Bill Harrington of the Croatan Institute has been sounding the alarm bells. Mr. Harrington is telling everyone that he can, that the market for privately securitized student loans is corrupt, and that oversight of the securities and their related derivatives has been almost nonexistent.
SLABS, Student Loan Asset-Backed Securities, are private and federally insured student loans that are bundled, rated, and sold in tranches to institutional investors as bonds. In other words, the private debt of student debtors and their families is turned into investments that are considered low risk, but in some cases high yield. The most lucrative investments are the most toxic loans.
SLABS are rated from AAA to B (junk) but all are marketed as safe and the demand is greater than the supply. No one outside of the industry knows who actually owns the financial instruments, but it's assumed they are almost always large institutional investors such as banks, state and municipal funds, and retirement funds.
Since at least 2015, SLAB sellers have extended the maturity dates of some SLABS by decades to avoid lowering their ratings. Issuers are known to game the system by shopping around for better credit ratings.
In May 2020, Morningstar accepted a $3.5 million fine for failing to separate its credit ratings and analysis operations from its sales and marketing efforts. But they denied any wrongdoing.
Who oversees the SLAB industry? Three raters: Moody's, Standard & Poor's, and Fitch Ratings. These companies are paid to rate the SLABS, and are also tasked for government oversight as Nationally Recognized Statistical Ratings Organizations (NRSRO's). The credit rating agencies not only rate SLABS, they are paid to rate them by the loan issuers, like Navient and Nelnet, causing a potential conflict of interest.
How much of a problem are SLABS as an investment? What's the real risk? Chances are that they are a much greater risk than they appear, and that's how it's framed in the SMU Law Journal article by Samantha Bailey and Chris Ryan titled "The Next "Big Short": COVID-19, Student Loan Discharge in Bankruptcy, and the SLABS Market."
Metaphorically, SLABS are like Soylent Green, the subject of the dystopian movie that came out in 1973 and portrayed a chaotic New York City in 2022. It's not until the end of the film that audience is told that the food that people were fighting for, Soylent Green, was actually people, processed for consumption.
In 2021, SLABS are human lives, in the form of crippling debt, packaged for consumption: consumed by a range of big investors including big banks and pension funds.
"It is up to each and every one of us, to decide where we wish to direct our focus. Is it fear, or forgiveness? Suffering or thriving? When we accept the principles of quantum physics, we understand that we are all entangled as one singular organism," said Allison Pyburn, student loan expert and author of the upcoming book, "The Great Unwind."
