American Express Is Now a Bank

One trend we point to for 2009 is the wave of personal bankruptcies that shall wash over Americans; we've written story after story after story about how people are now hiding out in their last option: credit cards - as all other places to stash debt have been shut off or used up.

Ironically the credit card companies successfully lobbied to make personal bankruptcies much harder which led to a rash of filings a few (2?) years ago before the rules changed. Now, we will watch in great irony in 2009-2010 as the politicians who were bought and paid off bring up the credit card company executives and make a public spectacle of their unfair practices; practices the politicians were happy to approve in return for campaign contributions.

We've mentioned in the past the major credit card companies such as Capital One (COF) and Discover (DFS) as excellent short ideas - last night we received news that American Express (AXP) is being proactive on what is going to lie ahead and turning into a bank holding company. Why would they do such a thing? Oh - simply to get access to our tax money. What is supposed to be an "emergency" point of funding is now becoming the standard - that's dangerous thinking. Instead of using the bond market to fund themselves everyone now just waits for Atlas (Federal Reserve) to fund them - those are some mighty broad shoulders.

Can't wait to drive around town and check out the new "American Express Bank" outlets.... really how many banks do we need?

• American Express wants your deposits. (not really)
• The Federal Reserve on Monday granted AmEx's request to become a commercial bank, opening the door for the credit card giant to accept deposits and permanently access financing from the Fed. (yes the latter point is more like it) The approval represented the latest reshaping of the financial services industry, which is undergoing its worst credit crisis in decades. In announcing the action, the Fed cited "emergency conditions." AmEx filed its application with the Fed on Nov. 5.
• The Fed's approval for American Express was similar to the decision it made in September to transform the country's two biggest investment banks, Goldman Sachs Group Inc. and Morgan Stanley, into bank holding companies.
• In the case of AmEx, with more consumers having trouble paying their bills, it's seen the value of its primary assets decline. That's made it harder for the company to borrow to pay for daily operations.
• In exchange for Fed oversight, AmEx said it wants "greater access" to government-sponsored financial assistance programs.
• The company revealed severe financial troubles late last month, when it laid off about 7,000 people, or 10 percent of its global work force, and said it did not expect to meet its targets until the economic climate improved.
• "You can't let AmEx fail, is basically what the Fed is deciding." (eyeroll)
• "It's showing the trickle-down effect. This isn't for mortgages; this is for cards," Gillen said. "
• In the next six months, AmEx will need $4 billion in net commercial paper and $7 billiion of long-term debt.
• A growing number of financial institutions are looking to buy banks and gather deposits. "There's a lot of competition for deposits now, and pricing for deposits is still high," said Blake Howells, director of equity research at Becker Capital Management in Portland, Oregon.

What a state of affairs.

Comments

[herbert hoover:]

I've just declared myself a bank. Can the Fed lend me a couple billion?

2008 Nov 11 05:13 PM

[2houndz:]

Great - Who's next? GM loans money. GE? They have a huge capital arm. Maybe they should be a bank. Can the REIT's qualify as banks? They were added to the no-short list along with the financial stocks, so they are halfway there.

BTW - I hope this clueless blogger above is not the real Obama. Why would someone post such a strong opinion when he clearly has no idea what he's talking about? Not even a vague concept of how business works. Hey wait a minute - I wonder if he really IS the Prez Elect?

2008 Nov 11 10:08 PM

[icandoitdon:]

i think barakobama is secretely either bernake or paulson. they both believe in free lunches and half-truths.

here's a little remedial education on why charge off's do matter :

In a growing economy, charge offs grow but so does income. everyone is happy, including the idiots who played the credit card company. but in a severely contracting economy, charge offs grow as income shrinks. and if income shrinks deeply enough and charge offs grow disproportionaly, that can be a big problem. income wouldn't just shrink...it would collapse. throw a credit crunch into the mix, resulting from years of credit abuse by consumers and businesses alike, and it's a prescription for failure of any institution that depends heavily on credit as both a borrower and lender...particularly the cheap and plentiful kind that we've had for the last 6 years.

AMEX relies on a growing economy to cover its growing charge off's, due in no small part to declining credit standards, which have accelerated in recent years. that prop has been kicked out from under them. it also relys on cheap and plentiful credit to fund its day to day operations. that prop is gone too. without it, their profitability goes into the toilet. if profitability goes into the toilet so does their credit rating. without an investment grade credit rating they might as well shut their doors.

AMEX has looked into the future and doesn't like what it sees...a severly contracting economy, tapped out consumers, increasingly high charge offs, reduced profitability and limited access to credit at much higher prices than they've historically paid. that's why they became a bank...so they could assure themselves of an endless supply of funds at government rates rather than market rates.

AMEX would never have made this move if not for fear that their traditional franchise is impaired.

2008 Nov 12 01:17 AM

[kurt walter:]

This bailout madness needs to stop right now. I said 3 months ago that there should be NO taxpayer funded bailouts. Banks should dilute shareholders and offer more common and preferred shares in the open market. Let investors take all the risk and reward. If some banks can't get enough investor money to stay alive, well, then go bankrupt. You are out of business. This bailout situation has become very embarrassing.

2008 Nov 12 06:48 PM

[2houndz:]

Just to make a footnote in history to my superior predictions above, GE received FDIC guarantees today.
I'm not sure whether to gloat or throw up.

2008 Nov 12 10:08 PM

[ozcutty2:]

I don't think Amex are in that much trouble, after all they just won a 4 billion dollar legal settleement from v and MA. Probably just a case of why look a gift horse in the mouth? if the fed wants to give me cheap cash am i really going to turn it down?

Also discover announced that it will use its deposits from Discover bank rather than commercial paper because its cheaper right now.

2008 Nov 12 10:35 PM

[Konsta:]

this market sucks major ass, what a f----ing nightmare. Discover has almost 7 billion in cash and is getting over 2 billion from V and MA. With a market cap of 3.85 billion, that stock price makes no sense. In the words of Keynes, the market can stay irrational longer than you can stay solvent. Hopefully that will not be the case and, it will correct upwards. Cramer is great to have predicted this, I did not take him seriously enough since he is wrong so much. Oh well, you gotta play he violin as the ship goes down, and if it doesn't so much the better. -Konstantin

long: discover (painfully at the moment)

2008 Nov 18 04:13 PM

[Konsta:]

Herbert, ha ha ha

2008 Nov 18 04:15 PM