Student Loan Changes

[Chisoxfn]

That's not entirely true, Jason. You can make the leap that mark to market (FAS 157) came about as a result of Enron, because of two reasons. 1 - the market that Enron established was falsely valued and 2 - the off balance sheet crap (which is what is now being debated by FASB and IASB). Mark to market would have come about, but not because of SOX but it's certainly intertwined as to the reasons behind it. And mark to market is not just mortgage loan portfolios. It's only a small portion of the FAS.

 

ETA: I see you sort of addressed this but I still maintain what I said here, which makes a slightly different point then you were making.

Look guys, I was on the calls. You two are completely off when it comes to this. Go ask anyone that audited or worked accounting in the big investment companies during the time period and not one person will tell you that 157 has anything to do with SOX.

[Chisoxfn]

This exactly what I am talking about with discounted loan valuations.

And it has absolute N00000000000000000000 correlation to SOX.

[NorthSideSox72]

And it has absolute 00000000000000000000 correlation to SOX.

Its also not where the savings come from.

 

Indirectly, they are of course related - the purpose of the subsidy is for the banks to take losses on the loans, and that does relate to valuation. But the taxpayer savings is about not having to pay the subsidy, and partially about money made on interest, offset by the already-existing default risk (they were always federally backed), and the new implementation costs.

 

[BigSqwert]

OT: consider the IRS route. My dad worked in the corporate world for years and had 60-80 hour weeks for a couple of months every year. Hasn't had anything close since going to the IRS, plus he gets to work from home a lot.

Thanks for the tip although not many relevant job postings right now.

[southsider2k5]

Its also not where the savings come from.

 

Indirectly, they are of course related - the purpose of the subsidy is for the banks to take losses on the loans, and that does relate to valuation. But the taxpayer savings is about not having to pay the subsidy, and partially about money made on interest, offset by the already-existing default risk (they were always federally backed), and the new implementation costs.

 

That is what I have been saying. If the government does it, they are exempt from the things that they force private banks to do. They don't show these loans as losses, there fore they don't need the subsidy.

[NorthSideSox72]

That is what I have been saying. If the government does it, they are exempt from the things that they force private banks to do. They don't show these loans as losses, there fore they don't need the subsidy.

Huh? The federal government doesn't need to subsidize itself - its not about valuation rules, its about the fact that the federal government equals the federal government. Being exempt is irrelevant here. They don't need to subsidize themselves for anything, ever, any more than you have to subsidize yourself.

 

[southsider2k5]

Huh? The federal government doesn't need to subsidize itself - its not about valuation rules, its about the fact that the federal government equals the federal government. Being exempt is irrelevant here. They don't need to subsidize themselves for anything, ever, any more than you have to subsidize yourself.

 

They don't need to subsidize themselves because they aren't subject to accounting laws that they do require banks to follow. It is absolutely the center of this story. If they weren't exempt from this stuff, they wouldn't be able to give out below market loans unless they were subsidizing at the other end as well.

[Chisoxfn]

The problem with your theory Mike is you are blaming accounting rules for why the subsidy was given and that isn't really the case.

 

The subsidy was given because these businesses want to make money and they aren't going to waste there resources on stuff that isn't as profitable as other avenues that they can utilize there resources on. Thus, the gov needed to provide a subsidy so that the Banks were making enough of a return to determine that being a part of this business was worth it financially.

 

 

 

[NorthSideSox72]

The problem with your theory Mike is you are blaming accounting rules for why the subsidy was given and that isn't really the case.

 

The subsidy was given because these businesses want to make money and they aren't going to waste there resources on stuff that isn't as profitable as other avenues that they can utilize there resources on. Thus, the gov needed to provide a subsidy so that the Banks were making enough of a return to determine that being a part of this business was worth it financially.

This.

 

And Mike, I just don't understand why you think it takes an accounting rule to tell you that you do not need to subsidze yourself.

 

[southsider2k5]

Nevermind. Neither one of you guys have any idea what I am trying to say.

[Chisoxfn]

Nevermind. Neither one of you guys have any idea what I am trying to say.

Mike, just an FYI, but the subsidy from the government for student loans started 45 years ago. That is 20+ years before Mark to Market accounting even existed and ~35 years before SOX.

 

Program history

 

Banks have been making government guaranteed loans under what is now called the Federal Family Education Loan Program, created in 1965.

 

Read more: http://www.sfgate.com/cgi-bin/article.cgi?...L#ixzz0jmrXGjJh

[kapkomet]

Look guys, I was on the calls. You two are completely off when it comes to this. Go ask anyone that audited or worked accounting in the big investment companies during the time period and not one person will tell you that 157 has anything to do with SOX.

