EISMAN SUBPRIME GOES TO COLLEGE PDF

Good Afternoon. I would like to thank the Ira Sohn Foundation for the honor of speaking before this audience. Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The For-Profit Education Industry has proven equal to the task.

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By Post Staff Report. Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task. 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.

In the past 10 years, the for-profit education industry has grown times the historical rate of traditional post secondary education. There has been a revolving door between the people who work for this industry and the halls of government. One example is Sally Stroup. In , she was the head lobbyist for the Apollo Group — the company behind the University of Phoenix and the largest for-profit educator.

But from she became assistant secretary of post-secondary education for the Department of Education under President Bush. In other words, she was directly in charge of regulating the industry she had previously lobbied for. But when the Bush administration took over, 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. And this growth has resulted in spectacular profits and executive salaries. ESI is more profitable on a margin basis than even Apple. Here is one of the more upsetting statistics.

The rest went to marketing and paying executives. Leaving politics aside for a moment, the other major reason why the industry has taken an ever increasing share of government dollars is that it has turned the typical education model on its head.

And here is where the subprime analogy becomes very clear. There is a traditional relationship between matching means and cost in education. Typically, families of lesser financial means seek lower cost colleges in order to maximize the available Title IV loans and grants — thereby getting the most out of every dollar and minimizing debt burdens. The for-profit model seeks to recruit those with the greatest financial need and put them in high cost institutions.

This formula maximizes the amount of Title IV loans and grants that these students receive. With billboards lining the poorest neighborhoods in America and recruiters trolling casinos and homeless shelters and I mean that literally , the for-profits have become increasingly adept at pitching the dream of a better life and higher earnings to the most vulnerable of society.

So the key question to ask is — what do these students get for their education? In many cases, NOT much, not much at all. Upon nearing completion, the students learned that not only would their credits not transfer to any community or four-year college, but also that their degree is not recognized by the American Association for Medical Assistants. Hospitals refuse to even interview graduates. And look at drop-out rates. Default rates on student loans are already starting to skyrocket.

In a sense, these companies are marketing machines masquerading as universities. Let me quote a bit from a former employee of Bridgepoint Education, operators of Ashford University:. They conveniently price tuition at the exact amount that a student can qualify for in federal loan money. There is no regard to whether a student really belongs in school, the goal is to enroll as many as possible.

They also go after GI Bill money and currently have separate teams set up to specifically target military students. If a person has money available for school Ashford finds a way to go after them. We mention tuition prices as little as possible. 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. In order to be eligible for Title IV programs, the universities must be accredited.

But accreditation bodies are non-governmental, non-profit peer-reviewing groups. In many instances, the for-profit institutions sit on the boards of the accrediting body. The inmates run the asylum. The latest trend of for-profit institutions, meanwhile, is to acquire accreditation through the outright purchase of small, financially distressed non-profit institutions. On the date of purchase, Franciscan now Ashford had students. Bridgepoint took that school online and at the end of it had 54, students.

The industry has gotten hysterical over this rule because it knows that to comply, it will probably have to reduce tuition. I cannot emphasize enough that gainful employment changes the business model. Gainful employment will cause enrollment levels to grow less quickly. And the days of raising tuition would be over; in many cases, tuition will go down. By late , it was clear to me and my partners that the mortgage industry had lost its mind and a society-wide calamity was going to occur.

It was like watching a train wreck with no ability to stop it. Who could you complain to? The rating agencies? They were part of the machine. Alan Greenspan? He was busy making speeches that every American should take out an ARM mortgage loan. Are we going to do this all over again? Are we going to load up a new generation with student loan debt they can never afford to pay back?

If nothing is done, then we are on the cusp of a new social disaster. Steven Eisman is the portfolio manager of the FrontPoint Financial Services Fund, and one of the first people to predict the subprime mortgage crisis. Adapted from a speech he gave to the Ira Sohn Investment Conference. Enrollment…………………………… 55,plus. This would force universities to lower their tuition, or face declining enrollment because fewer students could afford school.

After a discussion period, the rules will be issued in November and go into effect summer Read Next. Fulsome prison blues. This story has been shared , times. This story has been shared 76, times. Would you like to receive desktop browser notifications about breaking news and other major stories?

Not Now Yes Please. View author archive Get author RSS feed. Name required. Email required. Comment required. Enlarge Image. A student prepares for an online quiz at home for the Universtity of Phoenix.

How has this been allowed to happen? So what is the government going to do? Major for-profit educators include. Apollo Schools include……………….. The University of Phoenix Enrollment……………………….. Schools include……………………. Read Next Fulsome prison blues. Share Selection. John Podhoretz. Betsy McCaughey. Rich Lowry. Today's Cover. Cole Haan takes up to 70 percent off clearance for summer sale. DSW takes extra 30 percent off clearance for flash sale.

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Steve Eisman’s Next Big Short: For-Profit Colleges

Steve Eisman, the outspoken investor whose huge wager against the subprime mortgage market was chronicled by author Michael Lewis in his bestselling book The Big Short , has set sights on a new target: for-profit colleges of the kind of you might see advertised on daytime TV and at bus stops. After witnessing the first wave of subprime madness in the s, Eisman grew skeptical of the industry as a whole, Lewis writes. Then, when subprime surged again in the s, he put his knowledge to work. How does this kind of industry even stay in business?

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Subprime goes to college

By Post Staff Report. Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task. 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.

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Did Steve Eisman unduly influence the Education Dept.?

Earlier we aggregated a compilation of notes from the Ira Sohn Investment Conference where some very prominent hedge fund managers detailed investment ideas. You may be familiar with him as he was profiled as one of the successful subprime traders in Michael Lewis' book, The Big Short. Eisman thinks he has identified the next 'subprime' so to speak and gave a presentation at the Ira Sohn Conference entitled, "Subprime Goes to College. His general thesis focuses on two factors: Washington clamping down on the industry and a rise in employment generating a decline in enrollment. He notes that a key to the problem here is the 'rating' these institutions receive from accreditation boards and he likens these boards to the ratings agencies who blessed subprime mortgages. As we've detailed numerous times, the for-profit education space is an investor battleground with a clear divergence of opinion.

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Steve Eisman

Eisman grew up in New York City, where he attended Yeshiva schools. He attended the University of Pennsylvania , graduating magna cum laude in His parents also worked in finance. They were brokers for Oppenheimer. Eisman was unhappy with his work in law. His parents arranged a position for him at Oppenheimer working as an equity analyst.

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