Student Loan Bubble Cracks With Pulled Sallie Mae Bond Deal

Tyler Durden's picture

In 2007 a small number of French hedge funds imploded over sudden losses stemming from highly leveraged bets made on the unstoppable subprime mortgage market. At the time, a few saw the writing on the wall; but many simply wrote it off as just another over-levered hedge fund and the subprime mortgage market was 'fine'. Fast forward six years and as we have discussed numerous times (most recently here and here) there is a bubble, potentially far bigger than subprime, in student loan debt. As one of the last remaining outlets for state-sanction credit creation, this is a big deal; but, of course, the popping of the bubble (or even a slight leak) is eschewed since there is so much 'reach for yield' and the Fed's got your back. That is until this week. As WSJ reports, Sallie Mae (SLM), the nation's largest non-government student lender just cancelled a $225 million debt offering as investors  decided they simply were not getting paid enough for risk - amid rising student loan defaults. Simply put, there's a limit to what investors will tolerate.

 

 

SLM was offering a stunningly low 3.5% interest on the deal and investors snubbed it, "There are certain limits that can't, or shouldn't, be crossed if you're an investor," adding that, "we're beginning to see what the tolerances are." This is a significant shift since SLM and other issuers of debt backed by student loans sold $7.8 billion worth of securities this year through last week, up from $5.7 billion in the same period of 2012. With the portion of student borrowers who are late on their debt payments by 90 days or more climbing to 31% in 2012, from 24% in 2008; we wonder if this is the tipping point for the student debt in 2013 that was generally ignored in subprime in 2007, until it was too late.

 

Via WSJ,

Student-loan company Sallie Mae SLM -1.35% canceled a $225 million bond offering on Thursday after about two weeks on the market, according to people familiar with the deal. The move may mark a line in the sand: Investors whose thirst for yield has revived all manner of riskier asset classes decided they weren't getting paid enough to buy at the offered price amid rising student-loan defaults.

 

...

 

Sallie Mae pulled the plug on an offer for $225 million in bonds.

 

The yield hunt has revived the markets for securities backed by troubled mortgage loans and loans to borrowers with less than pristine credit, known as subprime. But even in these markets, there are boundaries.

 

"There are certain limits that can't, or shouldn't, be crossed if you're an investor," said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union. "Now we're beginning to see what the tolerances are."

 

Investors were demanding more interest than the 3.5% coupon Sallie Mae was offering on the bonds,...

 

Sallie Mae and other issuers of debt backed by student loans sold $7.8 billion worth of securities this year through last week, up from $5.7 billion in the same period of 2012, according to Bank of America Merrill Lynch data.

 

Securities backed by student loans have become popular for the extra yield they provide over safer debt, despite a significant rise in defaults on such loans. Overall, the portion of student borrowers who are late on their debt payments by 90 days or more climbed to 31% in 2012, from 24% in 2008, the Federal Reserve Bank of New York said in a recent report.

 

In the case of the canceled Sallie Mae offering, rising defaults could have crimped the cash flow of the federally backed loans supporting the new securities, because more defaults would mean less excess, or residual, income after holders of the original loans were paid.

 

...

 

Investors have been buying up securities backed by everything from troubled mortgages to loans to subprime borrowers looking to buy cars. Analysts expect the amount of securities backed by assets sold this year to outpace last year's $197 billion total.

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ihedgemyhedges's picture

"Simply put, there's a limit to what investors will tolerate."

What's an "investor"??????????

jeebus's picture

Great question. I feel like 99% of the bond market is just giant funds, mostly pensions, trying to keep themselves propped up. Whatever you want to call it, it is a bubblish scheme.

gmrpeabody's picture

This, like, really sucks, man. I mean, it's not like I was going to get a really high paying job even after I get my Masters in Parks and Rec, but now they are telling me, like, I can't take it to the next level. Dude, these guys aren't as smart as they think they..., cause, like, I wasn't planning on paying off my student loans anyway, man.

dark pools of soros's picture

Kids and mom's do not care about student debt at all... My niece is ready to ratchet up this debt next year withno care her major will never pay it off... Perhaps it's just the best way to get married

Anyway this bubble is the same as food stamps and military... They won't pop until the country goes tits up

It fuels the economy so it will never turn off. They don't care about inflating the dollar. Same story guys

Panafrican Funktron Robot's picture

Sounds to me like the Fed is about to enter the student loan business in a fairly substantial way.  They already co-opted a large chunk of privately held property via the MBS purchasing scheme, it would make sense that the next logical step is to own the rights to any potential productive labor through non-dischargable debt.  Ain't slavery grand!  

