State officials are preparing quietly to sell the majority of the state’s $3.4 billion in student loans to lending companies in a controversial deal involving longtime friends and contributors to Gov. Rod Blagojevich.
Legislators blocked a proposal in the 2005 budget to sell the loans for a one-time windfall, a move critics feared could gut services to college students and their families and leave them at the mercy of private lenders.
Since then, however, Blagojevich has revamped the board overseeing the loans, and his handpicked commissioners have forged ahead without legislative approval.
This year, the board put the valuable portfolio in the hands of Andrew Davis, a Blagojevich fundraiser from Chicago whose own business venture failed recently, leaving him saddled with lawsuits and debt.
Davis engineered an auction for part of the loan portfolio in January and hopes to sell more this spring. As lenders and brokers vie for the business, they have hired lobbyists with close ties to him and Blagojevich.
The privatization plan puts a spotlight on the little-known Illinois Student Assistance Commission. Working with colleges and universities, the agency makes loans available to students–roughly 263,000 borrowers across the nation this year–and guarantees and administers the loans, as well as providing financial counseling to families of college students and distributing state grants.
“I’d never heard of ISAC before I was approached by the governor’s office” to become a commissioner for the agency, Davis said in an interview.
In 2005, he joined the list of Blagojevich donors and fundraisers who have won appointment to state boards and commissions. Davis also has raised money for politicians including U.S. Sen. Barack Obama.
Last December, without any job posting or candidate search, the ISAC board promoted Davis to the $180,000 job as executive director. He immediately began pushing a plan to sell all of the state’s federally-backed student loans, which make up about 80 percent of the agency’s multibillion-dollar loan portfolio.
Davis says now is the time to get out of the business as Congress and President Bush consider adjustments that could affect loan providers’ bottom lines. He also says that the agency should focus on lending to Illinois students, and he is working on a new low interest-rate loan. Currently, about 75 percent of the loans are for students from other states.
“The strategy is to refocus ISAC on lending to Illinois students,” Davis said.
A Blagojevich spokesman said the governor has confidence in Davis’ plan.
“We look to ISAC and their board for those recommendations,” spokesman Justin DeJong said.
There are concerns, though, even from within the loan agency. A research report written by the ISAC staff and posted on the agency’s Web site last year called large-scale privatization “an irrevocable mistake.”
“This would cause a tragic loss of sorely needed resources for students and families,” according to the report, since loan interest and fees fund the agency’s other programs.
Critics also have popped up among government watchdogs and the General Assembly.
“I wish this [privatization program] had legislative approval, but the governor stacked the commission, and they’re going to totally do what the governor wants to do,” said state Rep. Raymond Poe (R-Springfield).
(The following two paragraphs have been added to this text.)
While the legislature has not voted directly on privatization of the loan portfolio since the General Assembly blocked the idea in 2005, a 2006 law authorizing student aid grants acknowledged that the funds for those grants could come from a variety of sources, including “the sale of student loan assets.”
The legislature has not considered any measure involving ISAC’s planned sale of about 80 percent of the portfolio. The loan agency does not need legislative approval to sell the loans.
Davis’ professional history also has raised eyebrows. Before appointment to the board, Davis was best known for running The Rock Island Co. of Chicago, a LaSalle Street securities firm that controlled dozens of Chicago Stock Exchange seats.
Repercussions of failed firm
He acknowledged in an interview that Rock Island crashed in 2005 in part because of risky deals in which he paid too much to buy out competitors.
“People advised me at the time that I was making a mistake, and they were right, and I was wrong,” he said. “It is hard to see the future.”
Davis “had a spectacular career in business, but obviously Rock Island went south and now he pops up handling state funds,” said Jay Stewart, executive director of the Better Government Association, a civic watchdog group. “Is he there because he’s the best person for the position or because he’s a campaign contributor?”
As Davis restructures the state agency, he is still dealing with Rock Island’s demise.
When it was shuttered, his company was sued for not paying office rent and worker’s compensation insurance. Former Chicago Board of Trade Chairman Patrick Arbor won a court judgment over a $1 million loan, and Davis agreed to a repayment schedule.
In a pending federal civil lawsuit, a former Rock Island employee alleges that Davis misappropriated more than $300,000 from that employee’s retirement account, a charge Davis denies.
Davis, 50, said he has never shirked from any corporate debts or obligations. “I tried to deal with it in an upright manner, a stand-up way,” he said.
The press release announcing Davis’ appointment as ISAC’s executive director glossed over Rock Island’s troubles. Instead, it touted him as chief executive officer of Pinnipedia LLC, “an investment firm specializing in electronic markets.”
But that firm has no business offices or staff. It is simply “an investment vehicle for family funds,” Davis acknowledges. His wife designed its business cards at a copy shop.
A former vice chairman of the Chicago Stock Exchange, Davis has been involved in politics since he served as a member of the Chicago Mercantile Exchange’s political action committee in the 1980s.
Between 2000 and 2002, he and his trading firms donated $51,000 to Blagojevich’s gubernatorial campaign, records show. Davis said he solicited roughly $50,000 more from friends and business associates.
“I raised an amount of money that today would be considered piddling, but back then was significant very early in his campaign,” he said.
