Sneaking Suspicions
Archives-- November 19-December 2, 2006

This page includes posts from November 19-December 2, 2006 in the usual reverse order. Each posting on the home page is perma-linked to these archive pages.

December 2, 2006
A bit of an ingrate

Some states pride themselves on the taxes that they don’t collect.

Think of Delaware’s constant reminders that it has no general sales tax, or the way folks in Tennessee gasped in horror at the very idea of a personal income tax.

One way or another, however, the states have to find their money somewhere. Each makes calculated political and policy choices about the mix of taxes and fees they’ll ask businesses and individuals to pony up.

Over twenty years ago, for example, Delaware made a policy choice to encourage banks and other financial institutions to call the Diamond State their home. Among the incentives created for this purpose, the word “usury” would henceforth be treated as a quaint bit of history. The former legislated caps on interest rates would no longer put a brake on the banks’ ability to charge whatever the market would bear. 

All the banks had to do was to open an office in Delaware, staff it with a statutory minimum of employees (assumed to be Delawareans), and pay a bank franchise tax that became cheaper as the banks became bigger.

It worked like a charm.

Look in your wallet--most of the credit cards there show the Delaware connection. For this act of unintended generosity we Delawareans give thanks. Your relaxed attitude about debt created a significant burst of economic activity here, as well as a nice bit of tax revenues for our state’s coffers.

This year’s bank franchise tax revenues topped $132 million, and the state Division of Finance estimates that number will go past $155 million for Fiscal Year 2007.

Nonetheless, apparently one of the new banks with a Delaware connection has become a bit of an ingrate.

Lehman Brothers is an investment banking firm. Several years ago it developed a keen interest in making money in the mortgage market. Among other challenges, however, Lehman faced the daunting prospect of finding relatively safe sources of cash to finance this new venture.

It just so happened that a tiny little Delaware bank was struggling to survive, and Lehman Brothers came to the rescue. It bought up the Delaware Savings Bank, F.S.B., and changed its name to Lehman Brothers Bank, F.S.B.

Owning a Delaware bank gave Lehman some significant advantages. It could sell Certificates of Deposit, which would raise a lot of money for its national mortgage venture. Even more important, the Bank could obtain funds from the Pittsburgh office of the Federal Home Loan Bank.

Using the money from these two sources, Lehman Brothers Bank would finance the mortgages that another Lehman subsidiary would sell, along with others. The  mortgages would then be carried on the books of the Delaware bank for a relatively short period of time, usually 45-60 days, and then be sold to Lehman Brothers on very favorable terms--as one might expect for a bank that was essentially a captive of its owner.

Lehman kept the Delaware bank location in place, in downtown Wilmington, but otherwise ran many of the bank’s operations elsewhere. That remains the arrangement today, as a quick peek at their website shows.

As financial schemes go, it was a beautiful thing.

Despite its success at using its new Delaware resource, however, Lehman decided that it didn’t really need to pay the Delaware Bank Franchise Tax.

The State Bank Commissioner did not take kindly to this decision. He began proceedings to collect the franchise tax, based largely on the interest income Lehman earned on these mortgages while they were kept on the Delaware bank’s books. 

It added up quickly. The calculated assessments ranged from over $3.2 million in 2000 to over $11.5 million for 2003. The Commissioner also sought over $14 million in penalties for the same 2000-2003 period.

After losing at the Commissioner level, Lehman appealed to Superior Court, where the case was assigned to Fred Silverman, who was the Chief Deputy Attorney General when I began working for the Justice Department in 1987.

Silverman affirmed the Commissioner’s decision in a 38-page opinion issued on November 30. He treated Lehman’s multiple arguments with respect, but did not agree with any of them. Instead, he adopted most of the reasons noted by the Commissioner in determining that Lehman owed a significant franchise tax, based on its choice to use the Diamond State’s banking laws to enhance the firm’s overall bottom line. 

The lynchpin of the Commissioner’s decision is the fact that the Delaware tax is only imposed on interest income earned in Delaware. In computing the franchise tax, Delaware did not include other transactions, e.g. when the mortgages were purchased outside Delaware or any interest earned after their transfer to LBH in New York. [W]hat is done within the state’s own borders can be taxed. Here, Delaware only taxed what happened within the state. [notes omitted].

Delaware taxed the mortgage interest, for franchise tax purposes, only when the mortgages were held by and on the books at the Delaware Bank. Also, the funds used to purchase the mortgages came from the Bank. The Bank marshaled the FHLB funding received in Delaware with money earned from the CD sales in Delaware and channeled it to the borrowers. Therefore, the taxed income was earned in Delaware....

[T]he Bank’s Delaware activities, such as accepting CD deposits and accessing FHLB loans, substantially furthered the Bank’s mortgage business, contributing over 90% of the funds for it....

