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This Year’s Big Short

by John Rubino on August 5, 2010 · 22 comments

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.

  • Brutlstrudl

    I can’t see speculating right now.

  • Brad

    Could you tell us there is ETF or index of 12 education companies that they mention?

    • John Rubino

      Brad, there isn’t one as far as I know, so you have to short those stocks individually.

  • MarkinPhx

    Will the price of these stocks go down? Most likely. The established government-led educational institutions now recognize the threat that is for-profit education and they are on the attack. And like any other industry that the government controls, they won’t let go of their power.

    And you wrote an attack piece in support of this.

    Do you have any personal experience with online education?

    In my personal recent experience with for-profit and public university online programs I have found that the for-profit experience has been superior. I did not experience any of negative items described in the report, although I did encounter a much more bureaucratic response from the public university.

    The schools on your list of institutions to short are American companies that are on the forefront of changing the educational model of this country, and around the world, which is sorely needed. Are they perfect? Certainly not! Will they survive the mounting attack from the supporters of government monopoly education? Some will. Unfortunately it will be like other industries in the U.S., where the government will decide the winners and losers. And we will be the losers.

    • John Rubino


      You’re right that in theory the private sector should play a bigger role in education. But this bunch seems to be scamming, based on the default rate on their student loans. Here’s an article that sheds some light on their practices:



  • MarkinPhx

    How about the report itself: http://www.gao.gov/new.items/d10948t.pdf

    This is an amazing hit piece. They lumped together the biggest named schools and some local trade schools like Joe’s School of Beauty and then painted them all with the same strokes. And they were vague in the extreme to ensure that people would assume that the whole group would be labeled ‘Scammers’. Goebbels would be proud. Read the report and you can see that maybe UOP was doing 56 in a 55 zone, but the press about the article , including yours, makes it seem like they’re clubbing baby seals.

    • John Rubino

      Fair enough. I’ll read the report over the weekend and if it shows the for-profit schools to be blameless, I’ll do a column saying so.

      But unless student loan default rates are also being misstated in the press, it’s hard to see how these companies get through the next year without major changes in their business practices. Here’s part of a recent New York Times article:

      “Especially alarming were the numbers for two-year and for-profit colleges, with 40 percent of students who borrowed loans to attend for-profit institutions defaulting since 1995. This data comes just when for-profit colleges are being subjected to federal scrutiny in part because of the amount of federal financial aid they draw and the amount they spend on expenses other than teaching. “While for-profits educate less than 10 percent of students, those colleges’ students received close to a quarter of Pell Grant and federal-student-loan dollars in 2008,” according to the Chronicle article.

      In 2009-10, the average for-profit charged about $14,000 in tuition and fees while the average community college charged about $2,500. In total, $50.8 billion worth of loans were in default by the end of the 2009 fiscal year, compared with $39.1 billion at the end of the 2008 fiscal year.”

      And this from the Chronicle of Higher Education (possibly the same article quoted by the Times):

      “According to an analysis by the Project on Student Debt, default rates at 183 for-profit institutions were at least 15 percentage points higher for the three-year window compared with a two-year window. That suggested that the colleges were aggressive about keeping defaults down during, but not after, the government’s tracking period. Those 183 colleges enrolled 9 percent of all students attending for-profits. By comparison, the analysis found, only 20 colleges from other sectors saw similar increases.

      Other analyses have suggested that many more colleges, including more campuses owned by the Apollo Group, Corinthian Colleges, and Kaplan, would run afoul of the new rules, based on how much higher the colleges’ rates were when defaults occurring in that third year were counted.

      “Schools are terrified of what their three-year rate will look like,” says Christopher Miller, a debt-management consultant for United Student Aid Funds.”

    • John Rubino


      I just read (okay, skimmed) the government report, and didn’t find it useful in separating the good for-profit schools from the bad because it doesn’t name names. No doubt it’s lumping fly-by-night massage schools with legitimate operators but it’s still not clear to me who the latter are. Do you know if anyone has done a comparison of the publicly-traded for-profits?

      Here’s link to the presentation by Steve Eisman. He’s obviously talking his book since he’s short these stocks, but if you have the time and the inclination to look it over I’d be interested in your thoughts. http://www.marketfolly.com/2010/05/steve-eisman-frontpoint-partners-ira.html



  • Brad

    Using Put Calls as far out as we go in the money seems the best course on the larger names mentioned abovelike you spoke about in How to Profit from the coming real estate Bust!!!

