Hedge Fund Sees `Big Short' in Education Stocks With Possible Law Changes

[Dappleganger]

http://preview.bloomberg.com/news/2010-05-27/frontpoint-s-eisman-bets-for-profit-education-stocks-to-fall-on-loan-rules.html

Steven Eisman, a hedge-fund manager whose bet against the housing market was chronicled in a best- selling book, said he has found the next “big short”: higher education stocks.

The stocks of companies operating for-profit colleges could fall much as 50 percent if the U.S. tightens student-loan rules, said Eisman, manager of the financial-services fund at FrontPoint Partners, a hedge-fund unit of New York-based Morgan Stanley.

An Obama administration proposal to limit student debt would slash earnings of Apollo Group Inc., ITT Educational Services Inc. and Corinthian Colleges Inc. by forcing them to reduce tuition and slow enrollment growth, Eisman said yesterday at a New York investment conference. Without new regulation, students at for-profit colleges will default on $275 billion of loans in the next decade, he said.

Eisman is shorting, or betting against, shares of higher- education companies because of the parallels he sees to the housing market, where prices began to fall in 2006 as loan defaults by homeowners with poor or limited credit history began to climb, he said. Like the lenders to these subprime borrowers, for-profit colleges boomed by saddling low-income people with debts they can’t repay, he said.


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This is good to read along with this thread: http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x8445452

[underpants]

1. education companies

I want my country back

[FarCenter]

2. The problem with the for-profit colleges is that they are not selective enough

They have been growing fast and will admit most candidates who can arrange a loan.

Much of the value of a college degree is the selectivity of the admissions process. If a college is very selective in only admitting extremely bright, highly motivated, accomplished students from the better high schools, then employers know that they will on average be getting superior employees.

[lurky]

3. Community colleges are worthless, then?

And the purpose of college is to impress future employers with the "brand" of the school you attended?

The problem I see with the for-profit education model is that providing an actual education is not as profitable as marketing aggressively to poor people on daytime television, collecting a bunch of financial aid and loan money from banks and the government, then leaving your dupes... I mean students... with a mountain of debt. The actual "education" part is just overhead that eats into your bottom line.

I think for-profit education is like for-profit health insurance. Both have a massive financial incentive against performing their stated mission, whether it is to provide a useful, quality education, or to cover health care costs for subscribers.

[FarCenter]

4. Community colleges tend to be pretty oriented towards employment specific training in their 2-years

But take for example a degree from a large state-supported college. A BA from mega-state college is unlikely to get you into the management development program of a major corporation. A high GPA could get you into a better university's grad school or professional degree program. Otherwise it is a ticket to various entry level jobs in business or government that specify more than a high school diploma, but not specific training.