NoDebt's picture

Their mistake was calling on PRIVATE investors.  Call the Fed- they'll buy that crap.  They're buying every piece of crap debt that isn't nailed down.

Ben Bernanke = the financial equivalent of Mikey from the old Life Cereal commercials.  He'll eat anything.

Just that Mikey died in a tragic accident involving and overdose of Pop Rocks (as we all well know who are of an age to remember this stuff).  Ben will die being crushed by his own ego, most likely.

malikai's picture

EVERYONE RELAX! Mikey isn't dead.

It's just an urban legend.

Now get back to work, slaves.

Radical Marijuana's picture

99% of everything has become an ourboros of incorporated robbery.

Nobody else could compete with the governments' powers to rob, while those who were able to benefit from the privatization of that power to rob have runaway with that. Thus, we have developed a system where more than a hundred thousand government mandated funds, many of which are just giant funds, mostly pensions, now dominate the ownership of all publicly traded companies.

Thus, the power to rob was channelled through governments around and around through a more and more bogus "private sector," to gradually become the situation were "collective government" owns the economy, that it regulates, for its own benefit. Meanwhile, in that flow are those who are positioned more favourably to stick in their paddles and divert some of that towards their private benefit.

However, the bottom line is that nobody else can complete with the governments' powers to rob, and therefore, after that has grown and grown, the economy is totally dominated and owned by the various agenecies of "collective government" that run everything throughout, both coming and going, while those who make private profit primarily do so by being positioned to be able to stick their personal paddles into that overall flow of organized social robbery, and so, divert some of that flow into their own private accounts.

For all practical purposes, everyone is now a debt slave to themselves! Moreover, the younger they are, the more impossibly in debt they have become to themselves. Since the overwhelming vast majority of people do not want to understand what is really going on, we can expect a tiny minority to be able to continue to pretend to extract their private profits, from a system which has actually become almost completely "collective government" coming and going, through an ouroboros of incorporated robbery.

Sudden Debt's picture

That would be you...

They took your 401K with a mix of taxdollars.

Invested it for you.... and the government will get a 5% return on it, lose the principal and raise your taxes as a thank you gesture.

HERE'S A FREE BEERPONG!!!

FUCKYEAH!!! THAT'S WHAT GOING TO COLLEGE REALLY IS!!!

 

augie's picture

 

HERE'S A FREE BEERPONG! FUCKYEAH! THAT'S WHAT GOING TO COLLEGE REALLY IS! 

+1 QFT.

onewayticket2's picture

Ever wonder why it costs $50k/yr?   the professors - like Fauxcahontas - teaching one class and getting $350k/yr, tenure and a sick benefits package.  and your kids are taught by their teaching assistant, not the professor.

malikai's picture

They really are doing it for the kids.

onewayticket2's picture

$257K/year for 3-4 hrs a day of lecture x 9 mos per year.  not bad.

that's about what, $250+/hr.?  with tenure.   (and this doesnt count the best part....the benefits, the pensions, the healthcare, ...just the cash)

Panafrican Funktron Robot's picture

"the benefits"

Indeed, the availability of young, stupid females with compromised morals and a willingness to "do what it takes" to get a passing grade, would be just one benefit.  

RafterManFMJ's picture

War is a racket.

'Education' is a racket.

Hell, racket manufacturing is likely a racket.

Fascinating how the entire US is one giant lie.

