Rolling Stone writer Matt Taibbi immortalized Wall Street investment bank Goldman Sachs this way in a 2010 story in the magazine, which bruised the bank in the public eye. Taibbi walked through a history of what he considers bubbles that the bank helped create and profit from. His opening of the article, however, was most memorable:
The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.
Huffington Post writer Chris Kirkham had a barn burner story last week on Goldman’s foray into higher education with its ownership stake in Pittsburgh-based Education Managment Corp., which Kirkham calls “A Predatory Pursuit of Students And Revenues.” The story package is replete with graphics and links to documents, which are worth checking out. He walks through the history of EDMC, Goldman’s involvement, the arrival of Apollo/Univ. of Phoenix executives and some of the wild recruiting and compensation practices that took place. Here are some highlights:
Education Management Corp. was already a swiftly growing player in the lucrative world of for-profit higher education, with annual revenues topping $1 billion, but it had its sights set on industry domination. So, five years ago, the Pittsburgh company’s executives agreed to sell its portfolio of more than 70 colleges to a trio of investment partnerships for $3.4 billion, securing the needed capital for an aggressive national expansion.
One of the new partners brought an outsized reputation for market savvy, deep pockets and a relentless pursuit of profits — the Wall Street goliath, Goldman Sachs.
After the deal closed and Goldman became a partner, employees soon noticed a drastic shift in culture. Longtime admissions managers were replaced, ushering in an era in which recruiters were endlessly hounded by supervisors about hitting weekly enrollment targets. The admissions staff nearly tripled, requiring expanded floor space to accommodate a sales force of more than 2,600 across the country.
Management handed down revamped telemarketing scripts designed to prey on poor and uneducated consumers, honing in on their past mistakes in life as a ploy to convince them that college would solve all their problems, according to conversations with more than a dozen current and former Education Management Corp. employees over the past two months.
“You’d probe to find a weakness,” said Brian Klein, a former admissions employee who worked for three years at Argosy University Online, one of four major colleges operated by EDMC. “You basically take all that failure and all those bad decisions, and you spin it around and put it right back in their face as guilt, to go to this shitty university and run up all of this debt.”
Kirkham draws parallels between the subprime mortgage industry and the online college industry. He paints Goldman as a greedy institution hell-bent on profiting from the for-profit college industry and with little concern of building a responsible and ethical business in higher education.
Just as the subprime mortgage bubble was giving way to a bust that would help trigger a devastating financial crisis, Goldman Sachs, a firm that had been at the center of Wall Street’s rampant mortgage speculation, found its way to a new area of explosive growth: In claiming what would eventually become a 41 percent stake in Education Management Corp., Goldman secured itself a means of tapping into the boom in for-profit higher education. The federal government was boosting aid to college students nationwide, just as a declining economy prompted millions of Americans to seek refuge in higher education, leading to dramatically expanding enrollments at many institutions.
But unlike in the mortgage markets, where some unwise or unlucky investor got saddled with the bad loans after the festivities ended and home prices fell, this new market in higher education boasted seemingly unlimited growth potential at virtually zero risk. The burden of college loan repayment falls entirely on students’ backs, shielding corporations from the consequences of default. The colleges essentially receive all their revenues upfront, primarily through federal government loans and grants for tuition, regardless of whether students are able to gain employment and pay back their loans.
Recruiters told people with felony criminal records that pursuing a criminal justice degree would allow them to achieve their dreams of joining the FBI — an impossible scenario, because the bureau is barred from hiring people who have been convicted of such offenses. They convinced students with no access to a computer or Internet that they could use the local library for classes, even though they would need to save files and download specific software to access coursework.
Kirkham goes through a history of Education Management Corp.
Education Management Corp. had grown from humble roots, getting on the map by purchasing the Art Institute of Pittsburgh in 1970. After EDMC went public the first time in 1996, the company expanded rapidly by acquiring other accredited colleges and trade schools — a common growth strategy in the for-profit higher education industry. Between 2001 and 2006, the company bought more than three dozen new colleges across the country, ranging from culinary schools to traditional four-year liberal arts colleges.
