Sallie Mae Strikes It (Even) Rich(er)
Blog Post
April 16, 2007
For a company allegedly "under siege," Sallie Mae has made out like a bandit. Last week, the company reached a settlement with New York State Attorney General Andrew Cuomo agreeing to pay a $2 million finepocket change to the loan giant, whose CEO made $19.5 million last year. It then turned around and announced yesterday that it will be sold to two banks and two private equity firms for $25 billion, substantially more than it's stock price value at the time of the announcement. The media has gone so far to describe the takeover bid as "salvation" for an "embattled" company. Praise be.
It's true that Sallie Mae has been on the defensive after months of threats from Congress to cut lender subsidies. But salvation? Sallie Maes buyerswho are not financial dummiesare paying $60 a share, almost a 50% premium over its stock price before news of a potential takeover became public. In fact, the Sallie Mae takeover deal is evidence that the Wall Street wizards expect Sallie Mae to be on firm financial footing for some time to come, no matter what happens in Congress.
Everyone knows Congress is soon going to cut excessive student lender profits. In fact, released last week were a set of Higher Education Act reauthorization proposals prepared by Senate Democrats that would reduce taxpayer subsidies to student loan banks by 0.6 percentage points (versus the 0.5 percentage point cut proposed in President Bushs budget). And yes, Consumer Bankers Association President Joe Belew in a fit of hyperbole described the Democrats plan as "a proposal to end the Federal Family Education Loan program."
But ask yourself, what do the buyersJP Morgan Chase, Bank of America, J.C. Flowers & Company, and Freidman Fleischer & Lowesee in Sallie Mae? They see what everyone else is starting to see (and the lenders are desperately trying to hide for as long as possible): that Sallie Mae has a can't miss business model with advantages built in and cemented by years of government favor.
Absent a paradigmatic shift, whatever reforms Congress enacts in the Federal Family Education Loan (FFEL) programreduced subsidies, reduced default guaranteesbig student loan banks will continue to turn a sizeable profit. And in terms of competitive advantage, Sallie Mae sits in the best position with the largest loan portfolio and lowest operating costs. The only thing Sallie Mae really has to fear is a government-sponsored shift to the Direct Loan programa risk that its buyers appear willing to take.
The casual student loan observer might wonder, "arent the buyers worried that Sallie Maes settlement with Cuomo, which required the adoption of a 'Student Loan Code of Conduct,' will affect its business model?"
No, because Sallie Mae has promised investors and colleges that Cuomo's settlement won't change the industry or Sallie's most lucrative practices. In fact, the company, which admitted no wrong-doing to Mr. Cuomo, paraded the settlement withas the Washington Post notedan Orwellian spin. "We are pleased that Attorney General Cuomo has recognized Sallie Mae's leadership in the student loan industry and our ethical market practices," Mr. Fitzpatrick, the company's ever-resourceful and lavishly-paid CEO, wrote in a letter to "Sallie Mae's school customers" late Wednesday.
Mr. Cuomo should take another look at Sallie Mae. Because, as The Chronicle of Higher Education reported, "moments after his deal was announced," Sallie Mae began backing away from it. Their settlement agreement, for example, clearly prohibits Sallie Mae from offering "opportunity pools"a fixed amount of private loan money that the institution can provide to students who otherwise would be ineligible for the loansto get on a college's preferred lender list. Yet, in his letter to schools announcing the deal, Mr. Fitzpatrick announced that the company "will continue to offer Opportunity Loans."
Trying to explain the discrepancy, Tom Joyce, Sallie's chief spinner, told The Chronicle that the company "could continue to offer colleges opportunity loans as long as the lender did not directly admit to the colleges that the benefit was being provided as a condition for the overall business relationship."
"We don't have to tell the school that; we can operate that way," Mr. Joyce said. "If we're not doing sufficient volume at a school, we can decide we're not making opportunity loans available." In other words, don't ask, don't tell. Was this your understanding of the settlement, Mr. Cuomo?
The bottom line: the Sallie Mae takeover deal poses a risk, marginal now, more significant over time, of Sallie Mae operating outside of the public accountability radar. With less Securities and Exchange Commission reporting requirements and less transparency, Sallie Mae might take the opportunity to engage in more problematic practices such as an expanded opportunity loan program or other new ways to offer potentially illegal inducements to colleges. In the long run, that'll hurt students and taxpayers.
We'll be watching though, and doing what we can to keep them honest.
Stephen Burd contributed to this report.
Editor's Note: Please check out Higher Ed Watch's new "special report" section on the fallout from our student loan investigation, including a news chronology, a compilation of investigative stories, and other resources. Let us know what you think.