For short sellers, the pickings aren’t quite as obvious as they were in 2006. But they’re still pretty good. Muni bonds, for instance, are a disaster waiting to happen. But the juiciest short — akin to the subprime lenders during the housing boom — are for-profit colleges. They came to my attention a while back when Steve Eisman (a hedge fund manager who made a fortune shorting the housing market and was, as a result, one of the stars of Michael Lewis’ Big Short) started publicly dissing them. Here’s an article he wrote, titled Subprime Goes to College, from June of this year.
The basic thesis is that for-profit higher education suffers from a bad set of incentives. Unlike a typical private school such as, say, New York University, a for-profit college worries less about its ongoing reputation with alumni than about shoveling in as many students as possible and financing their tuition with student loans. The result is a far higher student loan default rate than for other types of colleges.
The industry milked the system for $26.5 billion in federal aid last year, up from m $4.6 billion in 2000. Taxpayers pick up the tab for all those deadbeat graduates, while college administrators and stockholders reap the rewards.
The federal budget being what it is, this seems like an obvious place for a little regulatory oversight. Like this:
For-Profit Colleges Fall on Business Practice Concern
Aug. 3 (Bloomberg) — For-profit education stocks declined in the U.S. after a Government Accountability Office probe of the industry found recruiters lied to entice students and encouraged them to commit fraud to qualify for aid.
Education Management Corp. and Bridgepoint Education Inc. helped send an index of 12 education companies to a 4.5 percent loss at 4:01 p.m. New York time. Recruiters at 15 unidentified colleges studied by the GAO, Congress’s investigational arm, misled potential students about the costs, duration and quality of their programs, according to a report obtained by Bloomberg News that will be released publicly tomorrow. The shares retreated in six of the last seven days, losing 6 percent since July 20, on concern the government will reduce student aid for some programs. Apollo Group Inc., owner of the biggest for-profit university in the U.S., has lost half its value since Jan. 16, 2009, data compiled by Bloomberg show.
“The main bear case is that they’re fraudulently recruiting people,” said Robert Kean, a trader at Kern Suslow Securities Inc. in New York. “Whenever you’re going in front of Congress you have a huge overhang for your stock.”History teaches that when a stupidly-run industry starts to fail, the bottom is frequently zero or thereabouts. That’s where almost all the subprime lenders ended up in 2009, while most of the big banks and homebuilders fell by 80% or more. So the fact that the education stocks down a bit from their highs isn’t a barrier to shorting them — though availability of shares might be.
Here’s a list of major for-profit higher ed companies. Not everyone on this list is equally culpable. But if a few blow up, investors will dump the rest, so for a while it won’t matter which you choose.