For months in the early 1980s, I traveled from LaGuardia Airport in N.Y. to Minneapolis on either United or USAir, then from Minneapolis to Joe Foss Field in good old Sioux Falls. The downside of the plane change in MSP was that you’d have to get on a Beechcraft propeller plane flown by Mesaba Airlines.
Everyone loves a nice business trip to L.A. or SFO, but Sioux Falls was pretty radical at the time. And, yes, there are “falls” in Sioux Falls. The best hotel in town was the Holiday Inn in the center city, if you can call it that. If you were from New York and commuting to Sioux Falls, you’d know Minerva’s as the best restaurant in town. The Citi-joke was that the restaurant was so good, at least good enough to survive on 51st and Lexington Avenue, that the owner must have gotten to FSD through the witness protection program. However, workers did not realize the crunch of an N.Y. bagel.
Maybe too much background here, but if you wanted to motivate technical people transferred from NYC, you’d know that you’d better bring authentic N.Y. bagels if you tried to negotiate your requirements for the programming rock.
Back to the Washington Post:
Last week, Washington Post reporters exposed how global elites have used opaque trusts to shield wealth from tax authorities and the critical public. The story’s surprising detail was not the overt tax avoidance — activity we have come to expect. Rather, it was the setting: Sioux Falls, S.D.
When did the Mount Rushmore State, better known for bike rallies than banking, become an “offshore” haven for laundering ill-gotten fortunes? And why do U.S. authorities tolerate it?
The answer to the first question begins with a surprise meeting between executives from New York-based Citibank and South Dakota Gov. William Janklow (R) in February 1980. The bankers were there to talk about credit cards. Janklow was all ears.
Here’s the background:
Following the 1929 depression, a series of banking regulations curtailed interstate banking. First, the McFadden Act established the right to govern banks within their state. Then, in 1956, the Douglas Act forbid acquisitions of an interstate bank.
In the nascent days of credit cards, it was difficult for banks to operate lending products outside of their state. Interest rates were set at the state level, creating a challenge for calculations. In addition, if you operated from N.Y., you were bound by the state usury laws. In NY, at the time, the Washington Post recalls:
Because Citibank was based in New York, state laws regulated all Citibank credit card accounts.
And New York capped the interest rate that banks could charge at 18 percent (and only 12 percent on balances above $500) — no matter where the cardholder happened to live.
But true to Citi-style, ambitions for a credit card business were much broader:
Instead, Citibank executives envisioned a nationwide consumer bank delivered through cards rather than traditional branches. Unfortunately, the move, while ambitious, was poorly timed.
When Citibank initiated its nationwide campaign, it could live with these rates. In October 1979, however, the world changed. Then-Federal Reserve Chairman Paul Volcker launched an aggressive monetary experiment to wring inflation out of the economy.
Market interest rates skyrocketed. So did Citibank’s cost of funds. Yet, the price the bank could charge its credit card customers remained fixed. So every time a cardholder used their card, the bank lost money.
And said Walter Wriston, the legendary CEO:
“If you are lending money at 12 percent and paying 20 percent,” Citibank chief executive Walter B. Wriston lamented, “you don’t have to be Einstein to realize you’re out of business.” Wriston appealed to New York politicians for help. The legislature refused to budge.
The bank was in a fix. It could only escape the rate cap by leaving New York for a less restrictive state. And it could only do that if that state’s legislature invited Citi in. And so, in February 1980, Citibank lawyers knocked on Janklow’s door. South Dakota was one of the few states without an interest rate cap. Moreover, the state’s legislature was in session. They could act fast.
What made this all possible was the Marquette Decision, a Supreme Court Case that permitted rate exportability. The usury rate prevailed based on the state of the card issuance. N.Y. had a cap; South Dakota quickly lifted the interest rate cap.
Citibank offered just what the state needed, new industry, good jobs, and tax revenue. In March 1980, South Dakota’s legislature passed the “Citibank bill” inviting the company to open a subsidiary in the state with nearly unanimous approval — allowing it to shift its card-issuing business to the Mount Rushmore State.
Once in South Dakota, Citibank’s first move was to raise its interest rates. Citi cardholder rates rose from between 12 percent and 18 percent, depending on the consumer’s balance, to 19.8 percent for all balances, plus a $20 annual fee.
This move reshaped the banking and credit card industry. Citibank and South Dakota undermined the ability of every other state to regulate credit card interest rates. As a result, banks could now either move to South Dakota or threaten to, forcing most states to raise or eliminate interest rate ceilings, ending a critical consumer protection against excessive interest and long-term debt.
Both Citibank, NA and Wells Fargo Bank, NA, find their home base in Sioux Falls. As a result, the firms offer a more robust career path than the other large employer, Morell’s Beef Packing.
One thing they rarely mention about Sioux Falls. In the winter, with the wind chill, the air temperature can be 80 degrees below zero. That’s why employee parking lots have engine block heater connections. But, in the land of no-corporate income tax, that’s just a detail.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group