by Stewie, PolitiPorn Financial Markets Correspondent
Sallie Mae beats consensus estimate for first quarter profit, puts hand out to government.
In these times of economic peril, with credit markets seizing up and bad investments taking their toll on corporate balance sheets, companies are turning to a tried and true profit center, the taxpayers.
Setting the scene:
Last year, the newly elected Democratic congress sought to reign in the student loan industry that had found numerous ways to game the subsidy system to its advantage. The subsidies allowed student loan lenders to collect interest rates that bore no relation to the risks they were taking on or the costs of borrowing the money to fund the loans. The result was enormous profits for companies such as Sallie Mae, a private corporation spun-off by the federal government between 1997 and 2004, but no longer affiliated.
Now that times have changed and the gravy train was shortened by a car or two, Sallie Mae’s CEO is raising the alarm that we face a “train wreck” in the summer of 2008 unless something is done. Heaven’s to Betsy, according to Al Lord, Sallie Mae’s new loans might even lose money unless something is done.
The good news is that Lord says that he is working with Congress and the Bush Administration on a “solution.” Isn’t that great? During the profitable years Sallie Mae turns its earnings over to shareholders, but when things turn sour and a profit may not be immediately forthcoming, it turns to the government for a handout… I mean “solution.”
Currently in the works is a plan to allow the Department of Education, the agency that guarantees, subsidizes, and, arguably, should already hold the loans, to buy them from Sallie Mae and others when they won’t sell on the secondary market. However, it’s never a question of not selling; it is always a question of for what price they will sell.
Economics Pop Quiz:
If the Education Department pays the face value for a loan rather than the market value, the difference is:
A. Return on Investment
B. Return on Capital
C. Gross Profit
D. A Subsidy
When profitability returns, as it always does, in the student loan market, Sallie Mae will:
A. Give back it’s subsidy out of a sense of duty to free market capitalism
B. Give back it’s subsidy due to an obligation in the bill
C. Use the subsidy for a student loan forgiveness program
D. Consider the subsidy earnings and distribute it to shareholders
End Quiz
And if lawmakers don’t act on a “solution” quickly Lord offers this not so veiled threat, “Although we are awaiting a potential resolution of this issue from Washington, I want to be perfectly clear. We will not do business that jeopardizes the company’s liquidity position or franchise value.”
Translation: Give us a sweetheart deal or little Timmy is not going to college.
Long live free market capitalism!
Does anyone do hard work for honest pay anymore? I’ve done everything correctly in my life and I lay back and think I should have freeloaded all those years. I would be in the same position today if I just complained to the government that I needed this and I needed that without lifting a damn finger!
A major correction is coming in this country! I’m saving and waiting for the day people are really suffering. I’m not going to give them the benefit of the doubt or give them a damn thing of mine!
Our Government has made these low life thiefs in our society.
I hate Sallie Mae and hope they implode.