SOURCE: SEIU

May 01, 2007 10:20 ET

$25 Billion Buyout of Sallie Mae Raises Questions on Impact of Deal on Borrowers and Ongoing Investigation

WASHINGTON, DC -- (MARKET WIRE) -- May 1, 2007 -- SEIU members participate in pension funds with more than $1 trillion in assets, most of which invest 5 percent to 10 percent of their assets in private equity. SEIU is a longtime advocate of responsible corporate governance practices and an active member of the Council of Institutional Investors, an organization of more than 130 pension funds whose assets exceed $3 trillion.

Consumers and congressional leaders have raised serious questions about the $25 billion Sallie Mae buyout deal from a consortium of private equity firms that includes J.C. Flowers & Co. (J.C. Flowers), Friedman Fleischer & Lowe LLC (FFL), JPMorgan Chase (JPMorgan) and Bank of America (BofA). The proposed buyout raises serious questions for regulators, elected officials, and advocates worried about the rising cost of college education. It comes at a time when New York Attorney General Cuomo is scrutinizing three of the firms involved -- Sallie May, JPMorgan and BofA -- for their role in the burgeoning student loan scandal. SEIU will be monitoring the deal on http://www.salliemaerevealed.blogspot.com

Federal lawmakers are also considering reforms that could reduce subsidies for private loans made by student lenders. Many have expressed concern about the Sallie Mae buyout including Sen. Edward M. Kennedy, chair of the Education Committee, who said in a statement about the deal:

"The key question is not what this deal means for investors on Wall Street, but what it means for the millions of students and families on Main Street who rely on student loans to get through college ... Clearly, banks and investors see student loans as a very profitable business. It's more urgent than ever to enact reforms to our student loan system to ensure that students, not profits, are our top priority."

J.C. Flowers, the lead investor in this deal, is no stranger to profits. The firm participated in a $1.1 billion buyout of a troubled Japanese bank in 2000 that reportedly earned its investors more than $5 billion when it was floated in 2004. Japanese regulators considered this profit so substantial that they created what has come to be known as the "Shinsei Provision," -- "a tax addendum that forces investors to pay a capital gains tax when a company has received public funding." J.C. Flowers and related entities also invested $25 million in Green Tree Financial, a manufactured home financing company, in 2003 and then sold its stake for $40 million one year later.

The private equity buyout industry, armed with more than a half-trillion dollars of capital, is today engineering financial deals that together are larger than the annual budgets of most of the world's countries. This financial juggernaut is generating hefty returns to its investors, extraordinary riches for its executives, and newly relevant questions about the impact of its business practices on American workers, businesses, communities, and the nation.

Last week, SEIU released a set of principles designed to address the concerns of investors, the public, and workers including:

--  The buyout industry should play by the same set of rules as everyone
    else, including providing transparency and disclosure about their
    businesses, supporting equitable tax rates, and eliminating conflicts of
    interest and other potential abuses in their transactions;
--  Workers should have a voice in the deals and benefit from their
    outcome; and
--  Community stakeholders, including consumer organizations and the
    public, should have a voice in the deals and benefit from their outcome.
    
SEIU members participate in pension funds with more than $1 trillion in assets, most of which invest 5 percent to 10 percent of their assets in private equity. SEIU is a longtime advocate of responsible corporate governance practices and an active member of the Council of Institutional Investors, an organization of more than 130 pension funds whose assets exceed $3 trillion.

For more information go to http://www.behindthebuyouts.org

Contact Information

  • Contact:
    Renee Asher
    202-730-7118