The Risks of Distributing Risk(themargins.substack.com)
themargins.substack.com
The Risks of Distributing Risk
https://themargins.substack.com/p/the-risk-of-distributing-risk
5 comments
I definitely can see how Lambda school is now incentivized to generate as many ISAs as they can, and that price discovery in the ISA market (and other somewhat opaque or difficult to model debt markets) can be tricky, but shouldn't Lambda be incentivized to produce excellent graduates because that increases the credit rating (so to speak) of their ISAs and in turn the market value? I would think that ISAs of notoriously bad programs would sell for pennies on the dollar, while ISAs for a highly regarded program might be as good as cash (probably not that good, but you get the drift). I would think at some point that it would be easier to produce one good graduate than 10 or 100 terrible ones (even a terrible program probably has a decent amount of overhead per graduate to market to and find them, enroll them, instruct them, test them, etc.).
this is kind of the perfect example - in theory, the secondary market should correctly price the ISAs based on the quality of the students being graduated.
But there is a significant lag built in on the pricing. It would probably be a few cycles of students, and you wouldn't even know they're not getting good jobs for a number of months if not years. Especially given Austen's kind of a celeb, Lambda could raised a few bigger and bigger rounds in that time period - and their numbers would look fantastic to potential investors with the cash coming in up front. If they played it right, they could maybe even IPO before those secondary ISAs ever get properly priced. Financial innovation at its finest!
But there is a significant lag built in on the pricing. It would probably be a few cycles of students, and you wouldn't even know they're not getting good jobs for a number of months if not years. Especially given Austen's kind of a celeb, Lambda could raised a few bigger and bigger rounds in that time period - and their numbers would look fantastic to potential investors with the cash coming in up front. If they played it right, they could maybe even IPO before those secondary ISAs ever get properly priced. Financial innovation at its finest!
> "... would probably be a few cycles of students ..."
This sort of delay would be priced in by the person buying the ISAs from Lambda.
I agree with the grand-parent post. Lambda school definitely has skin in the game. If they want to continue operating (i.e., sell the next batch of ISAs onward to investors) then they need to have students who get high paying jobs.
This sort of delay would be priced in by the person buying the ISAs from Lambda.
I agree with the grand-parent post. Lambda school definitely has skin in the game. If they want to continue operating (i.e., sell the next batch of ISAs onward to investors) then they need to have students who get high paying jobs.
> but shouldn't Lambda be incentivized to produce excellent graduates because that increases the credit rating (so to speak) of their ISAs and in turn the market value?
[from the article]
> The moment Lambda started selling off the contracts, their incentives completely flipped. Their income was then derived from generating ISAs, meaning, the more, the better. Enroll as many students as possible. Of course, if no one ends up getting jobs, investors will eventually stop buying the Lambda ISAs, but that would all happen a long ways down the road.
As with most financial sins, it's short-term profits over long-term sustainability.
[from the article]
> The moment Lambda started selling off the contracts, their incentives completely flipped. Their income was then derived from generating ISAs, meaning, the more, the better. Enroll as many students as possible. Of course, if no one ends up getting jobs, investors will eventually stop buying the Lambda ISAs, but that would all happen a long ways down the road.
As with most financial sins, it's short-term profits over long-term sustainability.
buyers of these ISA securities should be factoring in that risk into the pricing