The birth of a new contra-indicator?

May 15, 2008

Last week, the once high-flying First Marblehead (FMD), which we first footnoted here back when it was trading at around $30, announced that it was cutting 500 jobs in an effort to save $200 million. That’s the sort of thing that normally causes a stock to rally, but that’s far from the case here: the stock has dropped about 25% since the announcement and is now trading around $3.

One reason may be the downright gloomy 10Q that the company filed earlier this week. Compared with earlier filings, this one is full of all sorts of new and dire statements, like this:

Our inability to access the securitization markets as a result of market disruptions continued during the third quarter of fiscal 2008. That inability, together with the reorganization of The Education Resources Institute, Inc., or TERI, has strained our client relationships, resulted in the termination of several material client agreements, reduced our facilitated loan volume and created uncertainty about our business prospects. We will need to change our business model significantly in order to overcome the challenges currently facing us.

Indeed, throughout the filing, much of the blame for First Marblehead’s problems falls on TERI, or The Education Resources Institute, which filed for bankruptcy protection on April 7. In the current Q, TERI, whose loan processing operations were purchased in June 2001, was mentioned a whopping 414 times. In the past month alone, First Marblehead has put out four separate 8Ks also noting its problems related to the TERI bankruptcy.

While First Marblehead has always mentioned TERI in its filings, dating all the way back to its S-1, the current Q still comes as a shock to the system and makes you wonder why the company’s dependency on TERI wasn’t mentioned as a significant risk factor a bit more forcefully. A quick skim of the K filed last August shows that TERI is mentioned about halfway through the 15-pages of risk factors. I’m guessing that’s something that will be brought up in the various lawsuits — the Q names 6, but more seem to come in every day, including this one from two days ago.

Maybe all of this signals the birth of a new contra-indicator: when companies start actively donating to politicians, perhaps it’s time to take a closer look.

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