Lessons Learned from the Privatization of Sallie Mae
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Lessons Learned From The Privatization of Sallie Mae DRAFT U.S. Department of the Treasury Office of Sallie Mae Oversight MARCH 2006 FOREWORD In 2004, after Sallie Mae accelerated its actions to fully privatize, then-Assistant Secretary Wayne Abernathy directed the undertaking of this study. He strongly believed that a careful examination and analysis of the history of Sallie Mae’s successful privatization would provide Treasury information and lessons learned that would be helpful to Treasury and others as we look forward. This study was prepared by the staff of the Office of Sallie Mae Oversight, who monitored the safety and soundness of Sallie Mae during the privatization process. Every effort was made to ensure the accuracy of the information it contains and to provide an impartial assessment of what occurred. As is the case with any history, the interpretations made by the authors are important to the structure and conclusions, and these interpretations are not necessarily those of Treasury or the Administration. Philip Quinn Larry Stauffer Suzanne McQueen Office of Sallie Mae Oversight March 2006 SLMA Timeline 1972-2005 External Highlights of Key Events Sallie Mae’s History 1972 - Sallie Mae (SLMA) created by Congress 1979 - Legislation 1973 - Federal Financing Bank (FFB) finances SLMA expands availability of student loans 1980 – Legislation strengthens SLMA, FFB arrangement 1981- SLMA enters GSE debt market 1989 - S&L 1983 – Non-voting common shares listed for trading crisis/GSE safety & soundness 1989 – SLMA’s assets exceed $40 billion scrutiny 1992 - Treasury oversight, Shareholders get voting rights 1992- Federal Direct 1993 - Offset fee imposed, SLMA’s market value drops Student Loan Program begins 1994-1995 - Negotiations to privatize SLMA, 1st ABS 1996 - Privatization legislation passes ’98 Russian 1997 – Proxy fight, Reorganization of company bond crisis. GSE wind down is side 2000 - Acquires USA Group, Issues non-GSE debt tracked 2004 - SLMA is dissolved on December 29th 2005 - SLM Corp is a fully private-sector company v Lessons Learned from The Privatization of Sallie Mae Table of Contents Timeline ...............................................................................................................................v Introduction..........................................................................................................................1 Executive Summary.............................................................................................................7 I. THE DECISION TO PRIVATIZE Chapter 1 – Why Did Sallie Mae Want to Privatize................................................ 17 Chapter 2 – Policy Arguments................................................................................. 27 Chapter 3 – Privatization Act Negotiations ............................................................. 35 Chapter 4 – Final Legislation................................................................................... 49 Chapter 5 – Proxy Fight........................................................................................... 53 II. BUSINESS SUMMARY Chapter 1 - Overview of the Student Loan Market ................................................. 61 Chapter 2 - Overview of Key Sallie Mae Business History .................................... 67 III. THE WIND DOWN, 1997-2004 Chapter 1 - Privatization Successes and Problems .................................................. 75 Chapter 2 - Planning and Implementing the Wind Down ....................................... 79 Chapter 3 - The Defeasance Trust ........................................................................... 93 Chapter 4 - Impact of Privatization on Sallie Mae’s Cost of Funds...................... 101 Chapter 5 - Safety and Soundness of Sallie Mae................................................... 119 IV. GSE MISSION AND POLICY DISCUSSION Chapter 1 – Objectives, Successes and Failures.................................................... 135 Chapter 2 – Public Interest Directors..................................................................... 147 Chapter 3 – Capital Policy ..................................................................................... 153 Chapter 4 – Market-Granted Subsidy .................................................................... 157 Chapter 5 – GSE Sunsets and Exits ....................................................................... 