Student Lender Concedes It Made Poor Decisions
By David S. Hilzenrath
Washington Post Staff Writer
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.
Addressing investors Wednesday, Sallie Mae's chief financial officer offered a different take.
"Our job is going to be to demonstrate to Washington that they cut too far," John F. Remondi said.
The troubled loans cited by Lord were those made outside federal programs, in the private arena that Sallie Mae has identified as a source of future growth.
Sallie Mae spent most of last year working on a leveraged buyout that would have paid its investors $60 a share. Had the deal succeeded, Sallie Mae would have been taken private and spared the need to answer to the stock market. But the buyout died in December, and Sallie Mae's shares closed Wednesday at $18.69, down 33 cents.
Beyond the need to improve the company's financial performance, executives may face other challenges.
In a filing Wednesday, Sallie Mae said the Securities and Exchange Commission is looking into "disclosures and actions" taken by the company in December "before and after stock sales of SLM Corporation common stock by Company directors and executives."
Sallie Mae did not identify the individuals or the disclosures and actions in question. It said it is cooperating with the SEC.
On Dec. 14, after the demise of the sale, Sallie Mae announced that it would allow officers and directors to trade company stock for the first time since it began negotiating the buyout in March. The same day, Lord sold about 1.3 million shares of Sallie Mae stock. The shares were pledged as collateral, and the company has said the liquidation was forced.
A news release Sallie Mae issued on Dec. 14 said Lord sold 1.2 million shares, slightly less than the actual number. Though the sale involved about 97 percent of the Sallie Mae stock Lord owned outright, the news release might have conveyed a different impression. It said the sale involved "approximately 10 percent of his equity units."
The company later reported that board member Charles L. Daley also sold stock on Dec. 14 under similar circumstances.
The last time Lord addressed investors, in December, was shortly after his stock sales. His performance was widely panned by Wall Street when he left a number of questions unanswered and ended the meeting with a vulgarity.
On Wednesday, Lord apologized for his conduct: "I can't say it's the first time I've used bad language. It's the first time I did it in front of 500 people," he said.
Lord was joined Wednesday by two high-level reinforcements hired since the December briefing -- Remondi, who answered most of the questions, and veteran banker Anthony P. Terracciano, the new chairman, who assumed a title that Lord had held. About 700 people listened to the proceedings by telephone and more than 100 attended in person.
During a question-and-answer period, an investor asked why the company did not warn that it would earmark $575 million in bad loans before it sold preferred stock in December. Remondi responded that the evidence of Sallie Mae's exposure to the losses is clearer now.
"I don't think this company's in trouble," Terracciano said in a brief interview afterward. "I think there's a very strong franchise."
Terracciano gave Lord a vote of confidence, calling him "the guy who knows the most about running a business like this." Lord, he added, "would be at the top of the list" if he were recruiting a chief executive.
Staff writer Kendra Marr in Washington contributed to this report.
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