Tag Archives: Business

For Those Of You Who Still Have Doubts About the Student Loan Industry’s TRUE Motives

The list below is courtesy of and can be found @  ForProfitEDU . ForProfitEDU is a HIGHLY  informative website with invaluable information!  I strongly recommend you check it out when you have a chance!

Top Financial Players in EDU

With the growth the industry has maintained over the past decade it is easy to understand why so many firms have established EDU related funds and or practices.  Below are just a few Investment Banks & Private Equity Funds that invest in Education:

Banks with larger Education practices:

BMO

UBS

FBR

Barclays

BA (formerly the Merryl Lynch EDU practice)

Goldman Sachs

Stifel Nicolaus

Credit Swiss

JP Morgan

Piper Jaffray

Signal Hill

William Blair

RBC

Robert W. Baird

PE Firms with EDU investments  & EDU Investment Funds

GE Capital

Alpine Investors LP

ACON Investments

Apax Partners LP

ARC Advisors (HK) Ltd.

Argosy Capital

Arlington Capital

Austin Ventures LP

Boston Ventures

BSG Team Ventures

Camden Partners

Maverick Capital Ltd.

Palm Ventures LLC

Providence Equity

Serent Capital LLC

TA Associates Inc.

Teachers’ Private Capital

Castanea Partners

Charter Oak Capital

Chicago Growth Partners

East Wind Advisors

Fox Hill Capital LLC

GE Capital

Gemini Investors

Halyard Capital

Kohlberg Kravis

LaSalle Capital Group

LLR Partners Inc.

New York Life Capital Partners LLC

Nova Venture Fund Ltd

Primus Capital Funds

RBG Capital Partners

Soros Fund Managemen

Trident Capital LP

Conversion Partners

Epic Partners LLC

Gryphon Investors

Greenhill Capital

Huron Capital Partners

Liberty Partners LP

New Mountain Capital

Sterling Partners

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STUDENT LOAN FRAUD ALERT: Fitch Downgrades and Withdraws Ratings on Education Loans Inc., Indenture Trusts

Wells Fargo in Laredo, Texas, is located near ...

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FYI Education Loans Inc. is ClassNotes Inc. it is also Wachovia Education Finance and they are all now Wells Fargo Education. For those students currently serving a debt life sentence at the WACHOVIA or WELLS FARGO STUDENT LOAN DEBT PRISON it may be worth your time to investigate this further. My gut says that someone found SERIOUS FRAUD in these trusts!

NEW YORK–(BUSINESS WIRE)–Fitch Ratings takes the rating actions described below on Education Loans Inc.’s Student Loan Trusts 1999-1, 2004-1 & 2004-C&D and withdraws all ratings. For these trusts, all ratings of senior and subordinate bonds are downgraded as indicated below except for one tranche which was recently affirmed. In addition, ratings on Education Loans Inc.’s Student Loan Trust 1998-1 and 2005-1 are being withdrawn.

Fitch used its ‘Global Structured Finance Rating Criteria’, ‘U.S. Private SL ABS Criteria’ and ‘FFELP Student Loan ABS Rating Criteria’, as well as the refined basis risk criteria outlined in Fitch’s Sept. 22, 2010 press release ‘Fitch to Gauge Basis Risk in Auction-Rate U.S. FFELP SLABS Review’ to review the ratings.

Each of the 1999-1, 2004-1, 2004-C&D transactions are under significant pressure as losses continue to accumulate at rates above Fitch’s expectations. The trusts are undercollateralized and exhibiting a downward parity trend, particularly for the 2004-C&D and 1999-1 trusts. The trusts are also under pressure due to the high cost associated with the failed auction-rate securities, not allowing the trusts to accumulate asset to build parity.

Fitch is withdrawing all of its ratings assigned to Education Loans Inc.’s Student Loan Trusts following the issuer’s decision to redeem subordinate bonds in the 2004-1 transaction with trust funds, an action which appears to be in breach of the provisions of the trust documents. In addition, the issuer has indicated that it has applied cash from 1999-1 trust accounts to make a payment related to a lawsuit.

These actions took place in late 2009 and during this year and Fitch only became aware of them in recent conversations with the issuer as part of its surveillance review process. These actions were not contemplated in Fitch’s rating analysis and Fitch has determined that it can no longer maintain accurate ratings as a result of such actions.