 

 

Meat Hammer's picture

Not to mention the prof requires you to buy the textbook supplement he authored for $80 which will be opened once during the semester.

tango's picture

My son, after squandering his college days, has decided to return and get a certificate in vehicle repair (he can strip and build a car).  He needed another 4K and someone suggested Sallie Mae.  He got the loan on-line without reading the terms and is on the hook for 12% interest.  I called and the nice lady said rates were sky high due to....high default rates.  I asked if they checked the credit records of their applicants.   "But it's a student loan," as if that was somehow an excuse.  She did add that "nobody oays these things back on time."  Tell me about it.

Poetic injustice's picture

If you sign things without checking first, you deserve to get ripped off.
I mean, there are multiple ways to raise 4,000. He chose one of most expensive.

InvalidID's picture

 

 I work as a debt collector specializing in student loans. You can NOT imagine the number of loand that go unpaid, nor the people most likely to not pay.

 

 I'll give you a hint though, the most likely loans to go unpaid EVER... Are in the 6 figures and held by people in the 6+ figure income.

onewayticket2's picture

Checkout SoFi. loans.  they are a private solution....much lower rates (and exacerbating the problem at sallie, etc. by stripping out the good loans from the crap)

Che Guevara is Dead's picture

Here's what we can do for those kids falling behind repaying their loans and struggling to find decent jobs.

Teach them gunsmithing and farm them out cheap to Colt, S&W, and the other gun makers. Put them to work making ammo and guns so that we don't have to look at bare shelves for both at our favorite gun shops. 

 

 

aerojet's picture

That's funny, but it won't help.  S&W quality is out the window and is never coming back. 

billsykes's picture

just rebuild 4 cars or 8 on the super cheap - 8 weekends, done. 8 happy hemmi people, no debt.  

At $500 bucks a pop you would have people lined up around the block. 

H E D G E H O G's picture

Okay Guys, lets not bash the Student Loan Bubble! I have to let you guys know that I just received my Diploma from Phoenix University. Thats right. I'm now a certified & have in my possession, (framed and over my computer, to admire and inspire, with a $20,000.00 .gov loan), a Baccalaureate of Bullshit Baffling. The Headgehog is open for business and is taking on a first come, first served basis, ground floor opportunity for ALL ZHer's to ease their minds about their investment portfolios. We're a brick and mortar investment company with a real brick and mortar post office box .    HEDGEHOG ENTERPRISES, PO BOX OU812, BUMFUCK, NIGERIA, 66666. We will be offering to the astute investor a   w  i  d  e diversivication of products, including, but not limited to, US BONDS! WE GUARANTEE to beat the going rate of any Us Bond, thats right, we will pay out -4% if the sovereign is -3, we pay -5% if it goes to -4% and so on to a maximum of -100%! Where can you beat that!? The answer is NO where! Treasuries you ask? Shit, we offer treasuries at a rate of BUY 3 GET ONE FREE! BUY 4, YOU'LL WANT MOAR! FIVE AND YOU'RE IN THE jIVE! SIX, PIK UP STIX, and so on. ETF'S !!! We offer any and every ETF that can be conjured up! From our new AIR ETF(HIGHLY PROFITABLE), all the way down(excuse the pun) to our Earth(as in dirt), or Water ETF. WE AGAIN, GUARANTEE DELIVERY UPON REDMPTION!!! CURRENCY WARS! Don't sweat it. Our Harbinger Fund will make you wealthy beyond belief. For every $1000.00(minium), we will purchase through legitimate markets, 590,000,000,000,000,000.66 Fresh, new Zimbawbe Dollars! That's right! Shipped at OUR expense to your garage, or any other legal address in the lower 48 states. (with all of your neighbors jealously looking through your garage door windows, you might need a Doberman(or similar facsimile), just in case. We  can handle that too) CHARTS! We've got CHARTS! We've got charts of charts, we've got charts of how many times your neighbors dog shits in your yard, we've got charts out the ying yang! CHARTS GUARANTEEING 100% DAYLIGHT TOMORROW! Hows that for accuracy? *(DISCLAIMER) Unfortuntely at this time, we can ONLY accept gold or US dollars sent to our PO box. THAT'S IT FOLKS! This is not a prospectus, but an offer to make you as wealthy as the 1%er's. All Funds, exclusive of our largest Fund, the Made Off Growth Fund, are 100% stable and backed up with the full faith and credit rating of HEDGEHOG LLC., LLP., INC., ETC.  "YOUR CASH & GOLD ARE OUR ONLY CONCERN"......Thanks for your patience.

