Election Risk

1
Election Risk Student LoansNCHELP Spring
ConventionTucson, Arizona

• June 3, 2008
• Charles A. Gabriel, Jr.
• Managing Director
• charles.gabriel_at_capalphadc.com

2
www.capalphadc.com
3
(No Transcript)
4
(No Transcript)
5
A Democratic Year

• Motivation and Money Mismatch
• Restiveness over War/Lopsided Right-Track,
  Wrong-Track
• Generic Ballot/Bush Approval/Economic Indicators
• 3 Straight Special Election Victories for the
  Dems
• Electoral College Shifting?

6
2000
2004
2008
7
Could Democrats Snatch Defeat From The Jaws Of
Victory?

• Will protracted, bitter nomination struggle
  impede Obamas ability to move to the center?
• Might Obamas troubles with white working class
  voters spell trouble in blue states like PA, WI,
  MI or MN?
• Might racism prove a factor?

8
Might McCain, The Anti-Bush, Prove The GOPs
Savior?

• Clear record of independence from Bush
• Strong appeal among independents
• Strong in Southwest
• Well suited to keep Ohio, Florida red
• Superior national security bona fides

9
Or . . .

• Might Obamas transcendent,
  post-partisan candidacy and younger image,
  rhetorical skills, money and reparational
  political advantage boost participation among
  traditionally-non-voting Dems and independents,
  enough to boost his partys gains down-ticket?

10
Hill Shifts Particularly in the Senate Could
Prove Most Important

• House alignment has 236 Democrats, 199
  Republicans.
• Senate 51-49 (i.e., 49 Democrats, 49
  Republicans, and 2 Dem-leaning independents)
• House shift should be modest.
• Net Democratic gains beyond 3-4 Senate seats
  could boost party to near-filibuster-proof
  working majority (i.e., the Al Franken
  scenario).

11
How Close Are Senate Dems To a Filibuster-Proof
Supermajority?
Source Charlie Cook 3/20/08
12
One Potential Result
Revenge of the Direct Lendinazis!!!
13
Nationally Clinton v. Obama
Source RealClearPolitics.com Capital Alpha
Partners, LLC
14
Race to 2,118
1,916
2,072
15
Winner Take All Clinton 2,257 vs. Obama 1,744
Source CNN Capital Alpha Partners, LLC
16
McCain vs. Obama
Source RealClearPolitics.com Capital Alpha
Partners, LLC
17
Veepstakes Names Most Often Mentioned
18
So What??
19
Blue Stocks, Red Stocks
20
Financials Seller Beware

• Subprime Mortgage Reform
• Duty-to-care/Suitability
• Assignee Liability
• Foreclosure Moratorium
• Mortgage Cramdown Legislation
• Housing GSEs

• Student Loans
• Credit Cards
• Banks/Overdraft Loan Protection
• Payday Lending
• Rating Agencies
• RALs

21
Five Hanging (Policy-Related) Curve Balls

• Healthcare Reform
• Climate Change
• Lender Liability

• Tax Reform
• Peace Dividend

22
A President Obama aligned with an enhanced
Democratic Senate caucus nearing a
filibuster-proof (60-vote) supermajority could
foretell more investor-frightening turns at bat.
23
Student Loans and FFEL Lenders The Vilified
Bill-payers

• Barack Obama Webpage
• Change We Can Believe In
• Plan to Strengthen the Economy
• At a Glance
• Provide Middle Class Americans Tax Relief
• Trade
• Technology, Innovation and Creating Jobs
• Labor
• Protect Homeownership and Crack Down on Mortgage
  Fraud
• Address Predatory Credit Card Practices
• Reform Bankruptcy Laws
• Work/Family Balance