For the portion of the trusts mentioned above that is backed by private loans, Fitch conducted a review of the collateral performance that involved the calculation of loss coverage multiples based on the most recent data provided by the issuer. A projected remaining net loss amount was compared to available credit enhancement to determine the loss multiples. Fitch derived the expected lifetime net loss based on the projected lifetime net default for each repayment year. Fitch then applied the current cumulative net loss level to determine the expected net loss over the remaining life for the trust. In addition, Fitch applied the most recent 12-month average excess spread rate over the remaining life. Basis risk stresses were also applied to account for the risk associated with the auction-rate securities. The ratings prior to the withdrawal are commensurate with the loss coverage multiples calculated.

Fitch has taken the following rating actions:

Education Loans Inc, – 1998-1 Indenture Trust:

–Class 1D withdrawn;
–Class 1F 6/1/20 withdrawn;
–Class 1H withdrawn;
–Class 1K withdrawn.

Education Loans Inc, – 1999-1 Indenture Trust:

Series 1999-1
–Class A downgraded to ‘BBsf’ from ‘Asf’; withdrawn;
Class C downgraded to ‘CCCsf’ from ‘Bsf’; withdrawn.

Series 2001-1
–Class A downgraded to ‘BBsf’ from ‘Asf’; withdrawn;
–Class B downgraded to ‘BBsf’ from ‘Asf’; withdrawn;
–Class C downgraded to ‘CCCsf’ from ‘Bsf’; withdrawn.

Series 2002-1
–Class A downgraded to ‘BBsf’ from ‘Asf’; withdrawn;
–Class B downgraded to ‘BBsf’ from ‘Asf’; withdrawn;
–Class C downgraded to ‘CCCsf’ from ‘Bsf’; withdrawn.

Series 2003-1
–Class B downgraded to ‘BBsf’ from ‘Asf’; withdrawn;
–Class C downgraded to ‘BBsf’ from ‘Asf’; withdrawn;
–Class D downgraded to ‘CCCsf’ from ‘Bsf’; withdrawn.

Education Loans Inc, – 2004-1 Indenture Trust:

–Class A1 downgraded to ‘BBBsf’ from ‘AAsf’; withdrawn;
–Class A3 downgraded to ‘BBBsf’ from ‘AAsf’; withdrawn;
Class A4 downgraded to ‘BBBsf’ from ‘AAsf’; withdrawn;
–Class B1 affirmed at ‘Bsf’; withdrawn.

Education Loans Inc, – 2004-C&D Indenture Trust:

–Class C1 downgraded to ‘BBB-sf’ from ‘AA-sf’; withdrawn;
–Class C2 downgraded to ‘BBB-sf’ from ‘AA-sf’; withdrawn;
–Class C5 downgraded to ‘BBB-sf’ from ‘AA-sf’; withdrawn;
–Class D downgraded to ‘CCCsf’ from ‘Bsf’; withdrawn.

Education Loans Inc, – 2005-1 Indenture Trust:

–Class A3 withdrawn;
–Class B withdrawn.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:

–‘Global Structured Finance Rating Criteria’ dated Aug. 13, 2010;
–‘U.S. Private Student Loan Criteria dated Aug. 24, 2009;
–‘Rating US Federal Family Education Loan Program Student Loan ABS’, dated April 11, 2008;
–‘Fitch to Begin Review of U.S. FFELP SLABS Applying Updated Criteria’ dated June 29, 2010;
–‘Fitch to Gauge Basis Risk in Auction-Rate U.S. FFELP SLABS Review’, dated Sept. 22, 2010.

Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547326
U.S. Private Student Loan ABS Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=463174
Rating US Federal Family Education Loan Program Student Loan ABS Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=382306

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE.

