Keiser University Sues Florida State College Jacksonville: Why this may concern you

Posted: October 20, 2010 in Commentary
Tags: , , , , ,

From: http://community.elearners.com/all_blogs/online_student_blogs/my_bellevue_university_experience/b/bellevue_university/archive/2010/10/19/keiser-university-sues-florida-state-college-jacksonville-how-this-may-concern-you.aspx

The “for profit vs. non-profit” fight has gotten a little bit uglier this month.  I’ve mentioned it on the forums but I’ve decided to do a little more digging before blogging on this particular news article.  In a nutshell, Keiser University (a for profit school) finds out about a collaborative effort between Florida State College Jacksonville (a non-profit school), the Institute for College Access and Success (a connected lobby group which is anti “for profit” schools), Gilchrist Bert (founder of the Water Street Capital hedge fund and famous for short selling) and of course Steve Eisman (a hedge fund analyst also famous for short selling) conspiring to drive Keiser University out of Jacksonville.

 

So who are all of these actors and how does this play out?  Why would they do this?  Is this a crusade to protect the interests of students?

 

Florida State College Jacksonville, generally a community college in Jacksonville who allegedly believes that Keiser University would steal enrollment dollars and decrease the demand for the college’s services.  The conspirators acting on behalf of FSCJ were Steven Wallace the president of the college and Susan Lehr, the vice president of government relations.

 

The Institute for College Access and Success (ICAS) is a lobby group who has a primary agenda of placing restrictions on for profit schools placing them at a competitive disadvantage to non-profits.  This organization is most famous recently for producing Robert Shireman who became the Deputy Undersecretary of Education at the U.S. Department of Education.  It was Shireman who started the ball rolling in changing the U.S. Department of Education’s official stance from neutral to hostile towards for profit education as a whole.  More on himhttp://www2.ed.gov/news/staff/bios/rshireman.html

 

Gilchrist Bert founded the billion dollar, Jacksonville based hedge fund Water Street Capital.  Gilchrist is famous for turning massive profits short selling.

 

Steve Eisman is a portfolio manager for FrontPoint Financial Services, a connected hedge fund, who is also very famous for making big bucks short selling, especially in this last mortgage crisis the nation underwent.

 

So the next logical question is, why do these hedge fund guys care about what happens to for profit schools and how exactly do they anticipate making money by short selling?  I’ll take a shot at giving an admittedly oversimplified explanation of short selling and how these guys make money doing it.  Basically a hedge fund manager borrows a stock at a given value on interest from a brokerage and then sells them.  To settle the account eventually the hedge fund manager will then have to buy back the same number of shares and return them to the broker.  If the shares can be devalued or drop in price, the hedge fund turns a profit because they are buying them back for a smaller amount of money than they borrowed them.  They keep the difference.  I’ll give an example, say you borrow a pen worth $1,000 from a friend and agree to pay him/her 10% for every month you keep the pen out of their possession.  You then turn around and sell the pen for $1,000 and during the following weeks the manufacturer of the pen drops the price to $500.  You buy the pen, return it to the owner plus the interest you owe on it and keep the difference.  Make sense?

 

So why are these guys so vested in seeing the education shares fall?  Simple, because they’ve borrowed shares and would like to return them by buying them back at a reduced price.  So other than the for profit schools who stands to lose?  The brokerage firm, that’s who.  And why should we care if the brokerage firm loses?  Take a look at your 401K, guess who is managing this account for you?  That’s right, a brokerage firm.  The brokerage is betting that the stock will remain stable or otherwise grow, meaning that the hedge fund will have to pay interest and return the stock that is now more valuable than before, thus the brokerage firm (and you) will see greater returns on your initial investment than you would otherwise.  This is a win/lose game, either the brokerage and your average investor win or the hedge fund wins.

 

So the basically the story is, these hedge fund managers smell blood in the water.  You have an administration in power that is almost openly hostile towards free market enterprise regardless of industry.  Add to that equation a U.S. Department of Education who has no problem imposing unprecedented policy upon schools based solely upon their tax status and who is also using their position to influence the decisions of non-governmental accrediting bodies.  Lastly you have Senators and Congressmen who receive large campaign donations from not only the hedge fund managers, but law firms who may represent them, non-profit schools and other organizations that may have a stake in the game.

The losers in this are the investors (me and you), the for profit schools, students and future students regardless of whether they will or already attend for profits schools or not.  Why?  Because the supply of readily available schools will drop, making it more difficult and expensive to earn a college degree (supply vs. demand).  Secondly the alumni of for profit schools stand to lose as their degree(s) will have an unfair shadow of doubt cast upon it regardless of the reality of the quality of education they received.

 

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s