Slobs and SLABS
I like it when someone in 2011 writes all these thoughtful, faux-analytical comments about the evils of collaterized debt obligations (CDOs), gullible idiots, greedy bankers, well-wishing politicians having no idea about the effects of their own policies, insufficiently zealous three-letter agencies, etc.
Where have they been when it was rolling down, fast? The very suggestion that the housing prices might go down was booed on all sides. If what you presently say is so obvious to every thinking individual, why aren't every one of them crying to heaven about the bubble that is right before our eyes: higher education bubble? One has to be blind not seeing it, and yet politicians and experts alike keep on lecturing us on the virtues of meaningless degrees from little-known universities that have grown like weeds everywhere. Sallie Mae is still busy dispensing "cheap" student loans unto people unable to count to ten. Do you know what happens to these student loans? Guess what: they get collaterized into SLABS, student loan asset-backed securities. These securities are considered to be the "sure thing," much like investing into housing market was considered to be the sure thing. The collaterization of these loans is done pretty much in the same way it was done for the CDOs, which was discovered to be insane and criminal. Naturally, there is no lack of people denying this bubble and offering elaborate theories why this development is "natural" and reflective of deep, structural change. They ALWAYS say that, especially towards the end. http://www.economist.com/blogs/schumpeter/2011/04/higher_education
http://www.theatlantic.com/national/archive/2011/04/is-there-an-education-bubble/237291/
...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: 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 $75.6m of these securities in circulation; at their apex, the total stood at $2.67t. The number of SLABS traded on the market grew to $250b by the fourth quarter of 2010. But while trading in securities backed by credit cards, auto loans, and home equity is down 50% or more across the board, SLABS have not suffered the same sort of drop. SLABS are still considered safe investments-the kind financial advisors market to pension funds and the elderly.
...With the secondary market in such good shape, primary lenders have been eager to help students with out-of-control costs. In addition to the knowledge that they can move these loans off their balance sheets quickly, they have had another reason not to worry: federal guarantees. Under the just-ended Federal Family Education Loan Program (FFELP), the US Treasury backed private loans to college students. This meant that even if the secondary market collapsed and there were an anomalous wave of defaults, the federal government had already built a lender bailout into the law. And if that weren’t enough, in May 2008 President Bush signed the Ensuring Continued Access to Student Loans Act, which authorized the Department of Education to purchase FFELP loans outright if secondary demand dipped. In 2010, as a cost-offset attached to health reform legislation, President Obama ended the FFELP, but not before it had grown to a $60 billion-a-year operation. The result is over $800 billion in outstanding student debt, over 30% of it securitized, and the federal government directly or indirectly on the hook for almost all of it. http://nplusonemag.com/bad-education
The fact is that the fundamentals of X do not matter when people convince themselves that X is the "sure thing", be it the return value of phoney education or SLABS. The bubble inflated by this universal belief will grow until it bursts, for human folly is the endless resource. Add to this government guarantees, real or perceived, and here you go. Naturally, for-profit universities behave in the same way as the lenders of subprime mortgages. 96% of their students take loans and 40% of them are in default within 15 years. The abuse is rampant. People are cheating on financial-aid forms, there is admission fraud, grade inflation, etc. So the investors are becoming nervous about these SLABS. Meanwhile the Feds collaterize these student loans even more and sell tons of them via their TALF program.
...The challenging credit market conditions in the US since 2007 and the waning of investor interest in asset-backed securities have forced entities, such as Michigan Higher Education Student Loan Authority, to suspend issuance of SLABS. Sallie Mae and other players have also witnessed a sharp decline in the bond issuance and student loan sanction activity since the financial crisis. In a bid to prop up the market for ABS, the federal government had introduced a Term Asset Backed Securities Loan Facility (TALF) in November 2008. http://www.economywatch.com/finance/high-finance/slabs-student-loan-asset-backed-securities.html
http://www.newyorkfed.org/markets/talf_terms.html
Soon yet another blame game will begin. The greedy financiers on the Wall Street will be raping America once again. Neither people nor the government have anything to do with it. It was gullible idiots and criminal lenders taking advantage of them.
