Good story today that brings back memories of me flying between Minneapolis (because of no direct flights from LGA) and the thriving metropolis of Sioux Falls, South Dakota in 1981 as Citi was moving the center for its card business from Huntington, Long Island (NY) to the Mount Rushmore state. Landing in Sioux Falls, at Joe Foss Field on Mesaba Airlines was always an experience.The article talks about a landmark legal decision referred to as the Marquette Decision. Up until this US Supreme Court decision in 1978, interstate banking was prohibited under the Glass-Steagall Act, a through back to the 1929 US Recession our grand (or great grand) parents lived through. Under Glass-Steagall, banks could only accept deposits in states where they were organized. A bank like Wells, based in California, could not accept deposits in Oregon or Washington. Reasoning was that if banks were regulated in their native state locations, risk would be lower.Credit cards were in their infancy. The big technology breakthrough was the magnetic stripe, desktops were unforeseen and cellphones were a dream, like the Dick Tracy watch. Credit card revolving debt in the US was $40 billion. (Today it is over $1 trillion).
Banks, with national intentions, such as Citibank, The Chase Manhattan Bank, and Bank of America saw the credit card model as a way to expand outside of their local markets. The Supreme Court heard a case involving a small Minnesota bank, named Marquette National, who complained that the First National Bank of Omaha was violating state usury laws by using the higher Nebraska lending rates for Minnesotan accounts. Ultimately, the Supreme Court ruled that interest rates were exportable from state to state, and while not unraveling the Glass Steagall Act, essentially acknowledges the ability of banks to lend outside of their state. So, why then are so many banks in Delaware?• Delaware is home to the credit card businesses of Chase, Discover and Barclaycard U.S., according to the Federal Deposit Insurance Corp. Bank of America and Citi also maintain certain card operations there. Together, those issuers represent about half of the U.S. credit card market. Meanwhile, Delaware residents account for only 0.3% of the U.S. population.
• The Marquette decision, which allowed issuers to export interest rates from the states where they were located, didn’t kill the interstate banking prohibition; it just left it to wither and die.
• In time, it left state usury laws essentially toothless.So, Citi went west to Sioux Falls and Chase went south to Wilmington; the Rockefellers probably made the better choice if you don’t like South Dakota’s sub-zero winters and massive prairie. • For banks, the Marquette decision came at the perfect moment.
• In the late 1970s and early ‘80s, the Fed raised rates to slow rampant inflation and encourage saving, making it more expensive for banks to borrow money. Credit card companies, many of which were based in New York, faced enormous losses. They were paying an annualized interest rate of about 19% to borrow money from the Fed, but New York’s usury law allowed them to charge cardholders no more than 12%.
• Citicorp brokered a deal with South Dakota leaders, promising jobs in exchange for permission to operate in the state, and hightailed it out of New York
• Meanwhile, Delaware Gov. Pierre S. “Pete” du Pont IV was looking for ways to bring more jobs to his state. That’s when Chase Manhattan Chief Operating Officer and President (and later, CEO) Thomas Lebrecque and his legal counsel Robert Douglass got in touch.
• Several major banks soon moved operations to Delaware, including Chase Manhattan, J.P. Morgan & Co., Manufacturers Hanover and Chemical New York. Even Citicorp — which had just relocated its card business to South Dakota — opened an operation in Delaware.
• As of February 2017, the state’s financial industry employs more than 47,000 people, according to the Bureau of Labor Statistics.Card companies certainly bring jobs. Before Citi came to South Dakota, your local career options were either your parent’s alfalfa farm or Morell’s beef packing. Now, banks thrive their and skill sets now center on technology, operations and production. And, in Delaware, formerly a ten minute drive-through on I-95 is a bustling financial center.
Overview by Brian Riley
, Director, Credit Advisory Service at Mercator Advisory Group
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