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A 'Short' Plays Washington

Ohanian Comment: Okay, so we may be happy that some influential people are giving for-profits a hard time. But there are bigger questions involved.

  • Do all those progressives out there still hope that Barack Obama is going to change his stripes and defy the interests of Goldman Sachs, JPMorgan Chase, General Electric, or hedge fund managers?

  • In the face of the facts of whom the Department of Education calls for advice, will professional organizations like NCTE continue to waste our dues money setting up lobbying offices in Washington, D. C.? Surely, nobody at NCTE is delusional enough to believe they have a seat at the table.

  • The liberal class refuses to directly confront the dead hand of corporate power that is rapidly transforming America into a brutal feudal state. To name this power, to admit that it has a death grip on our political process, our systems of information, our artistic and religious expression, our education, and has successfully emasculated popular movements, including labor, is to admit that the only weapons we have left are acts of civil disobedience. And civil disobedience is difficult, uncomfortable and lonely. It requires us to step outside the formal systems of power and trust in acts that are marginal, often unrecognized and have no hope of immediate success. . . . The only gatherings worth attending from now on are acts that organize civil disobedience. . . . --Chris Hedges, Where Liberals Go to Feel Good, Truthout, Jan. 24, 2011

  • Just who are the "education activists" referred to in the first sentence? Surely "activist" here means "vigorous & conscienceless advocate of a money cause."

    By Mary Pilon, Jonathan Weisman, and Brody Mullins

    WASHINGTON--When the U.S. Education Department set out to craft rules that would affect for-profit education companies, it drew input from a wide range of people, from executives in the business to consultants and education activists.

    It also heard from a group less commonly involved in Washington lobbying, hedge funds.

    "Hello, my name is Steven Eisman," began an email to an Education Department official in May. "I wanted to bring to your attention many of the unsaid or unknown aspects of this industry." Mr. Eisman runs a hedge fund called FrontPoint Financial Services, whose hugely profitable 2007 bet that housing would collapse was chronicled in the book "The Big Short."

    In the past year, Mr. Eisman has sold short the stocks of for-profit education companies. He and some other investors betting on these stocks to fall have sought meetings with Education Department officials, and in some cases gotten a hearing. In emails and presentations, the investors have painted the for-profit industry in a highly critical light.

    The process of writing laws and regulations has long attracted intense lobbying from companies whose prospects are at stake. Much less common is for investors such as hedge funds to do so. But some have moved to beef up their presence in Washington, especially since the financial crisis led the government more deeply into the private sector.

    Short-sellers are far from the biggest force weighing in. Among groups lobbying for tougher regulation of for-profit colleges are the National Consumer Law Center, the American Association of Collegiate Registrars and Admissions Officers, the United States Student Association and U.S. PIRG, the federation of state Public Interest Research Groups.

    Meanwhile, lobbying by the for-profits has surged, according to the nonpartisan Center for Responsive Politics.

    But the investors' involvement has riled political players. A group called [See the CREW statement here]

    In what the group called "more troubling," it said Education Department officials sought and received investors' input despite knowing their financial motives, and asked for an investigation. [emphasis added]

    Two Republican senators, Tom Coburn of Oklahoma and Richard Burr of North Carolina, earlier asked the Education Department's inspector general to look into the propriety of the contacts with investors. "It is important to ensure that the integrity of the rule-making process has not been compromised," said a spokesman for Sen. Coburn. The IG's office is looking into the issue.

    Education Department officials said their exchanges with Mr. Eisman and other investors were simply part of an effort to hear all sides of the debate, adding that the investors had useful financial information.

    "We met with as many people as possible with relevant information--including representatives of the for-profit industry and others--as part of our efforts to protect the interest of students and taxpayers," said a spokesman for the department. "We feel very confident with the integrity of our process and how transparent and fair we were and will continue be."

    The department wasn't the only place where investors had input. A Senate committee sought and received testimony from Mr. Eisman last summer.

