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<ul class="summary-list"><li>Inflation and higher interest rates aren't going away, veteran strategist Bill Blain says. </li><li>Blain, the principal of Wind Shift Capital, thinks global inflation is entrenched and rates can't come down much more. </li></ul>Households and companies may be breathing a sigh of relief as borrowing costs move lower, but they shouldn't get comfortable because rates and inflation are going to remain high — and that reality could spark a big drop for stocks in the next year, Wall Street veteran Bill Blain said.Blain, a longtime strategist and principal of Wind Shift Capital Advisors, said he sees a rocky 12 months ahead for the stock market. He said the Fed isn't poised to take interest rates as low as markets think, and borrowing costs could indeed rise from here. That could crimp lending, slow dealmaking, and take US and global stocks down 7%-12%, he told Business Insider in an interview."I think the crunch that we face is what happens when interest rates start to rise, and governments are not in a position to continue boosting the economy in an interest rate rising environment because they've lost the support of markets," Blain said.In the event of a credit crunch, he doubts the US will be able to dole out stimulus as it did during the pandemic, due to concerns about the overall level of debt and the inflationary impact on the economy."It's the reality that inflation is going to creep back into the global economy. Interest rates are going to have to rise," he said.<h2 id="7ebcc035-7ccc-4daa-908a-a2cb4f6ad8aa">A return to higher-for-longer</h2>Blain's forecast may sound counterintuitive to investors who have been pricing in ambitious rate cuts from the central bank. But the US economy faces too many inflationary pressures over the medium-term to warrant aggressive policy easing, Blain said.For one, the <a target="_blank" class="" href="https://www.businessinsider.com/harris-trump-fix-national-debt-how-to-invest-portfolio-protection-2024-10">federal debt</a> has swelled to a historic $35 trillion. Economists have flagged rapid government borrowing as a factor that risks <a target="_blank" class="" href="https://www.businessinsider.com/us-debt-problem-explained-deficit-gdp-inflation-economy-interest-rates-2024-4">stoking inflation</a>.Meanwhile, <a target="_blank" class="" href="https://www.businessinsider.com/rates-pandemic-lows-inflation-supply-chain-geopolitical-bofa-mensah-2024-10">supply chain issues</a> linger, and given rising geopolitical tensions, world trade looks on track to be more <a target="_blank" href="https://www.businessinsider.com/world-turning-its-back-on-globalization-2016-4">fragmented</a><a target="_blank" class="" href="https://www.businessinsider.com/world-turning-its-back-on-globalization-2016-4">,</a> which can also prop up inflation.Finally, the threat of high tariffs from former President Donald Trump would impose a tax on nearly all imported US goods that economists say would end up being <a target="_blank" class="" href="https://www.kentclarkcenter.org/wp-content/uploads/2024/09/RESULTS-2024-09-11-Survey-14.pdf">passed on to the consumer</a>. "I think inflation is going to be more ingrained, as it was in the 1970s and early '80s," Blain said. "It's going to be a very, very different economy and we just need to get used to it."Other forecasters have warned inflation could be much stickier than markets expect. Core inflation is unlikely to fall back to the Fed's 2% target, <a target="_blank" class="" href="https://www.blackrock.com/us/individual/insights/blackrock-investment-institute/weekly-commentary">BlackRock</a> strategists said in a recent note, pointing to large US budget deficits and other "mega-forces" that will propel prices higher. That means investors waiting for a return to near-zero borrowing costs to return will be in for a rude awakening. Blain thinks interest rates will hover between 4.5%-6% in the "new normal," causing interest payments to "go through the roof" when compared to pre-pandemic levels, he said.Companies could take a hit as the credit crunch plays out. Though Blain said he wasn't necessarily calling for a market crash or a wave of "zombie" firm failures, he thinks dealmaking in the private equity space could slow, while some of the most financially troubled firms risk insolvency.Meanwhile, stock prices will head back to a much more reasonable level as the speculative bubble in asset prices pops."I think there's still a massive hangover from the 2010 to 2022 era of ultra-low interest rates and easing and I think stocks are generally still priced for speculation and lower interest rates," he said of his predicted downside to the market. "I don't think there's any reason to really expect major interest rate cuts."Still, investors are feeling pretty positive about the short-term outlook for stocks and lower rates. Markets see a 95% chance the Fed will cut rates by 25 basis points at the November policy meeting, and a 72% chance that rates will be 50 basis points lower by the end of the year, according to the <a target="_blank" class="" href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html">CME FedWatch tool</a>.

Inflation isn't going anywhere, and higher rates could spark a 12% downturn for stocks in the coming year, veteran strategist says  

