Monday, May 08, 2006

by Ken Moser, Chairman of the Adam Smith Society

If the beginning of wisdom is the definition of terms, as Aristotle said,
then the head of America's largest student loan lender is quite the
philosopher.

As I recently found out.

As head of the Adam Smith Society of California, I wrote an article for a
couple of dozen newspapers talking about how Sallie Mae is the chief
beneficiary of a whole host of laws that outlaw competition for student
loans. And how that costs student loan borrowers billions of dollars a
year.

Not good.

Worse, Republicans were the ones behind many of these anti-competitive
arrangements. As a result, Sallie Mae had become what Fortune Magazine
calls the second most profitable company in America -- complete with CEO
Al Lord making more than $200 million over the previous 5 years.

Not because Sallie Mae was better, faster or less expensive; but only
because it was largely protected from competition. That is not what Mr.
Lord wanted to hear.

Soon after, I received several puzzling missives from the mysterious and
elusive Mr. Lord where he redefined all the terms and pretty much said
everything I thought I knew about student loans was wrong.

Let's see.

The so-called Single Holder Rule is the best - or worst - example. It says
that if all of your student loans are with one company, you cannot
refinance with another company.

Congress was set to outlaw Single Holder in December. But in the wee, dark
hours of a cold December morning a few days before Christmas, that
provision mysteriously disappeared from the budget deficit reduction bill.

And along with it, any hope of more competition, better rates, and better
service for the 30 million student loan holders.

Then Congress went two steps step further.

Led by Congressman John Boehner, then head of the House Education
Committee, now House Majority Leader, Congress effectively banned students
from locking in low rates for longer terms while still in school and took
the Single Holder Rule, single most anti-competitive provision in all of
American law since the enactment of wage and price controls in the earl
70's, and made it worse.

They said that one you refinance your student loans, you cannot do it
again. No matter if a different company offers better rates, longer terms
or better service. All at no extra cost to the government.

Imagine if someone tried to get away with that in the home mortgage
market. They would either go out of business, or go to jail for price
fixing. Or both.

Sallie Mae celebrated. Spokesman Tom Joyce told reporters the new laws
would make smaller companies "think twice" about getting into the student
loan business, and that student loans were never meant to be refinanced in
the first place.

It may be the Single Holder Rule to us, but to Sallie Mae, it is the
Golden Rule.

So that is what I wrote. I have to confess: I was not the one who figured
this all out. Everything I wrote had been reported in lots of other
places.

Fortune Magazine called Sallie Mae "predatory" and documented how Sallie
Mae is the largest contributor to Boehner and other key members of
Congress and depends on them to protect them from competition.

Dick Morris, yes that Dick Morris, wrote in his column that the lack of
competition for student loans was an "obnoxious rip-off."

Terry Savage, the financial columnist of TheStreet.com, says there is "no
way" borrowers should support Single Holder.

The New York Times calls it "Robbing Joe College to Pay Sallie Mae."

The Times Union of New York called it a "student loan shame."

And on and on and on. Then my own humble contribution: Where I wondered
how Republicans could be part of this anti-market scheme.

Then Lord spoke: Everything I knew was wrong! Starting with his salary:

"In the 8 years I was SLM's CEO my best salary and bonus year aggregated
$3.75 million and averaged less than $3.0 million annually," he told me in
an email.

"This was very generous compensation paid by SLM's shareholders, but less
than 10% of the 'more than $200 million salary and bonuses you cited I had
received over the last 5 years. Even a "big picture" economist can get
closer than that!"

Lord the philosopher redefined his compensation. The remaining 90 percent,
of course, was paid in stock options that are listed in all sorts of
public records and web sites. I felt embarrassed to point that out to Lord
in a later email, since he already knew. Heck, he was even using the money
to try and buy a professional baseball team, the Washington Nationals.

Perhaps I could get Lord to do my tax returns.