After he was elected, Blagojevich named Davis to an advisory committee and a blue ribbon panel. Blagojevich attended Davis’ 2003 wedding, though Davis says they are not close.
A Blagojevich spokesman said the governor supports Davis, who served as a trustee for his alma mater, Beloit College, for 15 years.
“His successes greatly outnumber his failures in any business venture,” Blagojevich spokesman Gerardo Cardenas said. “He is an individual with an impressive business background and very good academic qualifications.”
$629 million in loans sold
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Davis’ first major action as executive director was to oversee the sale of 15 percent of ISAC’s loan assets in January.
Sallie Mae, the nation’s largest student lender, and Nelnet Inc., another leading educational finance company, bid higher than about a dozen others to win the $629 million in loans, ISAC officials said.
That sale netted the loan agency about $35 million, providing the cash needed to pay for Blagojevich’s promise of scholarships for middle-class families.
John Wyma, a longtime Blagojevich confidant who served as his congressional chief of staff, registered as a lobbyist for Nelnet for three weeks last year; a Nelnet spokesman said Wyma continues to advise the firm.
Wyma also has ties to Davis. In 2003 and 2004, Davis hired Wyma to lobby for his Rock Island securities firm, disclosure records show. Today, he calls Wyma a friend. They “get together with some regularity” and sometimes talk about ISAC, Davis said.
But, Davis added, “We have been scrupulously careful to have absolutely no conversations or contacts on the issue [of the loan sales]. I don’t know what all the boundaries are in the state of Illinois, but we don’t get on the playing field.”
Wyma did not respond to requests for comment.
Past issues with lobbyists
ISAC has had problems in the recent past with lobbyists, including Wyma.
Last year, ISAC officials killed a deal to hire a law firm after the Tribune learned that the firm had hired Wyma as a lobbyist. Although Wyma was representing the law firm on unrelated business, the chairman of the loan agency’s board said at the time that he didn’t want to “deal with political connections.”
In another lobbying relationship related to the recent loan sale, the politically connected Conlon Public Strategies firm last year represented both successful bidder Sallie Mae and Morgan Stanley, which advised ISAC on which bids to accept.
Kevin Conlon, co-founder and president of Conlon Public Strategies, arranged meetings between ISAC and Sallie Mae officials, said Davis, who added that he was stunned when he learned from the Tribune that Conlon was also a registered lobbyist for Morgan Stanley.
A Morgan Stanley spokesman said Conlon worked for the company on an unrelated contract for a parking garage, not the ISAC loans. Still, Davis said he called Morgan Stanley officials and demanded Conlon not lobby for that company.
Conlon did not return calls for comment.
What Illinois decides to do with its loan portfolio could affect the national student loan marketplace, as private lenders vie for the lucrative business and cash-strapped states consider the potential profits.
Though Missouri is considering similar action, none of the other 14 states with loan agencies have converted or sold their loans to private lenders, according to an ISAC report.
Wary of such a move, Pennsylvania rejected a $1 billion takeover offer by Sallie Mae in 2004, in part because that state’s loan agency expects that its revenues will continue to increase as more students go to college, a spokesman said.
“It is incredibly short-sighted. It might balance the budget for a year or two, but the kids and families are left holding the price-tag,” said Keith New of the Pennsylvania loan agency known as PHEAA.
Davis acknowledges that selling the loans could leave the agency reliant on state funds to support its programs such as financial aid counseling and administering state grants.
He also said that the 505-employee agency will be downsized. Eight senior staff members have been let go in recent weeks.
Davis said the agency is facing financial uncertainty and needed to rethink its strategy.
“We were making money, but we have many reasons to think we won’t be making money in the future,” Davis said. “Let’s get out before it’s a disaster.”
Some Illinois legislators remain unconvinced.
“They would kill the goose that laid the golden egg,” said Sen. Chapin Rose (R-Mahomet). “ISAC to date has been self-funded off of those assets. It is stunning, absolutely stunning.”
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Connected investor recalls Obama’s campaign pitch
Former stock trader Andrew Davis recalls meeting Barack Obama by chance on LaSalle Street about four years ago.
Davis then was a wealthy and politically connected securities broker and vice chairman of the Chicago Stock Exchange.
Obama was a state lawmaker launching a U.S. Senate campaign in a field of seven Democrats. Obama asked for his business card, Davis said, and later phoned to set up a breakfast meeting.
“He told me if he could get $5 million he could be the next U.S. senator,” Davis said.
Obama spokesman Robert Gibbs said in an e-mail that “Senator Obama does not remember the details of meeting Andy Davis.”
Records show Davis donated $12,000 to Obama in 2003 and his wife gave $12,000. Davis estimates that, as a member of Obama’s Illinois finance committee during that race, he raised $50,000 more from friends and business associates.
Gibbs called this “early seed money,” noting that Obama raised $15 million, nearly $300,000 of it before Davis made his first donation.
Davis, now head of the Illinois Student Assistance Commission, said he and Obama last spoke more than a year ago, when Obama phoned him from a military flight as part of a congressional delegation abroad.
“He called and asked about [a football game] score.”
— David Jackson
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