Harkin Affords Short-seller Eisman a Very Public Soapbox

One of America’s most beloved and oft-quoted authors, Mark Twain, noted in 1897 that "man is the only animal that blushes; or needs to." In reviewing a video of the June 24 testimony before the Senate Committee on Health, Education, Labor and Pensions, chaired by Iowa Sen. Tom Harkin, I watched carefully to see if Steven Eisman, appearing that day as a witness, blushed. He didn’t; but as Twain might have observed, he needed to.

This hearing was as an oversight hearing inquiring into "Federal Education Dollars at For-Profit Colleges." Most of the testimony by the five witnesses who appeared was unremarkable, if not somewhat boring. Except for Eisman’s.

Eisman’s appearance as a witness stirred controversy even before the hearing began. He was listed in the committee’s pre-hearing news release as "Portfolio Manager"for "FrontPoint Financial Services Fund, LP" in New York City. Position descriptions for each of the other witnesses bore some obvious relationship with the topic at hand; namely, federal funding for proprietary colleges.

The controversy over Eisman’s appearance — given the fact that his daytime job as a Wall Street hedge fund manager had no apparent link to the subject matter of the hearing — was obvious as soon as Harkin began questioning the witnesses after their prepared statements. He noted that questions already had been raised about why Eisman was even invited. The veteran Iowan then asked Eisman directly if he had any “financial stake in the success or failure of for-profit education companies.” That began a cat-and-mouse game with Eisman, who was not placed under oath for the hearing.

To fully understand this exchange, at which Eisman assured Chairman Harkin with a straight, un-blushing face that he had absolutely “no interest in [for-profit schools] failing,” one needs to go back in time one month before the June 24 hearing. On May 26, Eisman had spoken at the Ira Sohn Investment Conference. Eisman, who has made a reputation (and apparently a fortune) engaging in short-sales of shares, offered to his many fellow hedge-fund managers in attendance his prediction on the proprietary college industry. Eisman said his crystal ball indicated this industry was likely to suffer a meltdown, perhaps similar to that suffered two years earlier by the sub-prime mortgage industry.

The interesting thing about such a prediction lies in the nature of “short sales.” These are paper transactions in which a seller borrows shares in a particular industry or company, and then quickly sells them; hoping that, prior to the time he must return them to the lender, they will have dropped in value. He makes a profit by having purchased the shares at the lower value before having to return them to the lender. This apparently was what Eisman had done prior to the dramatic failure of the sub-prime mortgage industry in 2008. In other words, he bet that the value of such instruments would drop; they did, and he profited handsomely by all accounts.

Some suspect that, in bad-mouthing the proprietary school industry, as he did on May 26 and again in the most public of ways on June 24, Eisman is hoping that the price of shares of companies that own for-profit schools will drop. While the witness denied — without perceptible blushing — any such intent, the question Harkin felt himself forced to ask, remains hanging like a flashing neon sign at an all-night diner. Why would a hedge fund manager with no obvious connection to the substantive topic of for-profit schools, be invited to testify at a major committee of the United States Senate chaired by one of the most senior members of that body?

While Eisman’s attempt at magnanimity — declaring he was appearing because there was still “hope” to salvage the proprietary school industry — was delivered with a straight (and again, unblushing) face, it rang hollow. Perhaps more revealing was another remark by Eisman, in which he noted in passing that he serves as a “money manager” to make money for clients that include “universities.” Guess who would benefit from the demise of proprietary colleges? Is the picture starting to come into focus?

Former Rep. Bob Barr (R-Ga.)

THE HILL