This writing "Calling for Revolution in America, It's Not Just Me" is my fundamental manifesto.

Society is like a stew. If not stirred frequently, the scum rises to the top.” – Edward Abbey

Sunday, June 5, 2011

For Profit Educators: Pigs at the Trough

James Chanos is one of the best out of the box thinkers in the investment world. He predicted the Enron house of cards -- I highly recommend the docu-movie "Enron: The Smartest Guys in the Room" -- and the mortgage disaster. In 2009, he presented another concept entitled "From the Trough to the Slaughterhouse," in which he proposes shorting companies with high profit margins that feed exclusively at the government trough.

In his presentation, you will see the primary flaw in his theory at least at the time, namely that he incorrectly saw Presidente Hopium as the "new sheriff in town," who would clean up the abuses of Bush deregulation.   How much more wrong could he have been. In March 2010, he finally admits that Hopium is nothing but a stooge on the health care industry. I figured out that he was not the hoped-for sheriff when he started making his appointments. He brought criminals, fools and sycophants into his Gumnut. Rather than reign in abuses,  Hopium enabled them and funded them, allowing hundreds of billions of dollars to be looted and stolen by pigs at the trough in one of the greatest financial grabs in history. This is now ongoing.

One of the most sickening kleptocratic rackets mentioned by Chanos to come down the pike are the for-profit "educators." It's a scheme that is almost totally enabled by Government funding via Title IV loans. The loans fit the modern American model of getting people heavily in debt, who then have little ability to pay the loan back.  This has been described as "Sub prime Goes to College".

This scheme has been well documented by hedge fund investor and short seller Steve Eisman. His presentation can be gleaned here.  Although it is superficially unfortunate that the counterpoint gauntlet has to be taken up by hedge fund managers like Eisman and Chanos, that is the reality of American discourse today. The same thing happened when short seller Chanos took on Enron.  Except for a few lone wolves like Ralph Nadar, if someone isn't talking his money book,  then the unrepresented public interest has no voice.  Unfortunately, highly intelligent short sellers that see the issue as it is, can and will cover their positions and thereby abandon the public interest. This has enabled the lobbyists representing these rackets to play the left against the right on the issue and ultimately get their way.

This was evidenced when progressive watchdog groups (specifically CREW and Move On) were co-opted by industry lobbyists. They did so by making Eisman's role in the reform process the core issue, while ignoring the facts and thinking as put forth by Eisman, whose case I present using some of his charts below. These tactics are often used when facts and arguments are powerful. Not once was I able to find an effective rebuttal of any of the facts and data put forth by Eisman. Instead, it was personalized ad hominems. Blood sucking lobbyists use this to exploit left-right politics and just attack the messenger ["Why are Progressives Fighting Student Loan Reform"].

Argumentum ad hominem and ad personem

I am sure that in the minds of the good folks at CREW and Move On, these ad hominem tactics were acceptable, as they just felt they were defending the "opportunity" of lower income youth to pursue an education using debt and at the same time were supporting the teaching profession. In the minds of ideologues from the right, they support little or no regulation, so why would they care about the facts of how the industry operates?  The result is the classic kleptocratic marriage: Abuses via a trough of government money provided to a corrupt, lightly regulated, wrongly incentivized industry.

Sure enough this week  a watered down reform called the "gainful employment rule" finally emerged from the DOE. In a nutshell, it stated that if these rackets could show that at least 35 percent of their students were repaying loans for three of the next four years, the college could continue to participate in Title IV after 2015. Until 2015, it is" Katie, bar the doors." What a joke, 35 percent repaying. Wow,  talk about a low hurdle. It says a lot about the value of the education received, doesn't it? Meanwhile, true to form, the Obama administration has increased Title IV lending for students by 27 percent to $104 billion in FY2012.

Although the for-profit educators represent only 10 percent of total enrollment, they account for 25 percent of Title IV lending. These companies use government funding to create one of the highest profit margin business in the world (chart 1) -- far, far exceeding other major companies feeding at the government trough. Instructional costs as a percentage of revenue is 39 percent. Self-serving advertising accounts for 19 percent of spending. Their model is getting government-subsidized, lower-income students into high-cost institutions (chart 2).  This government, debt-enabling gravy train has allowed these outfits to inflate tuitions higher and higher (chart 3).  This year, it's estimated to run about $14,000 a year for tuition on average.  To top it off, the top executives in these firms are compensating themselves beyond any reasonable standard (chart 4).

The performance of these schools in terms of keeping students around, or even graduating them, let alone preparing them for meaningful employment is poor. The next charts shows the churn and burn nature of these schools. The goal is to get the student to the first day of class, which immediately kicks in the liability for the tuition. If he or she quits a week later it makes no never-mind to the school.

There is an accreditation process involved for these school. Eisman states however that six of the sixteen members of this board are for-profit education stooges.

The other trick of the trade is to buy small regional accredited college, completely revamp them to an online model and crank though the business. Employers looking at these graduates apparently aren't terribly impressed with these mills.

Eisman concludes with what should be obvious to a thinking person:

"As long as the government continues to flood the for-profit education industry with loan dollars AND the risk for these loans is borne SOLELY BY students and the government…THEN the industry has every incentive to...

- Grow at all costs
- Compensate employees based on enrollment
- Influence key regulatory bodies
- Manipulate reported statistics and other regulatory measures

Unfortunately, like so much else in kleptocratic America, this will only be sorted out as the economy and government collapses or by real Revolution as opposed to phony change.  I close with the estimated default rates trajectory from the College Board, National Education Center and industry data. Of course, this for-profit sector problem is just the worst of it. The student-debt cancer also persists at non-profit and traditional colleges as well ["Trouble Ahead for Student Loan Defaults"]. There is now $875 billion in outstanding student debt ["16 Shocking Facts About Student Debt and the American College Scam"].

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