Sallie Mae Lost $1.6 Billion in 4Q

03/28/2008 02:45 am ET | Updated May 25, 2011

WASHINGTON — Sallie Mae, the embattled student lender, said Wednesday it lost $1.6 billion in the fourth quarter as borrowing costs rose and it set aside $575 million to cover bad loans.

To address the growing number of delinquencies and defaults on loans not backed by the government, Sallie CEO Albert Lord said the company is shying away from lending to students it considers unlikely to graduate or attending schools with inferior graduation rates.

Sallie also reported Wednesday that the Securities and Exchange Commission has asked for information concerning its public disclosures around the time of stock sales by its executives and board members. The SEC last year initiated an investigation of trading in Sallie shares related to a planned buyout of the student lender.

During a conference call, Lord apologized for his behavior during a stormy call last month in which he refused to answer analysts' questions and ended the session by uttering an expletive.

Shares of Sallie, formally SLM Corp., fell 1.7 percent, or 33 cents, to $18.69 Wednesday. That is a mere fraction of the $60-per-share buyout offer made last spring by an investor group led by private-equity firm J.C. Flowers & Co. The $25 billion offer for Sallie was later rescinded.

The October-December loss at Sallie Mae was equivalent to $3.98 a share, compared with a profit of $18 million, or 2 cents a share, in the fourth quarter of 2006.

Reston, Va.-based Sallie has slashed its earnings forecast for this year, recently held a special sale of stock to raise $2.9 billion in cash and is cutting 350 jobs from its workforce of 11,000 to help reduce costs 20 percent by 2010. The company's newly installed executive team expects that $625 million to $700 million will have to be set aside this year for soured student loans.

The company's new chief financial officer, John Remondi, said Wednesday the company is very close to securing the $26 billion in credit it needs by Feb. 15, to fund its loans. Sallie Mae likely will "pay dearly" for it in interest in light of the current tight credit market, he acknowledged.

The company reported a loss on a "core" basis of $139 million, or 36 cents a share, in the fourth quarter, compared with profit of $326 million, or 74 cents a share, a year earlier. Core earnings exclude treatment for student loans bundled together as securities and derivatives, the complex financial instruments used as a hedge against interest rate swings.

The per-share "core" loss still was milder than Wall Street's expectations: analysts surveyed by Thomson Financial anticipated a loss of 55 cents a share.

For all of 2007, the student-loan provider posted a net loss of $896.4 million, or $2.26 a share, compared with net profit of $1.15 billion, or $2.63 a share, in 2006.

The company announced earlier this month that it will cut back on its core business of making student loans, but executives homed in Wednesday on the importance of graduation as a predictor of an individual's higher earnings potential and likelihood to repay loans. People attending less "traditional" schools, offering associate degrees or with low graduation rates, will be far less likely to get loans from Sallie Mae, even at high rates, under the new policy.

Core net-interest income in the fourth quarter was $612 million, down from $651 million a year earlier. Net interest income is the difference between how much it costs to borrow money and the amount received from lending money.


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