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The U.S. Department of Treasury this month plans to infuse American Express with $3.39 billion of new capital as part of the $700 billion financial bailout program. The government on Dec. 23 approved American Express' participation in the Troubled Asset Relief Program Capital Purchase Program just a month after the Federal Reserve granted bank holding company status to both American Express Company and American Express Travel Related Services Company Inc.
In the TARP program, Amex is to issue and sell to the government $3.39 billion of preferred stock, along with warrants to purchase up to 15 percent more in Amex common stock. The program requires that all preferred shares are to pay dividends of 5 percent annually for the first five years and 9 percent annually thereafter to the government.
American Express plans to use the cash infusion to "make credit available" to its consumer and corporate customers, a company spokeswoman said this week. The company in recent months has reduced or eliminated lines of credit as it noticed a rise in delinquencies and defaults.
"We expect soft consumer spending to persist into 2009 and higher credit losses for at least the next couple of quarters. Given the challenged economic environment we are reviewing credit limits on some segments of our cardmember base. Our aim is to ensure we manage our balance sheet prudently and minimize the risk of cardmembers assuming too much debt during a time of economic stress," according to a company statement.
When the bank holding company status was approved in November, Amex said in a prepared statement that the approval "will provide American Express maximum flexibility and stability in this challenging economic environment." Amex chairman and CEO Kenneth Chenault said, "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 to support U.S. financial institutions. "This decision to become a bank holding company does not fundamentally change American Express' core focus on the payments industry, nor will it require any significant divestitures."
In particular, Amex would not have to divest of its travel agency to have bank holding company status. Federal regulations that prohibited banks from owning travel agencies were revised nearly a decade ago, according to sources. However, the Federal Reserve's Web site still displays a 1992 Bank Holding Company Supervision Manual that explained why it considered bank ownership of travel agencies as "impermissible activities," given that it is "not to be closely related to banking or managing or controlling banks." The section detailed how the Controller of the Currency in 1978 requested "all national banks then operating travel agencies to divest themselves of those agencies within a reasonable period of time not to exceed three years." In 1986, the board also "required, as a condition for approval of the application, the bank holding company to eliminate the travel reservations services from the roster of third-party database programs provided by the company."
In a history of regulations about nonbank activities of bank holding companies, a Federal Reserve staff member wrote in a 1990 article that one concern specific to travel agency ownership by banks was that "if all of the bank's commercial borrowers were required, as a condition of obtaining credit, to buy their business travel services from the bank holding company's travel agency, the independent travel agencies would be unable to complete." Thus, regulators in 1956 "restricted nonbank activities very severely," wrote J. Nellie Liang in the Federal Reserve Bulletin. A Federal Reserve board spokesman couldn't say when the regulations were changed, but sources said many restrictions on banks were lifted as part of the Gramm-Leach-Bliley Act of 1999.
While its new licensing as a bank holding company most certainly will mean "additional regulatory requirements, regulatory compliance and capital requirements," an American Express spokeswoman said the status should have no impact on its customers.
"Our core business stays the same. In terms of customers and customer servicing: That all remains the same. What this does is give us added flexibility for funding and gives us access to some of the government-funded programs, which is basically the reason that we sought this bank holding company status. In terms of our merchant relationships, cardmember relationships, travel relationships--everybody else, it's business as usual. We don't see that will have an impact on day-to-day operations of our business," Amex spokeswoman Joanna Lambert told The Beat.
As a condition to TARP aid, financial institutions must "modify or terminate all benefit plans, arrangements and agreements (including golden parachute agreements)" to comply with executive compensation and governance restrictions outlined by the government. Amex "will certainly follow all rules on top executives," the spokeswoman said.
As of year-end, the Treasury Department reported that it had purchased $188 billion of preferred shares and warrants in more than 200 U.S. financial institutions through TARP to loosen credit and energize the economy. In addition to Amex, Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and US Bancorp also were granted TARP aid. Discover Financial Services, the fourth-largest credit card network and owner of the Diners brand, was approved as a bank holding company in late December and applied for $1.2 billion in federal aid. Leading credit card networks MasterCard and Visa are ineligible for bank holding company status and federal aid.
Separately, American Express and Delta Air Lines last month announced a five-year extension of their co-branded credit card partnerships. The relationship includes co-branded consumer and small business cards, merchant acceptance, travel and American Express Membership Rewards relationships. As part of the new seven-year contract through January 2016, American Express immediately paid $1 billion for Delta SkyMiles. "Delta expects to receive an additional $1 billion from contract improvements through 2010," stated the companies in prepared remarks. Delta said the agreement could be worth "over $15 billion" over the seven years.
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