The discussion draft of the bailout bill is now available. For those wondering if student loans are covered under the current plan, the answer is "maybe." The definition of "troubled assets" to be purchased by the Treasury Department is defined as:
(9) TROUBLED ASSETS.—The term ‘‘troubled assets’’ means—
(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and
(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.
Clearly (B) provides wide latitude to the Secretary in consultation with the Fed Chairman to determine what financial instruments need to be purchased to "promote financial market stability." The two principal issues with student loans are:
a. Federal student loans originated prior to May 1st, the effective date for ECASLA, the Department of Education liquidity plan. For many lenders, these loans have languished on balance sheets as they wait for the pricing on securitizations to improve. Sallie Mae's has been able to access the securitization markets, however at a steep cost. Their most recent federal loan securitization was priced at LIBOR + 150 basis points in late August 2008 (the prevailing rate prior to the credit crunch was LIBOR +10bp).
b. Private student loans have suffered from increasing delinquencies and a frozen securitization market. First Marblehead, the largest securitizer of private loans, completed their last securitization in September of 2007. Sallie Mae, the largest private student lender, completed their last private loan securitization in March of 2007. They have increasingly relied on their Utah-based industrial bank, Sallie Mae Bank, to provide capital for these loans. KeyBank, which recently announced plans to leave the private student loan market, completed their last securitization in 2006. Treasury's purchase of these assets would allow lenders to continue making loans, however, it would not likely help the less creditworthy borrowers, as I would not expect to see credit standards loosened for the foreseeable future.
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