Thursday, April 17, 2008

Sally Mae “Off Point Excuses”

Sally Mae (SLM) officially known as SLM Corporation reported first quarter, “core earnings” net income was $188 million, or $.34 diluted earnings per share". They also reported that they made a record amount of student loans despite difficult economic conditions. Hey that all sounds pretty good. Tough times and they still serve up a profit. Keep that one on the radar.

Then they let you know that they are making loans at a negative spread. The actual sentence they used said “Under current conditions, however, loans can only be made at an economic loss.” Somehow they want to get onto the liquidity crisis bandwagon or need to get onto it.

Most people understand that lenders need to charge more for their loans than it costs to gather funding, admin and credit losses. That’s fundamental and remains unchallenged. Sally Mae has essentially allowed their origination machine to drive in business at uneconomic spreads.

The fault lies with management for operating at such razor thin margins that they have no room to manoeuvre. The liquidity crisis has been coming for some time and should have been foreseen in this context. On one hand they claim record volumes yet they are starting to engage in the practice of losing money. If management had been observing the road signs pointing to economic conditions they would not have been driving at record speeds to achieve losses.