Thursday, June 24, 2010

The Dumbest Thing I Read Today - Tom Matzzie

I was going to title this post "Tom Matzzie is an idiot,"  but I don't love starting internet flame wars, although it seems that Matzzie clearly deserves it in this case.  Felix Salmon wrote a coherent post debunking Matzzie's shit-sandwhich of an article, which attempts to discredit Steve Eisman's thesis against the for profit higher education companies by demonizing Eisman and short sellers in general.   The only problem is that Felix's post was too kind, and didn't make an emphatic enough point.  Felix calmly slapped aside Matzzie's mosquito of a claim that Eisman has a conflict of interest - in Felix's words:

"A conflict of interest happens when you have two different interests which are in conflict with each other: I see no conflict of interest at all here. To the contrary, I see an alignment of interests: Eisman has realized that if the government does the right thing, then he’ll make money, and so he’s more than happy to show the government everything he’s been able to find out about these companies."

Here's the point - since it seems that many people still have trouble with this simple concept:  it doesn't matter who wrote the article or made the argument. It doesn't matter what their underlying position is.  What matters is WHAT THE ARGUMENT IS.  So, in this case,  unless you are disagreeing with anything Steve Eisman is saying, it makes not an ounce of difference that he is short the stock, that he works for a hedge fund, that he bet against subprime mortgages, or that he likes comic books.  It doesn't matter if Steve Eisman is a vegetarian, or if he only eats candy bars.  It doesn't matter if he didn't graduate from high school, or if "Steve Eisman" isn't even his real name.   It doesn't matter if he's a democrat, republican, socialist, capitalist, illegal immigrant, or if his parents came over on the Mayflower.  What matters is his thesis, which, of course, Tom Matzzie didn't make a single mention of.

Although I personally think Eisman makes a pretty good case, it's irrelevant - Matzzie didn't even bother to take on a single one of Eisman's claims or data points (from Eisman's testimony):  

"The for-profit education industry accounts for 9% of the students, 25% of all Title IV disbursements but 44% of all defaults. And the President of the largest for-profit institution is paid nearly 25x the  compensation level of the President of Harvard. There is something wrong with this statistical  progression..."

"The bottom line is that as long as the government continues to flood the for profit education industry with loan dollars AND the risk for these loans is borne solely by the students and the government,  THEN the industry has every incentive to grow at all costs, compensate employees based on  enrollment, influence key regulatory bodies and manipulate reported statistics – ALL TO MAINTAIN ACCESS TO THE GOVERNMENT’S MONEY..."

"The core of the problem in both the subprime and the for-profit education industries is a problem of incentives. In subprime, brokers were incentivized to make as many loans as possible because they were paid on volume. They faced no risk of loss due to bad  decision-making because the loans were sold off to investors. In for-profit education, every segment of the institution is incentivized to enroll as many students as possible – recruiters are paid on volume, instructors are compensated based on completions, and executives and shareholders are paid based on growth. None bear the risk of loss should the students not get their money’s worth or even worse, default on their loans. The incentives to grow far outweigh the incentives to educate. And thus, like in subprime lending, rather than having a fundamentally sound industry with a few bad actors, you have a fundamentally unsound industry with few good ones."

Matzzie started his column with the attention getting intro: "Sometimes the ways of Washington, DC are truly baffling."

Indeed, Mr. Matzzie - it is truly baffling that people like you are still able to raise money to accelerate the spread of ignorance amongst the population.  A big fat sarcastic "Thanks" to all you're doing to help dis-educate America.


disclosure:  no positions in any of the companies Eisman mentioned, or any education related companies.


Yangabanga said...
This comment has been removed by the author.
getyourselfconnected said...

I would say that we have a argument on HFT, but on this you are 1000% right. I see no issue at all.

But What do I Know? said...

Actually, you could have titled the post Tom Matzzie thinks we're all idiots--he probably doesn't believe his own bullshit. . . just practices it in front of the mirror.

Anonymous said...

"Indeed, Mr. Matzzie - it is truly baffling that people like you are still able to raise money"

But how surprising is it, really? After all, the point is that there is a lot of money at stake. Is Matzzie really as stupid as he represents himself? Isn't it equally plausible that he is just corrupt? This "Accountable America" - grass roots or astroturf? Or maybe a little of both: grass roots with a side of astroturf, when he needs the money.

Transor Z said...

I confess I never heard of Matzzie before the link in your post. Please don't link to him anymore. Reading his post made my head hurt and the voices come back.

Kid Dynamite said...

Ah yes, Transor Z - that is another dilemma. Do you just ignore stupidity, and not publicize it - or do you call it out? I had also never heard of Matzzie, but i think he has some heft, and thus, deserves to be debunked.

Anonymous said...

I left this comment on his site but it was quarantined for moderation and I don't expect they'll publish it:

What's your point?

He's a short-seller? So what? He's not pretending otherwise and he's playing according to the rules. It's like seeing a twenty-dollar bill on the ground and no one around. The money is there for the taking. If you decide to pick it up, fine. If not, fine.

You, on the other hand, are missing the point. Look at the facts presented ABOUT THE EDUCATION BUSINESS:

9% of the students
25% of the government funds
44% of the defaults

It really is that simple. These companies deserve to have their stock prices smashed. The only reason they're so inflated anyway is because "investors" see how easily the government is duped into provided easy, guaranteed profits. Just like that twenty-dollar bill. The money's there for the taking, only in this case, it's yours because it was forcibly taken from you in the form of taxes and it's being given, without your consent, to profiteers who provide "services" of dubious value.

getyourselfconnected said...

I took the day off to go phishing, I mean fishing in the mighty Merrimack river today and I have some pics up if you are interested in that kind of stuff.

Bernard said...

I agree with everything you wrote in your post. I will say the Steven Eisman goes out of his way to avoid direct comparisons between for-profit and not for profit education. For example, he compares industry growth to the historical
rate of traditional post secondary education" and the operating margin vs. other companies that receive major government contracts".

There is a big problem with the government guarantee of student loans, but I get nervous when people attack "for profit" companies and ignore state run institutions.

Kid Dynamite said...

sure bernard - and someone wishing to argue the opposite point as Eisman has to make arguments with data and logic, not just attempt to nullify his arguments by attacking him personally or attacking his motives. attack the LOGIC - attack the DATA! attack the THESIS!

Daniel said...

What are some of the symbols so I can short them tomorrow?

Anonymous said...

Per Eisman, ""The bottom line is that as long as the government continues to flood the for profit education industry with loan dollars AND the risk for these loans is borne solely by the students and the government...". This seems to me to be the major problem with Eisman's short. He is depending on the gobvernment to do the right thing. I have never made any money betting on that. Even whent he government opens an investigation, their track record is attrocious. See Einhorn's book re: Allied Capital, for ahow long it can take for the government to do what is right. Does anyone disagree?

Kid Dynamite said...

yep - if the rules don't change, the behavior (and the profits) probably won't change either. Eisman acknowledged that point in his Ira Sohn presentation several weeks ago.