<div type="image" title="The RBI has cracked the regulatory whip on NBFCs and banks, who&amp;#39;ve been pushing microfinance and unsecured loans aggressively to grow their loan books." agency="ANI" msid="114778648" hostid="261" caption="&amp;lt;p&amp;gt;The RBI has cracked the regulatory whip on NBFCs and banks, who&amp;#39;ve been pushing microfinance and unsecured loans aggressively to grow their loan books.&amp;lt;/p&amp;gt;"></div> Imagine this. You have a younger sibling you’re mighty envious of. And why not? Unlike you, they seem to enjoy all the freedom and money in the world. They party like there’s no tomorrow, and here you are, stuck in a boring, ultra-disciplined but responsible routine that feels completely devoid of any independence, and mostly, funds. But of late, things are changing. This sibling is in massive trouble and just cannot escape the parent’s wrath anymore. Long story short, the party is over, and it is time to go back home. The rising defaults on this sibling’s part have now begun pulling the entire house down, thereby attracting the regulator’s ire. <h2>The Wild West of <keyword id="113684" type="General" weightage="20" keywordseo="microfinance" source="Orion">microfinance</keyword> and unsecured loans</h2>It's hard to ignore the issues with microfinance and unsecured loans in India. Many saw them as a small gamble and ignored the rising defaults much like the younger siblings’ tantrums, and now they find themselves in hot waters. The skyrocketing instances of non-payments aren't a micro-issue anymore and are threatening the stability of the entire banking system. In the quarter ended September 30, 2024, 5 of India’s 8 largest private sector <keyword id="19934118" type="General" weightage="20" keywordseo="banks" source="keywords">banks</keyword> reported a steep rise in their bad loan book, mostly thanks to microfinance loans. Some banks, in a bid to strengthen their fortress against these <keyword id="142154" type="General" weightage="100" keywordseo="bad-loans" source="Orion">bad loans</keyword>, have significantly upped their provisions. For instance, IndusInd Bank set aside Rs 525 crore during July and September 2024 to battle the menace of defaults on microfinance loans, which make up about 9% of its total loan book. See, banks rely heavily on their interest income, which they earn from advancing loans. Any loan where the borrower has not paid interest to the bank or defaulted for 90 days or more becomes bad, i.e. an NPA, or non-performing asset for the bank. And who likes things going bad? Simply put, there has been a steep rise in three areas, much to the dislike of banks and MFIs (micro-finance institutions). But hey, it's mostly their doing! <ol><li>GNPA ratio (gross net performing assets): The quantum of non-performing assets a bank has in proportion to its total assets.</li><li>Provision: The amount banks set aside to take care of such NPAs.</li><li>Slippage ratio: The rate at which good girls go bad, or the speed at which good loans turn into NPAs</li></ol>But how are these plaguing the Indian banking sector? And what does the road ahead look like? We decode it for you. <h2> Microfinance: A not-so-micro-menace</h2>Microfinance loans were initially brought forth for low-income households and individuals i.e. for those who might not generally have access to traditional ways of credit, like bank loans and more. They don’t require collateral or an asset to be pledged in lieu of the loan, making it a tad bit easier for borrowers. As of June 2024, the amount of outstanding loans in the microfinance industry stood at a staggering Rs 4,20,256 crore. Of this, NBFC-MFIs accounted for 40% and banks made for 33% of these. In 2022, RBI, in a bid to inspire some competition in this space, did something radical-they did away with the ceiling on how much interest MFIs could charge their customers. Previously, MFIs could add up to 12% to their cost of acquiring funds to determine the final interest rate chargeable to the consumer. So, assuming that Bank A incurs a 5% cost to acquire funds for further loaning, A could charge up to 17% interest from the end consumer. So, interest rates were in the hands of MFIs, and boy, did they have a gala time with it. Instead of spurring some healthy competition, as RBI expected, MFIs and banks went rogue and all guns blazing, competing for the title of “Who will charge the highest interest?” Recently, RBI banned 4 microfinance institutions (MFIs), namely Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and <keyword id="20117932" type="General" weightage="20" keywordseo="navi-finserv" source="keywords">Navi Finserv</keyword> from disbursing loans effective October 21, 2024. Why? Because they were charging 14% extra interest over their original cost of funds. To maintain their loan books (and pockets), banks and NBFCs resorted to shady practices like netting off loans, which RBI has now advised MFIs against. Here, lenders allow borrowers to settle a previous outstanding loan by issuing them a new loan! As crazy as it sounds, it helped banks to report less of their total assets as NPAs, since the new credit would cover pending instalments of the borrower’s previous loan. Then there was the issue of borrowers overleveraging, i.e. taking multiple loans using different IDs from various lenders and then failing to honour any of them. The consequence? Banks and NBFCs end up with massive NPAs. Data from credit bureaus suggests that over the last quarter, there was a 17.2% rise in the number of borrowers who had 5 or more active loans at the same time. <h2>Growth &gt; Caution</h2>It's an age-old tale unfolding yet again in India’s banking sector- Icarus flew too close to the sun and eventually, fell to its death. Between April and June 2024, NBFCs microfinance portfolio jumped by 2.7%. If you see this in terms of loan sources, microfinance loans issued by banks grew by 11.2% in Q1FY25. But the same portfolio in NBFCs swelled by almost double-23.9%. While most of these loans had an average ticket size between Rs 30,000-50,000, there was a sharp spike in the number of loans that had a ticket size of Rs 80,000 or more. Data suggests that as of March 2024, more than 12% of all microfinance borrowers had over 4 or more active loans. In dating parlance, this is a classic case of borrowers going polyamorous, minus the honesty and transparency. Not the best of situations, you'd agree! <h2>Will banks and NBFCs stand up to this stress?</h2>If their results for Q2FY25 are to be believed, NBFCs are not handling the pressure all that well. Or even slightly well. Only a few banks like Bank of Baroda (BoB), ICICI, and Indian Bank were up for the battle, even witnessing a decline in their loan delinquencies. Some others, like IndusInd Bank, saw their stock dip by a massive 16.2% over the last 5 days. Its slippages in the previous quarter burgeoned from Rs 15.3 billion in Q1FY25 to Rs 17.9 billion in Q2. As a result, the bank pushed a staggeringly high amount of money to create an NPA cushion for itself. While its management has highlighted its preference for secured lending, that was hardly reflected in its actions during the quarter, where growth in unsecured personal loans remained exceptionally high at over 7% on a QoQ basis. Turns out, only 44% of customers in IndusInd Banks’ microfinance loan portfolio were exclusive to it. The rest 47% were, you guessed it right-polyamorous! 27% had borrowed from another lender as well, apart from IndusInd Bank, while 20% were those who had outstanding loans with two other lenders, apart from IndusInd Bank. IndusInd Bank’s credit card segment did not miss the NPA bus and accounted for 7-8% of its GNPAs. Canara Bank’s total slippages during the previous quarter jumped to Rs 11.1 billion, up by 24.7% QoQ, and making up for 3.6% of its total loans. As for Bandhan Bank, its gross NPA for Q2FY25 inched up on a QoQ basis, up from 4.23% in Q1, to 4.68% in the second quarter. IDFC Bank’s heavy provisioning for its NPAs marred its profits significantly, causing its PAT (profit after tax) to dip by 73% on a YoY basis. Data from ICRA Analytics suggest that the AUM (asset under management) growth in microfinance loans and unsecured (personal and business) loans by the NBFCs will moderate to 10-12% and 19-21%, respectively, in FY2025 compared to 30% and 38%, in FY2024. Says A M Karthik, Senior Vice President &amp; Co-Group Head, Financial Sector Ratings, ICRA, “As bank funds constitute a larger share in the overall funding of NBFCs, a slower credit flow from banks to the NBFCs will compress their AUM growth. The NBFCs in unsecured and digital lending businesses shall face a higher squeeze in funding compared to others, and the unsecured lending space will continue to be a source of stress in the near term.” There has been uninhibited growth in <keyword id="6051027" type="General" weightage="20" keywordseo="Unsecured-loan" source="Orion">unsecured loan</keyword>s, apart from just the microfinance segment. For instance, Axis Bank’s gross slippages jumped by Rs 4,443 crore, largely thanks to its unsecured business. The same is the case with Yes Bank, which saw 35–40% of its retail slippages emerging from the unsecured loan portfolio. <keyword id="6376194" type="General" weightage="20" keywordseo="kotak-mahindra" source="Orion">Kotak Mahindra</keyword> Bank was also quick to follow Yes Bank’s suit, with around 35%-40% of its slippages coming from credit cards. <h2>How is the road ahead?</h2>While RBI has just cracked its whip and served a warning at the moment, experts at Morgan Stanley believe that more changes (read regulatory lashes) are underway. Moreover, with both festive and wedding seasons underway in our country, unsecured lending might pick up momentum, much to the disdain of the calibrated approach banks have been taking towards it so far. But if the situation doesn't improve, RBI will not waste any time in becoming the typical tyrannical <keyword id="19897820" type="General" weightage="20" keywordseo="bollywood" source="keywords">Bollywood</keyword> headmaster who runs his dominion with an iron fist. However, that's a story for another day. Do you have a topic in mind you'd want a simpler explanation for, or insights or personal experience to share on personal finance and more? Contact us at businessinsider@timesinternet.in.

