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Greenberg: For-Profit Schools ... Subprime Redux?

Rule No. 1 for companies engaged in battles with short-sellers should be: Don’t attack them and if you do, don’t make it personal. Doing so is often viewed as trying to divert attention away from the issue.

That’s why I was surprised to see just that in a press release from Harris Miller, president of the Career College Association, which represents the for-profit post-secondary education industry. His comment, posted on the Career College Association's website, was in anticipation of a hearing scheduled for today at the Senate Committee on Health, Education, Labor and Pensions.

He wrote: “What we will hear from one of the witnesses—a Wall Street short-seller born with a silver spoon in his mouth, who got his first big paycheck the old fashioned way, through his parents—will be self-serving attacks on non-traditional students designed to fatten his wallet, not to inform the American people on how best to get unemployed and underemployed Americans educated and back to work.”

The short-seller, Steve Eisman of FrontPoint Partners, is perhaps best known as being immortalized in Michael Lewis’ book, “The Big Short: Inside the Doomsday Machine,” as having warned about the sub-prime mess when nobody cared.

Now Eisman’s focus, which he detailed last month at the Ira Sohn Investment Conference in New York: The for-profit subprime industry, which for years has been engaged in an on-again-off-again tug-of-war between the shorts and longs. The title of his 48-page report: “Subprime Goes to College.”

Among the companies he mentioned:

Apollo Group

ITT Education

Corinthian Colleges

Eisman is among those scheduled to testify.

Others include Kathleen Tighe, inspector general for the Department of Education. Her testimony was scheduled to mention examples of “fraud and abuse” her office has spotted over the years at for-profit education companies.

According to her prepared comments: “Considering the economic downturn over the last several years, combined with escalating student loan debts, a significant concern is the potential for increased loan defaults as we have seen the national cohort default rate increase recently.”

But Eisman’s comments were the most direct. Key claims include:

  • “Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.”
  • With Title IV student loans, “the government, the students and the taxpayers bear all the risk and the for-profit industry reaps all of the rewards.”
  • “We have every expectation the industry’s default rates are about to explode.”
  • “How do such schools stay in business? The answer is to control the accreditation process. The scandal here is exactly akin to the rating agency role in subprime securitizations.”

In a 45-minute conference call Wednesday directed at Eisman’s testimony, Harris disputed Eisman’s claims, calling them “misleading” and charging that his subprime analogy is “wrongheaded.” Among his points:

  • “Mr. Eisman expresses concerns about cohort default rates but in doing so fails to provide the appropriate context and in some cases simply misstates the case.”
  • “The truth is that the overwhelming majority of career college students graduate and repay their student loans.”
  • “It’s no secret that the career education sector is under attack by short sellers, trial lawyers, self-styled consumer advocates and some traditional academics….And they recycle old news to give currency to new allegations. In short, they twist the truth to serve their self-interest.”

He added, “Comparing the for-profit career college sector to the subprime mortgage banking industry is as silly as it is simplistic.”

Or not. Stay tuned.

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