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Sallie Mae . . . Sallie Mae Not

Posted by Larry Doyle on March 6, 2009 5:36 PM |

In reading a fair amount of market analysis and listening to a number of policy wonks, it strikes me that more and more people feel the Obama administration is neither focused nor properly staffed. In Treasury, Secretary Geithner is largely working on his own!! What happens in situations like that?  Not surprisingly, Obama himself and his secretaries are not fully informed and say and do things haphazardly.

For those who are wondering what I am doing writing about politics while I navigate the economic landscape, well, risk comes in many shapes and sizes. The risk of an unfocused and thinly staffed administration is a huge risk. Let’s review one specific company that was literally blindsided by the administration. 

The Student Loan Marketing Association was the largest provider of student loans in the country. This company, like every consumer finance company, has been very negatively effected by the shutdown of the asset-backed securitization market. That said, what the Obama administration’s budget proposal did to current SLMA shareholders and bondholders is nothing short of devastating.

Again, Obama is the President and he can make whatever moves he deems to be in the best interest of our country. He views the shift in student lending to the government from SLMA as potentially a $4 billion savings.  However, I don’t know who, if anybody, is advising him because he just blindsided and devastated both shareholders and bondholders. In a Bloomberg piece, Sallie Mae May Lose 74% of  Loans Under Obama Budget:

The administration has signaled its intentions, and the risk will cloud SLM no matter the outcome,” Matt Snowling, an analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia, said in a report dated yesterday. “We view this proposal as meaning that lenders such as Sallie Mae will face continuous threats during the current administration’s tenure, which likely cause significant risk and turnover of the shareholder base.”

Snowling, who wrote that Obama’s announcement “blindsided the industry,” cut his price target by $7 to $13. 

Do you want to see what blindsided looks like from a price graph of the stock? 

sallie-mae-price-graph1The graph displays the price of Sallie Mae stock both before and after the proposed Obama budget. For those unacustommed to looking at graphs of stocks, that cliff-like drop represents a decline of approximately 60% of the value of the stock. Why and how do things like this happen?

1. The administration either does not care about investors and bondholders;
2. The administration was not properly focused due to a number of conflicting issues;
3. The administration is not properly staffed with market savvy people.
4.  All of the above.

The proper manner for the administration to handle a situation like this is to float the idea out there. Then they should study the situation. Revisit it in a few months. Have a few undersecretaries put out some position papers. All of those moves allow the market to manage expectations and risk. 

While some may say oh it’s only one company in one sector of consumer finance, I would respond that if Obama can blindside investors in SLMA, what makes you think he can’t or won’t blindside other investors in other companies he’d like the government to run?

I was taught when risk goes up, price goes down. Oh yes, we’re seeing a fair bit of that in the markets lately!  


graph courtesy of The Wall Street Journal

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  • SC

    I , and many former students, are thrilled with the idea of Sallie Mae no longer in the student loan business. They have brought devastation to many, many, many, young adults through their strong arm tactics and their Congressional given rights to not have to provide ANY consumer protections including, no Statute of Limitations, no usury provisions, no Fair Debt Collection guidelines, no right to bankruptcy of a private consumer loan, no Truth in Lending requirements, etc. I am sure the administration has heard from people who have been in the unfortunate position of having no consumer rights and no where to turn even though a predator was devouring them. No… will find no sympathy from me or lots of others who have been stalked by this company. It is way past time that our government started looking out for the citizens and stopped looking the other way while our young adults were being raped by private student loan companies

    • Larry Doyle

      SC….thank you very much for sharing your insights and perspectives. Please understand I am not writing to defend bad business practices. I am merely writing to highlight the devastating manner in which the Obama administration handled this company.

      Do you think Obama is interested in the business practices or the savings?

      • SC

        I think the Obama administration probably did it mostly from an economic standpoint but perhaps it has heard and read the literally hundreds of thousands to millions of voices complaining about this company and that, coupled with the need to save money made the decision. At least, I like to think they are listening to all those young adults begging for help.

        As far as the devastating manner in which this was handled, if it were any other company besides one who has preyed on young people and destroyed so many lives, perhaps there would be a pause for the way it was handled. But, not this company – this is only a small bit of what they deserve. There have been lots of former students who commit suicide, leave the country and just plain check out of life because of no where to turn and NO rights and from the abuse dished out by this company. Do you know that many young people owe amounts equal to several times over what they originally borrowed? At every turn, they make it impossible to live with this burden and the very sad part of all of it is that Congress gave them all the power to abuse our young people. No, no sympathy here at all.

        • Larry Doyle

          SC….thanks for the perspective. I do appreciate hearing from all interested parties. I had a student loan with SLMA and did not have that kind of experience but I will grant you that that was a long time ago.

          The better approach, in my opinion, is a public forum convenes to highlight abusive lending practices and compels SLMA to change business practices.

          Additionally, I know that there are a number of student lending organizations in the market. Competitive pressures should drive biz away from SLMA.

          If in fact Obama targeted a company intentionally, which I am not stating he did but the results show that, then ultimately it raises the cost of capital for all concerned because investors will shy away from these companies.

          I thank you for your comments. In regard to Financial Aid, Sense on Cents does have a link in the right sidebar to help people find alternatives.

          Additionally, in the Debt Management link in that same sidebar there is a resource for Financial Aid as well.

          Visit and comment often. Thanks!!

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