Simply Put: Is the lending party over? The dangerous tango of Indian banks with microfinance and unsecured loans

Rupee appreciated 7 paise to 84.22 against the US dollar in morning trade on Tuesday, on a sharp rebound in domestic equities amid improved investor risk appetite. Forex traders said the <keyword id="21663515" type="General" weightage="20" keywordseo="MSCI-equity-index" source="keywords">MSCI equity index</keyword> rebalancing significantly boosted sentiment for Indian equity markets as <keyword id="19932515" type="General" weightage="20" keywordseo="foreign-institutional-investors" source="keywords">foreign institutional investors</keyword> broke a 40-session streak of net selling by purchasing Rs 9,947 crores on Monday, lending robust support to the rupee. Moreover, the win by the incumbent government in Maharashtra, further fueled investor confidence in economic stability, sparking a rally in equity markets. At the interbank foreign exchange, the rupee opened at 84.27 and moved in a tight range and touched an early high of 84.22 against the greenback, registering a gain of 7 paise over its previous close. On Monday, the rupee appreciated 12 paise to close at 84.29 against US dollar. "While Donald Trump's aggressive trade policies loom large, the rupee's outlook remains cautiously optimistic. The <keyword id="19899810" type="General" weightage="20" keywordseo="Reserve-Bank-of-India" source="keywords" meta.keywordsubtype="org" meta.entityname="Reserve Bank of India" meta.hostid="261" meta.entityid="Reserve Bank of India">Reserve Bank of India</keyword>'s projection of a GDP growth rebound to 7.6 per cent in Q3 has infused fresh confidence in India's economic trajectory. Additionally, a surge in capital inflows is likely to provide robust support," CR Forex Advisors MD Amit Pabari said. Pabari further said that the RBI's vigilant stance will be critical in managing volatility, with interventions likely at key levels to maintain stability. "Given the factors, the USDINR pair appears to face resistance around the 84.50 level, with expectations of trading within a range of 83.80 to 84.50, leaning toward a downside bias," he said. On the global front, US Treasury Secretary nominee Scott Bessent's fiscal deficit reduction agenda capped US Treasury yields, Pabari said. The dollar index, which gauges the greenback's strength against a basket of six currencies, was trading higher by 0.28 per cent at 107.11. Brent crude, the global oil benchmark, rose by 0.33 per cent to USD 73.25 per barrel in futures trade. In the domestic equity market, the 30-share equity benchmark Sensex jumped 167.76 points or 0.21 per cent to 80,277.61 points in early trade, while Nifty jumped 55.80 points or 0.23 per cent to 24,277.70 points. Foreign Institutional Investors (FIIs) turned net buyers in the capital markets on Monday, purchasing shares worth Rs 9,947.55 crore, according to exchange data. SEE ALSO:<a href="https://www.businessinsider.in/tech/mobile/news/oneplus-open-oxygenos-15-update-now-rolling-out-with-flux-themes-improved-ai-features-and-more/articleshow/115657313.cms" target="_blank"></a> <a href="https://www.businessinsider.in/tech/mobile/news/oneplus-open-oxygenos-15-update-now-rolling-out-with-flux-themes-improved-ai-features-and-more/articleshow/115657313.cms" target="_blank">OnePlus Open OxygenOS 15 update now rolling out with Flux Themes, improved AI features and more</a><a href="https://www.businessinsider.in/tech/news/microsofts-ai-powered-recall-feature-is-now-rolling-out-to-copilot-pcs/articleshow/115654136.cms" target="_blank"></a> <a href="https://www.businessinsider.in/tech/news/microsofts-ai-powered-recall-feature-is-now-rolling-out-to-copilot-pcs/articleshow/115654136.cms" target="_blank">Microsoft’s AI-powered Recall feature is now rolling out to Copilot+ PCs</a><a href="https://www.businessinsider.in/business/telecom/news/jio-airtel-and-vi-lost-nearly-11-million-subscribers-in-september-2024/articleshow/115565541.cms" target="_blank"></a> <a href="https://www.businessinsider.in/business/telecom/news/jio-airtel-and-vi-lost-nearly-11-million-subscribers-in-september-2024/articleshow/115565541.cms" target="_blank">Jio, Airtel and Vi lost nearly 11 million subscribers in September 2024</a>