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UPDATE AND CORRECTION: The List Keeps Growing:The Student Loan Industry’s DIRTY Secret

A special purpose entity (SPE; or, especially in Europe, special purpose vehicle/SPV, in Ireland – FVC financial vehicle corporation) is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives. SPEs are typically used by companies to isolate the firm from financial risk. A company will transfer assets to the SPE for management or use the SPE to finance a large project thereby achieving a narrow set of goals without putting the entire firm at risk. SPEs are also commonly used in complex financings to separate different layers of equity infusion. In addition, they are commonly used to own a single asset and associated permits and contract rights (such as an apartment building or a power plant), to allow for easier transfer of that asset. Moreover, they are an integral part of public private partnerships common throughout Europe which rely on a project finance type structure-WIKIPEDIA

IF THIS REMINDS YOU OF THE HOUSING BUBBLE I.E. THE STOREFRONT ,MORTGAGE LENDERS THEN YOU’RE BEGINNING TO UNDERSTAND WHAT’S GOING ON AND WHY YOU’RE DEBT KEEPS GROWING AND GROWING AND GROWING AND GROWING!

Banks partnered with student loan guaranty agencies, student loan servicers, and other banks to create student loan brokerage firms aka student loan special purpose entities the majority of which were incorporated in State of Florida. For example, Student Loan Xpress, Goal Financial, K2 Financial, Education Finance Partners, US Education Finance etc. Kinda like the storefront mortgage companies and unlicensed brokers, think Enron’s LJM2, the Raptors, Chewco etc

The bank ffelp lenders, servicers and guaranty agencies used the student loan brokerage companies to access and repeatedly access students’ personal information, nslds, and credit reports for what they claimed were Marketing or Promotional Purposes. If you don’t believe me then just check your credit reports from 2006-2008. I bet you’ll have 3 ‘Promotional Purpose’ pages that are all student loan companies. Unfortunately, they weren’t accessing your reports for marketing purposes as they claimed. They were accessing the reports for your personal information which they unlawfully used to originate federal consolidation loans.

The Education Department’s Office of Inspector General found that American Education Services/Pennsylvania Higher Education Assistance Authority  (CLICK THE LINK I PROMISE IT’S WORTH IT!) received about $33 million in overpayments — and possibly much more — under an exemption in federal law that allowed lenders that financed the student loans they issued using tax-exempt bonds issued before 1993 to earn a government subsidized interest rate of 9.5 percent. Congress engaged in several aborted attempts to fully close the loophole throughout the 1990s and the early part of this decade, but some lenders continued to find ways to take advantage of it by recycling the pre-1993 loan funds, before Congress, as part of the Higher Education Reconciliation Act, finally closed it permanently last year.

Guess how they did it? You guessed it, by partnering with lenders to create student loan brokerage firms, special purpose entities and special purpose vehicles that unlawfully used your personal information to create federal consolidation loans. The lenders then used the fraudulent consolidations loans to replace loans that defeased, were repaid or discharged in their 9.5 percent floor loan securitized trusts and student loan revenue bonds. Consequently, because the federal consolidation loans were unlawfully created by the student loan brokerage firms (lenders + servicers + guaranty agencies) theft of your personal information they are not valid obligations; thus they are not enforceable! So, in protest of the nearly $1 trillion dollar student loan debt bubble and your ASTRONOMICAL student loan debt that’s growing bigger by the day pull your NSLDS report highlight that fraudulent loan, complete an UNAUTHORIZED SIGNATURE / UNAUTHORIZED PAYMENT false certification discharge form, and send it to fraudnet@gao.gov!

Don’t forget to name your lender, servicer, and guaranty agency on the discharge form and attach your NSLDS report with showing the fraudulent consolidation loan you never applied for or agreed to!

So without further ado here are a few of the Student Loan Special Purpose Entities that you should LOOK FOR ON YOUR CREDIT REPORTS. Please note this list is a daily work in progress and by no means complete:

National Collegiate Trust/                                                         PHEAA/American Education Services

American Educational Loan Services                               PHEAA/American Education Services


MRU HOLDINGS:                                                                             J.P. Morgan Chase, Key Bank, Morgan Stanley,

                                                                                                                       Lehman Bros, Assured Guaranty,

                                                                                                                        Global Securitization Service, LLC,

 Sallie Mae
J.P. Morgan Chase,

Bank of America,

J.C. Flowers & Co.,

Friedman Fleischer & Lowe.

First National Wachovia
First Savings Wachovia
Affinity Direct d/b/a Educational Direct Citibank Student Loans
Credit Card Protection Bain Capital Ventures

Bain Private Equity

CORTRUST Bank Citibank
Academic Funding Foundation Educaid/

Wachovia/

Class Notes Inc

Erie Processing Corp Wachovia
Xanthus Higher Education ABN AMRO
Student Loan Processors US Bank
K2 Financial Ceigis LLC

ACS-Education

Discover

University Financial Lenders Bank of New York
Educational Lending Group Citibank
Post Collegiate Financial First American Title Ins.

