Making Hay at Sallie Mae: Loangate Continues

There was a nice round-up of the Loangate corruption at Inside Higher Ed yesterday, and today there is another front-page story in the Times. Among its many ethical atrocities, Sallie Mae convinced Indiana U. with a $3 million dollar argument to ditch the National Direct Loan Program and to put Sallie Mae in charge of the student loan program.

Where is the oversight from ED? You've got to be kidding--remember that Rep. Boehner (R) is the Congressman that Sallie Mae made. Some of the Inside Higher Ed piece:

With the scandal over conflicts of interest in student loans continuing to grow, Education Secretary Margaret Spellings is pledging tougher enforcement of ethics rules, as the Education Department released more information about sale of stock in a lender by an official who works on student loan issues.

And in a sign of just how volatile the loan industry is today (and how lucrative it remains), reports emerged Friday morning that Sallie Mae, the industry giant, is in talks to be bought out by private equity in a deal for more than $20 billion, according to The New York Times.

A statement released by the department late Thursday said that Spellings has asked Susan Winchell, the department’s chief ethics officer, to review “best practices” on its own financial disclosure forms to identify ways that the department might improve. Spellings also has directed that each financial disclosure form now be reviewed by at least two lawyers.

Last week, Spellings placed on leave Matteo Fontana, an Education Department official who works on student loan issues, after the New America Foundation reported that he had sold at least $100,000 in stock in the Education Lending Group, which owned Student Loan Xpress, a lender at the center of the current controversy.

It is unclear whether that sale (or the prior ownership) violated any laws or regulations, but the news about Fontana prompted calls from Democrats for tougher enforcement of loan rules by the department.

Financial disclosure reports for Fontana released by the department late Thursday in response to a Freedom of Information Act request by Inside Higher Ed offered conflicting evidence on the extent of his stock ownership and sale and of his disclosures to the department about those assets.

In his initial filing in mid-December 2002, soon after joining the department, he reported owning between $1,001 and $15,000 in stock in Direct III Marketing, as Student Loan Xpress was known at the time, and an equivalent amount of stock in Education Lending, Inc., then the parent company of Student Loan Xpress. (A note written on the form by the ethics officer at the time said “Filer [was] advised to contact Ethics Division if ELG stock exceeds $15K.") In May 2004, his first full financial disclosure, covering the 2003 calendar year, he reported having sold between $1,001 and $15,000 in stock in both companies later in mid- to late December 2002. That could be read to suggest that he had sold all of his stock in both companies.

But in May 2005, according to his disclosure form for the 2004 calendar year, Fontana reported having sold between $100,001 and $250,000 in stock inEducation Lending common stock in July 2004. There is no explanation of where that stock came from. The fact that Fontana reported the sale is likely to add to Democratic Congressional criticism about the Education Department, as Fontana’s reporting raises the question of whether anyone at the department took action based on the apparent conflict.

Late Thursday, Sen. Edward Kennedy, chairman of the Senate committee with oversight of education programs, issued a statement saying: “The financial disclosureforms filed by Education Department official Matteo Fontana during his time at the department raise grave concerns about the effectiveness and impartiality of the ethics process at the department. The forms show that department officials were aware that Mr. Fontana held a significant financial interest in a company that
he was charged with overseeing. Any American can tell you that this is dead wrong.”

The statement from the department Thursday noted that “like many federal government employees, Department of Education employees may own stock in any company, including companies the Department regulates or with whom the Department does business.” The statement went on to elaborate: “The conflict of interest statute prohibits employees from working on department matters that will affect the companies they own stock in unless the employee receives a waiver or an applicable regulatory exemption. For example, employees are generally permitted to work on any matter even if they do own stock as long as their interest in the matter does not exceed $15,000.”

The department also announced that Spellings has asked for the resignation of Ellen Frishberg from the department’s Negotiated Rulemaking Committee on Student Loans. Frishberg, director of student financial services at Johns Hopkins University, was placed on administrative leave by the university after it
learned that she had received payments from Student Loan Xpress.

Frishberg is the second person Spellings has asked to leave a student aid post because of the scandal. Spellings earlier sought the resignation of Lawrence W. Burt from the Advisory Committee on Student Financial Assistance. Burt is director of financial aid at the University of Texas at Austin, although he too is on leave, following reports that he owned Student Loan Xpress stock. . . .