    Mr. Eisman has been open about his negative view of for-profit education companies. He also acknowledges communicating with U.S. Education officials about the sector, but not about how to oversee it. "No regulation was discussed in any way," he said in an interview.

    "I think the industry has major problems and I was trying to present them," said Mr. Eisman, whose FrontPoint firm is owned by Morgan Stanley. The Wall Street Journal reported last week that Mr. Eisman is considering leaving FrontPoint; there is no indication this is related to his stance on for-profit colleges.

    This industry exploded in recent years, fueled by a surge in students and easy credit. Close to 90% of some institutions' revenue comes from government aid to their students, including grants and federally guaranteed "Title IV" student loans. But since the start of 2009, even as stocks in general rose, many education companies' shares have fallen. A major cause is uncertainly about future regulation.

    The industry also has faced other challenges. Shares of one company, Strayer Education Inc., fell 22.6% in a single day this month when it said new-student enrollment was down. ITT Educational Services Inc. also has just reported lower enrollment. Mr. Eisman won't say which stocks he shorted or whether he still holds the short positions, nor whether he made money on them.

    For-profit colleges have drawn lots of critics, who argue that some of them provide degrees and certificates of limited value, with their graduates (and numerous dropouts) often left facing heavy student-loan debts and scant job prospects.

    Supporters say that the industry provides higher-education access for many lower-income people who wouldn't otherwise have such an opportunity, and that the for-profit schools help absorb the overflow from public community colleges.

    The Government Accountability Office last summer reported that 15 for-profit education companies it examined had made questionable statements in marketing themselves to would-be students.

    The report drew fire from industry supporters. The GAO issued some corrections to it. Last week, Republican Rep. Darrell Issa of California, chairman of the House oversight committee, wrote to the GAO requesting documents used to draft the report. The GAO says an independent review found the report to have no material flaws, though it continues to review the "internal processes that led" to the need for corrections.

    A move to regulate the industry kicked off a battle, starting in 2009. Last year, 90,000 comments poured in to the Education Department, which estimated that 60,000 were from letter-writing campaigns orchestrated by the industry, while 20,000 to 30,000 were from consumer groups.

    Investors were on the scene as well. Their efforts are revealed in large caches of documents and emails reviewed by the Journal, many of which surfaced as a result of a freedom-of-information suits filed by CREW, the Washington watchdog, and of legal action by a Florida for-profit college.

    One investor, a New York firm called Quilcap Corp., sent a research article to an Education Department official, the emails show. An investor for Dallas-based CPMG Inc., Antal Desai, met with different officials of the Education Department, the department's spokesman confirms.

    Quilcap is no longer active; Parker Quillen, who ran it, said he responded to a public request for comment by the Education Department and his comments were submitted publicly. CPMG and Mr. Desai didn't reply to messages seeking comment.

    CPMG got some research about for-profit education companies from a firm called Alternative Research Services. That firm's president, Robert MacArthur, spoke against a for-profit education business at an Education Department hearing in Philadelphia in June 2009.

    "Do I have a motivation to predict the stocks will go lower? Yes," Mr. MacArthur says. "But...I am also a taxpayer and citizen in the U.S. When I see [high] default rates...low graduation rates and the government guaranteeing those loans, clearly the taxpayer is not being served."

    Mr. Eisman and an associate at FrontPoint, Matthew Leahy, sought an audience with Education Department officials, through an email that FrontPoint's public-relations specialist, Diane Schulman, sent in early April.

    "As I mentioned, Steve Eisman, Matthew Leahy and I will [be] in Washington for meetings on Friday, April 16th. Steve and Matt would love to have a chance to share some of their exhaustive research on the for-profit education industry and get your input," she wrote.

    The recipient, David Bergeron, acting Education Department deputy assistant secretary for policy, planning and innovation, forwarded the note to Bob Shireman, then deputy under secretary of education, saying, "I suggest we take this meeting."