Rupee rises 7 paise to 84.22 against US dollar in early trade

Mumbai: The Reserve Bank is unlikely to cut the benchmark <keyword id="20071327" type="General" weightage="20" keywordseo="interest-rate" source="keywords">interest rate</keyword> in its forthcoming bi-monthly monetary policy review later in the week as <keyword id="19999652" type="General" weightage="20" keywordseo="retail-inflation" source="keywords">retail inflation</keyword> is still a cause of concern, and there is a possibility of the Middle East crisis deteriorating further, impacting crude oil and commodity prices, say experts. Earlier this month, the government reconstituted the Reserve Bank's rate-setting panel -- <keyword id="19913109" type="General" weightage="20" keywordseo="Monetary-Policy-Committee" source="keywords">Monetary Policy Committee</keyword> (MPC). The reconstituted panel, with three newly appointed external members, will commence its maiden meeting on Monday. MPC Chairman RBI Governor Shaktikanta Das will reveal the outcome of the three-day discussion on Wednesday (October 9). The <keyword id="19899810" type="General" weightage="100" keywordseo="Reserve-Bank-of-India" source="keywords" meta.keywordsubtype="org" meta.entityname="Reserve Bank of India" meta.hostid="261" meta.entityid="Reserve Bank of India">Reserve Bank of India</keyword> (RBI) has kept the repo or short-term lending rate unchanged at 6.5 per cent since February 2023, and experts think some easing could only be possible in December. The government has tasked the central bank to ensure that Consumer Price Index (CPI) based retail inflation remains at 4 per cent with a margin of 2 per cent on either side. In the current context, experts feel that the RBI may not follow the US Federal Reserve, which lowered the benchmark rates by 50 basis points, and the central banks of some developed nations, which have reduced the interest rates. "We do not expect any change in the <keyword id="20094323" type="General" weightage="20" keywordseo="repo-rate" source="keywords">repo rate</keyword> or stance by MPC. The reason is that inflation for September and October will be above 5 per cent, and the present low inflation is due to the base effect. Besides, core inflation is inching upwards," said Madan Sabnavis, Chief Economist, Bank of Baroda. Further, the recent Iran-Israel imbroglio can intensify, and there is uncertainty here, he said. "Hence, the status quo is the most likely option even for new members. Inflation forecast may be lowered by 10-20 bps and no change in GDP forecast likely," said Sabnavis. The central bank last hiked the repo rate to 6.5 per cent in February 2023 and since then, it has held the rate at the same level. Icra Chief Economist Aditi Nayar said that given the undershooting in the initial first quarter GDP growth relative to the MPC's forecast and the likely sizeable undershooting in the second quarter CPI inflation print as well, "we believe a stance change to neutral may be appropriate in the October 2024 policy review". This could be followed by a shallow rate-cutting cycle of 25 bps each in December 2024 and February 2025, she added. "The abundant monsoon offers some insurance for crop inflation. The impact of global political developments and geopolitical uncertainty on the growth inflation dynamics remains a risk," Nayar added. An HSBC report said three developments stand out -- softer growth numbers have trickled in recently, inflation has been falling, and the external environment has moved from rate hikes to cuts. "We believe the RBI doesn't gain from waiting any longer. We think it will change its stance from a hawkish 'withdrawal of accommodation' to 'neutral' in the upcoming 9 October policy meeting, followed by repo rate cuts of 25 bps each in the December and February meetings, taking the repo rate to 6 per cent," the report said. The RBI kept the repo rate unchanged at 6.5 per cent in its August bi-monthly review amid risks from higher food inflation. This was the ninth consecutive MPC meeting, which decided to maintain the status quo on the rate front. Pradeep Aggarwal, founder and chairman, Signature Global (India) Limited, said while the real estate industry, developer community, and homebuyers are hoping for an interest rate cut in the upcoming monetary policy review, the RBI is likely to hold on to the interest rate cuts for the tenth consecutive time. "The apex bank still seems uncomfortable with the overall retail inflation scenario, particularly food inflation. As such, it is expected to maintain the status quo. The recent interest rate cut by the US Federal Reserve has ignited similar hopes even in India, but the domestic scenario is very different," he added. SBM Bank India Head Treasury Mandar Pitale believed that the MPC has persistently advocated a restrictive policy until inflation aligns durably towards the 4 per cent target. "With the unfavourable base effect taking the next couple of CPI prints near 5 per cent plus or minus, it will pose a major challenge for MPC to start easing from the October meeting," Pitale said, adding that the MPC is also expected to deliberate upon the global factors like growth-inflation behaviour in developed economies. The government has appointed Ram Singh, Saugata Bhattacharya, and Nagesh Kumar as external members of the MPC. They have replaced Ashima Goyal, Shashanka Bhide, and Jayanth R Varma. Apart from the Governor, the other internal members are the RBI Deputy Governor in charge of monetary policy Michael Debabrata Patra and the Executive Director monetary policy department of RBI Rajiv Ranjan. In an off-cycle meeting in May 2022, the MPC raised the policy rate by 40 basis points and it was followed by rate hikes of varying sizes, in the subsequent meetings till February 2023. The repo rate was raised by 250 basis points cumulatively between May 2022 and February 2023.