Wachovia

Federal Family Education Wachovia Securities
Goal Financial Cit Group/Bank of New York
American Educational Loan Processing PHEAA/

American Education Services

Student Loan Xpress Bank of Lake Mills,

Citibank,

AMACAR,

HedgeForum Renaissance

Education Finance Partners

Education Finance Partners ACS Inc
PHEAA/American Education Services Citibank

Wachovia

Academic Finance Corporation ACS/

US Bank

Amerifund Education Corporation ACS/

Fifth Third/

RBC Bank/

US Bank

Ardent Financial, LLC/NSL Direct Citibank
US Education Finance PHEAA/

AES,

ACS,

Citibank,

Wachovia

Academic Financial Services ACS
Acapita Education Finance Corporation ACS/

US Bank

AMS Education ACS/

Bank One/

Sallie Mae

Fleet National Bank

Student Capital Corporation ACS/

Deutsch/

Bank of New York/

P Morgan Chase/

Citibank

Studentloans.com ACS/

Brazos/

Wells Fargo

Bosque HEA AES/

Wells Fargo Bank/

ACS

Pecos Student Finacnial Corp AES/

US Bank

us Education Finance Corporation AES
US Contracting Corp PHEAA/

AES

American Educational Services PHEAA/

AES

Education Funding Resources Cit Group
Education Lending Group Cit Group
Education Finance Partners ACS/

Cit GROUP/

HedgeForum Renaissance

Wachovia

AMACAR

Grad Partners Student Loan Xpress/

Education Lending Group

Cit Group


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Fitch Rates SLC Student Loan Trust: The Student Loan Bubble is Beginning to LEAK!

FYI an OUTLOOK NEGATIVE RATING USUALLY MEANS THEY DISCOVERED FRAUDULENT LOANS IN THE TRUST 
April 28, 2011 02:47 PM Eastern Daylight Time

Fitch Affirms Ratings on SLC Private Student Loan Trust 2006-A

NEW YORK–(BUSINESS WIRE)–Fitch Ratings has affirmed ratings on the Student Loan Corporation (SLC) Private Student Loan Trust 2006-A senior class A, subordinate class B and junior subordinate class C notes issued by the Student Loan Corporation. The Rating Outlook remains Negative. Fitch’s Global Structured Finance Rating Criteria and Private Student Loan Asset-Backed Securities (ABS) Criteria were used to review the transaction. The rating actions are detailed at the end of this press release.

The calculated loss coverage multiples for the class A, class B and class C notes are sufficient to maintain the current ratings. The Outlook remains Negative because of Fitch’s negative view of the private student loan sector in general.

The rating affirmations are based on a loss coverage multiples commensurate with the notes’ current assigned ratings and are based on the collateral performance data as of March 31, 2011. A loss coverage multiple was determined by comparing projected net loss amount to available credit enhancement. Fitch used historical vintage loss data provided by SLC to form a loss timing curve representative of the series 2006-A collateral pool. After giving credit for seasoning of loans in repayment, Fitch applied the trust’s current cumulative gross loss level to this loss timing curve to derive the expected gross losses over the projected remaining life. A recovery rate was applied, which was determined to be appropriate based on the latest data provided by the issuer.

Credit enhancement consists of excess spread, a reserve fund, overcollateralization and subordination. Fitch assumed excess spread to be the lesser of the average historical excess spread (earnings on the assets minus interest payments to bondholders and fees) and the most recent 12-month average excess spread, and applied that same rate over the stressed projection of remaining life.

The collateral supporting the SLC Private Student Loan Trust 2006-A note consists entirely of private student. The private student loans are intended to assist individuals in financing their undergraduate or graduate education beyond what the FFELP affords. The private loans are available to students enrolled in or recently graduated from graduate-level certificate or degree programs. Loan proceeds are used by students to finance a portion of the costs of attending law school, medical school, dental school, graduate business school, and other graduate schools, as well as preparing for and taking state bar examinations or participating in a medical residency program.