 

ps. through intensive research, we have found that informing your wife, or significant other(s), about this offer to become a REAL ONE PERCENTer, could be detrimental to your earning$.

RafterManFMJ's picture

He speaks truth! Only last month I completted my thrid University of Phoenix degree, this one in 'how to manage a fund.'  Now I only owe 170K in student loan, but am on fast trax to managering my own fund. So I take other money and make it grow!

Thanks you again University of Pheonexx! You are a lifesaver.

Cursive's picture

You know the financial system will be healthy when no one will be interested in CDO's of any stripe.

GetZeeGold's picture

 

 

Obamacation.....here we come!

urbanelf's picture

Or colateralized debt obamabligations?

TeamDepends's picture

What is the one common trait of all commie utopias?  They exist ALWAYS in the future!!!!

RafterManFMJ's picture

Just like fusion power. It's only 10 years away, and has been for the last 50 years.

22winmag's picture

Student loan bubble bursting? Told you so.

 

We are all nations of squatters squatting on the ruins of once-great civilizations. In Europe and the rest of the world they know this. They are sad, defeated peoples.

 

However, America has only been around for a few seconds on the 24 hour clock of human civilization and it doesn't matter if we are a "once-great civilization" or not... we are too young to know it... or even care.

Dingleberry's picture

No prob. Ben will just buy this garbage too, and add it to the collection.

JohnGaltsChild's picture

Truer words were never spoken. you're a prophet.

francis_sawyer's picture

That dude must be rich!... Oh wait...

onewayticket2's picture

After "bad bank" ben bernanke buys the junk, those who have been paying responsibly and those who have chosen non Sallie, private sources of funding will be punished by being left out of the forgiveness.

 

it should happen right before the 2014 election cycle....massive forgiveness.....obama will rationalize that "we cannot sit idly by while 'tomorrow's leaders' are swamped with debts they cannot pay"

 

just wait. 

DeadFred's picture

Don't do that! I could hear his creepy voice when I read your words. I might lose breakfast now

booboo's picture

Theere is soooo much money laying around in personel retirement plans that will be confiscated and will keep the wheels turning for another decade.

You didn't build that debt but you, your children and your childrens children will pay off the vig to the FOO on the Obamabonds. 

viahj's picture

why would "they" steal "paper assets" from retirement accounts when they are digitally "printing" billions every month?  if they did, they would have an instant rebellion on their hands as the act alone would crash every equity market on the planet rendering chaos for a few bps less in UST yields.  no, they won't upset the sheep by doing that, they will inflate away.  get your hands on gold for after the reset.

ElvisDog's picture

Ding, Ding, Ding. Agreed. Why would they steal something that they can create at will? Would an apple farmer go out and steal apples? I think the ultimate plan of bankers, both central and private, is to exchange their fiat, which they can create at will, for all the valuable real, tangible assets on this globe.

Meat Hammer's picture

And then when they own everything then they can yank the ejector seat lever.  

Fuck you Bernanke

resurger's picture

Hy, ig, cds, aapl, au .. wait i made a mistake somewhere

libertus's picture

It was easy to predict. Many of us did...game over traditional higher ed. 

Here is a good article.http://www.academia.edu/1225678/Blowing_the_Last_Bubble-_The_Frailty_of_...

Here is an excellent twitter feed for the same issues. https://twitter.com/Oplerno

There is big change comming to higher ed...Its going to be good. 

 

 

 

GetZeeGold's picture

 

 

From that feed.....no I'm not kidding.

 

Oplerno@Oplerno27 Apr

Pay tuition and faculty with Bitcoin? Why not?

LawsofPhysics's picture

"Pay tuition and faculty with Bitcoin? Why not?" -  Why not?  Duh, because their creditors and the banks/companies they do business with don't accept bicoin.  How fucking stupid.  Why don't farmers accept bitcoin? Because the people they deal with (fuel and fertilizer companies) don't accept bitcoin.   Stupid sheep.  Holders of physical are going to love the coming shit-show of scams and "solutions".