Status-quo on interest rate likely, say experts ahead of RBI's policy review

In the early 2000s, the business of for-profit college was booming. After the University of Phoenix's parent company, the Apollo Group, went public in 1994, others were close on its heels: Corinthian, ITT Tech, and Kaplan each had IPOs in the 1990s, netting tens of millions of dollars and setting off tremendous periods of growth.Soon, private equity firms caught wind of the opportunity. In 2003, there were just 18 for-profits owned by private equity firms; less than a decade later, that number had more than tripled, to 61. For-profit enrollments were also exploding, from a little more than 425,000 in 2000 to 1.7 million in 2012 — an increase of more than 300%. By contrast, public colleges had grown by just 31%.Increasingly the boom could be characterized as a Wall Street versus Main Street match-up. Even in the 1980s, the majority of for-profit programs were still mom-and-pop affairs: short-term certificate courses in subjects like cosmetology and truck driving. By the early years of the new millennium, students were attending Fortune 500 chain schools for full-fledged degrees in teaching, medical assisting, business, and psychology. In 2012 there were 21 publicly traded for-profit colleges, and less than a quarter of for-profit college students attended a mom-and-pop operation; the other 1.3 million went to publicly traded or private-equity-owned schools.The profits in this new world were beyond belief. One study found that the for-profit industry netted 55% profit margins between 2000 and 2012. In other words, for every dollar they took from students, 55 cents went to shareholders, with overall profits peaking in 2011 at $5 billion. Within a decade of Apollo's IPO, Phoenix's student body had grown tenfold, and thanks to students' easy federal money, the company was bringing in more than $1 billion a year.It was a win-win for just about everyone involved. The schools' profits came almost exclusively from federal grant and loan moneys. The federal government was bankrolling not only their and their investors' windfalls but also those of the financial institutions and guarantee agencies that did the lending and collecting under the Federal Family Education Loan program.But there were two groups left out of the bonanza: the public at large, whose tax dollars kept the machine running, and the students who got sacked with the bill.Then the evidence started coming in, yet again, that the for-profit corporate darlings of the '90s and aughts were no more sophisticated — certainly no more beneficial — than the shady computer schools that had preceded them. In 1970 there had been only 18,333 students enrolled at degree-granting for-profit schools, less than a quarter of a percent of the total number of college students. By 2009 there were 1.85 million — almost 10% of the total. The grift had grown a hundredfold."I had worked in the sales industry for many years," the admissions supervisor stated. "But Ashford [University] had the most aggressive sales floor I have ever seen." The supervisor's employer was putatively an accredited institution that offered a wide variety of bachelor's and advanced degrees; in reality it was effectively a money-printing operation.The school's many sordid practices were revealed in a 2017 lawsuit filed against the institution by the attorney general of California. Among them were the tales of Ashford's salespeople — aka "admissions counselors" — who made hundreds, sometimes even a thousand, cold calls a week. Still their managers berated and taunted them, forcing underperformers to stand all day, jangling keyrings with the ID cards of their fired former colleagues in their faces. Some of them cried; some had mental breakdowns; eventually most quit or were fired. Managers created "lowest performer lists" and then fired the bottom 10th of recruiters. When the salespeople did manage to land a mark, they celebrated by ringing cowbells or flapping plastic hand clappers. "The sales floor had a true boiler room atmosphere," said the supervisor, not unlike that "portrayed in the movie The Wolf of Wall Street." And if they all misled some naive fools in the process, say, a few hundred a month, well, that was just the cost of doing business. It wasn't like they were going to get fired for calling loans "grants" or promising a program would lead to high-paying jobs or guaranteeing that if things didn't work out at the school, any credits earned there would transfer elsewhere (as they almost certainly would not). One Ashford admissions counselor got 25 violations in eight months and the managers dished out only a slap on the wrist. The risk of punishment by the company's Compliance Department was low, but the reward was irresistibly high: admissions counselors got paid by the sale, and the best of them made in the six figures. Recruiters preyed on their marks' naiveté about higher education, convincing them that they couldn't receive their financial aid until well into the semester (when it would be too late to get a refund), lying about what their degrees would qualify them to do, and encouraging them to spend their federal aid funds on things like cars or expensive vacations (against federal law).Ashford University was owned by Bridgepoint Education, which was backed by Warburg Pincus, a private equity firm. And the secret to its success was a foolproof tactic that for-profit financiers had discovered for getting their business off the ground and gaining access to the all-important stream of federal aid money. The trick was to gobble up existing mom-and-pop proprietary schools — as well as small, financially struggling nonprofits — and to acquire their accreditations, assets as valuable as New York City taxi medallions.But for students, the business model was a bust — at Bridgepoint, just as at any number of for-profit giants. With only seven full-time faculty for almost 74,000 students, Bridgepoint, like many of its competitors, spent way more on recruiting than it did on instruction. And it showed: Only about a quarter of students in any given year went on to get their "diplomas" within six years (public and nonprofit schools consistently graduated about two-thirds of students in that timeframe). Those who did graduate tended to leave with a hefty amount of debt — nearly $35,000 on average. By 2017 almost 20% of alumni were unemployed, and almost half didn't do anything related to their degree.Five years after California filed suit against Ashford, a state superior court judge found that the company had engaged in widespread deception — estimating that over an 11-year period, its recruiters had spread misinformation in more than 1.2 million calls — and issued more than $22 million in penalties. (In 2024, an appeals court reduced the penalty by nearly $1 million).The beneficiaries of Bridgepoint's grift were its shareholders and managing partners. The losers were everybody else. And if theirs wasn't a particularly victimless crime, so what? Nobody cared much about students anyway. "You stop thinking of these students as people," said one recruiting manager.In 2010, Tom Harkin, chair of the Senate's education committee, began a two-year investigation into for-profit schools. Harkin's assessment of the sector was scathing. He declared for-profits expensive, exploitative, and concerned only with their own profits. "They are not focused on the success of their students," Harkin declared.A number of these schools were held by private equity firms like Goldman Sachs. In 2011, one Goldman-backed chain took in more than $350 million in Pell Grant funds and made a little more than that in profit. At a time when the federal government was refusing to help unemployed, down-on-their-luck, and defrauded borrowers, it was bailing out banks like Goldman Sachs twice over: They had already benefited from billions of dollars in Great Recession recovery funds, and now they were scooping up ill-begotten federal student aid via failing for-profit colleges. Fifteen of the schools Harkin's team investigated were publicly traded. These schools received, on average, 86% of their revenues from federal sources, right up to the line of what was legal. One of the ways they did this, Harkin found, was by recruiting veterans. In the years after World War II, legislators reinvented the GI Bill several times to reward veterans of later conflicts, like the Vietnam and Iraq wars, and to adapt to the evolving military, which had become an all-volunteer force in the 1970s. A loophole allowed them to count Defense Department moneys, including GI Bill funds, as non-federal money. In 2009, a Bloomberg News reporter uncovered a tactic used by Ashford University recruiters. They were targeting a wounded warriors unit at Camp Lejeune, signing up veterans with brain injuries who couldn't remember which classes they were taking. Each veteran was a lucrative prospect, allowing schools to gobble up yet more federal funds.And gobble they did. By 2010, Harkin found, for-profits were taking in a third of all GI Bill education funds. But even more shocking, federal money flowing to for-profit schools accounted for 25% of all federal student aid and 47% of eventual loan defaults. This, in spite of the fact that the schools enrolled little more than 10% of all American college students.So what happened to all the extra money for-profits took in? Harkin's investigation found that for-profits spent nearly a quarter of all revenues on marketing and recruiting and often paid their executives multimillion-dollar salaries, far above the average rates for public- or nonprofit-university presidents. Students' money enriched every corner of the for-profit industry except one: quality of instruction.<div type="image" title="Cover image of Burdened: Student Debt and the Making of an American Crisis by Ryann Liebenthal" height="2775" width="1838" msid="113224481" hostid="261" sizebytes="715136"></div>Economist Stephanie Riegg Cellini co-authored a sweeping study of for-profits, which found that students of for-profit certificate programs were slightly less likely to hold a job than their counterparts in public programs. In 2015, a separate study found that job applicants got just as many call-backs by listing no educational experience on their résumés as they did by listing for-profit credentials.When for-profit grads did find employment, Cellini found, they earned about a 10th less than the public program certificate holders. In fact, these for-profit students were actually worse off than if they hadn't gone to school at all. When taking into account their debt loads, for-profit graduates were projected to lose about $1,200 on their educational "investments" over the course of their lifetimes.In short, a simple equation summed up the for-profit ethos at this time: charge as much as federal student aid will supply, and cut costs to the bone. Everything in the middle could be harvested as profit. For-profit education was an industry on the dole.<a target="_blank" class="" href="https://www.businessinsider.com/author/ryann-liebenthal">Ryann Liebenthal</a> is a writer and editor living in Oakland, California, who has reported extensively on the student loan crisis. She is the author of "BURDENED: Student Debt and the Making of an American Crisis."Excerpted from the book "<a target="_blank" href="https://www.harpercollins.com/products/burdened-ryann-liebenthal?variant=41472117669922">BURDENED: Student Debt and the Making of an American Crisis</a>." Copyright © 2024 by Ryann Liebenthal. From Dey Street Books, an imprint of HarperCollins Publishers. Reprinted by permission.

