When hedge funds drive educational policy, who profits?

On Tuesday, Senator Harkin will convene a special Senate Committee on Health, Education Labor and Pensions (HELP) hearing, to further justify his energetic crusade against for-profit colleges. Among the cavalcade of speakers who will parade across the Harkin stage will be Pauline Abernathy, a VP at the Institute for College Access and Success (TICAS), whose founder Robert Shireman spearheaded the “Gainful Employment” regs in his brief stint at DoED.

Pauline played a pivotal role in back-channeling communications between TICAS, Wall Street short-sellers, and the Education Department as the vendetta against for-profits was mapped out and executed. This back-story of greed, manipulation and corruption – some of which was made public in a January page 1 story in The Wall Street Journal, “A Short Takes Washington”) will likely be missing from her prepared remarks.

“Gainful Employment” is a textbook example of how special interests can rake in profits while influencing the legislative and regulatory process. TICAS, a not-for-profit, led by Shireman and Abernathy who actively worked to promote the rule, is one major player. Another is hedge fund manager Steve Eisman, famous for making huge sums of money with his bets against the subprime mortgage market. Eisman profits when the prices on stocks he shorts go down.  After he and his investors were done making billions off the housing bubble, Eisman set his sights on for-profit colleges.

In May 2010, Eisman delivered a speech harshly criticizing for-profit colleges -- comparing them to subprime stocks.  He specifically cited the Gainful Employment regulation, sending shockwaves through the stock market as stocks plummeted. Eisman conceded that for investors to score financially, the government would help torpedo the value of educational company stocks.

Enter Sen. Tom Harkin (D-Iowa), a fierce critic of for-profit education, who called Eisman to testify before the Senate HELP Committee. Despite the fact that Eisman had no credentials in educational policy and stood to make a fortune if the market for educational stocks tanked, he used the forum to bash the companies he shorted. Neither Harkin nor any other Senator pressed for specifics on conflict of interest.

The campaign to discredit publicly-traded technical, vocational and other institutions picked up steam. A Government Accountability Office (GAO) study, requested by Sen. Harkin, on for-profit schools' marketing practices produced a scathing critique. DoED stonewalled requests for information about their role in the study. Even more damning was a significant revision quietly released by the GAO at the end of November 2010. The original study - used to damage the reputations of the for-profit schools - had numerous flaws, all of which portrayed the for-profits in a bad light.

Meanwhile, DoED was hammering out a set of regulations designed to do just what the short-sellers wanted: impose burdens on for-profit schools while leaving their competitors (community colleges) largely unscathed.

Eisman has refused to disclose to what degree his short positions paid off. Pauline Abernathy has yet to discuss the role that TICAS playing in back-channeling communications between the DoED and Wall Street short sellers. The department has stonewalled ongoing questions about its inappropriate collaboration with Wall Street.

Special interests have long sought to use the government's power to enrich themselves. The process which produced “Gainful Employment” demonstrates a new tactic: hedge fund short-sellers seeking to enrich themselves by a campaign which benefitted from a Senatorial hearing, a flawed GAO study and a one-sided government regulation. Is this any way for educational policy to be made?

Ken Boehm is the co-founder and chairman of the National Legal and Policy Center in Falls Church, Va.