159 Appendices Glossary Appendix 1 – Sallie Mae’s Early History Appendix 2 – Vexing Accounting Appendix 3 – Transcripts of Interviews Appendix 4 – Treasury Testimony Regarding Privatization Appendix 5 – Master Defeasance Trust Agreement Appendix 6 – Treasury Determination Letters & Supplemental Memorandum Appendix 7 – Press Releases Upon the Privatization of Sallie Mae vii DRAFT Lessons Learned from the Privatization of Sallie Mae DRAFT Introduction On December 29, 2004, in a ceremony at the U.S. Treasury Department, the Student Loan Marketing Association (SLMA), a government-sponsored enterprise or GSE, ceased to exist. On that day Assistant Secretary for Financial Institutions Wayne Abernathy signed documents that completed the historic transformation of the GSE into SLM Corporation, a fully private sector corporation, nearly four years sooner than the law required. This moment marked the culmination of over a decade of work on the part of the government and the private sector to transform a congressionally chartered, quasi- public entity into a successful private sector company. The process of converting Sallie Mae, as the GSE was commonly known, into a fully private corporation meant that the GSE ceased issuing tens of billions of dollars of GSE debt. Eliminating this debt also eliminated the perceived risk to taxpayers that the Federal government might step in and bail out the GSE if it failed. The conversion also did away with SLMA’s special privileges, including its $1 billion contingent line of Albert Lord of SLM Corporation (left), and Wayne Abernathy of Treasury dissolve SLMA. credit with Treasury and its exemption from state and local taxes. The privatization of SLMA is a success story. But what was it about SLMA that made it possible? Are there lessons that the government can glean from the SLMA experience? How and why was SLMA able to successfully cut its ties to the government and become a fully private-sector company? This paper seeks to answer these and other questions through an examination and analysis of events leading to SLMA’s privatization, the wind down itself, and the markets in which SLMA operates. Various Perspectives - Multiple Interests The SLMA story is one of a basic conflict: the GSE as an instrument of public policy versus the GSE management’s need to drive value to shareholders. The GSE’s special links to the Federal government caused investors to treat GSE securities very much like Treasury issues. SLMA’s many Federal benefits gave its debt a status and value to investors. As Treasury noted in a May 1990 report: The GSEs are entities established by Congress to perform specific credit functions but are privately owned. The market perception of Federal backing for GSEs weakens the normal relationship between the availability and cost of funds to the GSEs and the risk that these enterprises assume. Introduction Page 1 DRAFT Lessons Learned from the Privatization of Sallie Mae DRAFT Congress intended that this special treatment would facilitate the GSE’s ability to fulfill its public mission of providing liquidity and stability to the student loan market, which it did. At the same time, the special treatment decreased risks for shareholders and increased their profit. However, the company’s GSE status had a downside for shareholders in that it limited the business activities the GSE could pursue. When that limitation became a liability, GSE status lost its appeal. As alternative methods for raising capital were nearly as good as issuing GSE debt, SLMA’s impetus for cutting Federal ties became stronger. When the Federal government added costs and began to compete in the student loan market, SLMA and the Federal government agreed that privatization made sense. In 1996, Congress enacted amendments to the Higher Education Act providing for the reorganization and ultimate dissolution of the GSE. The wind down was a period of tumultuous change for Sallie Mae as it changed its leadership and expanded its markets and operations through non-GSE subsidiaries. Treasury restrained some activities of the GSE and helped to facilitate the GSE’s transformation. GSE Ownership Congress originally established SLMA in 1972 as a private, for-profit corporation. Stock ownership was initially restricted to financial and educational institutions participating in the Federal student loan programs. In 1983, SLMA became publicly owned and its non- voting stock was listed on the New York Stock Exchange. In 1992, this stock was converted to voting stock. In July 1997, SLMA shareholders approved the exchange of SLMA stock for SLM Corporation stock. The reorganization was effective August 7, 1997, and the “Sallie Mae” trademark was assigned, with restrictions on its use, to SLM Corporation. Normalization Rather than Privatization As discussed above, Congress provided SLMA with certain privileged benefits not available to other private companies. These benefits and other GSE characteristics are Introduction Page 2 DRAFT Lessons Learned from the Privatization of Sallie Mae DRAFT outlined in the following chart and compared to the state corporation