Wall Street tried getting into higher education. Disaster ensued. 

<ul class="summary-list"><li>Fed rate cuts will make it slightly cheaper to refinance commercial mortgages.</li><li>Yet, it'll still be tough to convince banks to keep lending to offices facing weak demand.</li></ul>Offices have been the weak spot in the commercial real estate market since the pandemic gave rise to widespread remote work and caused companies to reassess how much space they need. With $1.5 trillion in commercial real estate debt set to mature by the end of next year, questions have arisen about office owners can do to get loans either refinanced or extended in the face of widespread vacancies. The Federal Reserve's likely interest rate cut, expected at the end of its meeting on September 18, could give office owners some relief with lower interest rates when they refinance. But that doesn't mean they're in the clear, according to commercial real estate experts.Given Fed easing, office owners may be more likely to get loans extended, according to CRE Finance Council executive director Lisa Pendergast."When you extend a loan, what you're doing is giving that borrower time to, one, stabilize their property, and perhaps also, knowing that the Fed at some point was going to move and ease rates, that when they start doing that, it will make the refinance that much more palatable," Pendergast said. Pendergast added, though, that the key for office owners to actually get their loans extended is to prove they will be able to stabilize assets in coming years. That likely won't be easy, considering office vacancy rates rose to 18.1% nationally in July, according to data from <a target="_blank" href="https://www.commercialedge.com/blog/national-office-report/">CommercialEdge</a>."The values of the assets are going to increase as [vacancy] rates decline, assuming all else equal," Pendergast told Business Insider. "But if the cash flow in that property can improve over time, it's going to end up being very much a dividing line" between "the haves and have nots," she added.Owners of offices that can show improvement in occupancy and rental rates—likely newer offices with higher tech offerings—will likely see greater success getting loans extended, and fare better than older office buildings. "All of the technology that you need in an office today weren't required back in the 40s," she said, adding, "You could see this as sort of a changing of the guard situation."Some investors may be able to buy those properties for cheap. <a target="_blank" href="https://www.commercialedge.com/blog/national-office-report/">CommercialEdge</a> data shows that of the offices sold since the start of the year, 28% went for less than the building was purchased for, up from 18% last year.Which offices are able to escape a potential coming wave of distress depends on the length of leases they're able to get tenants to sign on for, according to EisnerAmper head of real estate Lisa Knee.Before the pandemic, companies wanted an office space with a 10 or 15 year-long lease, Knee told Business Insider."We're seeing a lot of three to five to seven year leases now in offices, which again changes the value of the building, changes the desirability for people to lend money," Knee told Business Insider. Those shorter leases make banks less likely to lend money, she said, as the long-term stability of the cash flows dwindles with more frequent turnover of tenants.Right now, most commercial real estate loans come from small, regional banks, but that could change. "It's just not going to be sustainable to have the number of these regional banks, and the number of them in the marketplace, to lend to commercial real estate. So there will be bigger banks or bigger institutions coming in and taking those loans off of their balance sheets," Knee said. Yet even with the weakness in the office market, lower interest rates are a net positive for the industry, economist Richard McGahey says.Adapting existing office buildings to apartments is often touted as a one-size-fits-all solution to the sector's troubles and the US housing shortage, but there's a <a target="_blank" href="https://www.businessinsider.com/office-owners-eye-creative-uses-for-spaces-devoid-of-workers-2024-3">wide array of associated costs</a>, in addition to zoning issues — but cheaper borrowing costs will likely make office space conversions more feasible, McGahey said.

