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00:00I guess I want to know for the energy sector in particular is have we seen the peak or are we looking at like six to nine months when things are gonna get really bad for the sector . It depends on the lockdowns you know and how we control the virus. The energy sector is hit by both the supply shock given the price wars between the Saudis and the Russians on the one hand and on the other hand the demand shock from having shut the economy down in the second quarter. If that continues I think you'll see the continuing wave of bankruptcies in the sector . Jan what about contagion here. It looks like in the first part of the crisis we saw a lot of energy a lot of retail. But now we're seeing related industries start to get hit. Is this just the tip of the iceberg here . Well again I think it goes to how well we control the virus. If if we can bring this thing under control and put people back to work and open up the economy. And I think you know some of that contagion effect of the contained. But you know it's a now I think you know we're seeing delinquencies rise in all consumer loan categories. And you know the in the hospitality and retails commercial real estate industry here you know you're starting to see the impact of the shutdowns on the ability of landlords to pay their mortgage debt. So you know this this could escalate if we don't get the virus under control . Joe what do you think the base case scenario is are we going to be in lockdown in and out and you know what's worst case scenario for bankruptcies and best case are our 15 percent of companies going to be taken out. If if we can't get a handle on the virus with the vaccine for the neck in the next two years . Well look you saw the largest a record number of downgrades in the corporate credit sector in the second quarter. Fully 35 percent of leveraged loan market was downgraded. You've now got a thirty five percent of leveraged loans with a credit rating A B minus or worse . Generally though that kind of wave of downgrades leads to defaults. A couple of quarters later. So you know if past is prologue we could see that see a big wave of bankruptcies in the third and fourth quarter . You know this is we have a national market. It's one of the great strengths of the United States a diversified economy across the 50 states of the union. But we've taken you know state by state approach to trying to control the virus. And that has all sorts of disruptive impacts as one state opens and another state closes and you go back and forth . You know the economic damage of not having a national policy is you know could be very great. Jim I know you have a lot of thoughts on the fiscal stimulus here but I want to talk about the monetary because I'm wondering how long you think this Fed foot will last. Well the programs the quarter credit facilities which is sort of the most novel aspect of the Fed's emergency interventions in this round. You know the Fed really hasn't been a direct lender to the corporate sector using its balance sheet to provide credit to the corporate sector since the Great Depression. So this is this is quite novel and as designed those programs you know say that their availability will be open until the end of September . You know obviously they can change that if the need arises right now. You know those facilities have barely been touched . The mere fact that the Fed is standing by with potentially two point one trillion with a T trillion dollars of capacity is obviously lifted animal spirits in the credit and equity markets . And there's been very little credit extended under those facilities as you've had record amounts of investment created high yield debt issue during the second quarter. So you know the salutary effect of that Fed put is that it's you know spark the animal spirits in the credit markets. And as a result those facilities haven't yet really been tapped to any significant degree. But up Brad Stone now even troubled companies had a lot of ease in raising money or at least some sense of ease. Does that end at some point . Oh yeah. No listen I think in the in the high yield sector notwithstanding the fact the spreads have been brought way down by the Fed program. The standby facilities you know at this point debt is not a cure to lack of revenue. And so you know you've got some companies that notwithstanding the fact that they're highly levered and haven't had in the past had access to relatively cheap financing over the last 10 years. You know the money the credit analysis has not been completely repealed. And those companies that you know really are struggling with the lack of revenue and cash flow. And you know today you've got 20 percent of the corporate borrowers are so-called zombie companies. They their cash flow is insufficient insufficient to cover their fixed debt service. So you know you can borrow to supplement the lack of revenue and cash flow only up to a point . And I think we're reaching that point. If we do not get the virus under control and this this recession extends how many of the companies that will go bankrupt are healthy companies and how many are actually companies that should have gone bankrupt in the first place . Look at it's a case by case thing. I mean this is an unusual example. Genus shocked the system. You know you've got perfectly healthy companies for example across the airline sector record profits last year. But the pandemic has obviously it travel in a completely unanticipated way and it changes the financial fortunes of all of those companies . They've had access to the capital markets both equity and debt as well as the government loan program under the Carers Act . They've extended their liquidity runway . But again it's it's a question of how fast is traffic going to come back. Is the runway long enough to get them back to where their cash flow. So that runway jammed as quickly to get your thoughts on the next round of stimulus. I know it's a big question but in theory if you're extending the runway what's the number one thing the government can do right now . Well I think if we want to prevent the contagion effects across the consumer loan sector credit cards auto loans housing the most important thing to do is to extend the unemployment benefits and maybe do another one time payment directly to families earning less than seventy five thousand dollars. You know we've got unemployment and an economic contraction greater than we've had since the Great Depression. You have 35 million people who have applied for unemployment or are getting unemployment. That's about 20 percent of the workforce. You know if that if those folks do not have continuing support you know we're going to see a spike in delinquencies and defaults in consumer credit. And you know that will that will have some contagion effects across the banking system and across the variety of financial institutions that that you know who supplied that credit .

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Guggenheim’s Millstein Warns of Risk to U.S. Financial System

Jim Millstein, co-chairman at Guggenheim Securities, discusses the risks posed to the economy and financial system by a lack of aid to U.S. consumers dealing with the coronavirus pandemic. He speaks on "Bloomberg Markets." (Source: Bloomberg)

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