There was this movie a few years ago — "Big Men
" — about the oil industry in Ghana and Nigeria. Only foreign investors have the resources to extract and sell the oil, which could enrich the impoverished nations, but they’re beholden to corrupt, inconsistent local rulers. The movie shows that totalitarian, “big man
” regimes can disregard the rule of law and change deals whenever they want.
That’s bad in the short term for whatever foreign investors might lose money when a big man decides to change the deal, but it’s worse in the long term because it scares away potential future investors. This leaves the country left out of the global economy and harms the citizens who are subject to the whims of their big man’s corruption.
Alas this phenomenon is not restricted to banana republics. We’re seeing something similar in the U.S. regarding student loans, where students are getting thrown under the bus to service an Obama Administration “big man” and his cronies.
The innocently named Consumer Financial Protection Board (CFPB) was given broad powers to regulate the financial industry — ostensibly to help the little guy, but by “broad powers” we mean its authority is unconstitutional and unethical. Perhaps the CFPB’s most questionable abuse of power was a “big man” bargain with National Collegiate Student Loan Trusts (NCSLT), which holds most of the country’s student debt through securitization capital market transactions.
While Richard Cordray was CFPB director, he cut a “consent agreement” with his buddy Donald Uderitz to put him in charge of NCSLT’s massive student debt assets — about $12 billion all together.
To justify this move, the CFPB made accusations of misconduct by debt collectors who attempt to collect on loan balances. They fabricated a villain in order to cast Uderitz as the hero students needed to save the day. But rather than the hero, Uderitz’s Vantage Capital Group is now the “big man” in charge of turn $12 billion in student debt, over which VCG now has absolute power over loan collection.
(If the debt collectors were really the villain, the answer would be to hold them accountable, not the trusts.)
Uderitz has moved against the Trusts so VCG can take over Trust servicing, collect related fees, and acquire student loans from the Trusts at a discount — all in violation of the terms of the Trust agreements (which has resulted in ongoing litigation). Uderitz also demands the reimbursement of millions of dollars from the Trusts in expenses.
Uderitz is not a white knight intent on protecting poor, abused students. He just wants a quick return on an equity interest that has virtually no economic value otherwise. This is the kind of financial shenanigan that demands a “Big Short”-esque takedown, but it probably won’t get one. After all, Obama promised the most transparent Administration in history! It wasn’t remotely transparent — but he promised so let’s just take his word for it!
Cordray’s and Uderitz’s abuse of the student loan market isn’t just bad for current student debtors in the short term, but it’s terrible for those in the long term. Investors need to have faith in the rule of law to anticipate liabilities and risk. Investors need to trust that negotiated agreements won’t be rewritten by regulators years after signing. For those who may benefit from the ubiquity of Star Wars references in our culture, it’s like when Darth Vader threatens Lando, “I am altering the deal. Pray I don’t alter it any further.”
Securitization is a boon to the economy, enabling investors to provide funding for students. The more capital that’s available for these loans, the lower the interest rates for borrowers. If we allow the securitization industry to be damaged like this, investors will flee, and students will have fewer financing options for loans. So, there will be fewer borrowing opportunities and then higher interest rates.
If this goes too far, it could threaten the entirety of securitization markets.
The solution is that acting CFPB Director Mick Mulvaney should dismiss the legal action. Even if he doesn’t, there’s a good chance the CFPB will lose anyway – again as the Obama Administration designed it, the CFPB is unconstitutional and unethical. Proposed legislation can rein the CFPB and turn it into what it should have been to begin with, instead of a platform for Democratic cronies.
Cordray is currently the Democrats’ candidate for Ohio governor. The Buckeye State, and America, deserve better than a banana republic-style big man.
Jared Whitley is a long-time politico who has worked in the U.S. Congress, White House, and defense industry. He is an award-winning writer, having won best blogger in the state from the Utah Society of Professional Journalists (2018) and best columnist from Best of the West (2016). He earned his MBA from Hult International Business School in Dubai. To read more of his reports — Click Here Now.
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