The office market is in trouble. Lower interest rates might not be enough to save it.

<ul class="summary-list"><li>Gold prices hit a fresh record high — above $2,500 an ounce — on Friday.</li><li>Gold prices have risen about 20% this year thanks to central bank buying and geopolitical and economic uncertainties.</li></ul>Gold prices have been on a tear, hitting a <a target="_blank" class="" href="https://markets.businessinsider.com/news/commodities/spot-gold-record-price-fed-interest-rate-cuts-safe-haven-2024-8">record high on Friday</a> — and they could gain further.The yellow metal has been boosted by a combination of factors, including active <a target="_blank" class="" href="https://www.businessinsider.com/dedollarization-usd-strong-china-pboc-central-banks-buy-gold-inflation-2024-5">central bank buying,</a> and has surged about 20% this year.Prices have, in fact, been in an "uninterrupted rally" from a low of $1,810 an ounce in October, wrote Ole Hansen, the head of commodity strategy at Denmark's <a target="_blank" href="https://www.home.saxo/content/articles/commodities/resilient-gold-bulls-drive-price-to-fresh-record-above-usd-2500-19082024">Saxo Bank,</a> in a Monday note.This means that a <a target="_blank" class="" href="https://www.lbma.org.uk/publications/good-delivery-rules/technical-specificationshttps://www.lbma.org.uk/publications/the-otc-guide/london-good-delivery-gold-and-silver">standard-size gold bar</a> of about 400 troy ounces — like those featured in gold heist movies — now cost over $1 million each.The <a target="_blank" class="" href="https://markets.businessinsider.com/commodities/gold-price">spot gold price</a> is just shy of $2,500 an ounce now, up about 21% so far this year.One big factor driving the market's expectation for higher gold prices is a potential Federal Reserve interest rate cut, following slower-than-expected <a target="_blank" class="" href="https://www.businessinsider.com/inflation-consumer-price-index-in-july-fed-interest-rates-2024-8">July inflation </a>data and higher <a target="_blank" class="" href="https://www.businessinsider.com/unemployment-rate-job-growth-july-labor-market-economic-data-2024-7">unemployment</a> figures.Investors will be scrutinizing Fed Chair Jerome Powell's keynote at the central bank's annual symposium at <a target="_blank" class="" href="https://www.businessinsider.com/fed-interest-rate-cute-powell-jackson-hole-signal-us-economy-2024-8">Jackson Hole, Wyoming,</a> on Friday, for cues on what the central bank might do next.Now, "the question now is how big will the rate cut be?" wrote Daniela Sabin Hathorn, a senior market analyst at Capital.com, in a Monday note.If Powell does signal a larger rate cut — for example, a 50 basis point, or 0.5% percentage point, cut — it could feed into higher gold prices.A fall in US interest rates typically depresses bond yields and the greenback, in turn driving investment into gold, which is internationally denominated in the dollar.Furthermore, a larger rate cut would "allude to greater concerns about economic recession by the central bank," wrote Hathorn.A key reason central banks cut rates is because they want to stimulate lending and in turn, economic activity.As a time-tested store of value, gold prices would likely rise on fears of recession.<h2 id="c66e64bc-e8b0-4be2-8a1c-f43d2f29c7e7">Geopolitical risks boost appetite for gold</h2>Other than monetary policy, heightened geopolitical risks are also boosting the appeal of gold, a traditional safe haven.Risks include the wars in Ukraine, the Middle East, and the November US presidential election, wrote Saxo Bank's Hansen.The US presidential election is a cause for concern because both candidates are "prepared to spend money they haven't got, thereby lifting the US debt levels further," Hansen added.<a target="_blank" class="" href="https://www.businessinsider.com/gold-price-china-consumers-central-bank-pboc-economy-concerns-dedollarization-2024-4">In China,</a> consumers are also snapping up gold to preserve value amid a depressed economic environment, an epic property crisis, and a weak currency."Continued central bank demand amid geopolitical uncertainty and <a target="_blank" class="" href="https://www.businessinsider.com/dedollarization-usd-strong-china-pboc-central-banks-buy-gold-inflation-2024-5">de-dollarization,</a> and not least gold's ability to offer a level of security and stability that other assets may not provide" would give support to the yellow metal, wrote Hansen.

