It was October 1987, and the House of Representatives was debating a bill written by then-Rep. Chuck Schumer that would disclose more information to prospective credit card customers. The legislation would ultimately create the “Schumer box” — the part of a credit card agreement that lists interest rates, terms, and fees in large type.
Liberal Democrats wanted more than just disclosure. Illinois Rep. Frank Annunzio submitted an amendment to limit the allowable interest rate on all U.S. credit cards to 15 percent. A 1978 Supreme Court ruling had rendered state-level interest rate caps useless, allowing lenders to charge 40 percent or more. Some states kept tight rules in place nonetheless, but a few became a Wild West for financial institutions, attracting major companies with an anything-goes regulatory environment.
“This credit card business is the biggest money item these banks have,” thundered Mario Biaggi, a New York Democrat who supported the amendment. “You don’t have real competition among the big banks. They take advantage of the inertia of the consumer.”
With a healthy 257-177 advantage, House Democrats had the numbers to force the federal cap through. But Schumer and his colleagues on the House Banking Committee wanted no part of significantly depressing credit card profits, having struck down this amendment almost unanimously in committee. One of those colleagues, a young Democrat from Delaware, stepped forward to urge a no vote. His name was Tom Carper.
“The bill before us without this amendment is a good bill,” Carper said. “Mr. Annunzio is trying to make a point here, and it’s a point that shouldn’t be lost on us or the banks. But I think it’s premature to try to make that point. We can do a lot of good things with this legislation and a free enterprise competitive system. Let’s let that competition work.”
Carper added that young college graduates and the working poor would not be able to access credit if interest rates were capped. It rehashed a perennial claim from banking industry supporters: You have to let banks gouge their customers, because how else will customers obtain vital services?
Against an alliance of Banking Committee Democrats and pro-business Republicans, the amendment failed. It took two decades for a federal interest rate cap to be debated again, as part of credit card reform legislation called the CARD Act. This time, Sen. Bernie Sanders, I-Vt., would fail to overcome the power of the banking lobby. Among the 60 senators voting no was the senior member from Delaware: Tom Carper. It was still, 22 years later, premature.
For nearly 40 years, banks have found a reliable ally in Carper. Staked with millions in campaign donations, Carper has taken the side of the industry in virtually every policy debate over that period, with the unfortunate side effect of helping to create the conditions for the 2008 financial crisis — and the next one.
This has sadly been expected of politicians representing Delaware, where banks reflect a significant chunk of the economy and dominate campaign contributions. Carper has faced no serious opposition from within his party over the years. It’s just been the way business is done in Delaware. But Kerri Evelyn Harris, Carper’s opponent in the September 6 Democratic primary, is trying something different, highlighting victims of predatory banking practices, which even in Delaware outnumber those who benefit. A Harris victory would signal an end to the home-cooking bank lobbyists have received from Delaware politicians since the 1980s.
But even among that group of yes men and bank sycophants, Carper stands out.
When Carper first got elected statewide as treasurer in 1976, Delaware was not yet a haven for financial institutions. It was struggling with high unemployment and high inflation, much like the national economy in the Carter years. Then the Supreme Court offered a lifeline.
In Marquette National Bank v. First of Omaha Corp., the court ruled unanimously that Omaha Bank, while chartered in Nebraska, could mail Minnesotans credit card offers with interest rates above those permitted by Minnesota law. This established the doctrine of “exportation” in credit card regulations: banks could export their home-state rules to customers elsewhere. It also created a nationwide banking system overnight; before this point, banks could not operate across state lines without permission. (The same regulatory change is repeatedly clamored for by insurance companies that want to operate across state lines so they can all set up in Nebraska or Delaware and evade state consumer protection laws.)
Shortly after the ruling, Delaware Gov. Pete du Pont, scion to another major state industry, heard from Chase Manhattan executives that if he combined Delaware’s existing business-friendly incorporation rules with loosened financial regulations, banks would swarm into the state. Desperate to diversify Delaware’s economy and create jobs, in 1981, du Pont pushed through the Financial Center Development Act with overwhelming bipartisan support. Carper was still state treasurer at the time, and making a bid for his first term in the House.
The law granted out-of-state banks the right to enter Delaware as long as they employed at least 100 residents. Usury caps were mostly eliminated, so banks could use the state as a lucrative home base for its credit card divisions. Numerous fees were also made legal, as long as they were disclosed. Banks could change terms of their credit card agreements at any time (later in his career, Carper would criticize this perk, but it was his own state that gave it to the industry). Tax breaks tucked into the bill further encouraged the largest banks to come to Delaware.
