By Peter Byrne
The U.S. Department of Education’s decision in August to ban a troubled for-profit college corporation from taking federal student aid funds made national headlines.
But what went largely unnoticed was the damage the move did to the family fortune of a powerful senator, as well as California’s pension system.
The federal action was a fatal blow to ITT Educational Services, Inc. (ITT); left investment banker Richard Blum, husband of Democratic senator Dianne Feinstein, reeling; hurt the Golden State public pension system; and stuck U.S. taxpayers with a half-billion-dollar bill. The dominoes began to fall when the department determined that the Indiana-based chain had not met accreditation standards, prompting ITT to shut down 129 campuses in 38 states and file for bankruptcy.
Thousands of students were cast adrift without the degrees for which they had paid tens of thousands of dollars.
Taxpayers are reportedly on the hook for $500 million to cover the government-backed loans that ITT banked before it became insolvent in the wake of the ban. ITT stock is trading at 4 cents, and the company reports that it is unable to make Securities and Exchange Commission filings due to “lack of resources and personnel.”
The demise of ITT followed years of governmental and media investigations that began after the FBI raided its corporate offices in 2004. Several state attorneys general have sanctioned ITT for financial and educational improprieties. The ban on federal funding came out of a 2012 U.S. Senate investigation. The SEC filed a complaint in the Southern District Court of Indiana in 2015, charging ITT and its chief executive officer with fraud. The company claims that it has done nothing wrong and is being persecuted for political reasons.
Despite the scrutiny, ITT thrived for years, and reaped big profits for Blum Capital Partners, a private investment bank owned and operated by Blum. The firm bought low on large amounts of ITT stock following the FBI raid. When federal regulators allowed ITT to continue accessing federal student aid money, despite its well-documented troubles, the share price boomed, reaching $122 in 2009.
Blum Capital has been ITT’s dominant shareholder for more than 10 years, owning 15 percent of its stock in 2012. Blum Capital was generally bullish on for-profit educational colleges, which composed more than a third of the value of Blum Capital’s 2010 holdings in public companies.
With a fortune estimated at $94 million, Feinstein is the ninth richest member of Congress. Under California law, Feinstein, 83, is entitled to 50 percent of her husband’s assets, including his stake in Blum Capital Partners and its investments. Her 2012 financial disclosure report takes 137 pages to list her family’s assets; by contrast, Sen. Jay Rockefeller’s disclosure runs eight pages.
Blum has a history of investing heavily in companies funded by the federal government. He has operated firms that constructed multibillion-dollar public works projects in the United States; sold U.S. Post Offices to his business partners at low prices; built military bases in Iraq and Afghanistan and around the world; and sold prosthetic limbs to wounded veterans. Feinstein has a history of not recusing herself from congressional actions that affect her husband’s businesses.
In 2007, Feinstein co-authored student loan legislation that benefited the for-profit education industry at a time when Blum Capital Partners was buying stock in ITT. Feinstein’s bill enabled ITT to triple its federal student aid revenue; ITT specifically applauded the profitable impact of Feinstein’s legislation in its annual report.
The department’s ban against ITT was taken “to protect students and taxpayers” who paid $1.1 billion to ITT in 2010. Following the 2012 Senate investigation, the Department of Education determined that ITT was failing to teach the trade skills necessary to be hired for jobs that recruiters promised. Pressured by its private equity investors, ITT managers were more concerned with generating profits than in educating its student body of mostly lower income workers and veterans, investigators found.
Investor profit came at the price of student pain. The Senate investigation reported that ITT used a recruiting technique known as the “pain funnel.”
“Recruiters are instructed to ‘poke the pain and remind [prospective students] what things will be like if they do not [enroll],’” the report stated.
Military veterans testified that ITT recruiters had told them that “the military was going to pay for everything,” which was not true; many veterans also had to take out private loans, which are still owed even though ITT is out of business.
In 2010, more than 40 percent of the value of the publically disclosed assets of Blum Capital Partners was invested in two for-profit college corporations, ITT and Career Education Corporation, also a target of the Senate investigation. Blum Capital Partners liquidated its for-profit college holdings during the past year. The publically disclosed value of the firm’s portfolio, worth more than $3 billion a decade ago, has sunk by 98 percent to $52 million, according to SEC filings in late October 2016.
Neither Blum nor Blum Capital Partners responded to multiple telephone calls and emails requesting comment for this story.
Taxpayers and students are not the only losers in the ITT debacle. During the past decade, CalPERS, the California public employees’ pension fund, paid Blum Capital Partners several million dollars a year in investment-management fees, and directly invested hundreds of millions of dollars in the firm. Through Blum Capital Partners, CalPERS maintained investments in ITT and the Career Education Corporation which have largely tanked in value.
Last year, CalPERS reported a $9 million investment in ITT—now worthless. Such a loss may be chump change for the multibillion-dollar CalPERS, but it would buy a lot of senior meals and eyeglasses.
Any reason why Mr. Byrne’s article did not make it to the front page of the NY Times or WSJ?