Bad Loans Help Push Sallie Mae To Loss
Student Lender Concedes It Made Poor Decisions
CEO Albert L. Lord said Sallie Mae violated its own lending guidelines.
(By Michael Nagle -- Bloomberg News)
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Thursday, January 24, 2008
NEW YORK, Jan. 23 -- Sallie Mae, the student loan giant, reported Wednesday that it lost $1.64 billion in the fourth quarter, a sharp reversal from its $18 million profit in the comparable quarter a year earlier.
Bad loans were partly to blame as the loose lending practices that crippled the mortgage industry also infected the student loan business.
Chief executive Albert L. Lord told investors and Wall Street analysts during a briefing here that the Reston-based lender had ignored its own precepts by issuing loans to students who had poor prospects of paying them back.
"Sallie Mae has lent too much money to students who have gone to schools without very good graduation records," Lord said.
The company booked a loan-loss provision of $575 million in the fourth quarter to cover actual and expected loan losses. That brought its annual loss for 2007 to $896 million, compared with a profit of $1.16 billion in 2006.
Asked after the briefing why Sallie Mae made the problem loans, Lord declined to explain. "Today is about what we're doing from here on out. . . . In retrospect, it was a mistake," he said.
Like many mortgage lenders, Sallie Mae is belatedly tightening its standards -- and its belt. The company made a round of layoffs last week and is seeking to reduce operating expenses by 20 percent.
The cuts "will create a massive cultural shift at the company," Lord said. "The word that comes to mind is wrenching."
The company is also cutting what it calls "borrower benefits," financial sweeteners offered to students and their families when they take out loans.
As a result of tighter lending standards, students attending smaller career schools could struggle to find financial assistance, said Harris N. Miller, chief executive and president of the Career College Association.
"It's going to be a challenging situation and the students that suffer the most are the working adults," he said.
Sallie Mae, formally known as SLM Corp., profited for years by issuing loans that were guaranteed and subsidized by the federal government, minimizing the company's risks. Now, it is squeezed by reductions in that federal support. In making the cuts last year, politicians argued that the government was needlessly showering money on profit-making lenders.
