Treasure Islands - Nicholas Shaxson [123]
This probably overstates the case: There is no single explanation for the latest crisis. Still, Geoghegan has identified an important contributing factor. The elimination of usury caps spilled out into a wide variety of financial fields.
Credit card debt, money market funds, and numerous other instruments that fueled the borrowing binge and the crisis—the removal of interest rate caps—had effects that are incalculable.
Having helped deregulate and boost the supply of debt, Delaware also set about getting a share of the demand side. It did this by setting itself up as a major player in the securitization industry—the business of parceling up mortgages and other loans, including on credit cards, and repackaging the debt and selling it on. Once again, Delaware did this simply by establishing the exact legal framework that corporations demanded.
The Delaware Financial Center Development Act of 1981 itself contained a section eliminating “affiliated finance companies” from all state taxes. These act like banks but aren’t formally banks, so they fall outside banking regulations. Along with structured investment vehicles and their like, these are a core part of the global “shadow banking system”19 that dragged the world into economic crisis from 2007. These companies were especially prominent in the United States, notably in Delaware. In 1983 a new International Banking Development Act got Delaware into the new offshore game of international banking facilities. When that was enacted, Chase and several other banks promptly moved foreign offshore activities to Delaware.
Biondi outlines several other statutes that followed and his role in them. “I wrote those bills with my boys here,” he said. The 1986 Foreign Act Development built on the 1983 legislation designed to let foreign banks take advantage of Delaware’s regressive bank franchise taxes. New tax legislation in 1987 enticed banks that wanted to get into dealing securities. “My staff and I wrote it,” Biondi explained. “We represented Morgan, Chase, Citicorp, Bank of New York, and Bankers Trust.” Biondi’s team also wrote the Bank and Trust Company Insurance Powers Act of 1989, authorizing banks to sell and underwrite insurance.20 The Delaware Statutory Trust Act of 1988, giving huge flexibility to people setting up such trusts, and “the protection of trust assets from creditors,” made Delaware the top jurisdiction for setting up so-called Balance Sheet CDOs, which allowed banks to offload their assets onto other investors and were another important contributor to the crisis.21 A new act in January 2000 allowed Limited Liability Partnerships: a major contributor to the degradation of corporate governance, which I will soon explore in detail. There was also the Asset-Backed Securities Facilitation Act of 2002, which further opened the securitization spigots.
All these helped Delaware become, as one expert put it, “The Jurisdiction of Choice in Securitisation.”22
Even more broadly, Delaware has played a central role in transforming global banking from its traditional fare of funneling savings into productive investments toward more speculative, risky, fee-based banking models. “Delaware recognized the quantum shift in the financial services industry toward fee based activities,” said Swayze, “and it provided the legislative and regulatory framework to accommodate that shift.”23
Now here is the big point. I do not claim that this story constitutes an explosive new revelation about the ultimate causes of the latest mortgage and financial disasters. This was just one among the many tangled roots of the crisis—though an important one. My point is to show just what a tax haven is: a state captured by financial interests from elsewhere. Mark Twain said that history does not repeat itself—but it rhymes. My next story, from