Wednesday, March 17, 2010

Ponzi Never Dies: SLM

"SLM Corp., the largest U.S. student-loan company, raised $1.5 billion in the bond market, paying more than it charges some borrowers to begin addressing $11 billion of bonds maturing through next year. 

Sallie Mae, as the company is known, sold $1.5 billion of 8 percent notes due in 2020 at a yield of 8.25 percent, according to data compiled by Bloomberg. Stafford federal loans disbursed between July 1, 2009, and June 30, 2010, have a fixed interest rate of 5.6 percent, according to the company’s Web site."

Ok, so they are paying a higher interest rate than they receive.  They'll make up for it in VOLUME!  I kid, I kid - Sallie Mae has to do this because they need money.  In a way, it's understandable.  But the next few paragraphs are even better:
"With $4.51 billion of bonds maturing this year and $6.44 billion in 2011, Sallie Mae is reestablishing access to unsecured debt markets. The offering may bolster investor confidence, lowering borrowing costs as the company will likely need to tap debt markets again, said Matthew Eagan, a money manager at the Loomis Sayles Bond Fund in Boston. 

“They’re in a virtuous cycle now,” said Eagan, who helps oversee $18.9 billion, including Sallie Mae debt. “People will see they can raise money in the market and they’re going to have no problem refinancing all these near-term maturities, pushing their cost of borrowing down.”"

A "virtuous cycle"!!!!!   That sounds like the Greater Fool Theory to me!  Monkey number two sees monkey number 1 buy SLM debt, and concludes, "Hey - that other monkey bought the debt - that must mean things are ok - there are clearly plenty of other monkeys out there who are likely to be willing to buy SLM debt, and as long as there are other monkeys always willing to buy this debt, I will get paid back on my debt.   It doesn't matter that the company would be hopelessly bankrupt if all the monkeys wised up and didn't want to buy this debt - as long as we don't run out of monkeys in the PONZI SCHEME, it won't fail!"

And so it continues...


 disclosures: no positions in the equity or debt of SLM or any related companies


Yangabanga said...

Seems like the right play is to short Loomis Sayles!

EconomicDisconnect said...

Well I guess the next logical step in Ponzi, is MORE Ponzi, or cowbell, I forget:
Bank Reserves to be a thing of the past

Well that should add a little fuel, yes?

It rained here (north of Boston) 9 inches and I had to take some alternate routes to get to work in Cambridge due to road closings. Unreal the weather lately, and all this week 60 degrees and sunny?

Kid Dynamite said...

GYSC - i can't believe that Bernanke comment about eliminating reserve requirements... i would swear it was an April Fools prank, but we're still a few weeks away.

isn't reducing reserve requirements essentially the same as increasing leverage? that's the solution? REALLY?!?!?!

James said...

Obama doesnt know that he has advisors that dont have any idea what is going on. We are years into this mess and Bernanke cant admit that the United States has a massive massive leverage problem that will eventually destroy our entire financial system.

But What do I Know? said...

Shhh--I've got some of this crap maturing in October--after that you can trash it all you want, lol.

JP said...

Hilarious KD - I had the exact same reaction to Eager's comment.

This is sad for those looking to invest in their education. The market will close that gap between 8% funding and 5.6% loans... I'm pretty sure I know which one will move more...

Kid Dynamite said...

i'm not at all convinced that student loan rates will jump, 1090rule - the government will eventually probably take over this market so that low loan rates can be maintained (kinda like FNM FRE!)

JP said...

KD - you are probably right - socialize it and leave every taxpayer on the hook.

And we Canadians are left leaning?
Funny how our mortgage agency was ALWAYS gov't backed, our education system was ALWAYS highly subsidized - that used to be a source of criticism.
US is looking more and more like us every day...
Now that you've got a sugar shack, I'd be happy to consider you an honourary (sic) Canuck.

Anonymous said...

This article is completely out of context of how SLM works. Federal loans have historically been funded by asset backed securities at rates below what they receive from customers. They currently put all their fed loans back to the Gov. The unsecured debt mostly funds their less regulated private student lending which charges customers much higher rates than 8%. They are comparing apples and oranges here.

Kid Dynamite said...

anon - that is an important clarification. thanks for bringing it up. I don't have the private loan rates on hand, but i'll trust your claim that they are made at higher than the 8% cost of funds.

you'll notice that i didn't dwell on that though. the key part of my post is that SLM cannot pay back its outstanding debt by any means other than issuing new debt. This is also known as a ponzi scheme.