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Did JPMorgan Pop The Student Loan Bubble?

Tyler Durden's picture




 

Back in 2006, contrary to conventional wisdom, many financial professionals were well aware of the subprime bubble, and that the trajectory of home prices was unsustainable. However, because there was no way to know just when it would pop, few if any dared to bet against the herd (those who did, and did so early despite all odds, made greater than 100-1 returns). Fast forward to today, when the most comparable to subprime, cheap credit-induced bubble, is that of student loans (for extended literature on why the non-dischargeable student loan bubble will "create a generation of wage slavery" read this and much of the easily accessible literature on the topic elsewhere) which have now surpassed $1 trillion in notional. Yet oddly enough, just like in the case of the subprime bubble, so in the ongoing expansion of the credit bubble manifested in this case by student loans, we have an early warning that the party is almost over, coming from the most unexpected of sources: JPMorgan.

Recall that in October 2006, 5 months before New Century started the March 2007 collapsing dominoes that ultimately translated to the bursting of both the housing and credit bubbles several short months later, culminating with the failure of Bear, Lehman, AIG, The Reserve Fund, and the near end of capitalism 'we know it', it was JPMorgan who sounded a red alert, and proceeded to pull entirely out of the Subprime space. From Fortune, two weeks before the Lehman failure: "It was the second week of October 2006. William King, then J.P. Morgan's chief of securitized products, was vacationing in Rwanda. One evening CEO Jamie Dimon tracked him down to fire a red alert. "Billy, I really want you to watch out for subprime!" Dimon's voice crackled over King's hotel phone. "We need to sell a lot of our positions. I've seen it before. This stuff could go up in smoke!" Dimon was right (as was Goldman, but that's another story), while most of his competitors piled on into this latest ponzi scheme of epic greed, whose only resolution would be a wholesale taxpayer bailout. We all know how that chapter ended (or hasn't - after all everyone is still demanding another $1 trillion from the Fed at least to get their S&P limit up fix, and then another, and another). And now, over 5 years later, history repeats itself: JPM is officially getting out of student loans. If history serves, what happens next will not be pretty.

American Banker brings us the full story:

U.S. Bancorp (USB) is pulling out of the private student loans market and JPMorgan Chase (JPM) is sharply reducing its lending, as banking regulators step up their scrutiny of the products.

 

JPMorgan Chase will limit student lending to existing customers starting in July, a bank spokesman told American Banker on Friday. The bank laid off 24 employees who make sales calls to colleges as part of its decision.

The official reason:

"The private student loan market is continuing to decline, so we decided to focus on Chase customers," spokesman Thomas Kelly says.

Ah yes, focusing on customers, and providing liquidity no doubt, courtesy of Blythe Masters. Joking aside, what JPMorgan is explicitly telling us is that it can't make money lending out to the one group of the population where demand for credit money is virtually infinite (after all 46% of America's 16-24 year olds are out of a job: what else are they going to?), and furthermore, with debt being non-dischargable, this is about as safe a carry trade as any, even when faced with the prospect of bankruptcy. What JPM is implicitly saying, is that the party is over, and all private sector originators are hunkering down, in anticipation of the hammer falling. Or if they aren't, they should be.

JPM is not alone:

Minneapolis-based U.S. Bank sent a letter to participating colleges and universities saying that it would no longer be accepting student loan applications as of March 29, a spokesman told American Banker on Friday.

 

"We are in fact exiting the private student lending business," U.S. Bank spokesman Thomas Joyce said, adding that the bank's business was too small to be worthwhile.

 

"The reasoning is we're a very small player, less than 1.5% of market share," Joyce adds. "It's a very small business for the bank, and we've decided to make a strategic shift and move resources."

Which, however, is not to say that there will be no source of student loans. On Friday alone we found out that in February the US government added another $11 billion in student debt to the Federal tally, a run-rate which is now well over $10 billion a month an accelerating: a rate of change which is almost as great as the increase in Apple market cap. So who will be left picking up the pieces? Why the Consumer Financial Protection Bureau, funded by none other than Ben Bernanke, and headed by the same Richard Cordray that Obama shoved into his spot over Republican protests, when taking advantage of a recessed Congress.

