By Scott Lanman and Ari Levy
Nov. 10 (Bloomberg) -- American Express Co. won Federal Reserve approval to convert to a commercial bank, gaining access to funds as credit losses build and sales of asset-backed bonds plummet.
The Fed waived a 30-day waiting period on the application ``in light of the unusual and exigent circumstances affecting the financial markets,'' according to a statement released today in Washington. Chairman Ben S. Bernanke and his colleagues unanimously voted for the action.
Credit-card holders failed to repay loans in the third quarter at almost twice the rate of a year earlier, New York- based American Express said last month. With defaults rising along with the unemployment rate, October marked the first month since 1993 that card companies were unable to sell bonds backed by customer payments.
``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,'' he said today in a phone interview.
American Express, the largest U.S. credit-card company by purchases, joins former investment banks Goldman Sachs Group Inc. and Morgan Stanley, which were allowed by the Fed in September to become commercial banks.
Company's Assets
American Express has total consolidated assets of about $127 billion, the Fed said. The company already owns 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 controls deposits of about $7.2 billion, the Fed said. Centurion is being converted to a bank, the Fed order said.
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.
The company has posted four straight quarterly profit declines and lost about half its market value this year as it set aside more 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 just processes payments and said yesterday that quarterly adjusted profit doubled to $448 million.
Best Position
``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,'' Chief Executive Officer Kenneth Chenault said in a statement today. ``We will continue to build a larger deposit base to broaden our funding sources.''
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 tens of billions of dollars of the short-term debt to the central bank as credit became more difficult to obtain.
American Express fell $1.33, or 5.3 percent, to $23.98 at 4 p.m. on the New York Stock Exchange. It has tumbled 54 percent this year, the fourth-biggest decline in the Dow Jones Industrial Average.
To contact the reporters on this story: Scott Lanman in Washington at
slanman@bloomberg.net; Ari Levy in San Francisco at
alevy5@bloomberg.net
Last Updated: November 10, 2008 19:53 EST
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American Express Gets Fed Approval to Convert to Bank
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