At first glance, there don’t seem to be many similarities between the Department of Defense and the Department of Education. But looking closer at scandals in each of the two agencies, there seem to be quite a few similarities. The Department of Defense was stung with the procurement scandal of the century with the Air Force tanker deal. At the Department of Education, there is an ongoing scandal involving newly proposed regulations for career colleges.
The Air Force refueling-tanker story began when a provision was added to the fiscal 2002 Defense Appropriations Act directing the Air Force to lease 100 Boeing 767s that would be converted to fuel tankers. Former Sen. Phil Gramm, Texas Republican, called it the worst pork-barrel handout he had seen in his Senate career. This no-bid lease eventually ballooned into a major scandal. Fueled by taxpayer outrage and grass-roots activism, the Air Force’s chief negotiator on the tanker contract and Boeing’s No. 2 corporate officer, Darleen A. Druyun, went to jail, and Boeing was fined more than $600 million. In the aftermath, the Air Force undertook a new, competitive bidding process, and two companies, Boeing and Northrop Grumman, submitted proposals. Even though Boeing eventually won a third bid, the scandal put the Pentagon and taxpayers on notice.
The backroom dealing and financial manipulation by short-sellers with respect to new “gainful employment” regulations at the Department of Education could have similar repercussions. In short, the proposed gainful-employment regulations put career colleges at a disadvantage by requiring for-profit schools to prove their graduates are either paying back loans or are capable of doing so. If not, the schools will lose access to federal student aid. The hook is that it is only the for-profit schools that are required to do so.
The Department of Education was supposed to release the regulations in September 2010, but that was delayed because of an overwhelming number of petitions opposed to the regulation. There also were some questions about the objectivity of a Government Accountability Office (GAO) report released on Aug. 4, 2010, that was highly critical of for-profit colleges. The report criticized recruiting practices of for-profit colleges and universities based on the evidence of 28 key investigative “scenarios.” After congressional pressure, the GAO released revisions to its August report in November 2010. The revisions released in November made factual changes to 16 of the 28 scenarios.
Now it appears that much more has been going on behind the scenes. In March, the National Legal and Policy Center sent a letter that “asked the Securities and Exchange Commission (SEC) to investigate the activities of short-sellers, including Steven Eisman, who profited from the collapse of share prices of companies that are in the for-profit education field.” The letter, in part, read, “A major feature of the short-seller effort has been to promote Department of Education policies that would result in draconian new standards for education loans applicable to students at for-profit schools. This intended slashing of funds would have the effect sought by the short-sellers: a collapse in the share prices of the listed for-profit trade school companies resulting in a direct monetary benefit to the shorts. It is also beyond debate that the tactics of the short-sellers and their allies appear to have worked insofar as share prices of affected companies have lost billions of dollars.
It appears that somebody was listening. According to the Daily Caller on April 29, “The Education Department’s inspector general is investigating Wall Street short-sellers’ role in strict new regulations of the for-profit college sector, sources confirm. … The investigation could reveal the extent to which the investors, who are hoping to collect when the for-profit firms’ stock goes down, influenced the process or received advance knowledge about regulatory actions by the department.”
This regulatory fiasco is a long way from over, but the lesson of the tanker deal should be clear to taxpayers and watchdogs: Never give up because victory may be right around the corner. These two scandals also should serve as warning to those who want to manipulate the system: We are watching.
David E. Williams is president of the Taxpayers Protection Alliance.