Outrageous -- Hedge Funds Using Obama Administration to Gut Their Short-Selling Targets

Living in Phoenix I know a number of people who work for Apollo (University of Phoenix).  They have obviously been appalled by the Obama war on for-profit colleges and the egregiously-flawed report that came out last year.  Several have told me they have complained for a while that certain hedge funds were pushing this initiative in order to make money off of short positions on their stock.  I thought this was a bit paranoid, but now the accusation is coming from third parties, even those on the Left:

A proposed regulation from the Education Department threatens to devastate for-profit career or trade schools, but one thing is even more controversial than the regulation -- how it was crafted.

Education Department officials were encouraged and advised about the content of the regulation by a man who stood to make millions if it were issued.

"Wall Street investors were manipulating the regulatory process and Department of Education officials were letting them," charged Melanie Sloan of a liberal-leaning ethics watchdog called Citizens For Responsibility and Ethics in Washington....

Among others, Sloan is referring to Steven Eisman, a hedge fund manager and a figure in the book "The Big Short," who testified in the Senate against for-profit career or trade schools, attacking them as "fundamentally unsound."

At the same time, he was betting that the stocks of those companies would fall, a practice known as short selling. "Making sure that they were going to be defamed and that their value was going to be depressed," said Harry Alford, head of the National Black Chamber of Commerce, who worries about the schools because they serve many minority students.

Simultaneously, through emails and conference calls, Eisman was advising Education Department officials -- and one White House adviser -- in detail on how best to write the new regulation, which he estimated would reduce the schools' earnings by as much as 75 percent.

The proposed regulation from the administration is aimed at what are known as career or vocational schools. The rule would cut federal aid to programs where student debt levels are deemed to be too high and where students are struggling to repay their loans.

In other news, everyone seems A-OK with kids in not-for-profit universities running up $200,000 debts to get such lucrative, workplace-ready degrees as women's studies, comp. lit. and poetry.

  • morganovich

    this seems like a terribly poorly substantiated claim.

    seems more like "blame hedge funds, no one is sympathetic to hedge funds"...

  • Clouse

    Looks like it backfired on them. Apollo is up about 15% since the announcement. The other for profit stocks are up hugh, too.

  • Mark

    The logical flaw in the argument was the rule that if the education cost too much they could not get federal funding.

    Turns out if non-profit and state schools were forced to use the same formula most of them would have to shut down too.

    Grossly unfair.

  • txjim

    When this story first broke, I heard about it in the context of short sellers. It made sense to me but I think the game plan fell apart on timing due to the fortunate incompetence of the political crooks trying to do the bidding of the short selling crooks. Too many counter-crooks or non-crooks figured out what they were up to before they were able to hit the launch button. For a good blog on short sellers using compromised politicians and media to pump-n-dump or short sell, go here

    The Day Hell Froze Over, And Flying Pigs Swarmed CNBC...(link is http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/EntryId/792/The-Day-Hell-Froze-Over-And-Flying-Pigs-Swarmed-CNBC.aspx )

    also check out
    http://www.deepcapture.com/

  • txjim

    ps - should have made it clear I'm referring to NAKED short selling, not simply short selling.

  • IgotBupkis, President, United Anarchist Society

    >> poetry.

    What, you think you can't get a job as a poet?

    Of course you can.

    The only problem is the pay scale is about 1/200th minimum wage.

  • Stephen

    Isn't what Eisman was doing essentially the same thing as insider trading, and shouldn't he therefore be in jail now?

    That said, I heard a piece about for-profit schools on some public radio show a couple weeks or so ago. The show was saying that their business model had changed in recent years, largely based on changes in the regulatory environment, such that many more, if not most, of their students were now ones who were least likely to be able to succeed. These students were gov't subsidized or something, and the schools would gladly take their money, but they got the subsidies precisely because they were otherwise unprepared to handle that level of education, the responsibility of keeping up on their own without a physical classroom setting, etc. I know I'm explaining it poorly, sorry; I recall the sense of it, but not enough detail to repeat it clearly and accurately.

  • morganovich

    i was under the impression that far from trying to regulate these schools out of existence, the hedge fund managers were trying to stop government groups like ginnie mae from making preposterously unprofitable (and subsidized) student loans to people who were never going to be able to pay them back.

    the whole fraud argument around these schools is that they lie about job prospects, get you to take out a heavily subsidized government loan so that they get paid, then you either fail to graduate or fail to find a job because they lied to you about hire rates.

    absent these heavily subsidized loans, these businesses would fail. apollo gets 77% of its revenue from title IV loans.

    if the hedge funds were looking to get short and regulate a company out of business for no reason other than profit, i'd be the first to cry foul, but in this case, they are trying to close a governmental loophole that is allowing these "schools" to survive utterly on government money while defrauding students.

    i view this as similar to calling for an end to ethanol subsidies. they are just arguing for the discontinuation of a ruinous government policy that is causing a market dislocation and shunting costs onto taxpayers and profits onto the fraudsters while damaging would be students.

  • Stephen

    @morganovich: From the article on public radio a couple weeks back, it sounded like these schools started out well. But something changed a while back--presumably the introduction or expansion of these gov't student loans--which resulted in a change in the schools's business models to chase this new money. So it's not that the schools in themselves are bad, per se, and that they would fail without students getting these loans. But they would probably have to shrink to their previous size and profitability if/when the loans went away--which would probably be a good thing for their effectiveness and student success rates. (Again, the details of the article are fuzzy in my memory at this point, but this is the sense I got from it--assuming the article was accurate to begin with.)

  • morganovich

    "But they would probably have to shrink to their previous size and profitability if/when the loans went away–which would probably be a good thing for their effectiveness and student success rates"

    but terrible for their stock prices which seems to be the more impactful driver.

    if you want to get a good overview on some of this, you might want to try reading the "seeking alpha" investment site.

    these companies have been widely viewed as frauds based on federal welfare for some time.

  • ParatrooperJJ

    I am for the rules as long as they apply to all schools, not just the for profit ones.