So You Want To Short The Student Loan Bubble? Now You Can

Tyler Durden's picture

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.

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The Grip's picture

QEternity+2.718... Hysterical!

Supernova Born's picture

What are a bunch of unemployed youth yoked to an impossible amount of non-dischargable debt to do?

cynicalskeptic's picture

Lifetime indentured servitude, selling oneself into serfdom or debtor's prison......  and you thought there were no choices.

booboo's picture

I am sure they can work it off with a four year stint in The Global Force (Farce) for Good(s)

"So daddy what did you do in the army? Well honey, I was a Commodity Resource Officer serving with The Goldman Sackers in Indonesia during the Petrol Rebellion, paid for my college education which allowed me and your mother to secure these nice jobs as Walmart stocking supervisors Automotive Aisle at store #406045"

Silver Bug's picture

Don't worry it's QE to infinity! The Bernake will just bail out the banks that have their loans defaulted on.

The Grip's picture

/edit - dup goddam safari & my fat fingers

_ConanTheLibertarian_'s picture

SecondMarket Holdings should rename themselves to BuyAtTheTop Holdings.

css1971's picture

I'm sure there is a model somewhere that shows student debt is of AAA quality no matter the economic circumstances as long as you spread the security over enough students.

augustusgloop's picture

Create tranches by league / zone :

Ivy tranch, Pac 12, etc. and  marke them to the schools and alumni. Then of course the (still AAA) garbage tranches of Florida school of information studies, DeVry, U of Phoenix, Lassen community college. 

onewayticket2's picture

SoFi has already done this...well, just with the top tier/low default.

Social finance, based in SF, uses alums to fund loans, but ONLY at low default institutions.

chubbyjjfong's picture

I just cannot believe that this sort of shit is happening again.  In light of what happened in 2008, why would anyone in their right mind want to invest in a whole bunch of shitty student loans? Did people not learn anything in 2008? God dam.. unbelieveable!!  This whole shit storm is really going down now.  

augustusgloop's picture

Sell all the ITT, Devry, etc. technical institute, long island schoold of medical plebotomy, crap to German pension funds, making it sound like they are baby MITs & Caltechs, ja? 

booboo's picture

Throw in Full Sail (or as I have labeled it, Full Fail) for good measure.

Its_the_economy_stupid's picture

I was talking w a twenty-something today that was in beautician school (hair cutting). She has borrowed in the high $20k for a 3 year school to learn how to cut hair for chissakes. Who the hell needs 3 years of school to cut freakin' hair.


You know the state governments that set up these trade licensing boards that require this crap just to get a certificate to cut hair are in bed with these piece of crap educators fleecing our youth. It is a goddam crime!

bigkahuna's picture

Lets do this.

There is money to be made from this somewhere.

tickhound's picture



Until the Mother of all AIG-like Bailouts comes in and squeezes the piss out of the shorts and the industries "exposed" become "beneficiaries" and any that survive consolidation proceed to make new highs.... All in the name of EDUCATION and protecting America's FUTURE.  It's practically a matter of National Security.  Students re-eligible for new loans in 2/3 years tops. 

As long as that doesn't happen you're good...

Of course they'll HINT at it first, a thousand times.  Deny it too.    



Never One Roach's picture

You can always sell it to Big Wealthy Muppets, like the Chinese a La 2008:


The earthquake on the Wall Street, triggered by the bankruptcy of Lehman Brothers, has been shaking the financial sector in Hong Kong in the last two weeks. Thousands of retail investors holding minibonds of Lehman Brothers, at the edge of losing their lifelong savings, have filed complaints to the regulators and even staged protests, in a bid to urge the government to take action upon some intermediaries??mis-selling, and to hold regulators accountable for failing in supervision and investor education and protection. 


 "I am illiterate. I have deposited my savings in the bank year after year. When the salesman (at the bank) recommended me the minibonds as the most suitable financial product for retirement, promising higher interest rate and low risk, I invested HK$500,000, all the money I have saved from decades of manual work??, said an old man in trembling voice on a meeting organized by the Consumer Council of Hong Kong.



- See more at:

MisterMousePotato's picture

It's for the chiiiiiiiiiiiiiiiiiiildreeeeeeeeeeeeeeen.

Never One Roach's picture

All part and parcel of the, "No Muppet Left Behind Act."

Cadavre's picture

someone somewhere has gotz to be rough drafting credit default swap prospectus [roposals betting against collection of student loan debt ... right (?) ... shit it don't matter -  collected - uncollected - it all in USD - the paper required to charter a student loan CDS is worth more than the USD underly  - save the paper for something important - like posters of a blood red "V" to hang from the national mall's trees that will eventually be decorated with politico heel hung (ala Mussolini's wake) carcasses for the commoms to use as spittoons and pilgrimage urinals.