 

 

You're missing the point, and it's not like I don't have a CPA and understand a correleation, not a direct relationship of this. Read what I said again. Almost all FAS's have had some correlation to what happened with these financial debacles and cleaning it up - which is a correlation of what SOX is about. No, one is not DIRECTLY tied to the other, but there are correlating circumstances to what the new rules are subsequent to 2003. And you have to have internal controls to get the FAS's right.

 

But Mike's larger point is that the government doesn't have these reporting standards to adhere to - so they "save" when banks had to keep the loans on the books less the deductability of the subsidies. Meanwhile, the government takes the difference and calls that a "savings" when in reality it's revenue neutral to a real accounting of the funds.

[Chisoxfn]

You're missing the point, and it's not like I don't have a CPA and understand a correleation, not a direct relationship of this. Read what I said again. Almost all FAS's have had some correlation to what happened with these financial debacles and cleaning it up - which is a correlation of what SOX is about. No, one is not DIRECTLY tied to the other, but there are correlating circumstances to what the new rules are subsequent to 2003. And you have to have internal controls to get the FAS's right.

 

But Mike's larger point is that the government doesn't have these reporting standards to adhere to - so they "save" when banks had to keep the loans on the books less the deductability of the subsidies. Meanwhile, the government takes the difference and calls that a "savings" when in reality it's revenue neutral to a real accounting of the funds.

So they've been saving the books since 1965 than, well before they needed to "save the books".

 

You guys are so far off, its ridiculous.

[kapkomet]

So they've been saving the books since 1965 than, well before they needed to "save the books".

 

You guys are so far off, its ridiculous.

 

 

One has nothing to do with the other - my point was a different point and only related in that standards developed today do take SOX in mind.

[StrangeSox]

But Mike's larger point is that the government doesn't have these reporting standards to adhere to - so they "save" when banks had to keep the loans on the books less the deductability of the subsidies. Meanwhile, the government takes the difference and calls that a "savings" when in reality it's revenue neutral to a real accounting of the funds.

 

Were they given subsidies because they were losing money on the loans or because they weren't profiting enough? That makes all the difference between revenue-neutral or not.

[Balta1701]

Were they given subsidies because they were losing money on the loans or because they weren't profiting enough? That makes all the difference between revenue-neutral or not.

At least for the last 20 years, it's been because they had good lobbyists.

[NorthSideSox72]

At least for the last 20 years, it's been because they had good lobbyists.

While its true that they've had good lobbyists, I hope you realize that banks aren't going to make money on giving out student loans at like 2% interest delayed 4-8 years. They'd lose money, so frankly, it only made sense to subsidize it, since it was the government that wanted to be able to make sure the loans could be made that way.

 

[StrangeSox]

While its true that they've had good lobbyists, I hope you realize that banks aren't going to make money on giving out student loans at like 2% interest delayed 4-8 years. They'd lose money, so frankly, it only made sense to subsidize it, since it was the government that wanted to be able to make sure the loans could be made that way.

 

So the government is still going to lose out on this, right? They'll be taking the loses directly instead of paying out subsidies. I think that's what Mike was getting at.

[Balta1701]

So the government is still going to lose out on this, right? They'll be taking the loses directly instead of paying out subsidies. I think that's what Mike was getting at.

Except...there have been very, very low losses on those loans.

[NorthSideSox72]

So the government is still going to lose out on this, right? They'll be taking the loses directly instead of paying out subsidies. I think that's what Mike was getting at.

No, the default risk hasn't changed at all. Previously, they were federally guaranteed, now they are federally held - either way, feds take the default risk. So that hasn't changed one bit.

 

[Chisoxfn]

So the government is still going to lose out on this, right? They'll be taking the loses directly instead of paying out subsidies. I think that's what Mike was getting at.

It isn't the losses. It is the opportunity cost and Banks weren't going to get enough of a return to do these products as is. They needed to be subsidized.

 

The federal government can do this. It isn't that you are losing money, it is more that you aren't getting enough of a return for it to be a worthwhile investment for your company (ie, the bank).

 

For example:

 

You have 100M.

 

You could loan that 100M on this student loans and get a rate of return of say 1.5%. Now you can switch that and loan this out to the general public or invest in different things and get a 6% return.

 

I'm not saying this is exactly what is happening, but if you are the bank, you not going to touch this 1.5% return when you have other options out there. Now when the subsidy kicks in, all of a sudden that 1.5% return moves up to 3 or 4% and given that it is fully guaranteed it is a nice risk-free return for the bank (thus they provided student loans).

[StrangeSox]

Thanks Jason, that was the general idea I had in my head. The government was incentivizing the loans via subsidies but wasn't covering actual losses. And they were always covering the defaults