How could that possibly have happened?
Where have they been when it was rolling down, fast? The very suggestion that the housing prices might go down was booed on all sides. If what you presently say is so obvious to every thinking individual, why aren't every one of them crying to heaven about the bubble that is right before our eyes: higher education bubble? One has to be blind not seeing it, and yet politicians and experts alike keep on lecturing us on the virtues of meaningless degrees from little-known universities that have grown like weeds everywhere. Sallie Mae is still busy dispensing "cheap" student loans unto people unable to count to ten. Do you know what happens to these student loans? Guess what: they get collaterized into SLABS, student loan asset-backed securities. These securities are considered to be the "sure thing," much like investing into housing market was considered to be the sure thing. The collaterization of these loans is done pretty much in the same way it was done for the CDOs, which was discovered to be insane and criminal. Naturally, there is no lack of people denying this bubble and offering elaborate theories why this development is "natural" and reflective of deep, structural change. They ALWAYS say that, especially towards the end. http://www.economist.com/blogs/schumpeter/2011/04/higher_education
http://www.theatlantic.com/national/archive/2011/04/is-there-an-education-bubble/237291/
...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: 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 $75.6m of these securities in circulation; at their apex, the total stood at $2.67t. The number of SLABS traded on the market grew to $250b by the fourth quarter of 2010. But while trading in securities backed by credit cards, auto loans, and home equity is down 50% or more across the board, SLABS have not suffered the same sort of drop. SLABS are still considered safe investments-the kind financial advisors market to pension funds and the elderly.
...With the secondary market in such good shape, primary lenders have been eager to help students with out-of-control costs. In addition to the knowledge that they can move these loans off their balance sheets quickly, they have had another reason not to worry: federal guarantees. Under the just-ended Federal Family Education Loan Program (FFELP), the US Treasury backed private loans to college students. This meant that even if the secondary market collapsed and there were an anomalous wave of defaults, the federal government had already built a lender bailout into the law. And if that weren’t enough, in May 2008 President Bush signed the Ensuring Continued Access to Student Loans Act, which authorized the Department of Education to purchase FFELP loans outright if secondary demand dipped. In 2010, as a cost-offset attached to health reform legislation, President Obama ended the FFELP, but not before it had grown to a $60 billion-a-year operation. The result is over $800 billion in outstanding student debt, over 30% of it securitized, and the federal government directly or indirectly on the hook for almost all of it. http://nplusonemag.com/bad-education
The fact is that the fundamentals of X do not matter when people convince themselves that X is the "sure thing", be it the return value of phoney education or SLABS. The bubble inflated by this universal belief will grow until it bursts, for human folly is the endless resource. Add to this government guarantees, real or perceived, and here you go. Naturally, for-profit universities behave in the same way as the lenders of subprime mortgages. 96% of their students take loans and 40% of them are in default within 15 years. The abuse is rampant. People are cheating on financial-aid forms, there is admission fraud, grade inflation, etc. So the investors are becoming nervous about these SLABS. Meanwhile the Feds collaterize these student loans even more and sell tons of them via their TALF program.
...The challenging credit market conditions in the US since 2007 and the waning of investor interest in asset-backed securities have forced entities, such as Michigan Higher Education Student Loan Authority, to suspend issuance of SLABS. Sallie Mae and other players have also witnessed a sharp decline in the bond issuance and student loan sanction activity since the financial crisis. In a bid to prop up the market for ABS, the federal government had introduced a Term Asset Backed Securities Loan Facility (TALF) in November 2008. http://www.economywatch.com/finance/high-finance/slabs-student-loan-asset-backed-securities.html
http://www.newyorkfed.org/markets/talf_terms.html
Soon yet another blame game will begin. The greedy financiers on the Wall Street will be raping America once again. Neither people nor the government have anything to do with it. It was gullible idiots and criminal lenders taking advantage of them.
How could that possibly have happened?