Three Evil Cousins: Freddie, Fannie, and Sallie

The following is a special guest post by JD Underground poster Diorama900 (a graduate of a T-14 law school ):

I have seen numerous bloggers criticize the ABA for its continued accreditation of law schools that are not needed in the legal market. No doubt, the ABA deserves condemnation for its refusal to protect the kids who enter these schools with no chance of getting jobs that will pay enough money to help them retire their law school loans. I was “lucky” – when I got into law school, a friend of the family was a law professor and he warned me that despite the $10,000 per year scholarship from Cardozo, I was better off paying full sticker at a T14 than getting a free ride at TTT. (Of course, even going to T14 was one of the big mistakes of my life, but that’s a different story.)

I think, however, that the bloggers are missing an important point of the story: The ABA is a culprit, but perhaps not even the worst culprit. Forget the deans at NYLS and BLS who need ever-increasing numbers of suckers to bleed dry. Worry about their enablers such as Sallie Mae.

The housing crisis presents a good metaphor for what is happening at law schools and many of our august institutions of higher learning like the University of Phoenix. I’m pretty sure that no one who buys a mortgage deals with Freddie Mac and Fannie Mae directly, but everyone deals with them indirectly. Say you go to a mortgage broker for a loan. Also, say that you don’t have sufficient cash to buy that house you really want. The broker doesn’t care and he doesn’t have to care. It’s not his money that you’re borrowing. He is going to package your loan with 100 other loans and sell them to Freddie and Fannie who will package them with another 10,000 loans and sell them to China.

Why do you think so many loans were made to people who ultimately couldn’t pay? The brokers didn’t care about the credit standards as they didn’t have to worry about repayment once the crap moved onto Freddie and Fannie! Freddie and Fannie provided the brokers with the capital without any of the responsibility. Why didn’t Freddie and Fannie care? So many reasons – they bribed Congress with $200,000,000 in lobbyist money in their successful efforts to avoid regulation, for one major reason.

Politically, all parties were to blame. Most of that $200MM went to the Democrats; George W. Bush pushed the “ownership society” where he thought that if more minorities bought houses they would become Republicans; Alan Greenspan, the most craven politician in D.C., pushed too-easy credit for years. For those of you with powerful political opinions, I have equal contempt for both sides. How does this apply to the law school crisis? Replace Freddie and Fannie with Sallie Mae and Matasar and Joan King with mortgage brokers.

It costs you as much to go to some TTT like BLS as it does to go to Yale and yet in any rational market this wouldn’t be the case. This is because BLS doesn’t have to care about whether or not its students pay back the loans. That’s Sallie Mae’s problem. If BLS had to lend its students its own money – just like a mortgage broker who actually had to worry about the creditworthiness of the borrower – you would see BLS be much more careful about lending money to its students. And they wouldn’t dream of charging as much for tuition, if they even remained in business.

Will this change? Well, Freddie and Fannie just got an open lifeline from the federal government – lobbyist dollars very well spent. Sallie Mae is no less powerful. I was formerly an attorney with one of the major bailout banks and I can tell you that their political reach is without peer. Just like when the UCC gets redrafted, it is always redrafted from the perspective of the lenders, so too banking regulation. Rest assured, Sallie Mae will be taken care of when bankruptcy laws are revised, not the students who borrow from it.

Like the mortgage crisis, this is yet another well-intentioned government program gone awry. Who can argue with providing students with an opportunity to get an education? Well, there are thousands of TTT graduates with worthless degree who can. Sallie Mae didn’t help anyone except the hustlers who exploited the system. Just like Dubya’s ownership society and Maxine Waters and Barney Frank saying five years ago that Freddie and Fannie were well run and well-capitalized, that no regulation was necessary, that they provided the underprivileged with an opportunity to own a home. The cold, hard facts remain: some people should rent an apartment, not own a home, and some people shouldn’t go to law school.