Obama Deals Stunning Blow to Bank Subsidies on Student Loans, and Sallie Mae Stock Soars
By Jane Hamsher
March 30, 2010
When President Obama signed the Student Lending and Fiscal Responsibility Act today, it dealt an enormous blow to Wall Street banks. He deserves huge props for that. I’m not sure people know how big a victory it was. Sallie Mae spent $3 million on lobbyists last year, and got none of what they wanted. Zero, zip, nada (largely because lobbyists like Tony Podesta and Jamie Gorelick screwed up, but we’ll get to that later). Nonetheless, Sallie Mae’s stock soared to a 52 week high upon passage of the bill. His student loan reform package represents, in essence, a “public option” for the student loan system, and demonstrates why proponents were fighting so hard for the same thing in the health care bill.
What Obama put an end to was not “student loans,” but a giant corporate welfare scam that subsidized the losses of private lenders like Citigroup, JP Morgan and Sallie Mae, who padded their profits by jacking up fees before unloading them on the federal government. Those fees could easily double the loan amounts that students eventually had to pay off.
The federal government was already subsidizing private student lenders with the guarantee that they would absorb the losses if students went into default — a classic “privatize the profits and socialize the losses” program of dubious value even when the banks were lending their own money. But in 2008, when the secondary market for student loans dried up, the government began propping up the industry with the passage of the Ensuring Continued Access to Student Loans Act (ECASLA), which provided $112 billion to buy up the loans of private lenders. The banks were no longer using their own money to make those loans. Jon Walker called it “one of the most corrupt forms of lemon socialism ever created,” noting that “the government stepped in to bailout a fundamentally unsound industry that has been for years wasting billions in taxpayers’ money.”
Meanwhile, the government was also offering direct student loans — as opposed to using Wall Street banks as a pass-through. And in 2006, George Bush’s budget report found that for every $100 lent by private lenders like Sallie Mae, the cost to the government was $13.81, whereas through the direct loan program it was $3.85. There is simply no way you can make an honest “fiscal responsibility” argument for the perpetuation of private government subsidized lending, as DeMint and Beck have done. Absolutely none. They retreat in those moments into a philosophical opposition to “big government,” but their fantasy utopias require that taxpayers subsidize Wall Street banks at ungodly multiples.
Fortunately, Obama decided to roll the dice. Whether it was because he didn’t want to piss off students at 12,000 community colleges across the country whose institutions badly needed the money, or because he wanted to cannibalize $18.5 billion to pay for the union deal on the excise tax, or because of pressure brought to bear by campaigns like ours, or just because it was the right thing to do, or all of the above — he did exactly what he said he was going to do. There was no “Sallie Mae compromise,” something that lobbyists like Podesta and Goraleck were pushing for, which would have allowed the big banks to continue to make loans and then sell them to the government within 100 days — again, at $75 a pop.
Read the full article at:
http://fdlaction.firedoglake.com/2010/03/30/obama-deals-stunning-blow-to-bank-subsidies-on-student-loans-and-sallie-mae-stock-soars/
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