This blog used to be about debt. Now it's about a few more things. But really, it all comes back to debt. Trust me.

Thursday, January 18, 2007

Everything Is Connected

Funny how related events happen in pairs. Sallie Mae, which you may know as the country's largest student loan lender, announced earnings to Wall Street today, just one day after congress tried to halve student loan interest rates over 5 years.

It wasn't pretty. And it had nothing to do with the watered down bill congress passed. Last year's quarterly earnings per share: 96 cents. This year's quarterly earnings per share: 2 cents. Ouch.

Why? Because their derivatives and hedging business took a $245 Million dive.
Uh. Derivatives and hedging?

And now a brief summary of Sallie Mae's business model:

Case 1
Sallie Mae loans Mildred money.
Mildred pays the money back over many years.
Sallie Mae makes tons of money.

Case 2
Sallie Mae Loans Franky money.
Franky pays his bill for a couple of months.
Franky gets wise and decides to move to Micronesia, where no debt collector can find him.
Sallie Mae makes tons of money.

That's right. Even if you default on your student loans, the government guarantees the amount and the interest you would have paid to student loan lenders.

After many years of perfectly legal lobbying, congress made it virtually impossible for student loan lenders to lose money.

My momma always told me to stay away from derivatives and hedging.

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