    On April 19, a FrontPoint portfolio manager emailed Mr. Shireman, who had joined the meeting by phone. "Bob, Thanks for taking the time to review our slide deck on the for-profit space on Friday....We hope you found the conversation useful and insightful (Steve is a character)."

    Education Department officials referred questions to the department's public-affairs office. Mr. Shireman has since left the department.

    A series of exchanges ensued. On April 20, Mr. Eisman sent Mr. Bergeron a paper about a lawsuit that was accusing one for-profit company of practices such as inflating grades and altering attendance records to retain access to federal student aid. "For your reading pleasure," he wrote. Mr. Eisman's colleague Mr. Leahy sent Education Department officials some "new analyses that I thought you may find interesting."

    Mr. Eisman broadened his outreach. Through a P.R. representative he communicated with Susan Lehr, a lobbyist for a Florida nonprofit community college who is also part of a group the Education Department assembled to advise it on the regulation of higher education. Ms. Lehr emailed a fellow activist saying she was "so excited about Steve Eiseman [sic] perhaps weighing in on our side."

    Mr. Eisman made his case publicly in a speech to an investment conference May 26. He likened the for-profit-college industry to subprime lending, as a sector that also grew rapidly through easy-credit loans, many made to heavily recruited low-income borrowers and many unlikely to be repaid.

    He described the schools as "marketing machines masquerading as universities" and predicted "a new social disaster" as tens of billions in loans eventually default, leaving taxpayers with the bill because of the federal loan guarantees.

    Ms. Lehr emailed a copy of his talk to an executive of Water Street Capital, a hedge fund based in Jacksonville, Fla., saying, "This is a speech given to Wall Street today that will rock the market." An official of Water Street, Gilchrist Berg, said, "We spoke to a lot of people and we always tell people we don't want any inside information."

    After Ms. Lehr received a brief email from Mr. Eisman, his P.R. representative, Ms. Schulman, told her, "You are one of his peeps now!" Ms. Schulman and Ms. Lehr declined to comment.

    One of the proposed regulations brought up by the industry during public hearings, designed to prevent over-indebted students, suggested limiting their loans to 8% of their projected income following graduation.

    Mr. Eisman weighed in specifically on this. "In our opinion," he told an Education Department official in a May 28 email, "if the administration were to move substantially away from the initial combination (8% ratio and a 10-yr repayment period), then it would be better off to have no...rule at all, since a diluted version will likely result in no changes at the schools and no reduction in student's debt loads."

    The Education Department said its officials offered Mr. Eisman no information and made no comments on his presentations, apart from one small factual correction.

    Sen. Tom Harkin (D., Iowa) invited Mr. Eisman to testify before the Senate Health, Education, Labor and Pensions Committee. Appearing there on June 24, Mr. Eisman reprised his critique of for-profit education companies.

    The Education Department came out with draft regulations in late July, calling for schools to disclose more about students' debt loads and better prepare them for employment.

    The rules were weaker than expected, and shares rose for companies that own for-profit education businesses, such as ITT Educational Services, Apollo Group Inc. (owner of the University of Phoenix) and Washington Post Co. (which owns Kaplan Inc.).

    A number of final regulations came out in late October, applying to all of higher education, but one important regulation still exists only in a draft version. It is known as the "gainful employment" rule, because it requires schools to show they are preparing students for the work force.

    To gauge this, the rule may use such measures as the rate at which loans to a school's students are being repaid. The rule holds the potential to crimp for-profit schools' revenue by excluding some programs from federal aid.

    The final version of this rule is expected early this year. It is still too early to tell whether the investors' input had an effect on it.

    Write to Mary Pilon at mary.pilon@wsj.com, Jonathan Weisman at jonathan.weisman@wsj.com and Brody Mullins at brody.mullins@wsj.com

    — Mary Pilon, Jonathan Weisman, & Brody Mullins





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