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Greenberg: Behind Eisman’s For-Profit Short

Is hedge fund manager Steve Eisman of FrontPoint Partners really on to something big with his bet against for-profit colleges?

Steve Eisman
CNBC
Steve Eisman

He thinks so—and has been more than willing to go on the record to say it. He laid out his reasons, in his first television interview in 10 years today (Wednesday), on CNBC’s "TheStrategy Session."

Why care about what Eisman says?

As a main character in Michael Lewis' bestseller, "The Big Short,” Eisman is best known for getting the subprime crisis right.

But at the time, his attempts to warn regulators were ignored.

This time they’re listening, especially after he capitalized on his role in the book with a report last June at an investment conference headlined, “Subprime Goes to College.”

His thesis, in a nutshell, is that the industry’s profits have grown largely by way of federally backed student loans. Despite being less than 10 percent of total enrollments, his report said that for-profits now claim nearly 25 percent of the $89 billion of Federal Title IV loans and grants.

“In a sense,” he said in his report, “these are marketing machines masquerading as universities.”

In his report he also mentions Corinthian Colleges and Education Management. The latter, whose largest investor is Goldman Sachs, went public last year.

More to the point:

From 1987 through 2000, the amount of Title IV dollars given to for-profits fluctuated between $2 billion and $4 billion.

But under the Bush administration Title IV dollars ballooned to more than $21 billion.

At many for-profits, federal loans and grants now comprise close to 90 percent of revenue.

And the growth has driven “even more spectacular company profitability and wealth creation for industry executives and shareholders.”

He goes on to say that many for-profits “are among the most profitable businesses in the world.”

Yet—and this is the kicker—loan defaults at for-profits have skyrocketed.

Earlier this week the government reported that the so-called cohort default rate in 2008 for for-profits was 11.6 percent, up from 11 percent a year earlier. (The cohort default rate is the number of loans that go into default in the year they’re granted.) That’s nearly double the default rate for public colleges and nearly triple that of private colleges. According to Education Department Secretary Arne Duncan, the data “tells us that students attending for-profit schools are most likely to default.”

As for Eisman, he says, “The more research I do, the more disgusted I become.”

Among individual companies, four names that have grabbed Eisman’s attention are ITTEducation, Strayer Education, Apollo Group and Washington Post , which owns Kaplan University.

The Education Department has proposed new “gainful employment” rules that are expected to be adopted later this year and go into effect next year, that could impact the eligibility of schools to qualify for loans based on meeting several metrics. The new rules would also curtail incentive compensation for enrollment officers and the use of third-party marketers.

The industry is fighting back, claiming among other things that if the rules go through, the biggest victims will be the underprivileged, who make up a big percentage of for-profit school enrollment and loans.

Says Eisman: “If you boil down the industry’s argument, they are saying that, ‘Everyone should get an education, we serve the underprivileged so leave us alone’.

“Change a few words and substitute education for housing and you get the scenario that led to the subprime meltdown.”

Stay tuned.

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