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Sallie Mae Gobbles Government Money at Expense of Students and Colleges

3:42 pm in Uncategorized by masaccio

Sallie Mae has taken hundreds of millions of dollars from the government using the Education Department’s Participation Program and an astonishingly favorable loan from the Federal Home Loan Bank Board of Des Moines. Let’s see how much they got from two other government programs.

The ED Conduit Program

This program allows Sallie Mae to sell any FFELP Stafford or PLUS student loan made between October 2003 and July 2009 to the ED Conduit for 97% of face value of the note. The ED Conduit charges interest at market rates, and if the money coming in from the loans is inadequate to make the payments, the loans are sold to the Department of Education at 97% of face value. The Department asserts that it has controls in place to insure that student loan companies don’t just dump bad loans into this program. It isn’t easy to see how that would work.

The effect of this amazing program was to enable Sallie Mae and other student loan players to refinance any student loans that were financed at higher interest rates by private sources. Sallie Mae had an asset-backed loan facility from a consortium of banks to fund both its government student loans and its private loans. Under that loan, Sallie Mae would borrow money and pledge the loan to the consortium. We don’t know all the details of this transaction because they are contained in a side letter which wasn’t filed with the SEC.

The loan facility had a floating rate interest of either LIBOR or the commercial paper rate plus 1.3%, plus unstated up-front fees. In March 2009, one-month LIBOR was .56%. The loan facility was terminated in June 2009. In May 2009, Sallie Mae started using an ED Conduit that had an interest rate of .75% for 2009. 2010 10-K, p. F-53. Sallie Mae dumped a total of $14.6 billion into the program. That had the effect of lowering its interest obligations by about 1.1%. For the last six months of 2009, we can estimate a savings of $94.5 million.

TALF

The Term Asset-Backed Security Lending Facility is a program created by the New York Fed to encourage the securitization markets. Under this program, lenders create trusts to hold pools of loans. The pools sell debt securities to the NY Fed. The NY Fed has the right to look at the loans in the pools and does not have to accept any pools it doesn’t like. The collateral posted must include a haircut, that is, you have to post more in face value of loans than the amount you get from the government loans. The interest rate is LIBOR plus .5% for government guaranteed loans. If the collateral is private student loans, the interest rate is higher, and hard to calculate.

Sallie Mae had $6 billion in TALF-eligible securitizations at 12/31/09. A few days ago, Sallie Mae did another TALF transaction for $1.55 billion. All were private student loans. Here is the company’s description of one of them:

On August 5, 2009, the Company priced a $1.7 billion Private Education Loan securitization which closed on August 13, 2009. The issue bears a coupon of Prime plus 0.25 percent and is callable at the issuer’s option at 94 percent of the outstanding balance of the ABS between August 15, 2013 and July 15, 2014. If the issue is called on August 15, 2013, the Company expects the effective cost of the financing will be approximately Prime minus 0.55 percent.

Sallie Mae currently offers private student loans at an annual percentage rate of 10.55%. Prime is currently 3.25%. That means Sallie Mae has a favorable spread of 7.85% on the private student loans it put into this trust.

Sallie Mae and other student loan finance companies failed to defeat SAFRA, the administration’s effort to cut off the subsidies, despite spending tons of money lobbying. Good for us.

Giant Banks Suck At Student Loan Spigot

3:37 pm in Uncategorized by masaccio

After Sallie Mae, the largest student loan finance companies are giant banks: Citi, Wells Fargo, Bank of America, and JPMorgan Chase. As best I can tell, none of these entities are using the bailout programs Sallie Mae uses. They don’t need to. The terms of the government guarantee make the loans so lucrative that they just carry the loans on their books and make huge profits.

Let’s look first at JPMorgan, because its 2010 10-K is a bit easier to follow. JPM has a deposit base of $882 billion, which it considers a stable source of liquidity for its loan portfolio. P. 77. The average interest expense for all of those deposits in 2009 was .55%. P. 258. As a side note, that isn’t good for savers, including retirees trying to live on the income from their savings.

At 12/31/09, JPM held $15.8 billion in student loans on its books, and perhaps an additional $.1 billion in retained interest in interests in securitized loans. P. 61, 199. There is no direct statement about private loans on the books. Loan loss reserves for student loans appears to be small, which is indirect evidence that private loans, if any, are a small part of the portfolio. Let’s assume that all loans on the books are government guaranteed to 98% of principal and 97% of interest. Interest rates on these loans are set by the government. The bank has to pay an origination fee of 1% to the government for all guaranteed loans. If we assume that all were issued at the lowest interest rate of 5.6%, JPMorgan has a guaranteed gross profit of 4.05%, before any losses, and we know it is higher. That comes out to an almost risk-free gross profit of $640 million. For new loans, JPMorgan has the right to sell those loans to the government for face value plus the origination fee plus accrued interest plus $75. Sweet.

Citi appears to pay more for deposits than JPMorgan Chase pays. According to its 2010 10-K, it paid an average of 1.5% on all deposits. The figures aren’t comparable, though, because Citi includes FDIC fees as part of its deposit interest expense. P. 94, 95. It has $20 billion in government guaranteed loans on its books. With the same assumptions, it has a guaranteed gross profit of more than 3.1%, $620 million almost risk free, and with the same right to sell the loans to the government.

The Bank of America pays an average of 1.05% on its deposits. P. 95. It originates a lot of loans, but apparently it securitizes them. It looks like the portfolio including all of those is about $1.1 billion. P. 148. There is profit there, but is hard to see how much goes to the Bank.

Wells Fargo, which includes the former Wachovia, has an average cost of .44%. Financial statements, year ended 12/31/09, large .pdf. P. 90-91. It also securitizes its student loans, and it isn’t clear what their share of profits might be.

It’s the same for the other large bank lenders. With the government guarantee in place, the bank can fund itself, and the student loan, which is almost risk-free, is an excellent thing to have on the books. And Sallie Mae has its own bank, on top of every other way it makes money. Why, it looks like just another part of the bailout, doesn’t it? Thank heaven Congress and the Administration stopped this senseless waste of money.