As I discussed in a previous post, regulations the U.S. Department of Education wants to impose on for-profit schools are knee-deep in suspicion by critics on both sides of the aisle and general political spectrum:
U.S. Education Department’s new regulations on for profit schools has become enshrined in what could very well be a huge pay-off for hedge fund short sellers and publicly funded universities like Iowa State, a school that recently named a new public policy institute after Senator Tom Harkin, Iowa Democrat.
Despite being probed by it’s own Office of the Inspector General, the Department of Education sent it’s new “gainful employment” rules imposed on for-profit schools to the Office of Management and Budget. The IG is currently examining if short-sellers, who make financial gains as a result of stock prices dropping, were made aware of the department’s rules before the regulation went public.
The proposed rules by DOE would require these educational institutions to “prepare students for gainful employment in a recognized occupation,” or risk losing federal funding for student aid.
Mr. Harkin’s Press Secretary Kate Cyrul responded to this piece writing in an e-mail:
“It is absurd to suggest any connection between Iowa State’s desire to house Senator Harkin’s Congressional papers as a resource for students and scholars and the Senator’s for-profit investigation. The Senator, as HELP Committee Chairman, launched his investigation of the for-profit higher education industry nearly a year ago to understand whether the growing student and taxpayer investment in these schools is yielding good results. His investigation has uncovered important information about the failure of these colleges to offer the promised education to their students, and even industry representatives are now acknowledging the need for a frank assessment of what these institutions can positively offer and where they have gone off track regarding the public interest. Far from the Senator having any private interest, it’s hard to image a greater public interest than the outcome of this investigation.”
As I noted in my piece, state universities can only benefit from for profit-schools being financially crippled by DOE’s “gainful employment” rule and intentional or not on Senator Harkin’s part, his alma mater, Iowa State University naming a public policy school after him comes off as unseemly, considering Mr. Harkin is a living practicing U.S. Senator who helps shape higher education policy from Washington.
Capitol Hill supporters of the DOE rule argue that short-seller Steve Eisman was brought into Mr. Harkin’s committee hearing to testify as a result of Mr.Eisman’s first-hand knowledge of the sub-prime mortgage crisis. Additionally, they point to Mr. Harkin initially asking Mr. Eisman if the New York City hedge fund principal of FrontPoint Partners had any financial interest in the issue pertaining to for-profit schools, to which Mr. Eisman *acknowledged.
Anne Weismann, chief counsel at the Washington, DC based Citizens for Responsibility and Ethics in Washington (CREW) doubts Mr. Eisman was telling the truth. Ms. Weisman told me on Thursday:
“There’s other evidence that suggests that Eisman had been short-selling education funds of the for-profit world, so he was not entirely truthful with the committee. He knew when he testified before this investor conference in New York, the stocks plummeted for for-profit education, so he knew that this was a volatile market that people were paying attention to what he said about it.”
“Obviously if you’re shorting, what you want is the stock to fall. I don’t think his answers were truthful. I understand that, in fact, he asked the committee for the opportunity to testify. And even if the committee was initially duped, they clearly should have had concerns when evidence started coming out, that he was short-selling and that he was attempting to influence the agency’s regulatory process. And I don’t think that it backed up from the propriety of having him testify.”
CREW was responsible for gaining access, via FOIA and a legal battle against DOE ,to e-mail correspondence between short-sellers and Department of Education officials while the DOE policy was still being crafted. From the hundreds of e-mails CREW milled through, a timeline showing Steve Eisman’s involvement with former DOE deputy under secretary at the U.S. Department of Education Bob Shireman. Ms. Weismann explained:
“It’s hard for me to point to one email, because you really have to piece them together. We know that there was a point earlier on, when [Eisman] had people acting on his behalf like Diane Shulman who he hired from one of these information gathering companies and were trying to disseminate widely among education officials Eisman’s economic analysis of the industry.”
“And we know that they [Shulman’s group] were successful in getting a meeting which I think Robert Shireman attended by phone. Somebody under him attended in person. We know that Shireman gave a speech shortly after that, where he picked up the whole analogy of the for- profit industry and what happened had been happening in the mortgage industry.”
“We know that right before the regulation was to come out, education officials were planning to release the advance copies [of it].”
“We know that the chain of e-mails shows that Eisman was in contact with one of the heads of the organizations that got an advance copy right at that time. There’s an e-mail that talks about lengthy conversations they had.”
“Then sprinkled throughout, you see Eisman’s name pop up here and there. And you see clearly an awareness on the part of people like Shireman and others that he’s following and he’s interested. An awareness on their part that he’s doing it. He’s a short seller. So, I think it’s a question of putting it all together. I think that there are some individual documents that are pretty note-worthy.”
Ms. Wiesmann points out that there are at least 10,000 pieces of DOE documentation on the matter, and CREW has only been able to obtain 300 pieces from that pile. In the meantime, DOE has ignored the warning signs and recently sent the “gainful employment” rule to the Office of Management Budget for final review. CREW is currently questioning why the education regulation is being rushed.
*Clarification:Eisman acknowledged his financial interests not denied them, saying: “I’m a money manager who has the ability to go long and to go short. My clients and investors are universities, pension funds and individuals who have given me their life savings and have asked me to give them a decent return with the appropriate amount of risk. And I must tell you, I take their charge as a sacred trust. And because I do that we are fanatics about research, because we feel that unless we do great research, you can’t make the appropriate investment decisions.”