Reuters reports that First Marblehead Corporation (NYSE: FMD) -- a student loan securitizer -- is in deep yogurt and the stock market is not happy, knocking 42% out of its stock. The reason? The Education Resources Institute Inc (TERI), which claims to be the largest not-for-profit guarantor of U.S. private education loans, filed Monday for Chapter 11 bankruptcy protection. Thanks to borrower defaults and credit market problems, its liquidity was "damaged."
People have asked me what would be the next shoe to drop after subprime. The $85 billion student loan market is one where the supposed alchemy of securitization is turning lead into toxic waste rather than gold. Securitization was supposed to eliminate the risk of loss by bundling enough good loans with bad ones so the security would offer attractive returns. While the securitizers got big fees, the losses are turning out to be larger than expected.
TERI -- which is supposed to step in and pay a student loan in the event of a default -- accounted for 32% of First Marblehead's business. But Willis Hulings, TERI's chief executive (and one of my business school classmates), on Monday said investor demand has "evaporated" for bonds backed by student loans because of turmoil in credit markets.
If we ever get out of this mess, securitization ought to come under intense scrutiny. It's looking like a major scam to me. Meanwhile, it will get much tougher for students to borrow the $50,000 a year they need to pay for private college.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
4-09-2008 @ 4:42AM
Christopher C. Morrissey said...
So as a management professor at a private college what actions should students and colleges be taking to alleviate the problem?