  • QQQBall

    At some point nursing skools have to be a short. Everyone and his sister is planning on becoming a nurse. The whole aging population, increasing medical demand, etc., is somehow going to manage to create an oversupply of nurses… or the healthcare lobby will get visas for 1/2 of the SE Asian nursing corp to come here and work cheap.

  • Brad Thrasher

    Fascinating. Where’s the deficit hawks screaming about government funding $14K for a massage certificate that cost $520. at the local community college.

    I turned down a job offer from one these private schools to teach a course for paralegals. The costs were similar to that found for massage therapists. The curriculum didn’t even include a section on calendering!!!

    Nothing like certifying someone as qualified to work in a law office who doesn’t know deadlines!!!! But hey, they were all pretty good at holding their noses in the air and talking down to people, lol.

    Meanwhile, I’m still trying to figure out the best short opportunity. Not a big guy who can afford to take a dozen positions. And the market may have already factored in Apollo’s exposure.

    All the best,

  • Brad Thrasher


    This exactly why we need some way of tracking investments of congress and congressional staff in real time. As you may know, congress and congressional staff are exempt from insider trading laws.

    For example, if the Inspector General at the Department of Education, Kathleen Tighe, is taking a long or short position on say Capella Education, that would be good to know.

    All the best,

  • MarkinPhx

    Thanks John.

    In addition to the report, take a look at UOP academic report. Compare them and their website to a state university. Are the numbers different? Including the default rate and completion rate? Yes. But consider that they are serving a very different and much broader demographic than most state universities. Are default rates in the Hamptons and the Bronx the same?

  • Brutlstrudl

    QQQBall,I don’t know about shorting healthcare just as the boomers are starting to retire. That would be like shorting Lionel Trains in the 50’s. Demographics is fate. Also, the Fed will do anything to keep the dow above 10,000 In Nominal terms it’s pretty easy to do and that makes shorting pretty risky. Good luck to you

  • Brad

    EDMC is Owned in part by Goldman who took them public a couple yrs ago!

  • Phosphorus

    2 MarkinPhx
    I have to admit the point you make — online education is not evil per se — is quite right.
    Just as much as the mortgage contract is not an evil thing in itself.

    On the other hand, shorting real estate (and everyone involved) was an excellent idea for the last couple of years.
    What’s wrong if online education companies are a wonderful short?

  • Arctic Guy

    The best shorting idea I’ve heard in a long time! The bubble in fluff education has to be huge. Millions have gotten degrees in worthless subjects – degrees only governments will entertain as valuable.

    In the real world, a Master’s degree in social work is not even good toilet paper, it is too stiff and rubs one’s arse raw.

    This whole system will crash – big time.

    Thanks John!

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  • zev

    ‘for profit’ schools are a scam? non-profit schools are also a scam. how do you justify selling 40k a year tuition for 2 years (80k) to get a professional school degree in anything ..”? you promise people jobs that pay a lot of money. most of which comes from wall street. columbia business school head, glenn hubbard thinks a lot of stimulus funding should go to educations to help re-train people for the new economy? what in hell is he talking about?

    people do what they do and learn on the job if they need to do something new. all this business about ‘training’ people for service sector jobs is the business of milking the government for loans for professional and higher education schools.

    how’s this for a non-scam? ALL childrens education and day care should be paid for buy the government for freee!!! and meanwhile the government should not SUBSIDIZE any graduate education with loans, and all college education is subsidized with whatever grants the federal government can afford instead of the scamulous 100B a year in loans to college degree students many of who can never pay them back.

    AND how about they change the bankruptcy code to alllow people to discharge educational debt. blame clinton for that piece of higher education bubble blowing genius. 40k a year for grad education? this is the average income of the american household. ….the non-profit higher education business is largely a scam. and the academics are there to defend it.
    let them eat the textbooks they author.

    • John Rubino


      Agreed, other than community colleges and some state universities, all of higher ed seems ridiculously overpriced and over-hyped. But the student loan default rate is way higher for some (though not all: see Mark’s comments) of the publicly-traded for-profits, which implies that they’re admitting students indiscriminately and leaving taxpayers to pick up the tab. They’re asking for trouble and creating a nice short opportunity. But it doesn’t invalidate private sector education any more than Citi and Bank of America invalidate the concept of banking. It just means you have to have a viable, sustainable business model.

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