Friday, May 28, 2010

The Itinerant Professor curse

Well, just as I was writing something nice about the proprietary sector, word comes out that an influential analyst has trashed it.  Steve Eisman of FrontPoint Financial Services Fund, an analyst featured in Michael Lewis's book The Big Short, spoke at the Ira Sohn Investment Research Conference on Wednesday.  He was quoted as saying (by Inside HigherEd):
"Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry," said Eisman. "I was wrong. The For-Profit Education Industry has proven equal to the task."
Pretty strong words from someone who supposedly has a good track record for reading markets and industries.

Mother Jones has a good recap of Eisman's perspective on the sector, and why he thinks it's ready for a tumble.  He blames the Obama administration's push for gainful employment regulations, which would force the sector to demonstrate that graduates of their institutions make enough money to shoulder the higher debt burdens students there have, on average (see the recent College Board report, Who Borrows Most? for more on this issue).

Criticism of this sector is not new; as far back as almost two decades ago, in the 1992 reauthorization of the Higher Education of 1965, the regulations on student loan defaults were changed and hundreds of proprietary institutions were thrown out of the Title IV programs.  But the sector has demonstrated an incredible resilience - and profitability - over the years.  The Chronicle of Higher Education had been doing a good job tracking the share prices and market cap of the key players in the sector, but it seemed to have stopped this in recent years (here's the most recent article on it I could find, from 2008 - you need to be a Chronicle subscriber to read it).  Its reporting has shown how stock prices of many of the large companies, such as Apollo Group (parent company of the University of Phoenix, the 640 pound gorilla in the industry), ITT Tech, Capella, and others, have risen far in advance of most market indices over the last decade (and fell less rapidly in the decline of the last couple of years).

Many in the proprietary sector broke out the champagne, I'm sure, when Bob Shireman announced last week that he was leaving the Department of Education.  He was seen as the leader of the efforts to rein in the sector, which has seen its share of Pell Grant dollars increase to 21 percent, even though they represent 9 percent of undergraduate enrollment (data from the College Board Trends in Student Aid website).  Their glee may be shortlived, however.  It is likely that others in the Department, as well as Congress, will continue the scrutiny of which Shireman was the figurehead.  Steve Eisman obviously agrees.

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