Americans should brace themselves for the coming failure of one of the biggest banks in the country that does not have the word "bank" in its title. And no impressive polished brass safe in the lobby either. Why should Americans care about this bank? Because they own it! And its receivables exceed $1 trillion! How much of those "assets" are actually collectible is a valid question.
This is deja vu all over again. Remember when mortgage lenders required down payments of 20% from home purchasers? Time-tested lending practices assured successful outcomes for lenders and borrowers. Mortgage lenders wisely and correctly knew that home buyers would be less likely to default on their obligations if they had actual "skin in the game" in the form of real cash.
Alas, politicians unwisely and incorrectly decided traditional, sensible lending practices were stifling less well heeled prospective home owners from entering the market. They fashioned laws to deal with that contrived issue and soon down payment requirements dropped to zero. Further, verifiable loan documentation, forever a standard in the lending industry, flew out the window with the dodo birds. The replacement was "liar loans" no one bothered to check on. People who formerly couldn't qualify for a loan to buy a backyard shed were suddenly living in veritable palaces.
We know how that fiasco worked out. Lax lending led to the financial calamity that led to the government bail out of giant institutions to the tune of hundreds of $billions. The bailout wasn't a requirement . . . but it happened anyway. It also led to the election of Obama as POTUS. A double whammy on the American public. Wait a minute . . . make that a third whammy . . . no one went to jail for the crooked activities that ensued from bad lending practices.
Not content with losing mere $billions the next step up was to go for $trillions! (An aside: When I entered the financial business decades ago, I thought trillion was a made-up word with no real meaning.) Well, dear readers, we have reached the top of the stairs. Visualize the ascent to the hangman's platform and you will get the picture. The number of nooses dangling there is roughly equal to the nations' taxpayers because we will all pay for this crime against sanity.
Seven years ago the Obama administration took over 100% of the student loan business that had operated quite successfully for 1/2 a century in the private sector. Sallie Mae, a government sponsored agency, and hundreds of non-government private lenders, generally banks, made student loans that were highly likely to be repaid. That was not good enough for today's socialists, aka Democrats, who proclaim the right and the smarts to run everything. With respect to the former, uninformed voters elected them into office and, with respect to the latter, they proved themselves inadequate for the job.
In 2010, Obama declared that all student loans would be made by the government, using the Department of Education as the lending vehicle. Who knew the DOE would become a virtual bank? And while Dodd-Frank legislation was established to rein in big banks and prevent them from doing dumb things, the Department of Education is exempt from that law. Nor does DOE answer to other regulators like the SEC, FDIC and IRS. No one is watching the store . . . or the cash register.
The government (I hate using that phrase because, according to the Constitution, we are the government) wanted more loans made to more students whether or not they would qualify for the debt under more normal lending practices.
Adding to the suspense about repayment capabilities of student borrowers and/or their families, Bernie Sanders, quickly followed by Hillary Clinton, ranted during the run-up to election day that college tuition should just go away. No wonder, amongst millennials, Bernie became a cult in his own time! Now that the Democrats have planted the seed that students shouldn't be charged for higher education, how many will take that as a license to default? I can hear the excuses now. They will all start with, "But Bernie said . . .
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Here's a line from an article in the Wall Street Journal a while ago: "More than 40% of Americans who borrowed from the government’s main student-loan program aren’t making payments or are behind on more than $200 billion owed, raising worries that millions of them may never repay."
Former Texas governor Rick Perry, running for POTUS, declared his intention, if elected, to rid us of three big budget government agencies, one of which was DOE. Too bad he won't get the opportunity to do that, and it's unlikely Trump will follow up on that notion. So we are stuck with the probability that the bank, masquerading as an agency for student learning, will collapse under the weight of unpaid debts.
Will anyone say a word over us when we reach the end of the rope?
Bob was born in Toronto and began his financial career as a trader on the Toronto Stock Exchange. He relocated to California and became SVP and CFO of a $multi-billion diversified financial entity. He served on the board of many companies in Canada and US. An avid yachtsman, he owns a twin diesel ocean going vessel once featured in Architectural Digest magazine. He maintains a hockey web site. “slapshotreport.com” and currently resides in Sausalito, California.
