Even as the gargantuan $1+ trillion student debt load has been the bubbly elephant in the room that few are still willing to talk about (as the ease of obtaining very fungible loans, with ultra-low interest rates, have become the primary source of lifestyle funding for a wide swath of Americans who are rotating out of high yielding credit cards into this latest Uncle Sam subsidy, and is thus just one more aspect of the status quo perpetuation), there have been until now zero opportunities for a the proverbial highly convex "ABX" short in the student debt space. This of course is the trade that was put on by those who sensed the subprime bubble is about to pop in early/mid 2007 and made billions as the yield chasers were summarily punished one by one as first New Century blew up, and then everyone else.
Yet while one was able to buy synthetic "hedge" exposure with limited downside and unlimited upside (by shorting synthetic index spreads) in subprime, so far the only way to be bearish on student debt has been to short the equity of various private sector lenders - a trade with very limited upside and unlimited downside, and which in the current idiotic New Normal is more likely to leave one insolvent and crushed in a smoldering heap of margin calls following yet another epic short squeeze as GETCO's stop hunting algo run amok.
This may be about to change. As WSJ reports, SecondMarket Holdings, the private-market securities trading firm best known for allowing numerous overzealous fans to buy FaceBook at moronic valuations, on Monday "will roll out a platform allowing lenders to issue securities backed by student loans directly to investors."
Why is SecondMarket doing this? The same reason Lloyd Blankfein was selling Abacus (and all those other synthetic MBS CDOs) to clueless yield chasers all across Europe and Asia: yield chasing and career risk. The justification is also the same: making a market.
The move is driven mainly by investors' growing appetite for student loans, said Barry Silbert, founder and chief executive of SecondMarket.
"The catalyst for this new suite of services is investor demand," said Mr. Silbert. "At the end of the day, investors are yield searching."
And just as Paulson was able to coordinate with other sellers of synthetic exposure and have a bearish bet already set in the primary market following collusion with Goldman even before breaking for trading, so we are confident that enterprising packagers of securities will be just as capable in tranching various student loan packets into securitized layers with the assistance of SecondMarket, and offload those with highest risk to those with the most aggressive career risk-for-yield chasing fulcrum points.
Investors registered through SecondMarket already can trade student-loan securities they hold in their portfolios, said Mr. Silbert. Since 2008, about $6 billion worth has traded on the exchange, he said.
The new platform will allow lenders to issue securities directly to SecondMarket's base of more than 100,000 investors, including institutions and affluent individuals who qualify as so-called accredited investors by the U.S. Securities and Exchange Commission.
Issuers will be able to sell securities backed by private student loans, which aren't guaranteed by the federal government, as well as older federally backed student loans known as Federal Family Education Loan Program (FFELP) loans. They also will be able to distribute servicing reports through the new platform, said Mr. Silbert.
Educational Funding of the South Inc., or EdSouth, and another lender have signed up to use the platform, according to SecondMarket.
Edsouth, which typically buys student loans from other lenders, has used SecondMarket to trade student-loan backed securities in the past, said President and Chief Executive John Arnold. The ability to issue securities piqued his interest, he said: "Any opportunity for capital, you'd have to be looking at."
And while some will be furious at what SecondMarket is doing, we applaud it as for the first time there will be a real chance for price discovery and crossing bids and asks in this latest debt bubble. After all, they are merely doing what Goldman Sachs called "making markets" which in retrospect merely allowed the subprime bubble to pop faster than it would have otherwise. Which in this day and age of one-way bets in everything is to be applauded.
Of course, all that betting against the student debt bubble - which is merely one more way of "fighting the Fed" - will do is crash it promptly, only to see it reincaranted in the form of the latest Ben Bernanke monetization program (QEternity+2.718) which will be launched after this one fails to take the DJIA to 32,000.
The key, as always, will be about timing. Those who get in just right, will be able to retire promptly. Everyone else will be sweeping their local McDonalds.