Common Sense Revisited: Securitization and student Loans and Other Matters

Common Sense Revisited: The current crises in reform of student loans, health-care, financial services, prisons, pharmaceuticals, and dozens of other things stalled on the table by an artificial definition of “majority” as 60% instead of 51% lies at the heart of our problem. It isn’t that one policy is right or another is wrong. The problem is that there is no real debate, vote or action.

Here is a simple proposition: A government policy intending to deliver a direct benefit to taxpayer/citizens MUST be delivered by a government agency. All other activities performed by the private sector must be subject to oversight and some regulation so there is a referee on the playing field.

Common sense proves the point with relentless precision. Suppose we violated this simple premise again by “privatizing” fire or police services. Privatizing a social service is exactly the same as delivering a choice to an intermediary as to whether to deliver the service or put the money in their own pocket. The outcome is obvious.

Whether it is student loans (see below),health-care, financial services, prisons, pharmaceuticals or anything else the effect of delegating government or social function to private interests can ONLY lead to one result — reduction of services, increased costs, and increased profits to intermediaries who add nothing to the process.

Here is an example: SECURITIZATION of STUDENT LOANS DEFEATS THE WHOLE PURPOSE OF THE PROGRAM BUT SECURITIZATION OF STUDENT LOANS IS THE INEVITABLE BY-PRODUCT OF DELEGATING A GOVERNMENT OR SOCIAL POLICY TO PRIVATE BANKS.

IF YOU LOOK CAREFULLY YOU’LL SEE THE SAME NONSENSE AS SECURITIZATION OF HOME MORTGAGES:

COMMON SENSE REVISITED

  1. For those who are academics a quick review of the economists Von Mises and Rothbard you will see that for decades there has been a whole school of economists who have equated economics with politics and politics in turn being the tool of economists.  With respect to the student loan program, the proposal back when this program started was based on the following suppositions:
  1. The use of private infrastructure would result in a more efficient system.
  2. The use of private sector banks would result in proper underwriting of loans since the banks presumably know how to make and underwrite a loan.
  3. The use of taxpayer money to guaranty against default diminished the risk to “quote nearly zero” thus encouraging banks to become involved in the student loan program.
  4. The use of taxpayer money in fees and grants to the private intermediary banks who were inserted into the process would further “encourage” student lending.
  5. The legislative imperative in the bankruptcy law preventing students from discharging their obligations under private student loans would further diminish the risk to private banking lenders and encourage them to participate in the student loan program.
  6. The conclusion was that everyone makes money, we get more college graduates, a booming economy results from a highly informed labor force, job growth would inevitably result, along with higher wages, more consumers with more money to spend, greater innovation from well rounded college students, more students getting advanced degrees and the ultimate result of the United States continuing as the No. 1 country in everything everywhere.

The assumption that using private infrastructure is more efficient is simply an ideological myth.  A quick look at the privatization of prisons clearly shows that privatizing infrastructure results in higher costs, more laws, more government, and the creation of a private sector accruing profits that would otherwise be translated into lower taxes for the citizens.

The use of private sector banks inserted into the process of student lending on the premise that they know how to make a loan is similarly a myth when you add the other features of the student loan program.  Through securitization like in the securitization of private home loans, the banks were inserted into a process where the initial premise was that they might have a risk.  In fact thorough securitization and the other features of the student loan program, the originating lender had no risk at all.  Thus the other features of the program should not have applied and, I would argue, do not apply if challenged properly in bankruptcy court or in state or civil court proceedings.

In fact these banks were not making the loans, they were simply passing on money from sources outside the transaction who were not identified or disclosed to the student at the time of the loan.  Like the home mortgages, students were lured into what appeared to be low payments only to find that their payments later skyrocketed along with interest rates that sometimes reached 16 percent or 18 percent per year.

Thus in a securitized student loan, just as in a securitized home loan, there never was a risk assumed by the mortgage originator nor any of the other intermediaries (including the investment banker who originated the securitization chain) and the guaranty from the federal government and protections against discharge in bankruptcy were waived at the time of the organization of the transaction because the risk presumed to exist on the part of the lender never existed.

The use of taxpayer money to “encourage” student lending merely amounts to another government program creating a giant at the taxpayer troth where they made a fortune in fees without risk.  The numbers just don’t add up.

The ultimate conclusion that the results would benefit society and the students has been disproven.  While there were many people in the private sector who made a great deal of money from the unwitting students who entered into these private student loans and from the government who paid the private sector banks to enter into these transactions, the rest of the benefits for the most part never materialized.  In fact, the numbers don’t add up today.  Getting a college degree on private student loans leaves the students in a state of virtual permanent economic slavery under a debt which will never be repaid.

February 5, 2010

Industry Lobbying Imperils Overhaul of Student Loans

WASHINGTON — Four months ago, it appeared all but certain that the White House and Democrats in Congress would succeed in overhauling the student loan business and ending government subsidies to private lenders.

President Obama called the idea a “no-brainer” last fall, predicting it would take billions of dollars from the profits of private lenders and give it directly to students, and many colleges were already moving to get loans directly from the federal government in anticipation of the next move by Congress.

But an aggressive lobbying campaign by the nation’s biggest student lenders has now put one of the White House’s signature plans in peril, with lenders using sit-downs with lawmakers, town-hall-style meetings and petition drives to plead their case and stay in business.

House and Senate aides say that the administration’s plan faces a far tougher fight than it did last fall, when the House passed its version. The fierce attacks from the lending industry, the Massachusetts election that cost the Democrats their filibuster-proof majority in the Senate and the fight over a health care bill have all damaged the chances for the student loan measure, said the aides, who spoke on the condition of anonymity because they were not authorized to discuss the matter publicly.

