Sallie Mae Forced Out CEO, Say Sources
Wednesday, May 23, 2007
Thomas J. Fitzpatrick, the chief executive of Sallie Mae, abruptly resigned yesterday in what sources said was part of a campaign by the Reston-based student loan company to improve its tattered image on Capitol Hill.
Fitzpatrick, 58, has been the company's top executive for two years and was expected to remain in charge of the company after a private-equity partnership takes the company private in a $25 billion transaction later this year.
But J. Christopher Flowers, the investment banker who leads the takeover group, decided that the company's rocky relationships with the Democrats now in charge of Congress made keeping Fitzpatrick at the helm too risky for a company as dependent as Sallie Mae is on government subsidies, according to people familiar with the decision.
Fitzpatrick has been replaced on an interim basis by C.E. Andrews, the company's chief financial officer. Edward Grebow, an operating partner of J.C. Flowers & Co., will oversee the acquisition of Sallie Mae over the next few months. Grebow is known in Washington for his Democratic leanings and for correcting many of the problems that plagued Ullico, a union-owned insurance and investment company.
Fitzpatrick's departure is part of a plan by Flowers to convince lawmakers that there will soon be a "new" Sallie Mae that will operate more openly and in closer cooperation with Congress than it had in the past, an executive close to the transaction said. The executive, who was not authorized to speak publicly about the situation, added that many lawmakers view Fitzpatrick and his company as arrogant and unwilling to listen.
Flowers and Grebow reached this conclusion after talking to senior members of Congress over the past few weeks, the executive said. "This industry and this company are going to change and this is one more piece of that," the executive said.
Sallie Mae has had the reputation for years as being heavily Republican, both in its political action committee's campaign contributions and in its closeness to Republican lawmakers. That has rankled Democrats.
In addition, many Democrats oppose Sallie Mae on ideological grounds; they would prefer that student loans be given directly by the federal government rather than through profit-making companies such as Sallie Mae. Sen. Edward M. Kennedy of Massachusetts, a leading Democrat on education issues, has long been outspoken in his criticism of Sallie Mae and its industry.
This year the legislative equation got even worse from Sallie Mae's perspective. In a surprise, President Bush broke with the Republicans' usually unwavering support for private student lending and sided with the Democrats. His budget proposal to Congress in February recommended reducing federal subsidies to private lenders and increasing some of their fees, for a total saving of $19 billion over five years.
Of all the industries under attack on Capitol Hill, the business of providing student loans is perhaps the most threatened. Flowers and Grebow intend to continue talking to members of Congress in an effort to convince them that Sallie Mae has changed and that large cutbacks in student-loan subsidies are not a good idea, executives said.
That line will be difficult to sell. The company and its industry have been battered recently by Andrew M. Cuomo, the Democratic attorney general of New York, who has been investigating aggressive marketing tactics in the $85-billion-a-year student loan industry.
This week, the financial aid directors at Johns Hopkins and Columbia universities were forced out after revelations that they had received payments or gifts from loan companies that they recommended to students. Congressional committees are also investigating student lenders.
Officially, Sallie Mae said only that Fitzpatrick was leaving to "pursue other interests." The board voted on the personnel changes on Sunday, Sallie Mae spokesman Tom Joyce said.
Fitzpatrick's resignation will mean that the company's top two officers will have left the firm by the time it goes private. Albert L. Lord, Sallie Mae's chairman, has said he will leave after the transaction is completed.
Lord and Fitzpatrick will not leave empty-handed. Their stock holdings and options are worth many millions of dollars.