24
A World class education I don't want to send
another generation of American children to
failing schools. I don't want that future for my
daughters. I don't want that future for your
sons. I do not want that future for America.
Barack Obama, Jefferson-Jackson Dinner, Des
Moines, Iowa, November 10, 2007 At a
Glance Early Childhood Education K-12 Recruit,
Prepare, Retain, and Reward Teachers Higher
Education
25
Soaring College Costs College costs have grown
nearly 40 percent in the past five years. The
average graduate leaves college with over 19,000
in debt. And between 2001 and 2010, 2 million
academically qualified students will not go to
college because they cannot afford it. Finally,
our complicated maze of tax credits and
applications leaves too many students unaware of
financial aid available to them.
26
American Opportunity Tax Credit Barack Obama will
make college affordable for all Americans by
creating a new American Opportunity Tax Credit.
This universal and fully refundable credit will
ensure that the first 4,000 of a college
education is completely free for most Americans,
and will cover two-thirds the cost of tuition at
the average public college or university.
27
Expand Pell Grants for Low-Income Students Two
decades ago, the maximum Pell Grant covered 55
percent of costs at a public four-year college,
compared with only 32 percent today. The first
bill Barack Obama introduced in the U.S. Senate
would have helped make college more affordable
for many Americans by increasing the maximum Pell
Grant from the limit of 4,050 to a new maximum
of 5,100. Obama has worked in a bipartisan way
on the Senate Health Education Labor and Pensions
Committee to achieve an increase in the Pell
Grant to 5,400 over the next few years. As
president, Obama will continue to work to ensure
that the maximum Pell Grant award is increased
for low-income students. Specifically, he will
ensure that the award keeps pace with the rising
cost of college inflation.
28
Community College Partnership Program Community
colleges are a vital component of our higher
education system, serving 12 million people each
year, almost half the undergraduate students in
the U.S. Without community colleges, millions of
people would not be able to access the education
and skills they need to further education or
succeed in the workplace. Barack Obama will
create a Community College Partnership Program to
strengthen community colleges by providing grants
to (a) conduct more thorough analysis of the
types of skills and technical education that are
in high demand from students and local industry
(b) implement new associate of arts degree
programs that cater to emerging industry and
technical career demands and (c) reward those
institutions that graduate more students and also
increase their numbers of transfer students to
four-year institutions. These efforts will ensure
that community college students are able to
directly use their skills in the workforce
following graduation, and be prepared to continue
their higher education. And the grants will
support programs that facilitate transfers from
two-year institutions to four-year institutions.
29
Eliminate Costly Bank Subsidies Currently, there
are two basic college loan programs the Direct
Loan system, funded publicly, and the
Federal Family Education Loan Program, funded
privately by banks and lenders who receive
subsidies and guarantees from the government.
Privately funded loans cost more per loan than
the Direct Loan program and provide no greater
benefits. Obama will save taxpayer money billions
by eliminating the more expensive private
loan program, and directing that money into aid
for students.
30
What to Expect (in the event of a leftward shift)?

• DOE higher ed programs will likely be
  commandeered by newly appointed FFEL opponents,
  with names like Shireman, Dannenberg and/or
  Kvaal.
• Facing program risk, and likely White House
  pressure to enroll in Direct lending, schools may
  begin to migrate toward the FDSLP as they did at
  the beginning of the Clinton administration.

31
What to Expect (continued)

• New administration will be confronted with
  incentives to advance a shift to full Direct
  lending as early as in its proposed FY 2010
  budget revisions
• Guaranty agency reserves will (once again) prove
  a fat target.
• Difficult roll-over from short-term liquidity
  enhancements announced by DOE May 20/21.

32
What to Expect (continued)

• Senator Kennedys future could prove important.
• An accelerated shift toward Direct lending could
  divide the industry, as existing players fight
  over everything from servicing to collection
  rights.

33
What to Hope For (as we fear the Hope-mongerer)?

• Obamas defeat (Currently, a McCain-to-win-the-pr
  esidency contract fetches only 37.5 cents on
  Intrade, but polls today would give the AZ
  Republican a narrow Electoral College victory).
• Only modest Democratic gains in the Senate
• Serious problems for DOE in servicing the Direct
  loan program
• Schools to exert preference for continued
  dual-program system
• Movement toward an auction-based system

34

This report is for private circulation and
distribution in its entirety and is based upon
information believed to be reliable. However, we
cannot guarantee accuracy and are neither
responsible for errors of transmission of
information, nor liable for damages resulting
from reliance on this information. Opinions in
this report constitute the personal judgment of
the analysts and are subject to change without
notice. The information in the report is not an
offer to purchase or sell any security, nor do
the analysts receive any compensation in exchange
for any specific recommendation or view expressed
in this report. Analysts may own securities of
the issuers discussed herein.