We at the Adam Smith Society do not begrudge profits. Far from it, we love
them. As long as they come from free competition in free markets. Which in
this case, they do not. Another point of contention between Lord and me.

So, in reply, I asked him all the questions: What about competition? What
about Single Holder? What about refinancing? What about all the sweetheart
deals with schools to buy their student loans? What about all the students
who cannot repay their loans because they cannot refinance them?

He wasn't buying any of it:

"You asked many questions in your recent E mail premised principally on
the notion that borrowers should be able to refinance their taxpayer
guaranteed, taxpayer subsidized, below market rate loans in the open
market without limitation and presumably without regard to the
government's ongoing economic interest in that loan."

In college rhetoric classes, we call that the "straw man" argument. I said
no such thing. But that did not stop Lord from setting his straw man on
fire.

"I disagree with your premise. So long as the government retains that
economic interest it rightfully sets loan terms. The student signed loan
documents to acknowledge and agree to those terms that you find so
objectionable. Those contractual terms formed the basic economic
understanding between borrower and lender when the loan was made. Now you
want to change the fundamental terms of the deal! Do you also endorse
retroactive changes in tax law?"

No, it's more like we caught you and your buddies in Congress using
federal law to give you and unfair advantage. Now we would like you to
stop.

Lord continued:

"The terms of that loan allow the borrower to refinance the loan at any
time without a government guarantee, just like the refinancing
opportunities you cite in your article that are available on their car
loan and their mortgage loan."

In other words, new graduates can pay off their $100,000 student loans all
at once any time they like. They might as well buy a professional baseball
team while they are at it.

"I must say you seem to have a remarkably low anguish threshold for
economic inequality, (worst government policy since Nixon's wage and price
controls?!!!). Please help me understand who is the victim of this
dastardly government policy?"

That's easy: The 30 million parents and students who are paying more for
student loans than they should. How students not only have record levels
of student loan debt, today they are less able to manage it because you
and your allies have outlawed competition, largely for the benefit of the
large student loan lenders, of which Sallie Mae is the largest by a factor
of four.

"I volunteered to answer your questions yet they all stem from the faulty
premise upon which you based your entire article so there is little else
for me tosay. Ironically, though I support the government's right to
regulate the transferability of its guarantee, we have not lobbied to
retain the single holder rule, of course you asserted otherwise."

This is quickly going from disagreement to disingenuousness. Then what are
your 70 lobbyists doing back in D.C. when they play golf with Boehner and
others?

In an earlier email, Lord chided me for not trying to contact him when I
wrote my article. So I apologized.

"While I thank you for your apology, it is not lost on me that you had so
prejudged the character you seek to defame, that you never tried to
contact me or my colleagues. And you probably wonder why the public
distrusts the media."

Defame? As the good book says, "speak the truth and fear not." Telling
unpleasant truths is not defamation. As to the public distrusting the
media, the only thing keeping this weird arrangement intact is the fact
that most reporters do not understand that competition for student loans
is illegal and costly.

As soon as they figure it out, Sallie Mae is going to have to compete for
business just like any other company. Get smarter, faster, better, less
expensive. Or go out of business.

We were getting nowhere. Even so, I tried again, asking about the lack of
competition, his monopoly power over his borrowers, and the like.

He was having none of it.

"I tried," Lord responded. "Obviously you do not want facts to cloud the
brilliance of your fiction. Please tell me you don't consider repeating
the diatribes of other equally uninformed writers of journalism. Yet that
was the extent of your research. Your search for truth ended with your
source, a source with economics dependent on retroactive legislative
change. Perhaps it was folly to hope a member of the Adam Smith Society
would actually attempt to examine the basic economics of the student loan
business before writing so transparent a political piece. "

"I did not appreciate your interpretation of my words. You might consider
the words of a great coach and sportsman, John Wooden, "We can disagree
without being disagreeable."

Or how about the words of that little know political philosopher: Me: "We
can disagree without being disingenuous."

As long as we do it in a free market.