As of December 31, 2010, Discover Financial Services acquired SLC and its servicing operations for private student loans. SLC, a wholly owned subsidiary of Discover Financial Services, will continue to act as the primary servicer and administrator for the trust and Citibank (South Dakota) National Association will continue to act as sub-servicer.

Fitch affirms the SLC Private Student Loan Trust 2006-A notes as follows:

–Senior class A-4 affirmed at ‘AAAsf’; Outlook Negative;
–Senior class A-5 affirmed at ‘AAAsf’; Outlook Negative;
–Subordinate class B affirmed at ‘AAsf’; Outlook Negative.
–Junior Subordinate class C affirmed at ‘Asf’; Outlook Negative.

Senior class A-3 notes have been paid in full.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
–‘U.S. Private Student Loan ABS Criteria’ (Aug. 24, 2009);
–‘Global Structured Finance Rating Criteria’ (Aug. 16, 2010).

Applicable Criteria and Related Research:
U.S. Private Student Loan ABS Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=463174
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547326

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE.

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Student Securities! You and Your Student Loans Belong to an Investor!

Mortgage Backed Security

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MUST READ Article @ N+1: Bad Education that fully explains Student Loan Asset Backed Securities;  why you’re loan balance is growing every month despite your payments and; why lenders prefer delinquent borrowers and borrowers who default over borrowers who pay on time.

“What kind of incentives motivate lenders to continue awarding six-figure sums to teenagers facing both the worst youth unemployment rate in decades and an increasingly competitive global workforce?

During the expansion of the housing bubble, lenders felt protected because they could repackage risky loans as mortgage-backed securities, which sold briskly to a pious market that believed housing prices could only increase. By combining slices of regionally diverse loans and theoretically spreading the risk of default, lenders were able to convince independent rating agencies that the resulting financial products were safe bets. They weren’t. But since this wouldn’t be America if you couldn’t monetize your children’s futures, the education sector still has its equivalent: the Student Loan Asset-Backed Security (or, as they’re known in the industry, SLABS).

SLABS were invented by then-semi-public Sallie Mae in the early ’90s, and their trading grew as part of the larger asset-backed security wave that peaked in 2007. In 1990, there were $75.6 million of these securities in circulation; at their apex, the total stood at $2.67 trillion. The number of SLABS traded on the market grew from $200,000  in 1991 to near $250 billion by the fourth quarter of 2010…..

Even with the Treasury no longer acting as co-signer on private loans, the flow of SLABS won’t end any time soon. What analysts at Barclays Capital wrote of the securities in 2006 still rings true: “For this sector, we expect sustainable growth in new issuance volume as the growth in education costs continues to outpace increases in family incomes, grants, and federal loans.” The loans and costs are caught in the kind of dangerous loop that occurs when lending becomes both profitable and seemingly risk-free: high and increasing college costs mean students need to take out more loans, more loans mean more securities lenders can package and sell, more selling means lenders can offer more loans with the capital they raise, which means colleges can continue to raise costs. The result is over $800 billion in outstanding student debt, over 30 percent of it securitized, and the federal government directly or indirectly on the hook for almost all of it.

If this sounds familiar, it probably should, and the parallels with the pre-crisis housing market don’t end there……”

Read the rest of the article at NPLUSONE MAG

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The Root Cause of Your Student Loan Miseries….The 9.5 Percent Special Allowance Payment Subsidy

Intended to Cut Lender Subsidies, It Created a Windfall

In the guaranteed student loan program, lenders receive interest payments from both students and the government. Under the 1980 law, the government payments (known as “special allowance payments”) assured lenders a quarterly return on their guaranteed student loans equal to the average bond-equivalent yield on 91-day Treasury bills plus 3.5 percentage points. Any quarter when borrower payments were insufficient, the government would make up the difference. (Loans made today receive the 91-day commercial paper rate plus 2.34 percentage points during repayment.) For loans backed by tax-exempt bonds, the 1980 formula cut subsidy payments in half but guaranteed at least a 9.5 percent return. In other words, lenders receive the greater of either (a) one-half the regular subsidy payments or (b) the amount necessary to provide a 9.5 percent return.[1]

Example 1: In times of high interest rates, the formula reduces subsidies.

