This page has been archived and commenting is disabled.

How One Hedge Fund Is Betting Against The $1.2 Trillion Student Loan Bubble

Tyler Durden's picture




 

On Monday, we got some color on Hillary Clinton’s $350 billion plan to make college more affordable. Students and former students across the country owe more than $1.2 trillion in college loans, and as Bill Ackman so eloquently put it earlier this year, "there’s no way they’re going to pay it back."

The fact that America’s student loan bubble is the focus of what may well end up being one of Clinton’s most expensive policy proposals speaks volumes about the urgency of the problem. 

Of course there are some other folks who understand how quickly the situation is deteriorating. Chief among them are Moody’s and Fitch and a few sell-side strategists who are having quite a bit of trouble figuring out how to incorporate the various IBR plans being promoted by the Obama administration into their ratings models.

These worries showed up earlier this year when Moody’s put billions in student loan-backed ABS on review for downgrade. Many of the deals in question are sponsored by loan servicer Navient, which was spun off from Sallie Mae in 2014. 

Now, one Boston-based hedge fund is building a short position on what it says is "runaway inflation in post-secondary education" by shorting the likes of Navient and other names tied to to the student loan bubble.

  Here’s Bloomberg with more:

FlowPoint Capital Partners, the $15 million hedge fund co-founded by Charles Trafton, is betting against companies such as student-loan servicer Navient Corp. to profit from what it calls a college bubble bursting in slow motion.

 

The Boston-based firm is building positions against stocks of textbook publishers, student lenders and real estate companies that focus on college housing, Trafton said in an interview. Changes in the more than $1 trillion student loan market could hurt companies such as Navient, Sallie Mae and Nelnet Inc., according to a July investor letter from the firm.

 

Businesses "levered to runaway inflation in post-secondary education are susceptible to growth and margin shocks," the firm wrote in the letter.

 


So there, ladies and gentlemen, is one way to trade the bubble if you believe expecting the nation's graduates to somehow fork over $1.2 trillion is unrealistic in a job market where landing a gig as "head bartender" is sometimes the best one can hope for if you happen to have majored in anything other than petroleum engineering

We wonder how many hedge funds are hard at work with Wall Street creating customized deals full of the worst student loan credits they can find with the sole intention of betting against them. 

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 08/11/2015 - 16:34 | 6415470 Concentrated po...
Concentrated power has always been the enemy of liberty.'s picture

It takes years for a $15 Million Hedge Fund to "build a position" via their Schwab account in this illiquid market.

Tue, 08/11/2015 - 16:49 | 6415510 Captain Debtcrash
Captain Debtcrash's picture

Good call, debt lent to fools is no asset, and you don't get much more foolish than those who back the majority of student loans. I take that back the government has got them beat by a long shot. 

Tue, 08/11/2015 - 16:53 | 6415543 knukles
knukles's picture

Wait a minute.  If the student loans are discharged, then there's capacity to rebuild same to finance further college expenditures.

Tue, 08/11/2015 - 18:53 | 6416017 N2OJoe
N2OJoe's picture

So what you're saying is: Go out and be an irresponsible and gullible idiot, take out a bunch of loans for edumacation, reap rewards of(possibly) better paying job through the connections you make, and get your loans paid for on the backs of taxpayers?

Tue, 08/11/2015 - 20:15 | 6416297 mkkby
mkkby's picture

I wouldn't short any of these companies.  The red/blue team will bail them out, just as hillary has promised, because walll street profits from it.  The only thing I would short is the middle class, which will get stuck with the bill ONCE AGAIN.

Tue, 08/11/2015 - 16:45 | 6415512 greenskeeper carl
greenskeeper carl's picture

Michael Burry all over again? good luck fellas, you're gonna need it. Although what they are really betting against is the stupidity and criminality of the govt and banks, Im sure if this goes well they will be demonized for "betting against america's young people" of some such nonsense

Tue, 08/11/2015 - 16:58 | 6415556 ParkAveFlasher
ParkAveFlasher's picture

Last I heard of Burry, he was betting on anything grown in California that required a lot of water, like four years ago. 

Tue, 08/11/2015 - 16:37 | 6415474 JC-BI
JC-BI's picture

The Fed is the reason such liquity engulfs the market which then looks for victims to dump it on.

Tue, 08/11/2015 - 16:35 | 6415477 KnuckleDragger-X
KnuckleDragger-X's picture

Never play craps with somebody who insists on using their own dice.....

