Goldman's student loan education could be painful

By Joseph A. Giannone and Tim McLaughlin - Analysis

NEW YORK (Reuters) - Goldman Sachs' $1 billion lifeline to First Marblehead Corp (FMD.N) to protect its newly acquired 20 percent stake might not be enough to revive the struggling student loan company.

Boston-based First Marblehead's bread-and-butter business -- packaging student loans into securities -- has dried up, thanks to prolonged turmoil in global debt markets. And analysts and experts say investors also should be worried about the company's rising loan defaults, its corporate governance and reliance on two banks for 44 percent of its 2007 revenue.

Investors want to see if Goldman's intervention will revive a high-flying finance company whose shares plunged in 2007. The stock peaked near $58 peak last January, more than tripling from their October 2003 debut.

The stock's fall has been steep, though. It was down 6 percent on Friday at $13.57.

First Marblehead said the investment from Goldman Sachs Capital Partners (GS.N), which declined comment, is a vote of confidence.

"Given the volatility in the capital markets, having additional cash on the balance sheet allows us to supply liquidity to the private student loan market," a First Marblehead spokesman said in a statement.

But many analysts say Goldman could be in for a painful learning experience if debt markets don't thaw out soon.

"The $1 billion (credit) line doesn't solve their issues. Ultimately, First Marblehead needs the securitization market to open again," Friedman Billings Ramsey analyst Matt Snowling, who slapped a "sell" rating on First Marblehead.

Most of First Marblehead's revenue comes from fees for creating loan-backed securities for investors. Much of their business is supplied by Bank of America Corp (BAC.N) and JPMorgan Chase & Co (JPM.N) for structuring their loans.

First Marblehead, a top U.S. private student loan company, last month eliminated its dividend. It also backed away from rosy assumptions that boosted results in the past, as more student borrowers were late on loan payments.

Moreover, a nonprofit company that guarantees loans packaged by First Marblehead is in danger of getting a junk credit rating. If that happens, First Marblehead has warned, it could lose business from Bank of America.

HEAD OF CLASS STUMBLES

For Goldman, the credit line and its $260 million equity investment, announced December 21, are a bold bet that these issues can all be overcome -- and soon. Private student loans have been one of the fastest growing segments in consumer finance as tuitions soar past what can be backed by Uncle Sam.

"The next few weeks will give an indication if these issues are going to be a longer term problem," said Mike Taiano, analyst at Sandler O'Neill Partners. He downgraded First Marblehead to a "hold" rating.

If credit markets rebound, First Marblehead can continue to grow and Goldman's funds will reap the benefits.