First Marblehead takes a big stinky dump today.

Why?

Because their loan guarantor, TERI, filed chapter 11. What's that mean? How does all this work?

Well, TERI has been around for a while. They're a non-profit that operates kinda like an insurance company. They insure losses on private student loans. This sort of operations takes two pieces: the ability to underwrite loans or provide an underwriting evaluation, and cash to make good on the loans that go bad.

TERI is pretty good at the first requirement. They have a lengthy dataset that they can model loan losses from. But oh no. Their dataset is based on people borrowing modestly to finance modest tuition rates. We surmise that their models don't take into account any macroeconomic considerations though (i.e. How will all these loans perform in a recession?).

And the second requirement to be a good guarantor requires you to have hordes of cash layin' around. No, TERI is no good at this part. We seem to recall TERI being BBB rated by one of the agency's. They seem to have been a little undercapitalized.

And First Marblehead has TERI locked up in an exclusive agreement. No one else can use TERI. Only First Marblehead. Personally, we're a little suspicious of this arrangement, but it's not our call. Anyway, First Marblehead stock did indeed take a big stinky dump, dropping 36% to close under $5 a share (a far cry from their $55+ days in Jan 2007).

Beyond the internal issues facing First Marblehead, will the private education loan market now survive? We'll have to wait and see. There are a number of First Marblehead-like companies out there, but it is now going to be a function of their marketing prowess. And if First Marblehead introduces a contagion effect like the FFELP market saw, then it looks like Timmy is going to community college this fall, living at home, and working at Taco Bell. Wonderful. Thank you, out hats off to our elected Congressional leaders.