Tuesday, February 22, 2011

Obama and team busted for accounting fraud

The Administration’s claim that its program will earn profits by lending to college students from low income families at generous terms is pure accounting illusion. As explained in earlier e21 commentary (Credit Reform Act: Another Budget Loophole), a loophole in the Federal Credit Reform Act of 1990 makes many government loan programs appear as though they both provide subsidies to borrowers and earn profits for the government. This apparent “free lunch” arises not because the government is inherently better at lending than private companies, but because the current budget rules that are used to calculate loan costs don’t factor in any cost for market risk. That is, by discounting expected loan performance at risk-free U.S. Treasury interest rates, the rules ignore the fact that loan performance is unpredictable over time and that defaults will be more frequent and costly in bad economic climates. As a result, risky loans made at below-market rates can appear profitable, but only when the government makes them. No private lender would risk its capital to make similar loans because the risks do not justify the potential gains.Economics for the 21th Century

I suspect that half of these students loans enter default. Mish covered this problem a while back, and the result could be the US default trigger.

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