American Express Wins Fed Approval to Become Bank (Update1)
By Ari Levy and Scott Lanman
Nov. 11 (Bloomberg) -- American Express Co. won U.S. Federal Reserve approval to become a commercial bank, gaining access to government funds as credit-card defaults climb with economies slowing around the world.
The Fed waived a 30-day waiting period on the application because of ``the unusual and exigent circumstances affecting the financial markets,'' according to a Fed statement released yesterday in Washington. Chairman Ben S. Bernanke and his colleagues unanimously approved the plan.
With defaults rising in the U.S. along with the unemployment rate, October marked the first month since 1993 that card companies were unable to sell bonds backed by customer payments. New York-based American Express said last month that credit-card holders failed to repay loans in the third quarter at almost twice the rate of a year earlier.
``That business has totally dried up,'' said Frederic Dickson, who helps oversee about $20 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. ``If I were a shareholder, it wouldn't send a very warm and fuzzy message to me.''
American Express, the largest U.S. credit-card company by purchases, joins securities firms Goldman Sachs Group Inc. and Morgan Stanley in gaining ``increased liquidity support'' as part of a $700 billion bailout of the banking system. American Express said its conversion won't require ``significant divestitures.''
At least 42 regional banks have received preliminary approval or said they're interested in participating in the government's Troubled Asset Relief Program. The Wall Street Journal reported today that it isn't clear whether American Express applied for financial aid provided through TARP.
``Given the continued volatility in the financial markets, we want to be best positioned to take advantage of the various programs the federal government has introduced,'' American Express Chief Executive Officer Kenneth I. Chenault said in a statement yesterday. ``We will continue to build a larger deposit base to broaden our funding sources.''
American Express rose 16 cents to $24.14 in German trading, after dropping 5.3 percent in New York yesterday. It has tumbled 54 percent this year, the fourth-biggest decline of 30 stocks in the Dow Jones Industrial Average.
American Express has total consolidated assets of about $127 billion and two bank units: American Express Centurion Bank, which operated as an industrial loan company under Federal Deposit Insurance Corp. supervision, and American Express Bank, which was regulated by the Office of Thrift Supervision. Each has assets of about $25 billion and deposits of about $7.2 billion, the Fed said. Centurion is being converted to a bank, according to the Fed order.
``It puts them in a better position to shift activities to the bank and to gain additional resources through use of the Fed's discount window,'' said Gil Schwartz, a former Fed counsel and now a partner at law firm Schwartz & Ballen in Washington.
In an Oct. 6 filing, American Express said that its bank units have access to the Fed's discount window and the company already had enough cash to last more than a year.
American Express used the Fed's commercial paper facility for the first time on Oct. 29, joining a growing list of borrowers that have sold short-term debt to the central bank as credit became more difficult to obtain.
Earnings Trail Visa
The company has posted four straight declines in quarterly profit and lost about half its market value this year as it set aside funds for soured credit-card debt. American Express makes loans to consumers, exposing it to defaults fueled by more than 700,000 U.S. job losses this year, unlike Visa Inc., which processes payments and said yesterday that quarterly adjusted earnings doubled to $448 million.
The move to become a commercial bank comes almost 15 years after American Express spun off investment bank Lehman Brothers Holdings Inc. to investors. American Express got into the brokerage business in the 1980s with acquisitions, including the purchase of Lehman Brothers Kuhn Loeb in 1984. Amid losses that stretched into the 1990s, the company shed its investment-banking operations.
To contact the reporters on this story: Ari Levy in San Francisco at firstname.lastname@example.org; Scott Lanman in Washington at email@example.com Last Updated: November 11, 2008 04:26 EST