Generally speaking, the preference of the private sector is for government entities to keep their bright ideas and legislative actions as far away from commerce as possible.

The gift of a government subsidy is precious indeed, and much depends on how much clout a particular industry holds in Washington, apparently. Anyone who has been taking notes recently would realize that the commercial real estate industry is clearly in the government's good books, while the student loan business is not. From a capital markets standpoint, something is off balance.

SLM Corp. announced that a derailed $25 billion buyout and higher borrowing costs forced it to lay off about 3% of its workforce in order to cut costs. What followed were fourth quarter operating results in which Sallie Mae reported a net loss of $1.6 billion, and a loss of $896 million for the year. It's not that Sallie Mae didn't make a great effort to have a successful year. Its student loan originations totaled $5 billion for 4Q07, and $25.5 billion for the entire year. As it turns out, it wasn't enough to offset the effects of a credit cutback that increased the cost to fund its student lending activity.

True enough, Sallie Mae's suffering was brought on by a drastic pullback in credit from the capital markets, but what of the College Cost Reduction Act, which is expected to cut $22.2 billion in government subsidies to student loan lenders over the next five years?

In October, J.C. Flowers & Co. moved to terminate its merger agreement with Sallie Mae, projecting a $316 million drop in Sallie Mae's core net income in 2009, and a net income loss of as much as $595 million by 2012. Sallie Mae could have dealt with the loss of subsidies by eliminating borrower benefits and, if necessary, cutting back its workforce, says Sameer Gokhale, a senior vice president of equity research at Keefe, Bruyette & Woods, who covers specialty finance companies.

The company has historically contributed about 8% in overcollateralization to its ABS bonds and taken very little interest rate risk, but it still faces basis point risk from widening Libor, he said. In terms of SLABS bond performance, the sector has had a miniscule amount of downgrades, if any.

"Asset-backed investors are in a safe position," said Gokhale. "It is puzzling why spreads have widened 50 basis points."

What's more puzzling is why the federal government chose to aggravate problems in the student lending business while giving the commercial real estate industry another rescue. In December, President George Bush signed the Terrorism Risk Insurance Program Reauthorization Act, which reauthorized a federal backstop to the reinsurance industry for seven years.

Granted, insurance coverage for terrorism is important, because, as Fitch Ratings analyst Joseph Kelly noted, "it helps facilitate the flow of debt capital to the commercial real estate industry." Real estate lenders require that borrowers obtain full replacement cost insurance, to guarantee repayment of the loan in case the property is destroyed.

The trouble is that the renewal of the government backstop has not encouraged the commercial real estate and insurance industries to come up with their own reinsurance framework, so the U.S. government appears to be locked into this role for the foreseeable future.

Arguably, there are as many advantages to supporting higher education as there are to boosting commercial real estate, because what sense would it make to create millions of square feet of Class-A office space without an educated population to support them?

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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