Almost anyone under attack reflexively attacks back. And so it was on Sept. 6, the day top executives of ITT Educational Services announced they were closing their 136 ITT Technical Institutes, shuttering a pioneer in for-profit education founded more than 50 years ago.
They said the government had forced their hand with severe sanctions, including a prohibition on doling out federal aid to new students—penalties they called “inappropriate and unconstitutional.” ITT said the U.S. Department of Education had demonstrated a “complete disregard” for due process.
The company’s side received a sympathetic airing in The Wall Street Journal, which in an editorial cast ITT as a casualty in the Obama administration’s crusade against for-profit education.
But a more reasoned perspective came from Credit Suisse analyst Trace Urdan, a longtime observer of the sector who this month penned “A Cautionary Tale—Lessons from ITT.”
Perhaps his most important takeaway flowed from this reality: The Obama administration wasn’t picking on for-profit education companies to be obstinate—it had real concerns that the sector’s expensive diplomas too often left students awash in debt while failing to properly prepare them for gainful employment. “The company failed to appreciate how its price points would combine with a weakened employment environment to turn its once-adequate value proposition upside down,” he wrote.
He said ITT also violated the edict, “You can’t fight city hall,” as it aggressively battled lawsuits from regulators.
Then there were the financial blunders—many driven by the board’s penchant for winning favor with investors instead of putting the long-term interests of the schools and their students first. Those included cutting back on capital expenditures and instead burning through cash by buying back more than $2 billion in stock, mistakenly assuming the company would always have access to debt markets.
“The prudence [of buying back stock] in a complex and increasingly hostile regulatory environment was not something investors well understood,” Urdan said. “This was the purview of the board, and in this respect we believe it objectively failed.”
Adding to the misery was the company’s decision to guarantee student loans issued by third parties, using default-rate assumptions that proved wildly optimistic.
In short, Urdan wrote, “You can’t be too conservative. This is the single, biggest lesson of the entire debacle and encompasses multiple missteps.”
That’s not a message Kevin Modany, ITT’s chairman and CEO, is likely to accept as he surveys the carnage, which includes the incineration of billions of dollars in market value, the sudden disruption of studies for the company’s 29,000 students and the company’s dismissal of its 8,000 employees.
He’d rather cast the federal government as the villain. But as with any corporate collapse of this magnitude, the truth is more complicated—and it can hurt.•
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