Ponzi Never Dies: SLM


SLM Corp., the largest U.S. student-loan company, raised $1.5 billion in the bond market, paying more than it charges some borrowers to begin addressing $11 billion of bonds maturing through next year. 
Sallie Mae, as the company is known, sold $1.5 billion of 8 percent notes due in 2020 at a yield of 8.25 percent, according to data compiled by Bloomberg. Stafford federal loans disbursed between July 1, 2009, and June 30, 2010, have a fixed interest rate of 5.6 percent, according to the company’s Web site.”
Ok, so they are paying a higher interest rate than they receive.  They’ll make up for it in VOLUME!  I kid, I kid – Sallie Mae has to do this because they need money.  In a way, it’s understandable.  But the next few paragraphs are even better:
“With $4.51 billion of bonds maturing this year and $6.44 billion in 2011, Sallie Mae is reestablishing access to unsecured debt markets. The offering may bolster investor confidence, lowering borrowing costs as the company will likely need to tap debt markets again, said Matthew Eagan, a money manager at the Loomis Sayles Bond Fund in Boston. 

“They’re in a virtuous cycle now,” said Eagan, who helps oversee $18.9 billion, including Sallie Mae debt. “People will see they can raise money in the market and they’re going to have no problem refinancing all these near-term maturities, pushing their cost of borrowing down.””
A “virtuous cycle”!!!!!   That sounds like the Greater Fool Theory to me!  Monkey number two sees monkey number 1 buy SLM debt, and concludes, “Hey – that other monkey bought the debt – that must mean things are ok – there are clearly plenty of other monkeys out there who are likely to be willing to buy SLM debt, and as long as there are other monkeys always willing to buy this debt, I will get paid back on my debt.   It doesn’t matter that the company would be hopelessly bankrupt if all the monkeys wised up and didn’t want to buy this debt – as long as we don’t run out of monkeys in the PONZI SCHEME, it won’t fail!”
And so it continues…
-KD
 disclosures: no positions in the equity or debt of SLM or any related companies

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