The Education Resource Institute (TERI) in Chapter 11: First Marblehead (FMD) Expected Value
TERI is to student loan bonds as MBIA is to municipal bonds. By insuring payment to holders of such securities, guarantors make it cheaper for students and municipalities to borrow money. (If a third party promises to pay you in the event of borrower default, you feel more comfortable lending money; this translates into a lower required interest rate.) For a while, financial institutions have been unwilling to buy student loan bonds, and TERI’s bankruptcy will worsen this situation.
I have avoided loan originators in the current securitization “freeze.” While these businesses have demonstrated value far in excess of current market capitalizations, they will have lower revenue (and eventually no worth) if financial institutions refuse to buy securitized loans. Tom Brown and Mohnish Pabrai were rational in purchasing Accredited Home Lenders and Delta Financial, respectively (link to previous post). But the irrationality of financiers severely impaired these companies. A good investor familiar with loan originators’ business models should have anticipated this risk.
While FMD has positive expected value, there is a chance of substantial underperformance. It is not an attractive bet.
