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Goldman Sachs Finds A Factory For Diplomas, Bubbles and Profits At EDMC?



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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.

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.”

Via The Huffington Post

arrow2 Responses

  1. Brad Lang
    40 mos, 2 wks ago

    I worked there..It’s ALL true. It was a boiler room. They brought me in at $40K after a year I couldt take the telemarketing atmosphere. I was calling the same people daily. They were geting 3-4 calls per day from me. In some cases they were just inquiring about scholarships in general.over 200 calls a day. It was all about getting the $50 it began there and ended after you called then up to do their first assignment which meant they get zero refund. To be accepted the potential student’s High School had to have a QPAa of 1.3 – 1.5 YES a “solid’ D….too boot a 16 week class semester was crammed to 8 weeks. In most schools the 3 essays were usually part of the criteria, At EDMC I had some returned to me to have the student redo the. Some were ust unbelievable. The failure rate I oredicted as dud e= every ADA (Assistant Director of Admissions aka telemarleter).

  2. Merrick Vanderson
    38 mos, 2 wks ago

    This is an actual assignment for a doctoral level class. I’ll let you be the judge of the adequacy of this student for a loan for her education.

    This was the “post” or one of two assignments each week. It was given an “A”. The Class was L7101. Please read it carefully and decide if this person is worthy of getting your tax dollars for education, if this school is doing this person a service by allowing them entrance and sustaining them in school, and if this student might ever become employed, at the doctoral level, in anything but a workfare program?Do you think that a school that allows this student entrance and allows this student to be deluded that they are “doctoral” material is a rip off con job?

    By the way, all five of the sources are to be cited in APA style, they are none as you can see and yet this student received an “A”.

    “Using theInternet, find at least five resources by Robert Quinn and Peter Vaill. Almostall of their leadership literature suggests that exemplary leaders musttransform themselves before they can effectively lead and motivate anorganization. Respond to this suggestion drawing upon at least 3-5peer-reviewed references. In a Word document, compare and contrast yourpersonal style with the following leadership practices discussed in Kouzes andPosner:Model the way. Enable others to act. Encourage the heart. How do yourleadership practices differ from the ones discussed in Kouzes and Posner?Discuss how you plan to decrease the differences. How will you incorporatethese practices into your personal leadership style? Develop personal changestrategies to incorporate these leadership practices into your personalleadership style.

    Module 6 Discussion Question 1Model the way:

    I really don’t have one leadership style I try to be veryflexible. In my leadership role I try to encourageeveryone. I don’t believe in the words I can’t because I know aperson can do the impossible if they put fourth an effort. Thereare times I would like to quit but I realize that you must talk the talk awalk the walk. You must be self motivated and be able to motivateothers in an organization. As a leader the main time you stop modelingthe way that’s when you realize how many people were modeling them selvesafter you. As a mother of six I must set the example. Myeldest daughter when I went to college and graduated she told me she wasgoing to do the same thing. Many times she wanted to give up but Iencouraged her that she could do anything she put her mind to. Enabling others toact: I was told that Icould be hard at times but I had to learn not to show favoritism. Toget a team to work together can be difficult but by giving everyone the sameinformation and keeping an open line of communication every thing will cometogether. Within the church I have people working in positions they hadnever worked in before many would complain that they are not prepared but bymotivating them they would do the job and it would always turn out betterthan what they expected. Believe it or not but they would come and tellme thank you for believing in them. Many times people can see what youcan achieve before you do. There were two ladies that wanted to do fundraisers around the same time. One came and was complaining that theother lady was trying to hinder her project. After explaining to her thatthey had to different project in two locations I told do what you can andallow her to do hers, and it was going to turn out better the sheexpected and it did. Getting to know their personality typeshelps a lot also. Within the church I try to encourage as many peopleas I can to stay in school and to take classes in the local college becauseyou don’t know what you can do until you do it. In essence what I am sayingis support you worker ideas and actions build their confidence level up intheir abilities and integrity them motivate them and pay attention to theirfeelings. Encourage the heart: First you must find theirstrengths and build on them. We all have weakness but don’t allow theweakness to weigh you down build on them. Reward your employees in words andgifts this builds trust and lets them know how much you appreciate them. Oncethey take on a project I don’t interfere with it if they ask my onion thenand only them do I give it. If something doesn’t work out I don’t beatthem up with it because I see it as a part of the learning process. There will be times thing want work in your, favor but learn from it.

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