"What we are likely to see over the next few months is a lot of private education lenders rethinking the product, particularly if it appears that the CFPB is going to become more activist," says Kevin Petrasic, a partner with law firm Paul Hastings.

 

"Historically there's been a patchwork of regulation towards private student lenders," he adds. "The CFPB allows for a more uniform and consistent approach and identification of the issues. It also provides a network, effectively a data-gathering base that is going to enable the agency to get all the stories that are out there."

 

The CFPB recently began accepting student loan complaints on its website.

 

"I think there's going to be a lot of emphasis and focus … in terms of what is deemed to be fair and what is over the line with collections and marketing," Petrasic says, warning that "the challenge for the CFPB in this area is going to be trying to figure out how to set consumer protection standards without essentially eviscerating availability of the product."

And with all private players stepping out very actively, it only leaves the government, with its extensive system of 'checks and balances', to hand out loans to America's ever more destitute students, with the reckless abandon of a Wells Fargo NINJA-specialized loan officer in 2005. What will be hilarious in 2014, when taxpayers are fuming at the latest multi-trillion bailout, now that we know that $270 billion in student loans are at least 30 days delinquent which can only have one very sad ending, is that the government will have no evil banker scapegoats to blame loose lending standards on. And why would they: after all it is this administration's sworn Keynesian duty to make every student a debt slave in perpetuity, but only after they buy a lifetime supply of iPads. Then again by 2014 we will have far greater problems (and for most in the administration, it will be "someone else's problem").

For now, our advice - just do what Jamie Dimon is doing: duck and hide for cover.

Oh, and if there is a cheap student loan synthetic short out there, which has the same upside potential as the ABX did in late 2006, please advise.

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Sat, 04/07/2012 - 23:36 | 2325500 eric89074
eric89074's picture

Too many Americans don't realize how much less they could go to school for if the government wouldn't subsidize studen loans.

Sun, 04/08/2012 - 00:00 | 2325542 whatsinaname
whatsinaname's picture

I wonder if tuition rates nationally would be far more reasonable if loans would not be so easily available.. aka a price bubble in college tuition thanks to easy loans ??

Sun, 04/08/2012 - 00:05 | 2325550 tmosley
tmosley's picture

On the nosy.

Sun, 04/08/2012 - 00:16 | 2325566 Troll Magnet
Troll Magnet's picture

but but but...education is a right and should be free to all so everybody can go fuck off for four years and get a shiny paper at the end without any useful skills...i mean, liberal arts, bitchez!

Sun, 04/08/2012 - 00:25 | 2325580 LetThemEatRand
LetThemEatRand's picture

A few decades ago, a large percentage of the population could not read or write.  Still true in much of the world where there are no public schools.  Rand paradise.

Sun, 04/08/2012 - 00:50 | 2325606 tmosley
tmosley's picture

If government shrinks, everything bad will happen!

Also, the last time a "large percentage" of the population was illiterate was 1920's, with "large" being defined as over 5%.  The last time it was over 10% was the 1870's.

Your anti-ideology blinds you.

Sun, 04/08/2012 - 00:56 | 2325613 economics9698
economics9698's picture

A private two year degree can cost $50,000.  It should cost $5,000.  I paid my entire college with one student loan.  My masters was $5,000 with books at state U.  Its insane.

Sun, 04/08/2012 - 01:26 | 2325641 Michael
Michael's picture

You can't get blood from a stone. That's a fact jack!

Sun, 04/08/2012 - 01:40 | 2325648 Michael
Michael's picture

Tiger Woods and President Barack Obama are the same level of blackness.

When was the last recorded incidence of racism against those two?

Sun, 04/08/2012 - 01:44 | 2325651 Michael
Michael's picture

Ask yourselves this question;

Is the white community a hindrance to the progress of the black community in this day and age?

Sun, 04/08/2012 - 02:59 | 2325713 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Don't ask questions, just short SLM.

Sun, 04/08/2012 - 04:10 | 2325773 Mary Wilbur
Mary Wilbur's picture

Jeff montanye  Thanks for the link.

Sun, 04/08/2012 - 12:07 | 2326086 Manthong
Manthong's picture

Hmmm… Grant Williams might want to do a piece on this:

“Harvard could easily offer free tuition in perpetuity off only a fraction of the annual interest off their endowment fund.”

http://www.dailycampus.com/2.7438/harvard-endowment-should-mean-free-tuition-1.1057409

Of course, there is little about the US Education system that has has to do with optimal education outcomes.

