Tag Archives: rent-seeking

Steven Eisman testifies about the subprime nature of the for-profit education industry

Here is another must read from Steven Eisman in front of the US Senate Committee on Health, Education, Labor, and Pensions yesterday (June 24). I excerpt:

My testimony today comes largely from a recent presentation I gave at an investor conference entitled “Subprime goes to College”. The for-profit industry has grown at an extreme and unusual rate, driven by easy access to government sponsored debt in the form of Title IV student loans, where the credit is guaranteed by the government. Thus, the government, the students and the taxpayer bear all the risk and the for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.

The for-profit education industry accounts for 9% of the students, 25% of all Title IV disbursements but 44% of all defaults. And the President of the largest for-profit institution is paid nearly 25x the compensation level of the President of Harvard. There is something wrong with this statistical progression.

In the past 10 years, the for-profit education industry has grown 5-10 times the historical
rate of traditional post secondary education. From 1987 through 2000, the amount of total Title IV dollars received by students of for-profit schools fluctuated between $2 and $4 billion per annum. But when the Bush administration took over the reigns of government, the DOE gutted many of the rules that governed the conduct of this industry. Once the floodgates were opened, the industry embarked on 10 years of unrestricted massive growth.

He continues:

The bottom line is that as long as the government continues to flood the for profit education industry with loan dollars AND the risk for these loans is borne solely by the students and the government, THEN the industry has every incentive to grow at all costs, compensate employees based on enrollment, influence key regulatory bodies and manipulate reported statistics – ALL TO MAINTAIN ACCESS TO THE GOVERNMENT’S MONEY.

In a sense, these companies are marketing machines masquerading as universities. And when the Bush administration eliminated almost all the restrictions on how the industry is allowed to market, the machine went into overdrive. How do such schools stay in business? The answer is to control the accreditation process. The scandal here is exactly akin to the rating agency role in subprime
securitizations.

There are two kinds of accreditation — national and regional. Accreditation bodies are non-governmental, non-profit peer-reviewing groups. Schools must earn and maintain proper accreditation to remain eligible for Title IV programs. The relationship of the for profit education industry and the national accrediting boards is, in my view, similar to the relationship between the rating agencies and investment banks. There, Wall Street paid the rating agencies handsomely for ratings on subprime securitizations that turned out to be overly optimistic. Here, the industry, we believe, controls the national accrediting bodies by actually sitting on the boards of those very same institutions. The lunatics are running the asylum.

Eisman predicts massive waves of defaults; his estimate is that students will owe some $330 billion in loans and fees on defaulted loans over the next ten years.

The entire testimony is worth reading, and I thank Rick Puig for the pointer.

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Great moments in rent-seeking, the geopolitics of oil edition

From The Politics of Oil by Robert Engler, p. 265-6:

Despite these setbacks, the vacuity and fumbling of American foreign policy and its application to oil still promote the propping up of regimes whose days are numbered and who are prepare to trade their people’s physical heritage for dollars and military support. All this takes pace with the active participation of oil corporations that seek to integrate the raw material producing countries of the world into the processes of their private government. Late in 1958 the United Nations General Assembly received Soviet-backed resolutions, first proposing that the UN provide aid for nations wishing to develop their own petroleum resources and then one more simply suggesting a study of internatioanl cooperation in such development. The Americans simply responded to the bait of this blunt threat to the international companies and clear provocation to the producing countries of Latin America and the Middle East. “In no time at all the oil lobbyists were swarming around the United Nations,’” the St. Louis Post-Dispatch reported. “There were so many conference between the oil men and members of the United States delegation that one American diplomat said he told the oil people to ‘let us alone so we can protect your interests.’” One oilman, a member of the delegation, “was warned to lie low.” Speaking for the United States, Senator Mike Mansfield rose to defend private enterprise and national sovereignty:

If the General Assembly starts with the oil industry today, where shall we stop? Will there be a separate resolution on the steel industry, the flour milling industry, poultry raising, cement manufacturing, automobiles, synthetic fibers or the hula hoop business?

In a setting where we know not where we are going, the quest for oil looms as one clear goal.

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