$5 Billion In Student Loans Evaporates

r-strategists aren’t known for careful, detail-oriented record keeping:

Billions of dollars in student loans may be wiped out for tens of thousands of borrowers in the US because a lender didn’t keep track of the paperwork verifying ownership of the loans, according to The New York Times…

Borrowers are failing to repay more than $5 billion of the $12 billion in private student loans held by National Collegiate,
sending the loans into default…

The student loans held by National Collegiate were made “more than a decade ago by dozens of different banks, then bundled together by a financing company and sold to investors through a process known as securitization,” and they weren’t guaranteed by the federal government, according to The Times.

I periodically hear an ad which implores people to not let their creditors fool them into thinking they need to pay back their debt. I always laugh, at the thought of people getting angry that they were being “fooled” into thinking they actually need to pay back the money that was lent to them. This is the era of r-selection.

The loans were guaranteed, but not any more:

How Trust Investors Minimize Their Risk

Investors minimize their risk in two ways.

The first involves the way in which the loans are piled into the trust. Some loans are riskier than others, so in theory they’re balanced out in the trust.

The second is far more interesting, and that’s the fact that the loans are guaranteed. Until 2008 these loan guarantees were handled primarily by The Education Resources Institute, Inc. (TERI), a nonprofit organization that touted itself as the largest private student loan guarantor in the county.

TERI filed for Chapter 11 bankruptcy in 2008 due in part to the acceleration of student loan defaults.

Sounds kind of like what precipitated the 2009 housing crisis that almost took down the banks. Part of me wonders if the paperwork snafus might be purposeful, to limit legal liability for the bad loans. If you give bad loans, and know they are never going to be paid, and then they default, you are liable. If you arrange for the paperwork to be screwed up along the way, and the loan defaults because of that accident, then you are not liable. Makes me think you do not want to be one of those investors in the trusts.

Again, this type of thing is an amygdala-trainer. These investors just got a new amygdala pathway, teaching them to feel aversive stimulus at the prospect of losing their investment. That will erode the r-selected mindset that has produced the irrational exuberance that is keeping our economic system afloat. Interestingly these National Collegiate Student Loan Trusts have the feel of some sort of economic skullduggery.

Basically banks make the loans. But then they transfer the student loans into these trusts, and then the trusts lure in investors to buy the debt, in return for the interest payments later. Notice Banks are getting out of the debt business, and doing it quietly behind the scenes. Either they think that many of these loans are not going to be paid back, or they think that one day the money which is used to pay back the loans may not be worth as much as money today. Either way, it seems these banks are getting these loans off their books.

If there is an Apocalypse, both cases may end up being the case, as people find themselves too broke to pay the loans, and the few who do pay them back will do so with worthless fiat currency. Watch how investor amygdalae develop then.

Tell others about r/K Theory, because when it comes down, it will all come down