It's mostly about the money and indocrrination.  

Mon, 04/09/2012 - 01:24 | 2327300 Simon Endean
Simon Endean's picture

"It's mostly about the money and indocrrination."

 

And a jobs program, don't forget that.  It's like mass transit, but it doesn't go anywhere. 

Sun, 04/08/2012 - 04:21 | 2325781 Colonial Intent
Colonial Intent's picture

Yes.

Neo-Nazis are currently conducting heavily armed patrols in and around Sanford, Florida and are "prepared" for violence in the case of a race riot.

The patrols are to protect "white citizens in the area who are concerned for their safety" in the wake of the Trayvon Martin shooting last month, says Commander Jeff Schoep of the National Socialist Movement. "We are not advocating any type of violence or attacks on anybody, but we are prepared for it," he says.

"We are not the type of white people who are going to be walked all over."

Isnt it time for you and trav to do your white patriotic duty?

http://blogs.miaminewtimes.com/riptide/2012/04/heavily_armed_neo-nazis_p...

Sun, 04/08/2012 - 08:41 | 2325946 Buckaroo Banzai
Buckaroo Banzai's picture

If the MSM was promoting a race war, this is exactly the kind of story you'd expect them to print.

Since they are, in fact, under orders to promote a race war this summer, expect to see a lot more stories like this. Evil whitey persecuting the black man. Subtext: you're a racist if you don't reelect the black man on the ballot.

Politics has hit a new low, thanks to the Chicago thugs running the executive branch. These guys make Nixon look like a choirboy.

Sun, 04/08/2012 - 09:10 | 2325970 knukles
knukles's picture

Not only promoting race wars, but also the "necessity" to disarm an unruly peasantry, diminish the freedoms of speech and assembly as the peasants abuse such and see what happens when they do, increase the role of gubamint especially in the militarization of local police forces, further censor the internet as it's irresponisible to disseminate information in such a manner (get that one, reread, again), etc., etc., etc.....
Just so bloody obvious.

From Chaos, Order.

Sun, 04/08/2012 - 10:07 | 2326035 Bendromeda Strain
Bendromeda Strain's picture

That's how Stand Your Ground becomes Kill At Will. See Van Jones, etc.

Sun, 04/08/2012 - 10:20 | 2326049 nmewn
nmewn's picture

lol...they keep trying.

And according to Sanford PD (as of yesterday) there are no armed neo-nazis on patrol around Sanford.

http://legalinsurrection.com/2012/04/sanford-fl-police-deny-any-indication-of-neo-nazis-patrolling/

“We have no indication of any such patrols at this point in Sanford. The only large gathering was the children and their parents at the Easter egg hunt.”

The Great Easter Egg Riot of 2012!!!

Sun, 04/08/2012 - 10:55 | 2326092 hungarianboy
hungarianboy's picture

And Did ZeroHedge popped the gold bubble? :D

Sun, 04/08/2012 - 16:11 | 2326546 eatthebanksters
eatthebanksters's picture

I'm a white guy who grew up in a well known black city.  To this day I have many black friends, good people, all of them.  What fry's my ass is the the ilk of those black folks who create a crisis out of the Trayvon Martin tragedy without knowing the facts.  It's sad enough when ANY young person dies,but when that tragedy is used as fodder for political gain it backfires, and instead, it actually fans the flames of racism. What I worry about is the very poeple who scream the loudest will create huge problems for everyone else.  Someone needs to stand up to the charlatains that call good paople racists.  While I don't condone any racial separitist organization, whether it's theNew Black Panthers or a White Supremist organization, Iread an article about a white supremist group that went to Sanford, FL to 'patrol'.  The leader said something ver interesting and should raise the hair on all of our spines...he said that if anyone in his group had put out a bounty like the New Black Panthers, they would have been in jail that same night.  Why is this?  Why have no New Black Panthers been arrested?  Aren't we all equal under the law? What are Obama and Holder thinking?

Sun, 04/08/2012 - 03:28 | 2325735 Calmyourself
Calmyourself's picture

"Rand paradise" So true, so true and those folks end up working for a boss who will not let them unionize, sound familiar?

