was, he was talking about their consumer loans and described that space as strong. And so this is clearly going to be a wake up call to the banking sector on that score. So I think that the, it's not necessarily that this might be the pin that breaks the bubble, for example, but I think it's just a compounding factor on a world of hurt that they're already kind of in denial of.

**Adam Taggart** (4:36)
All right, I'm going to make the pin comment or the mat that lights the few, my earlier analogy. Let me just mention one thing that I don't think you mentioned in your litany of pressures on the system is that on corporate credit side is the maturity wall that is now going on in full force now. And that will continue for the next two plus years, right?