WASHINGTON -- In a move that has some bankers concerned about unfair competition, the Clinton Administration said Tuesday it plans to privatize the Student Loan Marketing Association.
Treasury Secretary Lloyd Bentsen and Education Secretary Richard Riley explained the administration's plan to unleash Sallie Mae from its federal charter in a joint letter to key lawmakers.
"The most promising approach now under consideration is to ... restructure Sallie Mac from a GSE that has certain ties to the federal government into a completely private enterprise," the letter stated.
The letter was sent to Sen. Edward M. Kennedy, D-Mass., who chairs the Senate Labor and Human Resources Committee, and Rep. William Ford, D-Mich., chairman of the House Education and Labor Committee, both of whom had asked the administralion to study Sallie Mae's future.
Bankers are concerned that once Sallie Mae is freed from its federal charter, they will have yet another large, nonbank competitor to contend with. "With privatization, there is a real potential for an increase in competition from Sallie Mae," said John Dean, special counsel for the Consumer Bankers Association. "They have capital generation and loan origination capabilities that could allow them to be very competitive."
However, Lawrence A. Hough, Sallie Mae's president and chief executive, Said his corporation is not interested in competing with banks on this front. "For 20 years we haven't done loan origination," Mr. Hough said. "The secondary market is the business we know. If we were to become a direct competitor, we would lose some of the most valuable partnerships that we would turn to in the future to develop ,secondary business lines."
If the administration succeeds, Sallie Mac will be the first government-sponsored enterprise to be freed from the restrictions of a government charter. "I don't want to be paranoid, but there are certain restrictions placed on them by GSE status that would be lifted," said Joe Belew, president of the Consumer Bankers Association. "Sallie Mae would become a full-blown, efficient, well-funded competitor. Whether that's in origination, servicing, or whether that goes beyond student loans, I don't know, but a move towards privatization is not done to preserve the status quo." According to Mr. Hough, Sallie Mae desperately needs to diversify because a direct government lending program approved by Congress last year will take a serious bite out of Sallie Mae's business. "A year ago, our shareholders' valuation of the company was over $7 billion, and today that value has been reduced by half," Mr. Hough said. "That's all because of the direct lending program."