Eleven major banks opened subsidiaries in Delaware within three years of the law’s passage, as out-of-state laws on credit card rates or terms were made irrelevant. South Dakota also created a welcoming environment, but it couldn’t match Delaware’s proximity to New York City and corporate-friendly legal structure. Today, half of the nation’s credit cards originate in Delaware, and about 48,000 state residents are employed in the financial services industry, roughly one-tenth of the entire workforce. At the time, state officials only expected 1,000 new jobs.
Carper wasn’t very involved in this transformation; treasurers just managed cash. But when he entered the House in 1983, he sought to protect Delaware’s — and the banking industry’s — advantages.
Carper’s first term in Congress saw passage of the Secondary Mortgage Market Enhancement Act. This eliminated the ban on banks selling asset-backed securities without a government guarantee, and pre-empted state restrictions on their sale. It even let institutional investors purchase the securities, as long as an accredited rating agency gave them high marks — marks, it turned out, that were not hard to come by.
Combined with earlier bills allowing higher-risk lending and the 1986 Tax Reform Act, which gave a tax exemption to real estate securities, this created the securitization architecture that banks would use to build the subprime bubble two decades later. “Subprime lending could not have flourished” without these innovations during Carper’s House tenure in the 1980s, writes Vermont Law School professor Jennifer Taub in the book “Other People’s Houses.”
But Wilmarth notes that the first asset-backed securities issued after SMMEA’s passage were actually bundles of credit card receivables. Mortgage securities didn’t take over as the largest securitized asset class until the late 1990s. Credit cards were something of a dry run for how to set up a securitization market.
“First, you have to pre-empt the annoying state laws protecting consumers,” Wilmarth said. “That gives you a nationwide market. And securitization gives you an enormous pool of investors who think they’re getting a high yield. It migrates from credit cards to home equity lines of credit and auto loans and high-risk mortgages.”
Credit cards were also incredibly profitable. A 1992 study from the Philadelphia Federal Reserve notes that throughout the 1980s, credit card operations earned two to five times the rate of return in the rest of the industry. Ed Mierzwinski of the U.S. Public Interest Research Group cited the monoline credit card companies, which specialized only in credit cards, for growing the industry. “They popularized affinity cards, at your university, your department store, your phone company,” Mierzwinski said. The biggest monoline company was MBNA, and although it was formerly known as Maryland National Bank, it was based in Delaware.
When not engaged in fending off credit card interest rate caps, in 1987, Carper urged the Federal Reserve to allow banks to get into the securities business. A vintage C-SPAN clip shows Carper pressing Fed Chair Alan Greenspan on this point. The Fed eventually granted regulatory permission for banks to establish securities subsidiaries, which led to short-term funding arrangements sometimes known as “shadow banking.” These liabilities grew from $500 billion in 1980 to a whopping $12 trillion in 2007, and were critical to the credit crunch that followed the collapse of the subprime mortgage market.
As the savings and loan crisis raged, Carper defied House Speaker Jim Wright in demanding a $15 billion bailout of the Federal Savings and Loan Insurance Corp., the antecedent to the FDIC. That was three times as much as Wright wanted, but Carper eventually won that fight. Carper also played a role in 1989’s Financial Institutions Recovery, Reform and Enhancement Act, introduced in reaction to the savings and loan crisis. While FIRREA created new penalties for banks, the amendment Carper added to FIRREA protected state laws that indemnified corporate directors and officers, and was intended to safeguard Delaware’s generous indemnification laws.
“That’s the way Delaware rolls,” said Mierzwinski.
Christine Brennan, a Carper spokesperson, asked about his legislative record around banking, said that everything Carper has done, he has done for working families in Delaware, and that he has been a key player in major reforms that banks have opposed.
Senator Carper is a tireless advocate for Delaware’s working families, and it is misleading to imply his votes are for sale. Not only does Senator Carper support the strongest possible reforms to our broken campaign finance system, including a Constitutional Amendment overturning Citizens United and moving toward public financing of campaigns, but Senator Carper has also supported the most sweeping reforms to our financial system since the 1930s over the objections of the nation’s largest banks. Thanks in part to Senator Carper’s support, the CARD Act and Dodd-Frank became law, and families across the country are seeing the benefits, as well as increased consumer protections. Senator Carper strongly opposes the Trump Administration’s efforts to rollback Dodd-Frank and Mick Mulvaney’s assault on the Consumer Financial Protection Bureau. Senator Carper is also a strong proponent for protecting our nation’s veterans and military families from financial scams, especially protecting student veterans from predatory for-profit colleges that are ripping off service members and providing worthless degrees. In fact, Senator Carper’s support for the Obama’s Administration’s relentless assault on these for-profit institutions has led to many of them closing.
“Financial services executives are finding comfort in the return to Washington of an old friend,” American Banker wrote after Carper’s 2000 election to the U.S. Senate. MBNA’s senior vice chair called Carper “a steady supporter of the banking industry because the industry plays a big role in the state.”
