American Express to Become Bank Holding Company

 

By ERIC DASH

American Express, the nation’s last big independent credit card company, said late Monday that it would transform into a bank holding company to strengthen its position in the market turmoil.

Federal Reserve banking regulators said they approved its application because of the “unusual and exigent circumstances” roiling financial markets and the company’s interest in tapping up to $3.8 billion in government money. As a full-fledged bank, American Express would gain greater access to the Treasury Department’s bailout plan for banks, a move that might allow it to lend more freely and perhaps acquire a larger deposit-taking institution.

American Express customers are unlikely to notice the changes. But Monday’s announcement may also represent the end of financial companies operating a single line of business and depending on the capital markets for financing.

Goldman Sachs and Morgan Stanley recently transformed themselves from investment banks to bank holding companies after being battered by the markets. Big lenders like GMAC, the finance company partly owned by General Motors, and General Electric’s financial subsidiary have similarly been considering becoming banks.

American Express executives have publicly maintained they did not need to become a bank holding company, although they also never completely ruled out that option. But when their financing costs soared as the commercial paper markets froze , the company increasingly recognized it needed to diversify its sources of financing. The company applied for banking holding company status about two or three weeks ago, according to a person with direct knowledge of the situation.

Federal Reserve regulators sped up American Express’s request because of the market turbulence and the company’s desire to apply for the government investment program, which had a Nov. 14 deadline. Typically, the process can take 45 days or more; American Express got its license in about half that time.

American Express had already operated a commercial bank and a savings bank supervised by federal regulators. But the bulk of its assets were not in those institutions. As a bank holding company, these assets are now under federal supervision, a move that expands the amount of financing it can request from the government. That means the bank could qualify for up to $3.6 billion of the Treasury Department’s money, instead of just a small portion.

“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 or may introduce,” said Kenneth I. Chenault, the chairman and chief executive of American Express. “We will continue to build a larger deposit base to broaden our funding sources.”

His announcement came as American Express reported a 24 percent drop in third-quarter profit and said it would slash 10 percent of its work force as it prepared to write off a larger pool of credit card loans. American Express wrote off about 5.9 percent of these loans in the third quarter.