Thursday, May 27, 2010

Subprime Goes to College: $300 Billion in Defaults Coming

Mike O'Rourke (Via ZeroHedge) has a nice summary of yesterday's Ira Sohn Research Conference.

Of note was Frontpoint's Steve Eisman, who has spotted another private sector industry that is in bed with government big time ,that is taking advantage of the poor, and will collapse. Here's O'Rourke's report on Eisman's speech:

Steve Eisman, Frontpoint

Eisman’s theme was “Subprime goes to College.” After what transpired in the subprime mortgage market a few years ago, Eisman though he would never see a business with the capability to prey upon the underprivileged to those extremes again. Then he came across the For Profit Education industry. Despite only having 10% of the students these schools get 25% of the government aid. The industry is in bed with Washington due to serious lobbying efforts and the back and forth of executives from the companies to Government positions and back. Title IV loans offered by government programs comprise 90% of for profit education revenues.

ITT Educational (ESI) has higher margins than Apple (AAPL), and margins in the for profit education industry are 3-4 times those in other industries that deal with the government. For profit schools target poorer people, often leading them towards degrees that won’t get them jobs. The companies also maneuver to acquire small failing schools in order to get their accreditation. The loans the students take out for profit education have high default rates. ESI and Corinthian (COCO) often provision 50%-60% for the loans they privately offer, so the default rates overall are likely 50%. The companies in the industry are Education Management (EDMC), COCO, Apollo Group (APOL) and Washington Post (WPO). WPO, more than 100% of its EBITDA comes from for profit education. Eisman calculates there could be $300 Billion in defaults over the next 10 years. The key catalyst going forward is that the government will publish a rule for gainful employment , that threatens the companies. The government is also seeking to fix the accreditation process.


  1. Wallstreet is a roaring lion, seeking whom it may devour. .....You're next.

  2. Great comments from the Sohn Conference. I am trying to reconcile your highlighted piece from Eisman and another managers suggestion to invest in Sallie Mae (a student loan servicer). If default rates are as high as Eisman claims it seems like it would negatively impact SM. Unless SM has some sort of bad debt collection service. Will have to investigate.

    My favorite comments came about/from Klaman:

    "Financial Transactions among consenting adults are an important part of the capitalist system. He has a fiduciary obligation to his clients, not his counterparties. Short sellers are the policemen of the financial markets."

    To bad we couldn't replace congress with Klaman.
    Thanks for the headsup, Wenzel.

  3. "The key catalyst going forward is that the government will publish a rule for gainful employment, that threatens the companies."

    Ouch, I'm terrified to see what that rule is. If that isn't a new focal point for special interest/industry lobbying I don't know what is.

  4. Anonymous - your fears are well founded. The "For Profit" schools are already required to place a minimum percentage of their graduates in jobs and so there is a lot of politiking about this already. Interestingly, despite what Eisman says about lobbyist from the "For Profit" schools, the govt money flowing to public universities like Yale, Harvard, SUNY, UCLA etc. have no job placement requirement. So those schools seem to have the upper hand from a political perspective. Particularly since the govt is apparently going to "raise the bar" on job placement requirements for the "For Profit" schools. This has certainly depressed the "For Profit" schools stock prices. But may offer an opportunity for those schools that are good at job placement.

    Of course it would be much better if the govt just got out of the business.