Thursday, November 13, 2008

AMEX Seeks Bailout

American Express Co. is seeking $3.5 billion in funds under the government's plan to directly invest in financial firms, according to a Wednesday report in The Wall Street Journal citing unnamed sources.

Earlier this week, American Express received approval from the Federal Reserve to become a bank holding company, which is a similar structure to traditional commercial banks. The credit card company now has access to financing from the Fed and the ability to grow a large deposit base.

The increased funding opportunities through government programs, including the potential $3.5 billion investment, could be a huge boost to American Express as one of its primary sources of funding has nearly disappeared amid the ongoing credit crisis.

American Express relied on packaging pools of credit card debt and selling them to investors in the securitization market. As investors have shied away from purchasing all but the safest forms of debt, the market for credit card-backed securities has dwindled.

American Express is also facing a slowdown in the broader economy, which has led to more customers missing payments and cutting back on spending, hurting the company's profitability.

Third-quarter profit at American Express fell 24 percent to $815 million, or 70 cents a share, the company said last month. The card company took a $1.36 billion provision for loan losses, 51 percent higher than the year-ago quarter.

The $3.5 billion from the government could help alleviate some of the company's funding problem and help bolster reserves to protect against future losses.

Last month, the government approved a $700 billion bailout package that allows it to directly invest in financial firms. The companies can apply for a certain amount of cash based on their assets and in return the government receives preferred stock in the company and warrants to purchase common shares.

The government set up the plan in an effort to thaw the nearly frozen credit markets, which come under even more pressure in September when investment bank Lehman Brothers Holdings Inc. filed for bankruptcy protection and Washington Mutual Inc. failed.

Shortly after that time, investment banks Goldman Sachs Group Inc. and Morgan Stanley received approval to change to bank holding companies in a similar move to what American Express just completed.

American Express did not immediately return calls seeking confirmation of the plan.

Source - Yahoo Finance


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