For those of you who were not following me in my Peanut Gallery days, you may not be familiar with the shameful tale of STU – which is not dissimilar in its construct to the very appalling losses of last year from my oil and energy trade.
The stories begin on a tangent; a quiet Cain Hammond Thaler working on a lead. Suddenly, a grand conclusion is reached. A short position is entered upon. And finally – losses.
Terrible, blood-chilling, massive losses.
In late 2010, an acquaintance put me onto the state of student debt. After doing some digging of my own, I almost swallowed my tongue upon seeing the glib assumptions attached to some of these loans, compared to the number of them which were becoming distressed.
At that time, I compiled a quick search for the worst student loan companies – aided by a good many of my same readers today.
One The_Real_Hmmm (who has informally promised us that he will one day write in the Blogger Network, I would remind him), found the worm in the tequila, as it were…STU.
After running some analysis on their books, it became obvious that STU had a gargantuan problem on their hands. The short explanation is that their loan reserves were a black hole…under-cushioned by at least half. They had assumed that their loans would default at an average rate of about 8-10%, depending on the batch and issuance time.
Looking at how much cash they were losing in their loan reserves, they had to be defaulting at north of 20%.
So myself and some others; we shorted STU with great vigor and tenacity. Based on this information, STU was destined to trade to $0.00.
We got up more than 20% in a hurry – it was less than two weeks of a trade, as I recall. The others booked their gains and moved on.
I was not so altruistic.
I wanted the glory. I confess that. I wanted to ride that piece of garbage company into bankruptcy, while mocking their shareholders.
And then, it happened.
Albert Lord, the idiot CEO of Sally Mae, likely working through the orders of his leash holders, purchased the entire company…for a 50% premium to current share price.
If you have never woken to find 10% of your portfolio gone overnight, let me break down the sequence of events that will likely follow closely.
The first step is disbelief. You will refresh your webpage ten or twelve times, trying to shake the bug.
The second step is anger. You will pick up the nearest thing to you, once you realize how and why you lost that much, and hurl it across the room.
The third step is detachment. You will get up and storm around the house. If a one and a half year old golden retriever should be so unfortunate to get between you and your skulking, you will shout yourself horse at it, until it squats and pisses itself. This will not lighten your mood, as then you will be forced to clean up the urine.
At any rate, the point of this story is to let those of you who were involved in the event know that STU’s board is presently getting their brains sued out in a class action lawsuit for criminally understating the default rate on their loan portfolios.
Couldn’t have happened to a nicer bunch of people.
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Hah I got my copy of the lawsuit
(laughter) too bad we can’t participate.
“Excuse me your honor, but these cocksuckers owe me $XXXXXX.XX for breaking my shorts.
What…? No, I knew they cooking their loss provisions.”
Thanks for the acknowledgements Cain.
STU is one of those stocks I’d like to forget because of the harm incurred to you for which I feel somewhat responsible, but the thesis was correct! I was unaware of the class action lawsuit but to add to what you’ve said already, here’s what I got from murrayfrank.com, one of the plaintiffs:
“Specifically, it is alleged that during the Class Period, the Defendants made false and misleading statements about the Company’s operations and business products. Specifically, during the Class Period, Defendants made false and misleading statements about or knew but failed to disclose that: (1) the Company failed to perform adequate due diligence when lending to high risk borrowers; (2) the Company had not increased its underwriting standards, as represented; (3) the Company was experiencing a high level of default on its student loan portfolios; (4) the Company failed to take proper impairment charges on its non-performing loan portfolio assets, as required by Generally Accepted Accounting Principals (“GAAP”); (5) the Company’s loan loss provisions were inadequate, and too low to cover the probable defaults on its high risk student loans; and (4) as a result, the Company’s stock traded at artificially high prices.
On September 23, 2011, SLC announced that it had entered into an agreement to be acquired by a wholly-owned subsidiary of Discovery Bank. In conjunction with the announcement, the Company revealed for the first time that nearly $1 billion of its loans that had been carried as viable assets on its books were in fact nearly worthless. Following the news, the Company’s stock price, which was as high as $135 per share during the Class Period, dropped to a Class Period low of less than $30 per share.”
I really hope you get your deserved money back because that corporation was trying to fool some of the people all of the time (no Einhorn). The lawyers better mummify those fuckers in fees and claims to short shareholders.
I’m not sure I stand a chance to recuperate money as a short interest.
Oh, you bear no responsibility. After you helped compile the list of names, I was the one that decided to act. And hold…
Know how that feels. I was long BCE going into their takeover at the height of the credit crunch. Then KPMG found a loophole that prevented its client Citigroup from having to take a gigabuck-sized bath on the bonds. Nuff said.
I know many people going to college now just for the student loans and support, which they will inevitably default on.
Oh, for the record, I didn’t actually scream at a puppy to the point of it pissing itself. That was just an embellishment to the story, although my friends dog was around that day.
I’m not a monster…
interesting story! thanks for sharing.
wow, that was a great story. i find it close to some of the trades i watched go poof. it heart breaking.
on another note i met a duck today, he was acting kinda funny, i think he’s on quack
Oh I remember that saga vividly. I remember just before the takeover STU had a pop in share price. I thought to myself I’ll give it one more day and if it has started to correct I’ll short the bejeesus out of it. Next day was when SLM bought ’em out.
Fuck I remember we were trying to find quotes for CDS on STU back then. I had gone through the 10-Q’s and saw that their executives recently lined up a bunch of golden parachute clauses in their contracts so that was one thing I was worried about.
Sometimes the trades you don’t make are the best ones.
That was a great trick. Going forward, I’m going to have my eyes pegged to those material SEC filings. I had never considered checking to see if they had prepared for a sudden transfer of ownership.
Good find. Hopefully it’ll help avoid these kinds of hardships in the future.
It doesn’t always work. ATPG management gave themselves a bunch of similar contract amendments last year when the stock was moving up. I was really hoping that a buyout was near and I would be done with that piece of shit.
Yet here I am a year later and 30% poorer.
Let’s be honest here. The party that needs to be sued is Sallie Mae for agreeing to buy out a company like STU for a 50% premium.
Talk about zero due diligence. Not only did they acquire a portfolio of loans that were defaulting at twice the stated rate, they did so through a leveraged buyout of equity that wasn’t worth the bits of data those trades occupy.
And that company had huge debt, as I recall. AND they sold all the good loans to a third party bank.
FUCK…
Wasn’t the 3rd party bank Citi? Whichever bank it was I also remember about 75% of the executive committee of STU had worked for the bank previously in their careers. All that came out around the same time as the employee contract amendments.
God damn looking at it now, those guys were blatant in their misgivings.