Sunday, March 3, 2013

How To Short the Student Loan Bubble

Tyler Durden explains the new securitized student loans:

Even as the gargantuan $1+ trillion student debt load has been the bubbly elephant in the room that few are still willing to talk about (as the ease of obtaining very fungible loans, with ultra-low interest rates, have become the primary source of lifestyle funding for a wide swath of Americans who are rotating out of high yielding credit cards into this latest Uncle Sam subsidy, and is thus just one more aspect of the status quo perpetuation), there have been until now zero opportunities for a the proverbial highly convex "ABX" short in the student debt space. This of course is the trade that was put on by those who sensed the subprime bubble is about to pop in early/mid 2007 and made billions as the yield chasers were summarily punished one by one as first New Century blew up, and then everyone else.
Yet while one was able to buy synthetic "hedge" exposure with limited downside and unlimited upside (by shorting synthetic index spreads) in subprime, so far the only way to be bearish on student debt has been to short the equity of various private sector lenders - a trade with very limited upside and unlimited downside, and which in the current idiotic New Normal is more likely to leave one insolvent and crushed in a smoldering heap of margin calls following yet another epic short squeeze as GETCO's stop hunting algo run amok.
This may be about to change. As WSJ reports, SecondMarket Holdings, the private-market securities trading firm best known for allowing numerous overzealous fans to buy FaceBook at moronic valuations, on Monday "will roll out a platform allowing lenders to issue securities backed by student loans directly to investors."
Why is SecondMarket doing this? The same reason Lloyd Blankfein was selling Abacus (and all those other synthetic MBS CDOs) to clueless yield chasers all across Europe and Asia: yield chasing and career risk.[...]
The move is driven mainly by investors' growing appetite for student loans, said Barry Silbert, founder and chief executive of SecondMarket.

"The catalyst for this new suite of services is investor demand," said Mr. Silbert. "At the end of the day, investors are yield searching."
And just as Paulson was able to coordinate with other sellers of synthetic exposure and have a bearish bet already set in the primary market following collusion with Goldman even before breaking for trading, so we are confident that enterprising packagers of securities will be just as capable in tranching various student loan packets into securitized layers with the assistance of SecondMarket, and offload those with highest risk to those with the most aggressive career risk-for-yield chasing fulcrum points.


  1. Help me, 'cause I'm inexperienced.
    How EXACTLY do I short this?
    I mean I KNOW it's gonna end badly, but is there a fund that shorts the loans???

    1. If the securities are going to be bought and sold in the market, then you'll be able to sell the securities (short) by putting up sufficient margin.

    2. Find a dealer that is a market maker for these securities. Put up sufficient margin and go into a short position.

  2. The problem is you never now when to short. Isn't a short a time bet?

    1. Generally, yes. But once these hit the market, I'm sure an enterprising ETF company like ProShares will develop an ETF for it so those of us not so keen on trying to time the market can get in on the bet =)