Sun, 04/08/2012 - 10:04 | 2326032 Bendromeda Strain
Bendromeda Strain's picture

Bullshit. The union of illiterates is the Democrat Party.

 

Sun, 04/08/2012 - 11:00 | 2326096 Calmyourself
Calmyourself's picture

Did I forget the SARC tag for you guys again??  Eat rand runs a non union shop but preaches the benefits of unions every chance she gets....

Sun, 04/08/2012 - 08:48 | 2325953 AnAnonymous
AnAnonymous's picture

When was the last recorded incidence of racism against those two?
_______________________________________________

The whole presidency of Obama is a testimony of racism as a central core of US citizenism.

Probably the US of A US citizen president with the least personal power.

Had to apologize to a cop for a petty comment.

In the meantime, his predecessor could yell two inches close in the face of a marine for no reason than relaxing.

Etc...

Obama is your typical US citizen president. Just like the others, he has been abusing institutional power.

But when it comes to personal power, that is a totally different story.

Maybe putting more negroes in the seat could diminish endemic US citizen abuses of power. The function of institutional power is preserved but the private power is lessened.

So...

Sun, 04/08/2012 - 10:51 | 2326087 Normalcy Bias
Normalcy Bias's picture

Meanwhile, everything's just swell in the glorious People's Republic of China!

Sun, 04/08/2012 - 12:10 | 2326199 knukles
knukles's picture

Er.... Last time I looked, weren't no Negroes in power in China....
Lot of 'em in power in Africa.
Lot of Arabs in power in Arabia.
Lot of Latinos in power in Latin America.
Lot a Penguins in power in Antartica

Mon, 04/09/2012 - 01:30 | 2327304 Simon Endean
Simon Endean's picture

"Lot a Penguins in power in Antartica"

 

Yeah, the seals and killer whale gangs need to stop killing each other and fight the power!

Mon, 04/09/2012 - 11:49 | 2328145 Normalcy Bias
Normalcy Bias's picture

Wow. You actually read AnAnonymous' claptrap? "US citizenism is to blame for all the world's evils!" - There, you don't need to read his posts anymore...

Sun, 04/08/2012 - 10:20 | 2326044 Bendromeda Strain
Bendromeda Strain's picture

.

Sun, 04/08/2012 - 10:24 | 2326054 New_Meat
New_Meat's picture

mikey, u b talkin' to u self

Sun, 04/08/2012 - 11:26 | 2326126 derek_vineyard
derek_vineyard's picture

my dad loves tiger and obama

i sense he wishes he were black

Sun, 04/08/2012 - 01:47 | 2325657 batterycharged
batterycharged's picture

I love how ppl blame gov't.

Last I checked, JPM ain't a fucking gov't entity.

You can thank the bank lobbies for getting student loans to be unforgivable.

Do you think JPM or other sharks would be in the biz if 18 year old kids could default?

It's not Keynes, it's the banksters that manipulate gov't.

Yeah, you're wrong, we can blame banks.

Oh they also made credit card debt unforgivable. I guess that was socialism too and not crony capitalism.

Sun, 04/08/2012 - 02:12 | 2325675 Dasa Slooofoot
Dasa Slooofoot's picture

JP Morgue is a ward of the state, fuckface.

 

Lol.  And crony capitalism isn't socialism. Go shit on a sidewalk, douchebagger.

Sun, 04/08/2012 - 04:04 | 2325772 malikai
malikai's picture

Oh, and if there is a cheap student loan synthetic short out there, which has the same upside potential as the ABX did in late 2006, please advise.

How about APOL? Sounds as good a proxy as any to me. Of course, it looks like that train left the station back in January.

Sun, 04/08/2012 - 08:07 | 2325905 Straying from t...
Straying from the flock's picture

Well said.  JP Morgan and HSBC are both complicit in the fleecing of the republic's wealth.  But it is okay, they are doing it on behalf of their customers.

It is the normalcy bias that keeps us from standing up for ourselves.  Separate yourself from the herd.  Soon there will be a new paradigm and those not aware will be fodder for the masses.  People do many odd things when you take away their future.

Sun, 04/08/2012 - 09:13 | 2325975 knukles
knukles's picture

JPM and HSBC are two of the larger LBMA members....

