September 19, 2007
First Marblehead for Dummies
Originally posted at The Motley Fool First Marblehead board
Everyone else seems to be so much more clued in on this stock than me. I feel like I do when I'm reading complex instructions on the proper use of some software, and am getting beautiful explanations of how to optimise some fine point in its usage, when all I want to know is how to load my data into the damn thing.
Maybe I can get Mr. "T" to collaborate on a "First Marblehead for Dummies."
Students are a subset of humans who never have enough money and a big industry grew up to solve this problem. First Marblehead is one of the companies that operates in this business.
Chapter 1, Loans.
Banks have lots of money and students don't so it makes sense for banks to loan the money to the students. The problem is that banks are too dumb to know how to do it so they call First Marblehead to help them out. First Marblehead has a lot of very smart people who know how to make lots and lots of money from helping banks make the loans to students. The smart people at First Marblehead know they will be making out like bandits so they help banks make loans to students for free, just for what it costs them to do it.
Chapter 2, Banks are Fickle.
Banks are fickle. First they get rid of the money they have by lending it to students. But after making the loans banks decide that they prefer to have money instead of loans but, of course, students have 20 years or so to pay back the money. Banks are up the creek without a paddle so they call First Marblehead, where the smart people work, to help them solve the problem.
Chapter 3, Wholesale Loan.
Banks are not the only people who have money to lend. Big institutions like pension funds and others also have too much money that they want to lend but they don't want to do it retail like banks do with students. They want to do the lending wholesale. Since these people are as dumb as bankers they too call on First Marblehead to solve their problem. Being smart really pays off big for First Marblehead, that's why we invest in First Marblehead.
Chapter 4, Loan Sausage Factory.
This is where it gets interesting. The banks give First Marblehead all their student loans and First Marblehead makes a HUGE loan sausage out of them. This sausage is so big that no big institution is big enough to buy a whole loan sausage so First Marblehead slices up the sausage. The people at First Marblehead are so sophisticated that they don't call the slices slices. They use a big French word for slices: "Tranches." This gives First Marblehead at least two big advantages, for one, dummies who don't read this book don't know what tranches are so they stay out of the business. Apparently big institutions are so fascinated by the name tranches that they are more likely to buy them than ordinary slices but that is just speculation on my part.
Chapter 5, Loan Sausage Tranch Ratings.
Big institutions really like the tranches, but the people working there have to protect their jobs so they look for someone to blame should the business go south. This is where the rating agencies come in. They rate the tranches pretty much according to what the smart people at First Marblehead tell them to but they fill the ratings with lots of small print to make sure that, should the business go south, they can pass the blame to someone else.
Chapter 6, Loan Sausage Tranch Handling.
The smart people at First Marblehead know they don't want to get their hand dirty handling tranches so they have this other company called a Trust to do it for them. This is really smart, should the business go south, it's the Trust that is going to take the heat.
Chapter 7, Loan Sausage Tranch Guarantees.
Since everyone knows that students are a bunch of deadbeats, the smart people at First Marblehead get yet another company to guarantee the student loans that went into making the huge loan sausage that was sliced into tranches. The people at First Marblehead are double smart at this. For one, TERI, the company doing the guaranteeing, is a non-profit organization leaving more profit for First Marblehead. The double smart comes in because First Marblehead does not pay TERI, the students themselves do with an additional fee. Man, talk about a free ride! This has got to be the Original Free Lunch!
Chapter 8, The Deal Is Done.
Finally we come to the deal itself. Well, not quite. Since the smart people at First Marblehead don't handle the tranches and since the Trust is just a paper company, the smart people at First Marblehead call in yet another group of people to do the actual selling of the tranches. These people are called "underwriters." You probably want to know where they got that funny name. These people, who most likely are bankers but a different kind of banker than the ones who made loans that started this story, write a big document and they sign it at the bottom. Since their name appears under the meat of the document they are underwriters. I suppose if they were to sign at the top of the document they would be called "overwriters" or "topwriters." Maybe "abovewriters" would be better. Anyway, these guys do the actual selling of the tranches.
Chapter 9, The Money Flow.
The big institutions write big checks to get the tranches. The checks go to the Trust and they spread the wealth. The very smart people at First Marblehead make sure they get a very big chunk of it. Editor's note: Mr. "T" will complete this chapter which is too complicated for dummies like this writer.
Chapter 10, The Denouement.
This is a fancy word that means (I looked it up in the dictionary): "the final part of a play, movie, or narrative in which the strands of the plot are drawn together and matters are explained or resolved."
Who knows? Maybe the students all took off for Katmandu.
Denny (Chief Dummy) Schlesinger
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