Saving Sallie Mae?

Salle Mae Logo.gifSallie Mae continues to weather the widening financial havoc that began by throttling the financial sector and now spreads to manufacturing, retail and even university sectors. SLM Corporation, its formal name, is a private corporation that in 2004 shed its government sponsored roots that dated to 1972. It provides student loans for education that are financed, in turn, by extensive use of asset-backed securitizations. In its quarterly report issued last week, Sallie Mae reported significant losses ($158 million) but far less than in the same quarter the previous year ($343 million). Institutional investors have been seen increasing their stake in Sallie Mae’s equity. Its stock closed in New York today at $8.26 per share (compared to a 52-week trading range of $4.19 to $42.00).

If Sallie Mae is a bright spot in an otherwise dismal economy, it may be vital to provide hope for a timely economic recovery from the brewing recession. Many universities, including Brown, Cornell and Harvard, faced with shrinking endowments, are reporting hiring freezes and budget cuts. Conventionally, these and other universities could count on economic recessions to increase demand measured by rising applications, especially for graduate programs in business and law. In general, applications to those programs rise as employment opportunities for college graduates shrink. When the economy expands, employment opportunities rise and applications flatten out.

Recently, unemployment rates are rising sharply and are expected to continue rising. Law school applications are predictably up. Past patterns, however, are likely to recur only if students are both able to secure requisite funding and ultimately land jobs that facilitate loan repayment. So far, Sallie Mae’s relatively respectable performance bodes well, as it has avoided the fate ensnaring its former cousins, Freddie Mac and Fannie Mae. And also so far, despite some contrary rumors, there does not appear to be any student loan crisis.

Yet despite Sallie Mae saying ahead of its quarterly report that the “fundamentals of (its) business are strong,” its quarterly report does not indicate that Sallie Mae enjoys significant capital strength (liabilities total $160 billion while shareholder’s equity totals $5 billion). The filing also emphasizes that it faces potential adversity in its funding and profitability from deterioration in the asset-backed securities market and counterparty credit risk. Wall Street analysts note that “Student lenders like Sallie Mae face increased higher funding and credit costs, which will continue impacting the profitability of the company.”

The federal government, led by the Treasury Department, has been reactively spending nearly a trillion federal dollars to stabilize a wide variety of firms–commercial banks plus investment banks, especially Goldman Sachs and Morgan Stanley, the insurance company American International Group, and now the personal finance company American Express. Some of these companies compete with Sallie Mae. It now appears that proposals made earlier this year to intervene in the student loan market may be heating up again. This would include using authority under the recent bailout bill to buy student loans at prices equal to principal plus interest and origination fees.

These proposals warrant careful consideration–and already are stirring controversy. It is not obvious that Sallie Mae needs or will need any such assistance. And providing it could do more harm than good, if it creates a panic not justified by current market conditions. But it may be important for federal authorities to get ahead of problems, not merely respond to them, as they have been doing for more than one year. This may include assuring Sallie Mae’s continuing escape from the spreading financial vise.

You may also like...

1 Response

  1. Carol Cross says:

    Sally Mae joins her cousins in betting on an unknown future and we sincerely hope that the future is bright for Sally Mae! Hopefully, there will be employment for all of the college educated! Just what we need! More attorneys! and all of these student loans will be paid back with interest.

    Are the securitizations of the cash flows of the future good fiscal policy? Are investors protected when “forward looking statements” are not contractual promises under the law? Should Insurance Companies be insuring these bets into the future?

    Will there be a conversation between the economists and the investment bankers and our Congress as to whether or not these somewhat new financial products, these securitizations, have contributed to the great problems we are facing in the World Economies today?