Tue, 08/11/2015 - 16:45 | 6415514 negative rates
negative rates's picture

Never play craps with somebody who insists on using their own .......Casino.

Tue, 08/11/2015 - 17:54 | 6415830 messymerry
messymerry's picture

Never play craps with somebody that just finished winning a hot dog eating contest...

;-D

Tue, 08/11/2015 - 16:35 | 6415478 HedgeAccordingly
HedgeAccordingly's picture

college lol.. what  waste of time.. just found a startup! 

Tue, 08/11/2015 - 16:39 | 6415482 GMadScientist
GMadScientist's picture

If you need a goober assist, it is, by definition, not affordable, but I guarantee the government can stay dumb longer than Trafton can carry and stay solvent.

Tue, 08/11/2015 - 16:43 | 6415496 vq1
vq1's picture

There wont be enough debt collectors... 

 

wait a minute - maybe thats a new rising job market for all these grads, debt collection!

Tue, 08/11/2015 - 16:48 | 6415526 lordbyroniv
lordbyroniv's picture

Glad someone has figured out a way to make money on all that malinvestment.

America,...what a country !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!111111111111

Tue, 08/11/2015 - 16:48 | 6415529 large_wooden_badger
large_wooden_badger's picture

As long as the students pay the vig on their loans no kneecaps will be broken.

Tue, 08/11/2015 - 16:50 | 6415530 Lumberjack
Lumberjack's picture
Hillary Clinton cracks down on for-profit colleges after cashing in

http://www.washingtontimes.com/news/2015/aug/10/hillary-clinton-cracks-d...

When Hillary Rodham Clinton, the 2016 presidential candidate, unveiled her college affordability plan on Monday, she sounded every bit the critic of for-profit universities. But Mrs. Clinton, the spouse, benefited to the tune of millions of dollars from that same industry in a business relationship her husband enjoyed as recently as this spring.

Former President Bill Clinton collected more than $16 million from 2010 to 2014 as honorary chancellor of Laureate Education, a for-profit company that runs 80 education institutions around the globe, according to recently released tax returns. Four of its six U.S. colleges were flagged on the Education Department’s list of schools whose access to federal financial aid was being monitored out of concern over financial irresponsibility.

The Clinton Foundation also lists Laureate International Universities as one of its donors, giving $1 million to $5 million during the first half of this year. Mr. Clinton praised the company when he stepped down in late April, less than two weeks after his wife officially entered the presidential race.

Tue, 08/11/2015 - 17:47 | 6415798 insanelysane
insanelysane's picture

I'm sure no one is surprised.

Tue, 08/11/2015 - 17:01 | 6415571 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

What's the hedge on the jubilee play?

Tue, 08/11/2015 - 17:03 | 6415577 Marco
Marco's picture

A month late and a dollar short Tyler, they want to cash out now and you're being very accomodating.

Tue, 08/11/2015 - 17:05 | 6415595 mastersnark
mastersnark's picture

People who don't go to college catch the AIDS. You don't want the AIDS, do you?

Tue, 08/11/2015 - 17:07 | 6415615 rpboxster
rpboxster's picture

Ooooo.  A $15M hedge fund.

Tue, 08/11/2015 - 17:13 | 6415641 GMadScientist
GMadScientist's picture

The white sneaker crowd.

Tue, 08/11/2015 - 17:22 | 6415665 Lumberjack
Lumberjack's picture

bad link...

Tue, 08/11/2015 - 17:20 | 6415676 q99x2
q99x2's picture

I'm doing it my way. Taking out the maximum amount of loans until I graduate with my PhD at age 66 and then defaulting with a shitload of cash.

Tue, 08/11/2015 - 17:34 | 6415739 Berspankme
Berspankme's picture

Take the student loans and invest it in real estate, that never goes down. Ben Bernanke

Tue, 08/11/2015 - 17:28 | 6415702 Lin S
Lin S's picture

I used to think the bankruptcy laws would make debt-slaves out of today's college students, permanently.

Other ZHers here have me wondering if fedgov won't create a bailout of sorts for the college kids, as part of the lather/rinse/repeat cycle.

Which way is this crisis likely to end - anyone care to share?  I don't know anymore.

I do feel very sorry for those frugal and hard-working people who did things the right way, and went about paying for university honestly (i.e., working hard, saving, paying loans off, etc).  Seems to me these folks always get the worst deal whenever policymakers decide "to help."

