Sallie Mae Doesn’t Deserve More Taxpayer Money

December 16, 2008

Student lending giant Sallie Mae is quick to hold out its hand for money, but just how much does this company really deserve?  In the name of education, Sallie Mae has pillaged students with loan-shark interest rates and shakedown collection tactics, but instead of reining them in, the government condones this bad behavior by showering Sallie Mae with more money at every turn.  It’s time to demand accountability.  How can we allow yet another company that exploits its customers to get our taxpayer dollars?  Join our rallying cry-“No more money for Sallie Mae!”

Sallie Mae is already putting dibs in for money from the Federal Reserve and Treasury’s new bail-out program called the Term Asset Backed Lending Facility or TALF.  Under TALF, announced November 25, 2008, the government will make $200 billion in loans to asset backed security issuers with high investment ratings.  Among the big beneficiaries are credit card issuers, auto-loan issuers, and, yes, student loan lenders, like Sallie Mae.

But is Sallie Mae even in financial trouble, let alone deserving of a bailout?  The company touts its “strong business fundamentals” and “adequate liquidity, which “has been less impacted by the credit crisis than virtually any other financial services company.”  And Sallie Mae’s CEO actually declared: “the government’s helping hand is no longer necessary to fulfill Sallie Mae’s higher education mission.”

At its December 2, 2008 Fall Investor conference, Sallie Mae vice chairman and chief financial officer Jack Remondi discussed legislation passed earlier this year giving Sallie Mae unlimited funding to make federal loans until 2010, and guaranteeing a fixed income stream to Sallie Mae for those loans, whether they are paid by borrowers or not.  Remondi also expressed pride in the fact that that Sallie Mae had not denied any student a federal loan this year.  Who wouldn’t be proud of themselves if they found a way to lend billions of dollars in loans with a guaranteed return and no risk?

Remondi noted that the money coming in on Sallie Mae’s federal loan program “more than covers” their operating expenses. On top of that, a new Conduit program set up by the Department of Education will allow Sallie Mae to sell its federal loans into special purpose vehicles (SPVs).  Does this sound like a program that is in desperate need of billions of dollars? If making federal loans is not a problem, then there’s no problem to solve and no bailout money needed.

Sallie Mae is proud to brag that it has very limited credit risk since 82% of its loans already carry explicit guarantees.  Sallie Mae did not sell any loans at a loss this year and its average spread on recently issued private student loans is Libor plus 10%.  That’s a hefty profit!

And there’s more!  Sallie Mae also just announced the opening of a new 1,100 employee collections facility in Delaware, paying $20.75 million for a 72,000 square foot building.  This doesn’t sound like the profile of a company in desperate need of a bailout.  Usually companies begging for handouts are closing office branches, not opening new ones.

To make matters worse, any trouble Sallie Mae faces is self-created through irresponsible lending practices.  Sallie Mae has billions of dollars in private loans that it hasn’t been able to securitize over the past year.  That has finally resulted in Sallie Mae exercising more discretion in its lending practices.

By contrast, in the years leading up to the credit crunch, Sallie Mae was one of the biggest subprime student loan lenders.  According to Sallie Mae CEO Albert Lord, “we were just not very good at saying no.”  Through its “nontraditional” loan program, Sallie Mae lent billions to students who had little prospect of being able to pay the money back.  Knowing it could securitize the loans and sell off the risk, Sallie Mae was unconcerned since it knew that, no matter how predatory and unfair the loan terms, students generally cannot discharge private student loan debt in bankruptcy.

So HOW and WHY would our government reward Sallie Mae once again for predatory lending practices, that make Sallie Mae executives rich and students poor.  Even investors have figured out Sallie Mae is a bad investment.  That’s why no one is buying up those Sallie Mae securities anymore.  Let’s hope our government will give the taxpayers the same consideration.  Join our rallying cry by contacting your elected representatives to Congress. NO MORE MONEY FOR SALLIE MAE!