Need a couple of million, cash, to underwrite a student loan CDS for sure. Marketability would depend on how much of the student loan debt has been retailed into institutional and / or private (non NGO) portfolios - is there a source for privately held student debt?

formadesika3's picture

I counted 59 words in that last sentence before the break. I was afraid you were losing it but then you came on strong at the end.

DeadFred's picture

Wait for the ETF.

Maybe Student Holding Investment Trust? Just a guess.

icanhasbailout's picture

The Muppetization of America proceeds apace

Glass Seagull's picture

Tenured finance profs probably going to "teach" their students to buy this debt.

Uinta's picture

So will Jon Corzine be going long?

JustObserving's picture

How can you make rational decisions in a manipulated, fraudulent market?  Thanks, I will pass.  The sage of Omaha may have inside information but I don't have any. He can make a few billion like he did with the Goldman Sachs bailout.

Keep up the Financialization.  That is the only thing we do better than any other economy.  Dagong, the Chinese rating agency, says that it is half the US economy.

Freegold's picture

A rational decision would be to buy gold. You can make a killing in these distorted markets but chances are you will wake up one day and find that your wealth is mostly gone. I care not for yeild, only the return of my money. But the yield not collected will come back in the form of a windfall profit from golds revaluation. What is gold worth in a world full of paper-IOU:s? We will soon find out.

"Gold, go get you some" Aristotle

JustObserving's picture

I could not agree more.  But silver will rise faster.  So both gold and silver. 70% silver by dollars and 30% gold.

Only about $24 billion in silver bullion available in world now (870 million ounces) and about $3550 billion in gold (2000 million ounces).

cynicalskeptic's picture

Haven't you heard?   WIth central bank loans, unlimited rehypoothecation and magical ETF's there's UNLIMITED amounts of gold and silver available for purchase.  

Just don't count on it actually existing if you don't have it in your personal possession.

Hughing's picture

The purpose is give the fed a way to buy the debt. Wake me when the fed buys my Visa bill

Kirk2NCC1701's picture

You, sir, are not a sheep, or a useful fool/tool.  You are a frickin genius!

debtor of last resort's picture

Every thread has it's wake up call.

steve from virginia's picture




Sell short? how ... un-American!


That's terrorism, buddy!

disabledvet's picture

"highways with no cars. Government with no law. Universities with no students. Finance with no money." very American indeed...

Kaiser Sousa's picture

quick somebody alert CALPERS...

im sure theyd be interested.........

augustusgloop's picture

would be like carp, eating their own shit off the bottom of the seafloor in a beaucratic virtuous circle. 

ebworthen's picture


More debt instruments to make certain the bubble pops and more bailouts and QE for Wall Street and the pain to the students talked into the debt for illusory employment and the citizens who never went to college footing the bill for the FED and Wall Street's malfeasance.

The modern version of black tulips and South Seas shares, and it just goes on and on.

I would say "unbelievable" but it is too believable.

cynicalskeptic's picture

It astounded me that the housing bubble lasted as long as it did.    We went from 20% down and over 8% interest in 1990 to NINJA loans for everyone........   WTF?   

Even now, Wall Street remains propped up by unlimited ZIRP and TARP money, and govenrment debt expands at an exponential rate.


You think there would be people with pitchforks and torches in the streets but no.......   as long as the bread and circuses contiunue...  Foodstamps, years of unemployment, and the illusion of 'hope and changer' even as it's business as usual for the big banks and Wall Street.

bsdetector's picture

Nope, don't buy it. Keep your hard earned dollars out of this ponzi scheme. Starve the beast don't try to short it.

Michelle's picture

Could we be so lucky these securities get sliced and diced and tranched so many times that they "lose" the identities of the borrowers?

"Screw you, that ain't my debt."

"I never attended school."

"You have me confused with Linda Green."

Critical Path's picture

Good, Burn it down

ZeroFreedom's picture

Excellent job second market. Is there an ETF so I can short?

Downtoolong's picture

I can just imagine SecondMarket marketing this to students:

“Hey, want a great place to invest your student loan proceeds until your tuition is due? The more you borrow, the more you can make. Your interest alone could be enough to buy the new iPod5s.”

GMadScientist's picture

To really do things right, they'll need to find a way to end up with multiple students responsible for the same loans.

Born-Again Bankster's picture

The yields should buy pensions another 4 years before the whole thing explodes.  Damn...time to put the popcorn back in the pantry.  I thought we were getting close.

ToNYC's picture

So I can pay off my six figure school debt by shorting my loan cdss! how conveeeenyent