Will Obama's plan kill Delaware's credit card jobs?

General Motors will close its plant near Wilmington, Del., idling the region's last 450 auto workers. (Michael Wirtz / Staff Photographer)

Obama's plans for tougher bank regulation could wipe out the credit card industry's centers in Delaware and South Dakota, including around 20,000 jobs in Wilmington, says Alan S. Kaplinsky, a partner at Philadelphia's Ballard Spahr who has represented Wilmington-based MBNA (now owned by Bank of America) and First USA (now part of JPMorgan Chase & Co.), among other card lenders.

Plans in the president's 89-page bank-reform "White Paper" -- Financial Regulatory Reform: A New Foundation -- will cost bankers money, and they'll pass the higher cost to consumers through "higher interest rates" and  "restricted credit availability," Kaplinsky tells me.

"In particular, they're concerned about the section of the White {aper that deals with this new consumer agency, the Consumer Financial Protection Agency. There's a great deal of worry and concern on the part of my clients on the mandate for this agency. It begins with the fact that the architect of the plan is Prof. Elizabeth Warren from Harvard, who is not exactly a friend of the banks or of consumer finance companies, but has been very closely aligned with the consumerist point of view. She has been trying to get bankruptcy relief; she has been supportive of the (anti-foreclosure mortgage) cramdown legislation. This is her baby.

"This has the potential for eliminating the advantage for locating a credit card operation in Delaware or South Dakota... They're essentially eliminating federal pre-emption of state laws. I would assume that would include usury laws. They talk about federal law being a floor, and the states can build on top of that. Anything stricter, the states would be able to implement it.

"Banks went down to South Dakota and Delaware (in the early 1980s)  because Section 85 of the National Bank Act had been interprested by the US Supreme Court to enable banks to export the usury (interest and fee limit) laws in the states where they were based, around the country. Under this White Paper, I believe this would go into the trash, and a credit card issuer locaed in Delaware would get no more advantage out of being in Delaware, but would have to comply with a patchwork quilt of usury laws in the other 49 states."

For banks, "it would be an absolute nightmare. It would make credit card programs, already reeling from the fact delinquencies are very high, lack of liquidity because they have no ability to securitze credit card portfolios (due to the credit market slowdown), and the new credit card act will make cc lending even less profitable. And if you lay this thing on top of everything else, it makes the industry a basket case."

Isn't this the banks' own fault, for lending to people who can't or won't pay? "You can make that argument. I don’t think the fact delinquencies are as high as they are, is a result of the credit card lenders being irresponsible. I think it's more a reflection of the recession that we're in and the soaring unemployment."

But consumer advocates and credit card counselors warned us for years there was too much easy money. The banks didn't see this coming; isn't it time the government steps in?  "I'm not saying standards were too loose. It is what it is. Maybe there were credit card issuers who were much too free with cards for people who weren't A rated... But the industry has been contracting. Credit cards are no longer contributing to the bottom line. They're now a drag on the banks. I think it's only getting worse."

The White Papers include a sweetener for the banks -- that they have legal protections if they agree to provide approved loan terms and disclosures. "What are we, in Communist Russia? One type of stove, one type of refrigerator, one type of loan? That's not attractive to our clients. -- They’ve already got plenty of people looking over their shoulder regarding compliance... We have a whole group of our lawyers at our firm who are constantly giving advice to our banking clients who have been examined by the comptroller or the FDIC or the Federal Reserve who have identified things that are violations of law...

"What really went wrong here were certain kinds of mortgage loans that were made mostly to subprime borrowers. 2/28 and 3/27 and negative amortization loans." Credit card lenders were just hit by collateral damage? "Right. And the way the (home) loans were marketed to consumers. By and large it was not the banks. It was the mortgage brokers. They were suppose to be regulated by state banking departments."

But the states did a bad job. Shouldn't the federal government step in? " The problem is there's a lot of over-reaction and overkill. This Obama White Paper superficially is very attractive. We gotta do something to protect the consumers. Sounds great. But why is it going to be better, what's the cost of it? The White Paper says most of the costs will be passed along to the industry. Who's going to pay for that? The pressure will be enormous to pass along all of it to the consumers. And the shareholders.

"I don’t buy the idea of there being this horrible conflict of interest between the banking agencies and the safety and soundness mandate they have. Seems to me the two things fit hand in glove. If anything I think it creates a real problem to have a consumer agency that looks at things completely divorced from safety and soundness of banks.
It's extremely misguided.... And it's on a very fast track."