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Mount Rushmore Comes to Bernanke

Posted by: Matthew Goldstein on March 06

South Dakota isn’t a big state. In fact, there are 46 other states with more people than South Dakota. But for years, the state’s favorable state banking laws has made it a magnet for national banks like Citigroup with high-interest bearing credit cards.

That’s why South Dakota officials were up in arms last December when they learned the Federal Reserve was poised to adopt a regulation that would make it more difficult for banks to issue high-interest credit cards to consumers with shaky credit histories. The state’s government feared that the regulation might imperil the jobs of some 5,000 state residents that work in the so-called subprime credit card business.

So South Dakota’s elected officials kicked it into high-gear, putting on an impressive lobbying effort to persuade the Fed to change its mind. Over a weeklong stretch in mid-December, South Dakota’s entire congressional delegation got more face time with Federal Reserve Chairman Ben Bernanke than the top executives of Citigroup and Bank of America.

Beginning on Dec. 10, Bernanke fielded a series of half-hour phone calls from South Dakota’s two US senators and the state’s lone member of the House of Representatives. The state’s full-court press culminated on Dec. 16 with a phone call with Bernanke, Democratic Sen. Tim Johnson, Republican Sen. John Thune and Republican Gov. Michael Rounds.

But despite all that lobbying, the South Dakota delegation didn’t get what it was looking for from the Fed. On Dec. 18, the Fed approved the measure putting limits on subprime credit cards, along with other regulations designed to protect consumers from “unexpected interest charges.” In enacting the series of regulations, Bernanke said: “These protections will allow consumers to access credit on terms that are fair and more easily understood.’’ The new rules are slated to take effect in July 2010.

Rounds said he’s disappointed by the Fed’s action, but added the state’s delegation got a fair hearing from Bernanke. “These jobs are on the line now,’’ said Rounds.

The dates and times of the meetings between Bernanke and South Dakota officials were provided to BusinessWeek’s Unstructured Finance blog by Kenneth Thomas, a finance lecturer at the Wharton School of Business. For nearly a decade now, he has been submitting Freedom of Information requests for the daily schedule of the Fed chairman. The schedule doesn’t reveal much, expect for the names of the various people the chairman meets with on a given day.

But the diary is proving to be a useful road map for trying to figure out the inner workings of the Fed, especially during the still unfolding financial crisis. Thomas said the lobbying by the South Dakota delegation, however, stands out. He can’t recall another time when so many officials from the same state have managed to get the ear of the Fed’s chairman.

“Occasionally you will see a governor come in, or a senator,’’ said Thomas. “But I’ve never seen a full state contingent.’’

Reader Comments

Paul O'Brien

March 6, 2009 07:17 PM

Shame on South Dakota. It is sad that people have to make a living trying to deceive people. Imagine if people concentrated on selling a product that actually helped people.


March 6, 2009 07:18 PM

This is perhaps the ONE time that I approve of actions by the FED. I don't know why the article suggested that this is a subprime credit card issue. All card holders are subject to arbitrary rate hikes--just ask any American Express cardholder. They recently raised rates by as much as 4% (a 50% hike for some cardholders). American Express is even worse than the subprime issuers, as they do not give you an option to opt out! Keep the new regulations and make them effective this year.

Munir Bhatti

March 6, 2009 07:29 PM

South Dakotans are a tight-knit group, so this isn't too surprising. With Wells Fargo and Citigroup both in trouble, this could become an employment concern for some parts of the state. I can understand the full court press on this.

It's also not too surprising that the Fed went ahead with limitations on subprime credit cards anyway, especially since the Fed is purchasing credit-card-backed debt in order to increase liquidity. Taken all together, this is an example of everyone protecting their interests.


March 6, 2009 08:24 PM

Tack that on to our Senator Johnson's leadership with 'bankruptcy reform' as understood by credit card bankers, i.e. 'reforming' the federal bankruptcy code code by removing the existing reforms in the code a few years ago, and you have a US Senator who never met a credit card banker he did not fall in love with. By the grace of 'W's Bernanke appointment, we have a central banker with the sense to address credit card abuse and stand up to the credit card bankers' bought and paid for "full state contingent".


March 7, 2009 12:45 AM

I'm not surprised about South Dakota and subprime credit cards. This is a state that has a love affair with Video Poker(or what's also called VLTs). These gambling machines are the crack cocaine of gaming, and quite honestly it's just another unfortunate symptom of living in South Dakota. It's always about sucking the well dry from the lowest rung of society so that South Dakota can make a little more money.

It's sad.


March 7, 2009 03:51 AM

While undoing the "usury limits" may have been usavory, and have gotten us into more long-term trouble than they saved, it's hard to fault them completely.

In the 1970s, interest rates were so high that it was impossible to loan money to consumers without violating the usury laws. South Dakota was the first state to undo its usury laws for this reason. To be sure, the banking industry had a thing or two to say about this.

There was a fascinating "Frontline" documentary on this subject some time ago. Google it...

Thank you for your interest. This blog is no longer active.



BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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