Here's why gold prices could climb even higher from current record levels     

<ul class="summary-list"><li>The Federal Reserve cut interest rates by 50 basis points on Wednesday.</li><li>But the lag in monetary policy means it'll take time to feel the relief.</li></ul>The nation's central bank has <a target="_blank" class="" href="https://www.businessinsider.com/fed-cuts-interest-rates-how-much-september-fomc-powell-inflation-2024-9">finally cut interest rates</a> for the first time in over four years. But Americans might not feel that relief just yet. On Wednesday, the Federal Open Market Committee announced an interest-rate cut of 50 basis points, concluding years of the Federal Reserve's aggressive inflation-fighting as the US began recovering from the pandemic. It followed months of some experts and Democratic lawmakers <a target="_blank" href="https://www.businessinsider.com/interest-rate-cuts-timeline-federal-reserve-inflation-powell-economists-forecast-2024-7">calling for the Fed to cut rates to give Americans relief</a>, and their calls were finally answered.While the cuts signal good news for Americans — it reflects the Fed's confidence that inflation is finally returning to normal — it'll take time for consumers to actually feel the effects of lower rates. That's because there's a lag in monetary policy, meaning that it could take months for a rate cut this month to materialize for consumers. Further, rates for the kinds of loans most Americans hold are only indirectly affected by the Fed's moves."The universe of interest rates is one where the Federal Reserve's impacts vary, but the central bank helps set the tone even where there isn't a direct correlation," Mark Hamrick, a senior economic analyst for Bankrate, told Business Insider.Erica Groshen, senior economics advisor at Cornell University and the former commissioner of the Bureau of Labor Statistics, said in a statement to Business Insider that lower rates will have at least three types of effects: They'll lower the cost of consumer borrowing, similarly make corporate borrowing cheaper, and "people who live on interest on their savings will lose some of their income, and so may reduce their spending."Those effects might not be felt right away.One big area where consumers might experience the lag is <a target="_blank" href="https://www.businessinsider.com/fed-rate-cut-impact-credit-card-loan-rates-debt-consolidation-2024-9">credit cards</a>. Credit card interest rates are at historic highs right now — the Consumer Financial Protection Bureau found in a recent report that the average annual percentage rate on credit cards surged to 22.8% in 2023, nearly doubling over the past decade. Michele Raneri, vice president and head of US research and consulting at TransUnion, told BI that "it'll take a while for consumers to realize the benefit" of the cuts."A consumer who is carrying a balance is going to have to pay off the balance that they already have at that higher rate before the lower rate applies to their balance," Raneri said, meaning consumers with credit-card debt will continue to see high rates despite the Fed's cuts.Still, Hamrick said within a day of the Fed's rate cuts, banks will likely adjust their prime lending rates, which will be noticed in credit-card rates "immediately."The Fed rate cuts indirectly affect <a target="_blank" href="https://www.businessinsider.com/how-fed-rate-cut-could-impact-mortgage-rates-homebuyers-2024-9">mortgages</a>, which are generally based on other interest rates that are loosely tied to the Fed funds rate. Homeowners who already have a fixed-rate loan, which make up an overwhelming majority of the US mortgage market, won't feel the effect of the Fed's decision unless they refinance at a lower rate or buy a new home. The situation is similar for people who have a fixed-rate car loan.And when it comes to businesses, rate cuts will have a positive impact on their operations, making it cheaper to take out loans. However, they won't be immune from the lag — it'll likely take a number of rate cuts from the Fed before businesses are able to significantly speed up their hiring and investing, as a single cut won't be enough to make those changes to their business plans.Savings rates will also be affected by the Fed's rate cut decision."Savers will continue to be rewarded for searching for the best rates, even as yields slip from the peak," Hamrick said, adding a "modest decline in yields is relatively inconsequential compared to the decision to save itself."Elizabeth Renter, senior economist at NerdWallet, said in a statement that people will see "impacts on the interest rates that banks pay on savings accounts and certificates of deposit." However, she added "these reductions work against the consumer.""Rates on savings accounts and CDs have been higher than typical in our recent high rate environment," Renter said. "As the Fed cuts initially and moving forward, we'll see banks reduce these rates too."It's unclear at this point how many more times and how low the Fed will cut rates as the year comes to a close. However, it will take time for Americans to see borrowing costs get cheaper, and it could be beneficial to them to account for that lag before making big financial decisions."I would urge people to do the math rather than to just sort of take a signal like it's a traffic light and now's the time to go," Hamrick said.Are you planning to make any big purchases now that the Fed has cut interest rates? How does this impact your financial planning? Share your story with these reporters at <a target="_blank" href="mailto:asheffey@businessinsider.com">asheffey@businessinsider.com</a> and <a target="_blank" href="mailto:mhoff@businessinsider.com">mhoff@businessinsider.com</a>.

It'll be a while before you feel today's interest-rate cuts

<ul class="summary-list"><li>US commercial real estate faces higher interest rates, tighter lending, and maturing debts.</li><li>The sector's woes may hit asset prices and spread to other industries, an expert at Goldman Sachs says.</li></ul>Brutal headwinds are buffeting US commercial real estate, threatening to hit prices and hammer the wider economy, Goldman Sachs strategists have warned.The CRE sector is navigating a "nearly perfect storm" of much higher interest rates, a credit crunch, and about $1 trillion of debt maturing in the next 12 to 18 months, Jeffrey Fine said during a <a href="https://www.goldmansachs.com/insights/podcasts/episodes/04-18-2023-karoui-fine.html" target="_blank" rel="noopener">recent episode</a> of the "Exchanges at Goldman Sachs" podcast."We've got a big rightsizing of the market that we're going to have to confront," Goldman's global head of real estate client solutions and product strategy said.<h2>Why is CRE feeling the squeeze?</h2>The Federal Reserve has raised interest rates from virtually zero to upward of 4.75% over the past 13 months in an effort to curb historic inflation. Higher rates make borrowing more costly, and typically weigh on riskier assets such as stocks and real estate as investors shift their money into savings accounts and government bonds that offer guaranteed returns.The surge in rates played a key role in the <a href="https://www.businessinsider.com/silicon-valley-bank-failure-what-happened-bank-run-explained-2023-3">sudden collapse</a> of Silicon Valley Bank and Signature Bank in March. The failures have scared customers into <a href="https://markets.businessinsider.com/news/stocks/money-market-funds-inflows-300-billion-banking-crisis-deposits-2023-3">moving their deposits</a> from smaller banks to bigger ones and money-market funds, and spooked lenders into <a href="https://markets.businessinsider.com/news/stocks/credit-crunch-us-bank-crisis-stock-corporate-earnings-recession-svb-2023-4">pulling back</a> out of fear of further bank runs.The result is that CRE investors, who rely heavily on financing from smaller banks, face higher borrowing costs and tighter credit just as they're looking to refinance their debts. Those challenges could lead to a spike in defaults and a decline in property prices."I think you will see a further drop in valuations," Fine said about the most exposed parts of the CRE sector, including older properties and office buildings grappling with declining occupancy levels and slowing rent growth.He noted that obtaining CRE loans now is "almost impossible" as financing has "almost completely shut down."The real-estate guru also warned there could be serious fallout if authorities don't intervene. He cautioned that if defaults jump, banks won't want to take possession of assets that are expensive to maintain and may be in need extensive renovations."Over time there's going to have to be a very organized public and private partnership to figure out a careful unwind of this current dynamic," Fine said. "Otherwise, we have a very messy situation on our hands."Fine added that the sector's troubles could spread to other industries and pull down the prices of other assets. When CRE financing dries up at a time when debts are coming due, "the outcome can be really upsetting to the overall economy," he said.

Commercial real estate faces a brutal combo of higher rates, tighter lending, and looming debts - and the fallout could be disastrous, Goldman strategist says

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