The Education Trust, a nonprofit advocacy group, recently released a report and statements titled “Opportunity Adrift” that criticizes the financial aid practices of public universities. The report used data from 2003 to 2007.
The report accused public research universities of increasing the amount of aid to students whose parents make at least $115,000 a year by 28 percent, to $361.4 million. Also it reported that public colleges routinely award as much in financial aid to students whose parents make more than $80,000 a year as to those whose parents make less than $54,000 a year.
Apparently public universities do have authority to favor the neediest students over those who are better off, but if tuition is going up at a faster rate than the maximum in Federal government need based financial aid then students of modest means will be crowded out anyway.
Posted in-state tuition at the University of Virginia in the 2002-2003 academic year was $4,595; in 2008-2009 it was $9,505. That amounts to an annual compounded rate of increase of 12.88 percent.
Virginia is not alone. At the University of Arizona the increase over the same years was 14.23 percent; at University of California-Berkeley it was 10.52 percent; at the University of Colorado-Boulder it was 12.63 percent and so on.
Federal financial aid comes primarily from grants and loans and it is not keeping pace with the inflation in college tuition. Grants are the best form of aid since they do not have to be paid back, but grants and loans have yearly upper limits.
From 2003 to 2007 the top Pell grant award was frozen at $4,050, but went to $4,731 for 2008. It should have been $5,832 by 2008 if it was keeping up with inflation as measured by the Bureau of labor Statistics education price index, one component of the Consumer Price Index.
But the price index comparison doesn’t measure the short fall of funding in the years 2002-2008. In the 2002-2003 academic year at the University of Virginia a Pell grant covered all but $545 = $4,595-$4,040 of tuition. In 2008 the gap of funding was up to $9,505-$4,731 = $4,774.
The more grants in aid fall below tuition the more difficult it will be for prospective students from moderate income households to finance their education. In the period from 2003-2007 wages were not keeping up with inflation either. Federal student loans have limits and Congress raised interest rates during the years of the study.
In this way we shouldn’t be surprised that State Universities are channeling more financial aid money to higher income applicants because we suspect they have fewer lower income applicants who can afford to fund the rest of their tuition. It also suggests that the Federal Financial Aid program is the problem more than the state universities.
There is reason for optimism because the Obama administration has increased the Pell Grant maximum $5,350. Of course we shouldn’t ignore the policies of state universities in directing their Financial Aid, but the first place to look for problems is at Federal Financial Aid.
Tuesday, June 15, 2010
Wednesday, June 2, 2010
The Big Short
Michael Lewis, The Big Short: Inside the Doomsday Machine, (New York, NY: W.W. Norton & Co. 2010), 266 pages, $27.95
The Big Short tells the story of the 2008 financial crash by following a small cast of characters who saw it coming. In a brief prologue, titled Poltergeist, Lewis recounts his experience on Wall Street in the 1980’s by summarizing the period as a time when a great nation lost its financial mind. He told that story in his first book on Wall Street, Liar’s Poker, published in 1989. That book is still relevant and makes a good preamble for The Big Short.
Back in 1989 Lewis had hope the finance sector would improve. Now he is disgusted that nothing has changed, but he wants to set the record straight by telling the story of the people who not only saw it coming but also had the nerve to bet on the outcome.
The story begins when we meet the first in a cast of characters: Steve Eisman. Eisman got a chance to operate his own hedge fund, Front Point Partners, after some years working at Oppenheimer securities. He invited several other like minded colleagues to help: Vincent Daniel, the numbers guy, and Danny Moses, the trader. Before long Daniels began to notice a high rate of defaults on manufactured housing sold with sub prime mortgages. It was the first in a long list of evidence showing the sub prime mortgage bonds had no real earnings.
In Chapter 2 we meet Michael Burry, who was finishing medical school and starting his medical internship, but found time to pursue his fascination with stock and bonds. He started his own hedge fund: Scion Capital. Mike Burry found he could earn good returns as a contrarian who bet against popular trends, the perfect approach for the sub prime mortgage market.
After we meet Michael Burry but before we meet the partners of Cornwall Capital, the third of the three hedge funds that Lewis features, we meet Greg Lippmann. Lippmann is a Deutsche Bank bond trader who is the wild card of the sub prime mortgage meltdown: an oddball among oddballs. He not only decided that vast numbers of home mortgages were certain to default as soon as home prices stopped rising, he developed a 42 page presentation to promote and sell the idea. The presentation was titled “Shorting Home Equity Mezzanine Tranches.”
To make money the Lippmann way required buying Credit Default Swaps on the worst sub prime mortgage bonds. The Credit Default Swap is a contract sold as an insurance policy against the risk of bond default. A buyer pays periodic premiums over the years of the contract to insure against the loss of principal in a default.