He immediately went to work on something he testified for in Congress while governor — overhauling the nation’s bankruptcy system. “The idea that people who have rung up large debts, have the ability to pay their debts, but can walk away from them is, to me, abominable and should be stopped,” Carper told American Banker at the time. This was the credit card industry’s top priority in the Bush years, the battle that first brought Elizabeth Warren into national politics. And in 2005, the banks got their way, making it exponentially harder for individuals to declare bankruptcy and escape their debts.
Many look at Delaware colleague Joe Biden’s role in passing the bankruptcy changes. But Biden was not a co-sponsor; Carper was. Biden voted for several amendments that would have improved the bill; Carper rejected practically all of them. He voted against closing a loophole for asset protection trusts that the rich use to shield wealth; discouraging junk credit card offers and other predatory lending practices; preserving bankruptcy protections for caregivers to ill or disabled family members, victims of identity fraud, and debtors with serious medical problems; establishing a homestead floor so the elderly wouldn’t have to surrender homes in bankruptcy; and many more.
The bankruptcy bill passed, with Carper standing behind George W. Bush at the signing ceremony. Warren warned that it would be devastating for people facing hardship, and indeed it has been. A 2010 working paper from the National Bureau of Economic Research even argued that the bankruptcy bill contributed to widespread mortgage failures and the subsequent recession, calculating that prime and subprime defaults rose 23 and 14 percent, respectively, after the law passed. “The reform … contributed to the severity of the mortgage crisis by pushing up default rates even before the crisis began,” the authors wrote.
Carper served on the Senate Banking Committee from 2001 to 2008, during the height of the housing bubble and collapse. He was not raising alarms about rampant fraud and unsustainable lending in mortgage markets, as this late 2006 subcommittee hearing shows, with Carper wondering whether low stock and bond yields caused the bubble, instead of a breakdown in underwriting standards.
In the aftermath, Carper did vote to bail out the banks in 2008, while voting against the most potentially potent step for preventing foreclosures: allowing bankruptcy judges to modify the terms of primary residence mortgages. “Cramdown,” as it was known, would have given homeowners a more level playing field to negotiate resolutions with mortgage companies. Carper was among a dozen Democrats who killed it, arguing that it would create market uncertainty and spike mortgage interest rates. But the bill was limited to mortgages issued prior to 2009, making the uncertainty claim bogus. Carper drew attack ads from MoveOn for his vote.
As the bill lumbered to defeat, bill sponsor Dick Durbin, D-Ill., would say of Congress that “the banks frankly own the place.” They certainly seemed to own Carper. Since 1989, Carper has received over $4.3 million in federal campaign contributions from finance, insurance, and real estate companies. His No. 1 lifetime contributor is JPMorgan Chase, giving even more than home-state chemical giant Dow DuPont. No. 3 on the list is MBNA, now part of Bank of America. And those numbers underestimate Carper’s bank donations, because they don’t include his two gubernatorial runs.
With the public seething over bank malfeasance, Congress felt pressured to at least reverse the worst abuses of the crisis and protect consumers. But at each step, Carper would lead the resistance to financial reform. For example, in the CARD Act, the credit card reform legislation, Carper would help vote down a national interest rate cap and the restoration of state-based usury protections. The Consumer Financial Protection Bureau would also be barred from instituting interest rate caps in the Dodd-Frank financial reform.
During Dodd-Frank, Carper fought an effort by his Delaware colleague Sen. Ted Kaufman, appointed to replace Biden in the Senate, to cap the size of the largest banks. Carper also worked with Republicans to craft a controversial amendment preserving the right of the Office of the Comptroller of the Currency to pre-empt state consumer protection laws on nationally chartered banks. The OCC had successfully used this tactic previously to shut down state anti-predatory lending laws during the housing bubble.
Consumer groups expressed alarm, and even the Obama White House vowed to fight the pre-emption amendment. Carper defended it by saying, “There are times when it’s not always wise to have 50 different states weighing in on what’s best.” He used the formation of the new Consumer Financial Protection Bureau against his opponents, arguing that it should police the market with uniform standards rather than “hand(ing) over its enforcement tools to the states.”
In the end, the banking lobby won what they at the time called their No. 1 priority in all of Dodd-Frank. Carper reached a compromise with bill authors that maintained pre-emption authority if state law “prevents or significantly interferes” with the activities of a national bank, at the discretion of the OCC chief. The amendment also banned state-led class-action suits, while allowing states to police consumer protection within their jurisdictions. The compromise passed 80-18.