This [interest] income is attributable to Delaware since the funds from the Bank “fueled the entire mortgage banking business.” Without these funds, the Bank could not buy the mortgages. And, it was the Bank that bought the mortgages. (It does not matter that someone else, LBH, told the Bank which mortgages to buy.) Then, the Bank earned money from them while they were here. Delaware did not tax any other transactions.

Given the amount of money at stake, it’s certainly probable that Lehman will appeal this decision to the state supreme court. Nonetheless, given the comprehensive dismissal of each of its legal and constitutional arguments thus far, I think the only thing the appeal will do is give Lehman some extra time to find the money to pay the taxes it so obviously owes.

And as a Delaware taxpayer, I’m certainly willing to wait a little longer before Lehman eventually pays up--as long as it also pays the steep interest charges that are accumulating at a fast clip.

It’s only fair.

November 28, 2006
Not too surprised to learn this

I've seen this test at several blog sites, including these two, so I tried it:

What American accent do you have?
Your Result: Philadelphia

Your accent is as Philadelphian as a cheesesteak! If you're not from Philadelphia, then you're from someplace near there like south Jersey, Baltimore, or Wilmington. if you've ever journeyed to some far off place where people don't know that Philly has an accent, someone may have thought you talked a little weird even though they didn't have a clue what accent it was they heard.

The Midland
The Northeast
The South
The Inland North
The West
North Central
What American accent do you have?
Take More Quizzes

Yup. I'm originally from Wilmington.

Considering that my wife of 26.5 years is a native Philadelphian, surely there has also been some significant influence there, too--although we can easily distinguish our accents from each other.

When it comes to accents from all over, however, there's another story I've told before that you can read here.

November 27, 2006
A Gold-Plated Claude Winner

Sometimes a Claude-winning headline can just make your jaw drop.

As originally conceived and conferred, this award is for using an utterly banal description of such thudding obviousness as to drive far more folks away from reading the article below than those who are attracted to it, regardless of the inherent appeal of the material.

Nonetheless, sometimes the folks writing up these headers can really outdo themselves, as in this four-Claude winner from the New York Times:

Lure of Great Wealth Affects Career Choices


Just wow.

November 25, 2006
Birthday boy

Happy birthday to Charles Hill, the best Oklahoma blogger I know.

He's the only Oklahoma blogger I know, but still.

Work with me here, people.

November 23, 2006
Happy Thanksgiving

Happy Thanksgiving to you all!

About a dozen folks will be present for our dinner later today. As requested, I will be making my mashed potatoes for the assemblage, to go with the roast turkey, green beans, sweet potatoes with apricots, cranberries, cornbread muffins, salad, rolls, dressing, and other items.

If you need a short break from the football or the feasting where you are, you might like this book review of The Schoolboy, by Tony Rosa.

Rarely have I had my own memories of ninth grade so vividly brought back from where I thought they were successfully hidden.

November 22, 2006
Black Friday cometh

Just because the shopping malls and outlet centers on the day after Thanksgiving are notably crowded with shoppers doesn't mean you have to join them.

Instead, you can go visit fine arts studios and shop for unique gifts, from folks such as my friend Deb Appleby.

She is the artist/owner of The Studio on 24, and a master artisan in hand-blown glass.

We are both on the board of directors of the Rehoboth Beach Film Society, but that's not why I'm suggesting you visit her studio during the holiday season.

It's because she has some wonderful, beautiful works of art you should see and buy, such as these:

Check her out. Your friends and family will thank you for it.

November 20, 2006
Recommended reading

Glenn Reynolds pointed to a new post by Bruce Kesler, describing a kind of voter that I think fits me very well.

[T]here’s ... an underlying, consistent constituency in both parties called national security voters. Their interests are in a strong defense of America, Western values, and of those abroad who are oppressed or in whose lands or periphery dire threats to the West germinate and grow. National security voters are being either taken for granted or ignored by most Republican and Democrat leaders, treated as inconvenient to both’s overriding interest in controlling the government’s spending spigot to perpetuate their entrenchment and self-enrichment.

The description is similar to what I attempted to set out in a short post here about the national Democrats, just before Election Day.

Kesler's really onto something here in describing a large set of the citizenry who increasingly feel disregarded by both major parties on what they consider the central issue of the times.

Read the whole thing, as they say.

November 20, 2006
Twisted holiday catalog

This afternoon's mail brought a few initial pieces of the upcoming flood of holiday-related gift catalogs.

Fortunately, this season's collection started off very nicely, with the offerings from the folks at

A truly awesome display of irony, and all of them at reasonable prices.

I love the De-Motivational posters the best, including for example a photograph of a jogger running down a seemingly endless stretch of desert highway:





The Race For Quality Has No Finish Line--
So Technically, It's More Like a Death March.

Pure genius.


Contact Information:

Fritz Schranck
P.O. Box 88
Nassau, DE  19969

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© Frederick H. Schranck 2002-2006