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AmEx clears hurdle to secure loans from Fed

The Fed on granted a request by American Express Co. to become a bank holding company, opening the door for the credit card giant to access low-cost financing from the Fed.
/ Source: The Associated Press

American Express wants your deposits.

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.

The Fed said it had approved the application for American Express and a related company, American Express Travel Related Services Co. Inc., to become bank holding companies.

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.

That move bolstered the two institutions after the collapse of Lehman Brothers, which became the largest bankruptcy filing in U.S. history. The investment banks’ troubles stemmed from bad bets on the housing market, including mortgage-backed securities.

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 a statement, AmEx said becoming a bank holding company will give it “maximum flexibility and stability in this challenging economic environment.” 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.

The transformation of AmEx into a commercial bank opens it up to “an infusion of funds,” said Red Gillen, a credit card analyst with research and consulting firm Celent LLC. “You can’t let AmEx fail, is basically what the Fed is deciding.”

AmEx last month reported that its profit fell 24 percent in the third quarter as cardholders restrained their spending and had more trouble paying off debt.

In its quarterly filing with the Securities and Exchange Commission on Oct. 31, the company said it expected write-offs in its credit card portfolio to continue to increase in the fourth quarter and into next year.

The New York-based company has reported four straight quarters of profit declines as a rising number of consumers struggle in the face of the worsening economic downturn.

While Morgan Stanley and Goldman Sachs became bank holding companies in September, AmEx is the first card company to do so.

“It’s showing the trickle-down effect. This isn’t for mortgages; this is for cards,” Gillen said. “Credit cards were kind of the credit source of last resort. You could borrow against that as long as your credit wasn’t reduced. People have gone from mortgages to home equity loans to credit cards.”

Sung Won Sohn, an economist at the Smith School of Business at California State University, said that as a bank holding company, AmEx hopes to greatly expand its resources and avoid the fate of other companies that had to depend heavily on commercial loans to operate.

“As a bank holding company, they will have a lot more flexibility,” Sohn said.