This month, the Office of the Comptroller of the Currency started accepting applications for national bank charters from financial technology (fintech) companies that engage in online lending. OCC could assert that these fintech firms no longer have to abide by state consumer protections on online lending. State prosecutors could even be prevented from supervising fintech firms through examinations or subpoenas of records. It could lead to a mass migration of lenders online, where states are most stymied from regulating.
“This is the next frontier,” said Ed Mierzwinski of U.S. PIRG. “Pre-emption is the principal goal of every industry in the U.S., and the banks have been the most effective in getting it for years and years.”
And guess which state is working to welcome fintech companies? Delaware, which may create a regulatory “sandbox” for fintech, with looser rules for a trial period. “The basic concept is setting up an organization that’s going to make Delaware the fintech capital of the United States,” said John Collins, one of the lead consultants in the effort and a former adviser to … Tom Carper.
Of course, Carper isn’t done trying to weaken the rules for meatspace banks either. In 2014, he voted for the omnibus legislation that killed the derivatives section of Dodd-Frank, a bill that Citigroup wrote. Weeks after the Trump inauguration, he announced his interest in changing the Consumer Financial Protection Bureau leadership to a five-member commission, seen by critics as a way to give lobbyists more targets to water down enforcement. A single director had been a line in the sand for Warren. And earlier this year, he joined 16 other Senate Democrats to support a bipartisan bank deregulation bill that represented Donald Trump’s biggest legislative victory of 2018, and the most pronounced rollback of Dodd-Frank rules since its passage.
The deregulation bill removes enhanced supervision on 25 of the 38 largest U.S. banks, and eliminates mortgage disclosures that prosecutors could use to detect discriminatory lending. M&T Bank, the largest commercial banking institution in Delaware, is one of the biggest beneficiaries. Beyond large regionals, megabanks also get less frequent stress tests, weakened capital and liquidity requirements, and the change of one word, from “may” to “shall,” which will give bank lawyers a tool to toss out any attempts to impose regulatory scrutiny.
“I think there are plenty of places where regulations are appropriate, and I also think we need to deploy those regulations using some common sense,” Carper told The Intercept during debate on the bill.
There’s a temptation to write off Carper’s decades of work for banks by chalking it up to Delaware and its large financial services industry. A spokesperson for Carper told The Intercept that he “is, and always has been, driven solely by a motivation to serve the people of Delaware and their interests, and his track record proves it.”
Drew Serres, campaign manager for Carper’s primary opponent Kerri Harris, said that one reason the criticism bothers Carper is “because he doesn’t even view it as being a bad thing. He’s like, this is the Delaware way. This is how you help people.”
Yes, banking remains the profession of 10 percent of Delaware’s entire workforce, though layoffs at Capital One and HSBC have hit in the past couple years. At the same time, it’s only 10 percent. More Delaware residents than that have lost a job or a home in the recession, or fell victim to abuse at the hands of the banking industry, or know someone who does.
And within that 10 percent, it’s a mistake to assume that employees of the companies support the mission of the company. For many, it’s a job, and they’d prefer a different one. Serres told The Intercept that employees of the financial industry in Delaware make up a sizable chunk of the campaign’s supporters, and they universally want their companies to be better regulated. “It’s kind of funny — a lot of our volunteers work for DuPont, work for Chase,” he said.
Harris has foregrounded stories of the victims of lending abuses, and it hasn’t alienated many of the lower-level employees of those abusive companies. “Many of our fellow Delawareans have suffered from biased lending,” Harris wrote in an op-ed opposing the bipartisan bank deregulation. “More than 10 percent of all Delaware housing units are mobile homes,” she added, citing a section of the bill that would loosen regulations on mobile-home lending. “This bill allows banks to gamble with working families’ opportunities to obtain a piece of the American dream.”
Carper may end up outspending Harris 30-1 in the primary, yet the contest is a real one, with Carper agreeing to a debate later this month. Harris supports reinstating the Glass-Steagall firewall between commercial and investment banking, and a “speculation tax” on Wall Street securities trades. Both would be almost unheard of for Delaware politicians. But maybe it doesn’t have to be that way. Maybe you don’t have to enter into a Faustian bargain with financial oligarchs to serve the public, no matter how many donations they give or how many meetings they take. Maybe you don’t have to be quite as solicitous as Tom Carper.
“The conscience is a muscle — if you don’t use it, then it atrophies,” said GW’s Arthur Wilmarth. “Carper is not a libertarian. He doesn’t hate government. I don’t think he wants to grind the little guy into the dust. But look what he’s been forced to do to become a successful politician in Delaware. In his gut doesn’t he wonder, how many people went bankrupt because of what I did?”
Ryan Grim contributed reporting from Wilmington, Delaware.
Correction: August 23, 2018
This story originally misstated the first name of Rep. Frank Annunzio.