Bundling Student Loans Like Mortgages. What could go wrong?

GOLDMAN SACHS: There’s an attractive way to profit from the $1.3 trillion student-loan bubble

Goldman Sachs has a plan to bundle student loans into securities and sell them, just like they did home mortgages. What could possibly go wrong!?

We won’t know until my friend David Dayen​ writes a book on how it all fell apart in 2021 under a Democratic president.

This sounds like a great plan — for the financial industry. I’m no expert, but I can’t see the downside for the industry.

  1. Students have to pay. They can’t get out of the loans via bankruptcy like with mortgages.
  2. Just like housing prices, tuitions always go up! Bigger loans are needed. The pipeline of students in debt will continue because free college isn’t coming anytime soon.
  3. Investors are looking for a new debt instrument to speculate with. They can’t use home mortgages like before, Millennials aren’t buying houses–because of their student debt–so it’s a winner for banks.
  4. The people who give out loans set the standards for worthiness or and credit. They have an incentive to give loans to people who may or may not be able to pay them back.
  5. The banks will be able to bundle loans to students who have jobs and A+++ ratings with students who don’t have jobs and D+++ ratings. Just because they can’t get a job isn’t the lender’s fault.

If they scheme crashes (free college comes in the future, debt forgiveness is arranged for previous students) the government will bail everyone out!

When that happens the  excuses are already in place!

Blame the students!

  1. It’s his own fault, he bought too much education.
  2. They should have known some degrees will just never pay off!
    “Computer programming!? Ha! Everyone knows that Indians can do it cheaper and better over the internet! . A degree in government lobbying is where the big money is at, everyone knows that.”

Blame Obama and Sanders

Obama was always giving people free stuff. First hope, them medical care.

Sanders put the crazy idea of “free college” into their heads. They figured Sanders would be elected and wave a magic wand to get rid of their debt! So they rolled the dice bought too much expensive education and lost.

Don’t blame Wall Street!
The financial institutions were just doing what they do. Make profits. There was a demand and they filled it.

Nobody could have predicted that an unregulated financial market would follow the same path with student loan debt instruments as it did with mortgage debt instruments.

Excuses, excuses, excuses

But Companies have learned their lesson! 

The line is always, “Markets work.” Shareholders would punish the companies if they tried to do the same thing again. Investors in securities KNOW things now. Movies, starring Margot Robbie were made about the credit default swaps and it’s hard to forget that bubble bath scene!

But have things changed? Really?

People smarter than me write on this topic and I’m sure they have already pointed this out.   I just wrote this post because I stumbled on the Bloomberg story and it read like the kind of story that you would see in a docu/drama like The Big Short, where people watching it asked, ‘Why didn’t anyone do anything to stop this at the time?” And then they would cut to Trump as President, the tax bill the Republicans rammed through congress, while a cabinet of Goldman Sachs executives quietly did what vampire squids do.

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