Under interest rates prevalent in 1979, the new formula cuts lender returns from 13.5 percent to 10.25 percent.10

 

Regular Loans:

 

Student Rate                                        Special Allowance:                       Lender Return:

7.0%                                                        6.5%                                       13.5%

 

Loans Made with Tax-Exempt Bonds:

Special Allowance:                                                                                  Lender Return:

3.25%                                                                                                   10.25%

Example 2: But with the lower rates that have been more typical in recent years, the 9.5 percent floor creates windfall profits.

In the second quarter of 2004, regular loans earned a 3.57 percent return, including only 0.15 percentage points in federal subsidies. Loans eligible for the 9.5 percent floor collected 25 times more in federal subsidies.[2]

 

Regular Loans:

 

Student Rate                                          Special Allowance:                 Lender Return:

3.42%                                                      0.15%                                      3.57%

 

 

Loans Made with Tax-Exempt Bonds:

Special Allowance:                                                                             Lender Return:6.08%                                                                                                  9.5%

 

 

The 1993 Attempt to Repeal 9.5 Loans

In early 1993, the borrower interest rate on regular new student loans fell to 6.15 percent, highlighting the absurdity of guaranteeing a 9.5 percent return on tax-exempt loans.12 Congress decided to try again to fix the problem.The Omnibus Budget Reconciliation Act of 1993 eliminated the 1980 formula for all loans financed with new student loan bonds. However, responding to arguments that bond investors need stable, assured returns, it kept the 1980 formula for loans backed by existing bonds, including loans made with collections from earlier loans. It seemed like a limited liability, confined only to pre-existing bonds, and involving non-profit and government entities.[3]



[1]Money for Nothing • Skyrocketing Waste of Tax Dollars • A Report by TICAS:The Institute for College Access and Success


[2]Author’s calculations based on U.S. Department of Education,“Federal Family Education Loan Program Special

Allowance Rates for the Quarter Ending June 30, 2004,” July 6, 2004.


[3] General Accounting Office and U.S. Department of Education, Final Report Regarding the Findings of the Study Group on the Feasibility of Using Alternative Financial Instruments for Determining Lender Yield under the Federal Family Education Loan Program, January 19, 2001, pp. 120, 123.

 

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Enriching a Few at the Expense of Many

Hmmmm…this article makes me think of the executives at the student loan companies….like Sallie Mae’s CEO.

By GRETCHEN MORGENSON
Published: April 9, 2011

SOME people say it doesn’t really matter how much companies pay their executives, at least as far as the shareholders are concerned. Whether investors prosper depends on the executives’ management skill, not on penny-ante items like pay, this argument goes.

To this, Albert Meyer, a money manager at Bastiat Capital in Plano, Tex., responds with a resounding “phooey.”

Executive pay is not only a sign of how a company views its duties to shareholders, Mr. Meyer says, but it is also a crucial tire to kick when making investment decisions.

“When compensation is excessive, that should be a red flag,” Mr. Meyer says. “Does the company exist for the benefit of shareholders or insiders?”

As investors scan corporate proxy statements this spring and prepare to vote in annual elections for company directors, executive pay is again moving to center stage. After a few years in the wilderness, top executives are getting hefty raises, according to Equilar, a compensation analysis firm in Redwood City, Calif. But while outrage over executive pay has been eclipsed in recent years by anger over the causes and consequences of the financial crisis, compensation issues still resonate among many investors.

Of course, pay is just one item that Mr. Meyer takes into account when analyzing companies. In his search for shares he can own “forever,” he also hunts for companies with high-quality earnings — that is, those that don’t depend on accounting tricks — as well as generous cash flows and management integrity. Companies he avoids include those that award oodles of stock or options to their executives. Such grants vastly dilute the earnings left over for a company’s owners: its shareholders.

Stock-based compensation plans are often nothing more than legalized front-running, insider trading and stock-watering all wrapped up in one package,” Mr. Meyer says.

A former professor of accounting, he earned recognition when he identified a Ponzi scheme in Philadelphia that had scammed nonprofits out of hundreds of millions of dollars. It was called the Foundation for New Era Philanthropy, and it went bankrupt in 1995. As an equity analyst, he has identified aggressive accounting at Tyco, Enron and other companies over the years.

