April 16 (Bloomberg) -- Shares of First Marblehead Corp. plunged as much as 31 percent, the company's biggest one-day slide, on concern that leveraged buyout of rival SLM Corp. will reduce the supply of student loans to securitize and service.

First Marblehead gets about 41 percent of its loans through relationships with JPMorgan Chase & Co. and Bank of America Corp., two members of the group that agreed today to acquire SLM, Thomas Weisel Partners Group Inc. analyst Mark Sproule wrote in a note to investors. The acquisition may prompt the banks to drop First Marblehead in favor of SLM, or they may choose to provide student-loan services in-house, he said.

``The potential SLM transaction highlights the rising concern that both JPMorgan and Bank of America may begin to originate and retain private loan volumes,'' Sproule, who rates Boston-based First Marblehead ``market weight,'' said in today's note.

First Marblehead, the third-largest securitizer of student loans after SLM, known as Sallie Mae, and Citigroup Inc.'s Student Loan Corp., generates revenue by designing and facilitating the loans for banks, and by packaging them into bonds. Sproule estimated that losing JPMorgan alone would cost First Marblehead 27 percent of its earnings.

The company's shares dropped $8.40, or 19 percent, to $36.03 in 2:09 p.m. composite trading on the New York Stock Exchange. Earlier, they dipped to $30.62, the lowest since September.

CEO Responds

Jack Kopnisky, First Marblehead's chief executive officer, said in an interview that the market was ``overreacting.''

JPMorgan and Bank of America ``are going to continue to operate independently from Sallie Mae,'' he said, citing conversations he has had with both banks. ``They're not putting the businesses together.''

While Bank of America can end its relationship with First Marblehead on 90 days' notice starting in June, ``we have no reason to believe they'll do that,'' Kopnisky said. New York- based JPMorgan has a contract with First Marblehead that doesn't expire until May 2010.

``We will honor our contracts with First Marblehead,'' said Scott Silvestri, a spokesman for Bank of America. JPMorgan spokesman Tom Kelly declined to comment.

One incentive for dropping First Marblehead is JPMorgan and Bank of America could ``cross-sell their other products to the student customers they get through Sallie Mae, selling credit cards, mortgages and the like,'' Sameer Gokhale, a New York- based analyst with Keefe, Bruyette & Woods, said in an interview.

Statement Triggered Speculation

Bank of America, based in Charlotte, North Carolina, triggered speculation that it might stop outsourcing student- loan services in February. At a meeting with investors, it said education and healthcare were good platforms from which to expand consumer lending.

The group acquiring SLM also includes investors J.C. Flowers & Co. and Friedman Fleischer & Lowe LLC, which together will hold a majority of the company. JPMorgan and Bank of America said in a statement announcing the transaction earlier today that they'll continue to operate independent student- lending businesses.

To contact the reporter on this story: Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: April 16, 2007 14:16 EDT