But they said the administration had recognized the threat and was beginning to push back in an effort to get the plan approved.

Sallie Mae, a publicly traded company that is the nation’s biggest student lender with $22 billion in loans originated last year, led the field in spending $8 million on lobbying in 2009, more than double the year before, and other lenders spent millions of dollars more, according to an analysis prepared for The New York Times by the Center for Responsive Politics.

Political action committees for the lenders and company employees made $2.1 million in political contributions last year, with the money split evenly among Democrat and Republican candidates, the data showed. Sallie Mae’s PAC alone made $194,000 in donations.

Some 10 million students got loans last year to help pay for their educations, and there is disagreement about whether having the federal government take over virtually the entire lending program would help or hurt them. Private lenders warn that students may default on their loans more often because they will get less counseling; the Obama administration says students will benefit from more grants and expanded educational programs.

A defeat for the White House at the hands of the industry could become further evidence of the administration’s sagging political fortunes. The unexpected loss of the Massachusetts Senate seat has given opponents of the lending plan an opportunity that seemed unlikely last September, when the House approved legislation to move to a federally-sponsored loan program.

The student loan industry, which would be forced out of the loan origination business if the proposal became law, is seeking to cast the administration’s plan as an ill-conceived government takeover that could put thousands of people out of work at private lending centers around the country at a time when unemployment is hovering around 10 percent.

“We anticipated this,” Arne Duncan, the education secretary, said of the lending industry’s lobbying efforts. “They’ve had a sweet deal. They’ve had this phenomenal deal that taxpayers have subsidized, and that’s a hard thing to give up.”

Private lenders get a cut of the federally backed loans that they originate and service, with little risk of their own. At Sallie Mae, lobbyists for the firm are focusing on senators regarded as fiscal conservatives, as well as those in states that are home to lending centers with jobs at stake, including Florida, Illinois, Nebraska, New York and Pennsylvania, said John F. Remondi, chief financial officer for the company.

Student loan lenders employ about 35,000 people around the country, although estimates differ as to how many jobs would be eliminated if the federal government took over all direct lending on student loans.

“We haven’t left any stone unturned — we’ll meet with anyone who will meet us,” Mr. Remondi said in an interview. “We’re trying to identify at least 12 senators who would be helpful in this process.”

At the same time, Sallie Mae and other lenders have staged a series of town-hall-style meetings at their job centers around the country to help mobilize opposition to the White House plan and collect thousands of signatures for a petition drive in support of their own plan.

“I would think that the White House would prefer not to make senators vote for something that is going to be very unpopular in their states — and for good reason,” said Jamie Gorelick, a former Clinton administration official who is now lobbying for the lending industry.

Mr. Obama defended his plan last week in his State of the Union address.

“To make college more affordable, this bill will finally end the unwarranted taxpayer subsidies that go to banks for student loans” and use the savings to finance other educational programs, he said to cheers from Democrats. “In the United States of America,” Mr. Obama said, “no one should go broke because they chose to go to college.”

The money that would be saved by cutting out the private-industry middlemen — about $80 billion over the next decade, according to a Congressional Budget Office analysis — could instead go toward expanding direct Pell Grants to students, establishing $10,000 tax credits for families with loans, and forgiving debts eventually for students who go into public service, administration officials say.

The bill would also shift tens of billions of dollars in expected savings to early learning programs, community colleges and the modernization of public school facilities.

Representative George Miller, the California Democrat who has led the fight for the lending overhaul as chairman of the House Education Committee, predicted in an interview that the plan would ultimately pass.

“If people want to lose $80 billion on the taxpayer’s dime for the very narrow interests of Sallie Mae, I guess they can decide that, but it makes no economic sense to me,” he said. “They had a great ride for years.”

If Congress backs Mr. Obama’s proposal, opponents say that students will forfeit the individualized service that private lenders are better able to offer: a one-on-one meeting in a high school gym, a range of loan options to pick from, or an 11th-hour meeting to avoid a default. The lenders have offered an alternative proposal to retain a more active role in originating loans, which they say would generate significant federal savings — $67 billion in the next decade, according to the Congressional Budget Office.

Some financial-aid administrators at colleges around the country say they are worried that the political uncertainty over the loan proposal and the one-size-fits-all approach of the White House’s approach could hurt colleges and students.

“We’re caught in a political struggle,” Caesar Storlazzi, the chief financial aid officer at Yale, said in an interview. Like a wave of other colleges in recent months, Yale decided in November to switch from private-sector loans to the federal government’s direct-lending program.

But with passage of the White House plan now appearing “less inevitable,” Mr. Storlazzi wonders whether keeping the private lenders in business is better for students.

“It really felt like the administration was just shoving this down our throats,” he said. “It feels a bit like a federal takeover.” With competition among lenders, he said, “We get better prices and services.”

2 Responses

  1. With prisons, you also have the bribing of judges sending people to jail unnecessarily, as in the juvey hall shenanigans in Pennsylvania.

  2. Check out this latest in the DB v BoA and BNP v BoA: BoA moves for dismissal:

    TBW is in bankruptcy, and Ocala cannot make its note payments because TBW, to delay the fate that befell many other non-depository mortgage originators at the time, had double- and triple-pledged Ocala mortgages and stolen assets that served as collateral for the notes,” Bank of America wrote in the court filing.

    From Bloomberg at: http://www.bloomberg.com/apps/news?pid=20601087&sid=apFSzZ.EuT8A&pos=4

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