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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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