Saturday, January 9, 2010

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.


  1. Very well said. Now the Democrats will call you a racist. Oh well.

  2. Wonderful post. And the same reason credit card companies can charge 30% interest and get away with it, the government only cares about the banks that throw money at them, not the people who vote for them.

  3. The federal government is owned down to its soiled underwear by the banksters. The regulators look the other way, even when major infractions occur. For something really egregious, a few hearings are held and not much else is done; maybe a few of the pigs are given prison time and a few fines are assessed. (

    When it comes to white collar crime, notice how the fines are seldom enforced. And how those amounts are usually far less than the sum stolen/extorted. Contrast this to some desperate kid who robs 7-11 for $30. Such a person can face several months in jail, large fines (far more than the amount he stole), probation (with requisite fees, of course), a court-ordered class (at the offender's expense), and will have a difficult time even finding a job at McDonald's. A corrupt CEO can land on his feet somewhere else, or simply live off the money he stole.

    Does anyone with an IQ above 40 really believe that the government gives a fuck about the working man? Also, I agree that both political parties are trash.

  4. These three evil cousins don't play fair and actually screw up capitalism, not encourage it.

  5. Agreed 100% on all accounts. These were government created artificial conditions with too much money too available to too many people. I only wish that I had gotten refused for a loan when I was a naive 22-year-old entering my Tier 2 expensive private school!! I would actually now have a shot at a financial future. Yes, the ABA is an absolute joke and inept and other, more sinister things. Yes, the law schools themselves are engaging in fraud and churning out heavily indebted losers into what they know is a grossly over-saturated marketplace. But this was all possible because of this hideous government program (albeit well-meaning.) Maybe you could do a post on private loan companies- Access Group and others.

  6. I don't understand what the people who are so angry about the government student loan program could possibly want. Congress has already fixed this problem in 2007 with the IBR plan.

    If you only have gov't student loans, this program guarantees that the loans will be manageable, and if you can combine with the Public Service Loan Forgiveness Program, in the end it's like the Feds will have paid you to go school.

    It seems to me that everyone who is up in arms believed that *because* they borrowed $120,000 to go to school, they are entitled to a job that allows them to pay off the balance in 3 years without any real impact to their lifestyle, since some people do get jobs like that.

    If you didn't realize that borrowing $120,000 came with potentially lifelong consequences, you are an idiot. If, given the IBR program which guarantees your loans will not force you into *real* poverty, you still think you're getting fucked I have a question.

    What exactly is it that you still want, and why do you think you deserve that?

  7. Not exactly. Lobbyign congress to allow de-regulation is not exactly what happend. What was pushed was a type of 'regulation'.. Whereas in any default the US government would back up the debt.

    If the US government basically said "guess what, we aren't gonna insure this junk or make mandates on companies" none of this would have happened.

    The clinton initiative act forced banks to lend to unqualified people and the big banks sturct a deal where they said they'd lend the money but only if they can sell the debt to the US government (fannie and freddie).

  8. Student debt is similar too right? Doesn't some us government branch buy up all the debt? Sallie Mae eats this shit up right?
    And in any default the US government will fit the bill ?

  9. 1:19 AM - I think there's more here than just the ramifications for those who are stuck with lots of debt and few job options.

    What the government has done has merely shifted the problem, not solved it. I don't think it's any more fair for the law schools to profit off the backs of US taxpayers than off the backs of gullible borrowers.

    The problem is that the easy credit allows law schools (and other institutions) to profit without really producing anything. This is classic rent seeking behavior.

    Also, some people (not me) have private loans, which are not subject to IBR and can't be discharged in bankruptcy.

  10. Does the IBR apply to all loans? or just government guaranteed loans?

  11. IBR applies ONLY to federal loans, NOT private loans of which many law grads have. If you go to a private law school and pay full sticker, chances are, you have private loans. Private loans have no protections, no reduced payments for x number of months if you loose your job. Nada. And let's face it, in this economy, people are getting laid off left and right. Also, the argument that people who take out loans are "expecting" six figure jobs is simply a myth. At my law school, with the exception of those that did OCI and were top 5% and were in fact headed towards BigLaw, no one expected to rake in loads of money, pay off loans quickly and then live a lavish lifestyle. We expected a job. Period. No really, I can't think of anyone (me included) who thought we had a huge salary coming our way. We did expect, however, to have decent jobs that would allow us to live above the poverty level while paying off our loans and that eventually, we would get the next better job and so on and so on. That turned out to be impossible for a not insignificant amount of law grads who couldn't even get or keep their first jobs because of the complete oversaturation.
    Keep in mind that when you're 22, you are not necessarily "stupid" (well maybe a little) because you have no concept of the kind of payments you will need to be making and that you're essentially going to be paying interest alone for the first few years. People are naive at 22. Law schools are aware of that, but the government-backed loans and removal of bankruptcy specifically to student loans created the tidal wave of excess law schools.

  12. JJD:

    While it is true that the gov't only cares about the lobbyists who throw money at them, it is capable of caring about the people who could vote them out of office. The only problem is that people are ignorant of the dangers of misguided government programs: Freddie, Fannie and Sallie are harmful entities that ruin peoples lives. If people understood this and threatened their elected officials, they would be as afraid as they are of the majority of Americans who oppose, um, health insurance reform. Um, never mind. It's hopeless.

  13. Leave aside the outright distortions from the law school administrators and the consequences law school matriculation has on the students/suckers. Yearly, law school administrators are hampering economic growth by preventing these would-be students from being able to purchase property, make investments, save money, or other socially productive goods beneficial to the economy.


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