Greenberg: Why Strayer Has Attracted Eisman

Steve Eisman of FrontPoint Parnters got it right on subprime mortgages, as chronicled in Michael Lewis’ “The Big Short.”

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Several months ago, Lewis started beating the bushes on for-profit colleges in a provocative report titled, "Subprime Goes to College."

One company he never mentioned, which has historically been considered among the best and cleanest: Strayer Education .

Eisman tells me that he is short Strayer and that it is a relatively new position.

His interest was piqued by the discrepancy between Strayer and the Department of Education over Strayer's student-loan repayment rate. (Going forward, under new “gainful employment” rules proposed to go into effect later this year, repayment rates will be an important metric in determining the amount of federal aids and loans a college can accept.)

As we've reported previously: Strayer says its repayment is 55.4 percent. The Ed Department claims it’s 25 percent.

Strayer defended itself on a conference call with analysts and has claimed the department made an error. As part of the call, Strayer prepared a two-page sheet in an effort to show how it did its calculation.

Much of this is complex with plenty of nuance. An important key to understanding the discrepancy, Eisman insists, is in a footnote on a “Repayment Rate Analysis” chart Strayer has posted on its website.

The footnote shows that as part of its calculation, Strayer used loans with an “RP” code, which means the loan is in repayment.

Here’s the problem, according to Eisman: Those loans include delinquent and interest-only loans, which are not part of the government’s proposed equation for calculating its repayment rate.

Matt Snowling, an analyst for FBR Capital Markets, writing in a report today, takes it a step further when he says without mentioning Strayer specifically, “Using the RP codeto calculate an institution’s repayment rate would result in overstating the school’s repayment rate as defined by the ED, in our opinion… We believe the overstatement could be significant considering that delinquent loans can account for 30 percent, or higher, of loans entering repayment in the first one to two years.”

He adds that “because of the inability to adjust for delinquent and non-principal-paying loans,” he doesn’t believe “an institution would be able to accurately measure its repayment rate.”

Meanwhile, Eisman says, “I find it impossible to believe that when Strayer did its conference call that it did not know this RP category included delinquent loans.”

Strayer CEO Robert Silberman told me he did, but that based on the amount of time a loan needs to be delinquent in order to be counted as delinquent makes him believe that “delinquent loans will not be the dispositive issue here.”

In the end, if there has been a math error he still believes (as he has from the beginning of this controversy) that it will be in his favor.

Eisman thinks otherwise.