Tue, 08/11/2015 - 17:47 | 6415800 americanreality
americanreality's picture

HAHA!  Frugal and hard working will get you a semester these days.  You feel sorry for all the parents that sank $30-40,000 into a degree for their precious little booger pickers that, over the last 30 years of wage stagnation, outsourcing/globalization, and unrestricted immigrant workers, has become worthless.  Or don't feel sorry for anybody.  Be angry that it was allowed to happen to people that were trying to improve their futures.  It's sickening that investors can make money off of our kids trying to climb the ladder. 

Tue, 08/11/2015 - 18:58 | 6416031 Lin S
Lin S's picture

To be specific, since you mention it, I feel sorry for ZHers who post here like we do, who have shared honestly here on the site about how they sacrificed to get their children to and through univesity the right way - meaning, they accepted no hand-outs, didn't gouge their fellow taxpayer, and didn't take on the vicitim role - only to see fedgov want to "ride to the rescue" of indebted people who couldn't afford (and, perhaps, didn't merit) to be able to attend university to begin with.

But I agree with you (and upvoted you too), just trying to clarify a little.

Good folks here on ZH so yeah, when any one of them gets taken advantage of or scammed, I get upset.  You guys have helped me a lot.

Thanks for the reply, btw.

 

Tue, 08/11/2015 - 17:48 | 6415804 Peak Finance
Peak Finance's picture

Nope.

The bailout is already here. IBR *is* that bailout.

Quit your job, IBR your student loans for 25 bucks a month, get a new job, never report the new job to IBR, keep paying your 25 bucks a month. Discharged in 300 months as Paid In Full. Think about it, Fucking social security is still paying dead people for years, you think they will ever catch an IRB plan if the debitors income goes up? 

Even if they do catch you, after how many months of 25 USD payments? Whats the penlty for "forgetting" to tell the originator that your income went up, and therefore your monthly IBR payment should have been adjusted?

 

 

Tue, 08/11/2015 - 18:57 | 6416040 Lin S
Lin S's picture

Thanks for the thoughtful replies, guys.  They're much appreciated.

Tue, 08/11/2015 - 17:53 | 6415825 insanelysane
insanelysane's picture

If you take away the government backed student loans you create 2 problems.  Universities would fire faculty and staff and maybe 1 administrator which increases unemployment.  And you would also have "students" that can't go to school so they would also be counted as unemployed.

Students already in debt can't pay their loans now so even if you forgive the debt you don't jump start the economy because they don't have excess cash.

Tue, 08/11/2015 - 19:11 | 6416076 malek
malek's picture

A bailout for the college kids?? That's a good one!

If anything they will bail them out just so much that they can/must avoid bankruptcy and therefore remain in debt-serf status...

Tue, 08/11/2015 - 17:35 | 6415742 Lostinfortwalton
Lostinfortwalton's picture

If the student loan experiment to date has been one train wreck after another why do they keep sending trains down the track?

Tue, 08/11/2015 - 17:45 | 6415790 goldman58
goldman58's picture

What an idiot I am for first working three jobs to pay ffor my education and then even getting the degree to begin with............

Tue, 08/11/2015 - 17:49 | 6415807 goldman58
goldman58's picture

If the bitch Hitlery is so concerned about the cost of education then maybe she should stop charging the universities 250K forr her senseless speeches - her and her deadbeat scumbag husband both - same for Barry - he's going to become a billionaire making senseless speeches after he finshes wrecking whats left off the USA before he leaves office......

Tue, 08/11/2015 - 17:50 | 6415812 Perseus son of Zeus
Perseus son of Zeus's picture

Does anyone know how I can short Ultracoin? That bitch is tanking.

http://coinmarketcap.com/currencies/ultracoin/

Ask - $ 0.002144

Marketcap -259 BTC
Volume - 5 BTC
Available Supply >+ 32 million

Tue, 08/11/2015 - 17:52 | 6415824 goldman58
goldman58's picture

Karma is a bitch - and the bitch is in heat

Wed, 08/19/2015 - 11:30 | 6443770 Omega
Omega's picture

In some situation it can be a good solution. But I think that this remains one of the important problems in the society. Young specialists have no place to work due to such retires who stay at their working places for longer period. I understand all the benefits to schools that can pay lower salaries to such workers, but from the other side this problem causes a lot of difficulties for young generation. Young graduates have to look for Vita Loans Reviews to get appropriate financial assistance, because they have great student debts and no possibility to find appropriate job.

Do NOT follow this link or you will be banned from the site!