At Bastiat Capital, a money management firm he founded in 2006, Mr. Meyer oversees $25 million in private clients’ capital. About $8 million of that is invested in the Mirzam Capital Appreciation mutual fund, which he manages. It is up an annualized 4.5 percent, after expenses, since its inception in August 2007. It is up 4.57 percent this year.

His interest in executive pay has led Mr. Meyer to a raft of international companies whose pay and other corporate governance practices are, in his view, more respectful of shareholders than those of similar companies in the United States. He cites as good stewards Statoil, the Norwegian energy company; Telefónica, the Spanish telecommunications concern; CPFL Energia, a Brazilian electricity distributor; and Southern Copper of Phoenix, a mining company with operations in Peru and Mexico. These and other companies he favors have performed well, while paying relatively modest amounts to executives, he says.

Mr. Meyer’s favorite pay-and-performance comparison pits Statoil against ExxonMobil. Statoil, which is two-thirds owned by the Norwegian government, pays its top executives a small fraction of what ExxonMobil pays its leaders. But Statoil’s share price has outperformed Exxon’s since the Norwegian company went public in October 2001. Through March, its stock climbed 22.3 percent a year, on average, Mr. Meyer notes. During the same period, Exxon’s shares rose an average of 11.4 percent annually, while the Standard & Poor’s 500-stock index returned 1.67 percent, annualized.

According to regulatory filings, Statoil paid Helge Lund, its chief executive, 11.5 million Norwegian krone in 2010 (roughly $1.8 million at the exchange rate last year). There were no stock options in the mix, but Mr. Lund was required to use part of his cash pay to buy shares in the company and to hold onto them for at least three years.

By comparison, Rex W. Tillerson, the chief executive of ExxonMobil, received $21.7 million in salary, bonus and stock awards in 2009, the most recent pay figures available from the company. Mr. Tillerson’s pay is more than double the combined $8.3 million that Statoil paid its nine top executives in 2010.

OTHER aspects of Statoil’s governance also appeal to Mr. Meyer. Its 10-member board includes three people who represent the company’s workers; management is not represented on the board. In addition, Statoil has an oversight group known as a corporate assembly, something that is required under Norwegian law for companies employing more than 200 workers. This 18-person group oversees the company’s directors and the chief executive’s management and makes decisions about Statoil’s operations that affect its work force. The assembly members are elected for two-year terms; shareholders elect 12 and workers elect 6.

That second layer of corporate governance protects the shareholders and the employees,” Mr. Meyer says. “They are really doing it as a civic duty to oversee the actions of the directors.”

Another company whose approach to pay is commendable, Mr. Meyer says, is Telefónica. Based in Madrid, it dispenses stock options to employees but eliminates the dilution to existing shareholders by buying a call option in the amount of shares given out as compensation.

At CPFL Energia in Brazil, financial statements routinely compare the highest level of executive pay with that of the lowest-paid workers. In 2010, that ratio was 79 to 1. (Comparable multiples for United States companies range from 100 to 300, depending on the size of the company.) CPFL Energia also discloses the number of “complaints and criticisms” it receives each year — whether from customers, employees or others — and how many are resolved.

“This is an ideal for disclosure,” Mr. Meyer says.

He also rejects the argument that sky-high pay is necessary to attract talented managers. “Look at some of the pay at the companies my fund owns,” he says. “They prove that you don’t have to pay nosebleed compensation to attract good people.”

FEW money managers seem to share Mr. Meyer’s view that pay should be factored into investment decisions. His background as a forensic accountant made him train his eye on corporate proxy statements, where pay practices are outlined. Indeed, he says he first became interested in how executive pay affects shareholder returns during the early 1990s, when companies began issuing boatloads of stock options that they did not have to deduct as compensation costs.

The fiction that options should not be counted as a business expense finally changed in 2005, when the Financial Accounting Standards Board required that companies recognize the costs of options in their financial statements. But options had become the drug of choice for those addicted to excessive compensation, whether on the receiving end or delivering it as directors on a corporate board’s compensation committee.

Middle-class America experienced a lost decade in their retirement accounts, whereas executives enjoyed record compensation packages through the subterfuge of stock option programs,” Mr. Meyer says.

“There has been a massive wealth transfer from middle-class America’s retirement accounts to the bank accounts of the privileged few. The social consequences of this wealth transfer bear scrutiny.”

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