American Express Banks on Federal Help

As more Americans struggle to pay off credit cards, American Express makes a bold move designed to win access to more funding

By Ben Steverman

American Express (AXP) might have been feeling left out of the government's $700 billion financial bailout package. But now, as the company's consumer credit quality deteriorates faster than rivals while the economy falls into recession, it can get help from Uncle Sam.

On Nov. 10, the Federal Reserve approved American Express' application to become a bank holding company. Until now, AmEx couldn't use the same tools as its rival credit-card companies to raise cash. Under the government's bailout plan, banks regulated by the Federal Reserve could rely on cheap funding from the Fed and from other efforts by the government to prop up the banking system. Also, these banks can compete for deposits from bank customers, another relatively cheap form of funding.

AmEx's rivals that are both banks and big credit issuers that are under the Fed's watch include JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Capital One Financial (COF), and Discover Financial (DFS).

Analysts Like the Move

Now, American Express is joining that club. The move will provide AmEx "maximum flexibility and stability in this challenging economic environment," the firm said in a statement. "We want to be best positioned to take advantage of the various programs the federal government has introduced or may introduce to support U.S. financial institutions," said Kenneth Chenault, the company's chairman and chief executive.

The surprise announcement generally got positive reviews from analysts. "Becoming a bank holding company will increase regulatory oversight, but should significantly enhance American Express' ability to fund itself," Credit Suisse (CS) analyst Moshe Orenbuch wrote. (Credit Suisse has provided investment banking services to American Express.)

But investors reacted to the news by selling AmEx stock. The shares dropped 6.6% on Nov. 11 to close at 22.40. That's off almost 57% from the start of the year.

Doubts About Securitization

Perhaps investors recognized AmEx's bold decision as a sign of the serious problems that the firm's executives foresee on the horizon. The conversion to a bank holding company is "the prudent action," said Scott Valentin of FBR Capital Markets (FBR), but it "evidences the significant funding stress we believe [American Express] is experiencing." Oppenheimer (OPY) analyst Meredith Whitney said American Express is assuming "a protracted, worst-case funding scenario."

A top concern is the fact that credit market turmoil has wreaked havoc on the securitization market, a process by which credit-card companies were used to raising money by issuing securities based on credit-card debt. In a statement Nov. 11, Standard & Poor's Ratings Service warned "it remains unclear how vibrant or cost-effective the securitization markets will be after the current tumultuous period." S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies (MHP).