The Short-selling of Higher Education

In August of 2010, Senator Tom Harkin, D-Iowa, who is chairman of the Senate Health, Education, Labor and Pensions (HELP) Committee, wrote an article in Forbes magazine, taking on “For-profit” institutions of higher education.  These would include universities such as the University of Phoenix, DeVry University, Kaplan University, and Walden University, among others. Senator Harkin’s claim was that there is widespread corruption in the recruiting practices of these institutions, and that the students, most of whom receive financial aid, complete their educations with a high amount of debt.  Senator Harkin then warned the prospective university student to take a hard look at for-profit university programs and costs versus community colleges.  He did not mention state universities and private universities.

The implication was that the education received at these schools did not measure up to that which could be received at a traditional community college – there are many on-line courses offered by the for-profit schools, for example.  It was also implied that share-holder pressure drove unscrupulous recruiting, because it drove revenue, most of it from federally backed financial aid programs.  Senator Harkin advocated federal oversight and regulation to “crack down on the bad actors… while preserving the positive options and innovations that many for-profit colleges have pioneered.”

Nobody wants corruption in higher education.  However, “For-profit” institutions cannot claim ownership to corruption in recruiting practices.  I have a friend who was recruited for a major, Division I athletic program and was told that he would receive a university degree without ever having to attend class.  He chose to attend classes anyway and discovered that tutors, assigned to help him and his teammates, would provide copies of the actual exams in advance of the date of the exam for “practice study.”  Shady recruiting practices, in public and private institutions of higher education, are not limited to athletics either.

Now, the appearance of impropriety has found its way into the U.S. Department of Education that has been tasked with writing the rules called for by the Senator Harkin’s committee.  Steven Eisman, a hedge fund leader, who has made a lot of money betting that the housing industry would collapse has been lobbying the Department of Education and seeking audience to share his, highly critical opinion, of “for-profits.”  Not surprisingly, he has been selling short the stocks of “for-profit” education companies – In a short sale, traders sell borrowed stock, wagering they will be able to repurchase it later at a lower price and pocket the difference.  If the stock goes down, it will benefit the shorts.  However, very surprisingly, he has been given audience with senior personnel at the Department of Education and has been in a position to have “direct and sustained input into the regulatory process.” (Wall St. Journal: A ‘Short’ Plays Washington, posted on January 26, 2011, by Mary Pilon, Jonathan Weisman & Brody Mullins)

A group called Citizens for Responsibility and Ethics in Washington, called Mr. Eisman and the Department of Education out on this impropriety, and “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. (ibid.)  In addition to his influence with senior Department of Education officials, Mr. Eisman was also called to be a witness before Senator Harkin’s committee.

Mr. Eisman’s firm ended up losing 8.3% in 2010.  The “for-profit” education companies have lobbyists also, though probably not with the questionable access that Mr. Eisman had.  The battle may not be over, but, for now, it is good advice not sell short higher education.