By the time Goldman and the seasoned team of University of Phoenix executives arrived in 2006 and 2007, EDMC was already a juggernaut. It owned more than 70 college campuses across the country and had doubled its revenues over the previous five years. During that timeframe, its student population tripled to more than 72,000 — larger than mammoth state universities such as Ohio State and the University of Texas.
But the Goldman investment promised to propel the company to even greater heights. Like many companies in 2006, Education Management Corp. was attracted to private equity as a way to realign the company and maximize future profits. Easy credit before the financial crisis made 2006 a record year for corporate buyouts
Some of the juiciest material from Kirkham’s reporting are the details on recruiting at EDMC, such as these paragraphs:
All admissions employees interviewed by The Huffington Post described the widely used method of “finding the pain” in prospective students, a tactic employees said was meant to exploit recruits’ past failures in careers or education.
A sales call handout obtained by The Huffington Post describes the first three steps when talking to a new sales lead: “1. Build em up! … 2. Break Em Down! Find the PAIN! … 3. Build em Up!”
Recruiters were instructed to create the illusion that they were in a position of power and discretion, telling prospective students they would not receive a “recommendation” if they delayed. In closing calls, the script instructed recruiters to say: “At this point you should understand my role as the Assistant Director of Admissions here at the school” — a title bestowed on thousands of admissions recruiters. “The school also gives me this position to ensure that you are admissible and to provide a recommendation to complete an application.”
And the results of Goldman’s cash and push into aggressive recruiting at EDMC schools:
But while the infusion of capital from Goldman and know-how from the former Apollo executives has proven beneficial to shareholders, students have fared less profitably: Student loan default rates have grown substantially at several of EDMC’s schools.
The most recent student loan default data, released this month, showed that the percentage of students defaulting within two years of leaving at the Art Institute of Pittsburgh nearly doubled, from 7.9 percent in 2008 to 15.4 percent in 2009. South University’s default rate increased from 7.9 percent to 13.5 percent between 2008 and 2009.
According to a JP Morgan Chase analyst report in 2010, EDMC’s schools have among the highest tuition of publicly traded corporations in higher education. Tuition at EDMC’s Art Institutes schools can average about $50,000 for an associate’s degree and between $77,000 to nearly $100,000 for a bachelor’s degree.
And the legal troubles EDMC is facing…
In August, the Justice Department and attorneys general from five states, including Florida, California and Illinois, alleged widespread fraud in EDMC’s recruiting model, arguing that admissions employees were compensated entirely based on the number of students enrolled.
EDMC’s employee compensation “matrix” did list other “quality factors,” such as business ethics, professionalism and job knowledge. But the complaint said that the “so-called ‘quality factors’ have no real impact on the manner in which EDMC’s compensation system is implemented” and amount to “window dressing.”
Lawyers for EDMC challenged the notion that the “quality factors” had no bearing on an employee’s salary. Bonnie Campbell, a former Iowa attorney general serving as a spokeswoman for EDMC’s legal team, pointed out that EDMC had two education law firms independently review the compensation plan to ensure it complied with the “safe harbors” in the law.
Meanwhile, Goldman’s private equity fund that owns the stake in EDMC and Providence Equity Partners now control 80% of the school. Goldman recently bumped its stake to 41%, up from 33%. Goldman Sachs does not disclose its ownership of EDMC in its annual SEC filings and the company does not show how much money it has earned from EDMC. Kirkham writes:
The Justice Department complaint does not specifically name Goldman or Providence as defendants, but their returns could be significantly affected were EDMC compelled to pay penalties and return prior revenues to the government.
But the track record of such false claims suits is spotty. Two former employees at University of Phoenix filed a whistleblower lawsuit against the University of Phoenix in 2003 that involved billions of federal student assistance dollars, but the case was eventually settled with an agreement to pay the federal government $67 million in 2009, which amounts to less than a third of its quarterly income. The Justice Department, however, did not intervene in that false claims case, as it has in the case against EDMC.
“The financial brilliance behind these schools is that unlike the mortgage industry, when this bubble bursts, these loans are guaranteed to these companies,” said Lawrence, the former Argosy University recruiter. “They’re backed by the government, so it’s not them that’s going to go under.”