The Student Loan Credit Crunch

Securities tied to student loans, another seemingly safe corner of the credit markets, are succumbing to the credit crunch.

Wall Street's financial-engineering machine bundles together long-term student loans and uses them as collateral for short-term investments owned by money-market investors. Since Thursday, auctions of these securities conducted by Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Citigroup Inc. have failed to generate investors' interest, leaving roughly $3 billion of such securities in a sort of limbo.

Under normal conditions, the banks would step in when investor demand is weak -- just as a specialist on the New York Stock Exchange intervenes to keep trading liquid in a stock. Because big banks are already bloated with other kinds of loans and bonds they are trying to get rid of, they have been allowing the auctions to fail.

That, in turn, is pushing up interest rates for the securities and leaving them in the hands of investors who might have intended to get rid of them.