The college version of the subprime mortage mess

Investor Steve Eisman whose huge wager against the subprime mortgage market was described by Michael Lewis The Big Short has launched an assault on fast growing for-profit college industry. Here's the link at Mother Jones. According to the Eisman, for-profit colleges "raked in almost one-quarter of the $89 billion in available Title IV loans and grants, despite having only 10 percent of the nation's post-secondary students." Here is the main parallel between for-profit educators and the sub-prime lenders:

Eisman attributes the industry's success to a Bush administration that stripped away regulations and increased the private sector's access to public funds. "The government, the students, and the taxpayer bear all the risk and the for-profit industry reaps all the rewards," Eisman said. "This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper."
Here's another similarity between subprime lending and for-profit education

Both push low-income Americans into something they can't afford—in the schools' case, pricey programs that leave the students heavily in debt; what's more, the degrees they get mean little in the real world: "With billboards lining the poorest neighborhoods in America and recruiters trolling casinos and homeless shelters—and I mean that literally—the for-profits have become increasingly adept at pitching the dream of a better life and higher earnings to the most vulnerable."

In the Mother Jones article, Eisman pointed to the self-reported (and thus potentially under-reported) 50-plus percent dropout rate at for profit colleges as further evidence that they offer poor-quality education. After reading the above article, I referred to Wikipedia's article one of the biggest for-profit colleges: Phoenix University, subsidiary of the publicly traded Apollo Group, Inc. It offers "open enrollment," meaning that it requires "proof of a high-school diploma, GED, or its equivalent." Phoenix graduates only 16% of its students, compared to the national average of 55%. On the topic of de-regulation and quality of education, consider this:

The school was the top recipient of student financial aid funds for the 2008 fiscal year, receiving nearly $2.48 billion for students enrolled. In 2006, due largely to the efforts attributed to the Apollo group, the 50-percent rule (requiring colleges and universities to conduct at least half of its instruction in person in order to receive federal aid or collect federal student loans) was modified. It no longer classifies students receiving instruction through telecommunications methods as correspondence students.

The Wikipedia article offers a lot more information to feed the fires of my suspicion. I don't claim to know any more about Phoenix University than what I have read in these two articles. What I do bring to the table is that I investigated diploma mills as part of my job while I worked as an Assistant Attorney General for the state of Missouri; I don't like the smell of what I'm reading about these for-profit colleges. Based on what Michael Eisman has stated, it would seem to be a good idea for the federal government to tighten its standards for the types of post-secondary schools eligible for federal loans, and to take a much closer look at the quality of education received by the typical Phoenix University student. Is it really worthy of a federal loan guarantee?

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Obama Administration continues Bush tradition of free market fundamentalism

William Black was a guest on Bill Moyers Journal yesterday. The conversation was lively and informative, including detailed discussion regarding "liar's loans" (In a liar's loan, the mortgage company doesn't require any verified information from the borrower about the borrower's income, employment, job history or assets). Black indicates that even after all that has come to light regarding the financial collapse, our politicians refuse to use the "F word," fraud. Why? Because too many politicians (and businesses) simply don't believe in fraud. That is the hallmark of free market fundamentalism. To make matters worse, Barack Obama refuses to utter the word "fraud" from his bully pulpit. Nor does Eric Holder or anyone from the Obama Administration:

WILLIAM K. BLACK They can't even get themselves to use the word "fraud."

There's a huge part that is economic ideology. And neoclassical economists don't believe that fraud can exist. I mean, they just flat out -- the leading textbook in corporate law from law and economics perspective by Easterbrook and Fischel, says -- I'll get pretty close to exact quotation. "A rule against fraud is neither necessary nor particularly important." Right?

Notice how extreme that statement is. We don't need laws. We don't need an FBI. We don't need a justice department. We don't even need rules like the SEC. The markets cleanse themselves automatically and prevent all frauds. This is a spectacularly naïve thing. There is enormous ideological content. And it fits with class. And it fits with political contributions.

Do you want to look at these seemingly respectable huge financial institutions, which are your leading political contributors as crooks?

But can't we insist that suspect businesses be audited to determining whether they are committing fraud? Not based on a long sordid track record regarding prestigious accounting firms:

BILL MOYERS: Isn't the accounting firm supposed to report this, once they learn from somebody like him that there's fraud going on?

WILLIAM K. BLACK Yes, they're supposed to be the most important gatekeeper. They're supposed to be independent. They're supposed to be ultra-professional. But they have an enormous problem, and it's compensation. And that is, the way you rise to power within one of these big four accounting firms is by being a rainmaker, bringing in the big clients.

And so, every single one of these major frauds we call control frauds in the financial sphere has been-- their weapon of choice has been accounting. And every single one, for many years, was able to get what we call clean opinions from one of the most prestigious audit firms in the world, while they were massively fraudulent and deeply insolvent.

BILL MOYERS: I read an essay last night where you describe what you call a criminogenic environment. What is a criminogenic environment?

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Complexity as a curtain for fraud

“Whoever knows he is deep, strives for clarity; whoever would like to appear deep to the crowd, strives for obscurity. For the crowd considers anything deep if only it cannot see to the bottom: the crowd is so timid and afraid of going into the water.”

Friedrich Wilhelm Nietzsche, The Gay Science (1882).

“. . . using financial complexity allegedly to deceive and then using so-called independent experts to validate the deception (lawyers, accountants, credit rating agencies, "portfolio selection agents," etc etc ) . . .”

"Now we know the truth. The financial meltdown wasn't a mistake – it was a con"

Why are many human systems complex? If we’ve learned anything over the past few years, it’s that there are two reasons—there are two kinds of complexity. Sometimes, complexity is required to get the job done. I think of this as “parsimonious complexity.” For instance, the Mars Rovers are extremely complex robots, but every part of these magnificent robots has a specific function that furthers a clearly and publicly defined mission. There are also instances where complexity is purposely injected into a system. I think of these as instances of “gratuitous complexity.” It’s important to keep in mind that all forms of complexity serve as entry barriers to activities, due to the limited attentional capabilities of humans. Very few of us have the stamina or intellect to thoroughly understand all of the artificial systems people create; many of us don't have the stamina to thoroughly understand even simple systems. When an activity is more complex, it is more difficult to understand and more daunting to those wishing to participate. Activities that are more complex are thus accessible to fewer people. For instance, chess is more complex than checkers, in that the state space of possible moves is larger in chess than in checkers. Checkers is easy to learn and play. But many checkers players don’t graduate to chess due to the increased complexity. Some systems are so incredibly complex that only the chosen few are able to participate.

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Dylan Ratigan’s three strikes against the pending financial services legislation

Dylan Ratigan put on a "Family Fued Show" to illustrate the three major failures of the pending financial services legislation. Seems like this bill is not for any meaningful reform. It's only a dog and pony show.

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