Federal Government Bailout for American Express
American Express has been the high end credit card company for years, never aiming at the Fed's low cost financing or any other source of funds from aside. But the stressed economy effects and a surprisingly high delinquency rate at the company made it reconsider its financial model and seek the federal bailout.
Before it sent a request for the Federal Reserve to turn it into a bank holding company, American Express expected to hold out with the help of the $700 billion bailout package. They failed and the application to become a bank holding company seemed the only way to survive the hard economic environment and pass it with minimum changes and loss. November, 10, the Federal Reserve approved their application which means the company will now enjoy a range of privileges as well as new restrictions.
Along with the new obligations and business reconstruction, American Express gets just what the doctor ordered during the economy crisis - the urgent funds to help the giant company stay aswim and avoid serious financial problems. December, 23 Amex announced it was going to receive $3.39 billion from that $700 bailout package in exchange for the regulatory oversight on the Federal government side.
Critics see the decision to become a bank holding company as an attempt to offset great losses from its credit card business. Who could ever think that the wealthy and credit conscientious American Express customers would ever find themselves unable to pay off credit card balances? Such a thing should never have happened to a card company always a bit too much choosy about its clients. According to recent analysis, American Express has now reached a delinquency rate close to that of the national average. This bailout is expected to help the company through with minimum changes in consumer and business credit card service, although the prime focus of its policy - serving the wealthy layer of society, - may be lost. It may not mean that it would roll back its lowest interest, no fees and exclusive rewards card applications such as those for frequent flyers, but it certainly may pose risk to the company's upscale brand image.
American Express does not seem to be much concerned about its core focus, however, and as chief executive of the company said, it is more important to gain the advantage of the federal government's various programs to support US financial institutions. Now the company will have similar options as its rivals, Chase, Citigroup and Capital One and will be able to consistently borrow low cost federal money to build up a solid deposit base.
Another possible outcome of becoming a bank holding company and receiving cheap financing is turning into the business of debit cards. A decision to reshape has not been announced but it might, given consumers' increased use of debit cards in the present environment.
The capital injection was not granted for free and American Express agreed to sell its preferred stock and warrants to the US Treasury.