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Bailout of the Year (this is a must read)

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Bailout of the Year (this is a must read) [#permalink]

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New post 28 Apr 2008, 14:07
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Bailout of the Year
April 24, 2008; Page A12

Guess who's asking Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke for a bailout now? Hint: They are members of an exclusive club who bet wrong on the credit markets last fall. No, it's not a cabal of Wall Streeters, but Democrats in Congress.

We're referring to the "student loan crisis" now appearing in a media outlet near you. In September, Congress vowed to make education more affordable by passing the "College Cost Reduction and Access Act." The law reduced the interest rates borrowers pay on federally insured student loans. Backed by the Federal Family Education Loan Program, these loans account for more than 70% of education lending. Taxpayers will fork over $7 billion by 2012 to pay for the rate cuts.

But Congress didn't stop there. Convinced that the private lenders who make these loans were reaping too much profit, Congress also cut the yield on each loan. The return on the popular Stafford loan for undergrads was reduced by 70 basis points. For loan consolidations, Congress cut returns by 65 basis points. In a vibrant market, banks might have absorbed these hits and continued to lend. But the combination of legislative fiat and fewer investors willing to buy asset-backed securities amid the credit crunch has put the squeeze on lenders.

What's now clear is that Congress didn't merely wring the profits out of student lending. It's blown up the entire student loan market. Market leader Sallie Mae says it now loses money on every new federal education loan. Sallie continues to lend in hopes of a change in D.C., or increased investor demand for securitized loans.

Others can't wait. A third of the nation's top 100 lenders to students in 2007 have temporarily suspended new loan originations or exited the business altogether. Citibank subsidiary Student Loan Corporation cited "unprecedented federal legislation" in announcing its recent withdrawal from much of the market.

Usually, the law of unintended consequences takes so long to reveal itself that no one remembers the culprits. But the speed at which Congress's student lending changes have gone south is raising political danger for Democrats, if Republicans had the wit to point it out. (They don't; that's why they're Republicans.)

Democrats would thus like to clean up the mess they created before May, when a flood of college-bound seniors will seek loans. But the pols can hardly repeal their autumn blunder mere moments after taking credit for it. No doubt many of them are still sending out taxpayer-financed mail bragging of their "achievement."

The result is that the same man who authored last year's bill to cut lenders' returns has crafted a new bill to subsidize those same lenders. Last week the House passed Education and Labor Chairman George Miller's latest foray into collegiate finance. The bill gives the Department of Education new authority to purchase loans directly from lenders.

To summarize: Congress mandated a return on student loans that is too low to attract private capital in the current market. So Congress will now use your money to create artificial investor demand. Taxpayers will bear more risk so that Congress can fashion a new business model to replace the one it just destroyed. The Bush Administration, unwisely but typically, has endorsed this approach.

Oh, there's more. Mr. Miller's allies in the Senate understand that legislation moves more slowly on their side of the Capitol. There may be too little time before the angry phone calls from parents target the 202 area code. So the same Senators who gave us the autumn accident have begun a letter-writing campaign to request that bailout we mentioned earlier.

Daniel Akaka, Bob Casey, Tom Carper, Chris Dodd, Tim Johnson, Bob Menendez and Jon Tester are desperately seeking a bureaucrat with a large checkbook to rescue them from their self-made political disaster. Last Thursday they wrote Mr. Bernanke asking him to accept student loans as collateral under the Fed's new Term Securities Lending Facility. They sent a similar letter to Treasury Secretary Paulson asking him to order the Federal Financing Bank to buy student-loan-backed securities.

So having raised solemn alarms when the Fed began to accept dodgy mortgage-backed securities as collateral, the Senators are now demanding that the Fed accept dodgy student-loan paper too. The Senators helpfully note in their letter that a virtue of their proposals is that they can be implemented quickly. Indeed, November is just around the corner.

Needless to say, none of this legislative history is appearing in the multiple media sob stories about students who can't get loans. But like airline passengers stranded this month due to panicky inspections, the current student loan "crisis" didn't have to happen. It is entirely a product of Congress.

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Re: Bailout of the Year (this is a must read) [#permalink]

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New post 28 Apr 2008, 16:16
gee, what a surprise.

So, we have the general population, half of whom can't balance their own checkbook or live by a budget.
Throw in congress, a group of people with little to no financial backgrounds that can get fired by the general population.
Add in the temptation to cave in to some b.s. populist message about how companies turning a profit on a product is a bad idea. (Which the general population buys into, as they don't know what is going on)

Who would have guessed congress would try to appease an idiotic demand without thinking of the consequences. <Sarcasm>At least they "did something" </sarcasm>

Great article trader!!! I like reading something that brings out my contempt for the common man :lol:

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Re: Bailout of the Year (this is a must read)   [#permalink] 28 Apr 2008, 16:16
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Bailout of the Year (this is a must read)

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