Circles within circles...

Go figure

Sun, 04/08/2012 - 08:27 | 2325931 Ag1761
Ag1761's picture

 

JP Morgue is a ward of the state, fuckface.

 

 

The state is a ward of JP Morgue

 

Fixed it for you

 

Sun, 04/08/2012 - 13:16 | 2326293 Cathartes Aura
Cathartes Aura's picture

truth = no nationstates, just the banking class, re-inventing "realities" as they go. . .

 

"what's in yer wallet"

Sun, 04/08/2012 - 15:02 | 2326455 BobPaulson
BobPaulson's picture

Yes. That's why exactly zero policies effectively change when government changes except bullshit wedge issues related to religion and race that get people screaming at each other while they are being robbed.

Sun, 04/08/2012 - 16:10 | 2326540 MrPalladium
MrPalladium's picture

The implied universalism of the "robbery" mentioned in your comment would ring true if there were not for massive inter-racial transfers of wealth occurring through group differentials in the extent of the robbery, and the concomitant need of one race to protect itself from another.

Group resource competion is an inevitable reality of life, and the best mechanisms for civilizing such competitons are homogeneous nations that can negotiate with each other most of the time on a rational basis.

In "multi-cultural" societies the inevitable resource competion between groups always escalates and is a profoundly destabilizing mechanism. Only in times of increasing prosperity is such a society attain a tenuous and fragile inter group peace.

All else is a lie.

Sun, 04/08/2012 - 20:22 | 2326871 DCFusor
DCFusor's picture

Mod parent up!  Gheez am I ever tired of the red vs blue game - all, and only, about what I can do in bed or at the doctor, as if all the other problems were solved.  Bob has it right here.  Don't drink the kool ade - both colors are poisoned.

Sun, 04/08/2012 - 06:25 | 2325834 barroter
barroter's picture

Agreed.  Only those with enough $$$ can afford well connected lobbyists to plead their wishes for changes in law, regulations for their clients.  I am sure PRIVATE business had a hand in demanding that student loans couldn't be discharged in court.  It wasn't ONLY the gov't. that created this.

Business..isn't some innocent bystander when it comes to this monumental thievery and fraud. 

I wish I would hear libertarians SCREAM for the end of business tyranny once in a while.  But you barely hear a peep from them about it.

Sun, 04/08/2012 - 08:42 | 2325945 Sean7k
Sean7k's picture

Business tyranny is the result of governmant and the police power of the state. The elimination of government, the protection of private property and market based economics will resolve this- a truly libertarian position. Perhaps if you actually studied the concepts, it would help.

However, as libertarianism has been hijacked by the Republicans, please see anarcho- capitalism or voluntaryism.

Sun, 04/08/2012 - 08:48 | 2325952 Buckaroo Banzai
Buckaroo Banzai's picture

Never forget that corporations are, legally speaking, creatures of the state.

You don't see many sole proprietorships hiring lobbyists, do you?

What would happen if we returned to the kind of crippling limitations that corporations were legally subjected to as recently as the 1850s?

Sun, 04/08/2012 - 15:11 | 2326465 BobPaulson
BobPaulson's picture

Smith himself implied he was worried what would happen if corporations were given rights as they have today. When you do the equivalent of a Turing test on a corporation (watch its behaviour without knowing if it is a person or a machine) you see that it behaves exactly as it is legally obliged to behave: like psychopath with the single priorty of increasing shareholder value.

As a means of collectively pooling money to fund economic activity, it works pretty well and the fudiciary duties are supposed to protect people from getting ripped off. The problem is when we allow them to influence government, who should have the single goal of protecting the rights of the citizens.

Sun, 04/08/2012 - 20:57 | 2326937 barroter
barroter's picture

Anarcho-capitalism...THERE I agree with you on that!

Sun, 04/08/2012 - 08:01 | 2325900 TWSceptic
TWSceptic's picture

Banks are manipulated by government , by bailouts and regulation. It's called corporatism, look it up.

Sun, 04/08/2012 - 11:50 | 2326182 TMT
TMT's picture

Hey dumb dick who lets the bankers do what they want? THE GOVERNMENT. They write the laws.

Your slobbering love for the government is quite sad.

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