Credit default swaps are not regulated as insurance so it is up to the buyer to discuss the seller’s reserves, or ability to pay if there is a default, but the hedge fund does not need to be insuring against a debt they own. They can enter into a contract to buy a credit default swap because they expect, or hope, a bond will go to default and they will get a payoff.
Markets with buyers of credit default swaps need sellers of default swaps, which turned out to be the insurance giant AIG. They were willing to sell billions of credit default swaps. Beginning on page 72 and going to page 77 we learn more details. We learn that Front Point Partners and Scion Capital were not the only ones buying Credit Default Swaps, Goldman Sachs was also buying them. That put Goldman Sachs in the position of selling bonds to customers while betting on them to default.
There is more however, because Goldman Sachs apparently reasoned that Credit Default Swaps generated a cash flow from premiums payments that was similar to the cash that bond holders get from bond interest. From this idea Goldman Sachs began selling a bond called a synthetic CDO where the buyer received the amount of the credit default swap insurance premium as long as the underlying bond did not default.
To sell these so-called bonds they had to pay what Lewis calls “fat fees” to Moody’s and Standard and Poor’s to falsely rate their synthetics with a triple A rating. In a footnote on page 77 Lewis tells readers they get a gold star if they followed the story so far. I may not deserve a gold star, but readers should be warned I read these pages several times to understand whatever I understand.
By chapter 5 we learn 13,675 hedge funds reporting results and that despite the hard sell of blunt talking Greg Lippmann only 10, or perhaps as many as 20, of these hedge funds are actively bet against sub prime mortgage market.
Chapter 5 is also where we meet the managers of Cornwall Capital, the final hedge fund the Lewis describes. The founders, if that is the word, were two thirty year old guys with a $100,000 Schwab account: Jamie Mai and Charlie Ledley. Later they brought in their neighbor Ben Hockett who had Deutsche Bank experience.
They started by turning a $26,000 purchase of Long Term Equity AnticiPation Securities(LEAPS) into $526,000. LEAP’s we learn are a contract to buy a stock at a fixed price in the future. Eventually Cornwall Capital bought Credit Default Swaps that ended up as millions when the crash came.
The remainder of the book’s narrative follows the trials and troubles of the managers of the three featured hedge funds as they cope with the rest of the financial sector. Even after Cornwall Capital has amassed $30 million we read how they cannot get the “bigshots” of structured finance to take them seriously. We go with them to a Las Vegas conference in January 2007 where Steve Eisman stands up and tells the featured speaker he is wrong and a fool.
Over more than a hundred pages readers learn the personal burdens of predicting a crash. Running a hedge fund full of credit default swaps requires spending money on insurance premiums with nothing coming in until a default and the payoff. The delay of more than two years before the crash took its toll as nervous hedge fund investors questioned the whole strategy. The crash came and the payoffs were millions, but the winners Lewis interviewed sounded depressed more than vindicated. Realizing the financial sector was really out of its mind was not something they wanted to celebrate.
The book ends with an epilogue where Lewis has lunch with his former boss from the 1980’s, John Gutfreund. Recounting the lunch conversation helps tie the recent abuses to their beginning, which Lewis puts at 1985.
In the end the losers lost little because the federal government stepped in to save the bankrupt firms of Wall Street and their CEO’s who gambled with other people’s money and lost. Lewis reminds readers that Congress appropriated funds intended for Secretary Henry Paulson to buy sub prime mortgages from banks, but apparently the money was handed over to Morgan Stanley, Goldman Sachs and others with no strings attached.
Lewis avoids suggestions for reform, even something as simple as a 90 percent tax bracket for the income over several million dollars. I am reminded of a comment of Will Rogers speaking about the scandals of the 1920’s and the Harding Administration. He said it is hard to convince a jury of corruption in these lush times because the jurors secretly admire the people who get away with it. We will hope those sentiments have changed, but it is hard to tell even after reading a book like the Big Short.
The Big Short tells the story of the 2008 financial crash by following a small cast of characters who saw it coming. In a brief prologue, titled Poltergeist, Lewis recounts his experience on Wall Street in the 1980’s by summarizing the period as a time when a great nation lost its financial mind. He told that story in his first book on Wall Street, Liar’s Poker, published in 1989. That book is still relevant and makes a good preamble for The Big Short.
Back in 1989 Lewis had hope the finance sector would improve. Now he is disgusted that nothing has changed, but he wants to set the record straight by telling the story of the people who not only saw it coming but also had the nerve to bet on the outcome.
The story begins when we meet the first in a cast of characters: Steve Eisman. Eisman got a chance to operate his own hedge fund, Front Point Partners, after some years working at Oppenheimer securities. He invited several other like minded colleagues to help: Vincent Daniel, the numbers guy, and Danny Moses, the trader. Before long Daniels began to notice a high rate of defaults on manufactured housing sold with sub prime mortgages. It was the first in a long list of evidence showing the sub prime mortgage bonds had no real earnings.
In Chapter 2 we meet Michael Burry, who was finishing medical school and starting his medical internship, but found time to pursue his fascination with stock and bonds. He started his own hedge fund: Scion Capital. Mike Burry found he could earn good returns as a contrarian who bet against popular trends, the perfect approach for the sub prime mortgage market.
After we meet Michael Burry but before we meet the partners of Cornwall Capital, the third of the three hedge funds that Lewis features, we meet Greg Lippmann. Lippmann is a Deutsche Bank bond trader who is the wild card of the sub prime mortgage meltdown: an oddball among oddballs. He not only decided that vast numbers of home mortgages were certain to default as soon as home prices stopped rising, he developed a 42 page presentation to promote and sell the idea. The presentation was titled “Shorting Home Equity Mezzanine Tranches.”
To make money the Lippmann way required buying Credit Default Swaps on the worst sub prime mortgage bonds. The Credit Default Swap is a contract sold as an insurance policy against the risk of bond default. A buyer pays periodic premiums over the years of the contract to insure against the loss of principal in a default.
Credit default swaps are not regulated as insurance so it is up to the buyer to discuss the seller’s reserves, or ability to pay if there is a default, but the hedge fund does not need to be insuring against a debt they own. They can enter into a contract to buy a credit default swap because they expect, or hope, a bond will go to default and they will get a payoff.
Markets with buyers of credit default swaps need sellers of default swaps, which turned out to be the insurance giant AIG. They were willing to sell billions of credit default swaps. Beginning on page 72 and going to page 77 we learn more details. We learn that Front Point Partners and Scion Capital were not the only ones buying Credit Default Swaps, Goldman Sachs was also buying them. That put Goldman Sachs in the position of selling bonds to customers while betting on them to default.
There is more however, because Goldman Sachs apparently reasoned that Credit Default Swaps generated a cash flow from premiums payments that was similar to the cash that bond holders get from bond interest. From this idea Goldman Sachs began selling a bond called a synthetic CDO where the buyer received the amount of the credit default swap insurance premium as long as the underlying bond did not default.
To sell these so-called bonds they had to pay what Lewis calls “fat fees” to Moody’s and Standard and Poor’s to falsely rate their synthetics with a triple A rating. In a footnote on page 77 Lewis tells readers they get a gold star if they followed the story so far. I may not deserve a gold star, but readers should be warned I read these pages several times to understand whatever I understand.
By chapter 5 we learn 13,675 hedge funds reporting results and that despite the hard sell of blunt talking Greg Lippmann only 10, or perhaps as many as 20, of these hedge funds are actively bet against sub prime mortgage market.
Chapter 5 is also where we meet the managers of Cornwall Capital, the final hedge fund the Lewis describes. The founders, if that is the word, were two thirty year old guys with a $100,000 Schwab account: Jamie Mai and Charlie Ledley. Later they brought in their neighbor Ben Hockett who had Deutsche Bank experience.
They started by turning a $26,000 purchase of Long Term Equity AnticiPation Securities(LEAPS) into $526,000. LEAP’s we learn are a contract to buy a stock at a fixed price in the future. Eventually Cornwall Capital bought Credit Default Swaps that ended up as millions when the crash came.
The remainder of the book’s narrative follows the trials and troubles of the managers of the three featured hedge funds as they cope with the rest of the financial sector. Even after Cornwall Capital has amassed $30 million we read how they cannot get the “bigshots” of structured finance to take them seriously. We go with them to a Las Vegas conference in January 2007 where Steve Eisman stands up and tells the featured speaker he is wrong and a fool.
Over more than a hundred pages readers learn the personal burdens of predicting a crash. Running a hedge fund full of credit default swaps requires spending money on insurance premiums with nothing coming in until a default and the payoff. The delay of more than two years before the crash took its toll as nervous hedge fund investors questioned the whole strategy. The crash came and the payoffs were millions, but the winners Lewis interviewed sounded depressed more than vindicated. Realizing the financial sector was really out of its mind was not something they wanted to celebrate.
The book ends with an epilogue where Lewis has lunch with his former boss from the 1980’s, John Gutfreund. Recounting the lunch conversation helps tie the recent abuses to their beginning, which Lewis puts at 1985.
In the end the losers lost little because the federal government stepped in to save the bankrupt firms of Wall Street and their CEO’s who gambled with other people’s money and lost. Lewis reminds readers that Congress appropriated funds intended for Secretary Henry Paulson to buy sub prime mortgages from banks, but apparently the money was handed over to Morgan Stanley, Goldman Sachs and others with no strings attached.
Lewis avoids suggestions for reform, even something as simple as a 90 percent tax bracket for the income over several million dollars. I am reminded of a comment of Will Rogers speaking about the scandals of the 1920’s and the Harding Administration. He said it is hard to convince a jury of corruption in these lush times because the jurors secretly admire the people who get away with it. We will hope those sentiments have changed, but it is hard to tell even after reading a book like the Big Short.
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