In an effort to remain afloat amid the global financial crisis and the dramatic slowdown of consumer spending, New York-based American Express, the United States’ largest credit-card company measured by purchases, announced that it had received approval from the Federal Reserve to operate as a commercial bank. This follows on the heels of major investment banks Morgan Stanley and Goldman Sachs making the move to commercial banking. In view of the current financial crisis which calls for swift action, the Fed fast-tracked the application’s approval by waiving the thirty-day waiting period that would normally apply to an application of this nature.
Statistics reveal that credit-card holders are defaulting on payments at almost twice the rate they did during a comparative period a year ago. With the unemployment rate rising, it is anticipated that default rates will continue to rise as well. The impact of this can be seen in the fact that October marked the first month in fifteen years that credit-card companies were unable to sell bonds backed by customer payments, simply because customer payments are no longer guaranteed. American Express has assured investors that the conversion to commercial banking will not require, or result in, any significant divestment.
American Express (AmEx) chief executive, Kenneth Chenault, noted that AmEx wants to be in the best position to receive assistance via the various financial institution rescue programs that the Federal Reserve is putting into place. Moreover, the move to commercial banking will allow AmEx the opportunity to grow its deposits, which is a more stable form of funding. AmEx has total consolidated assets of approximately $127 billion and currently operates a savings and loan company known as the American Express Bank, as well as a small bank known as American Express Centurion Bank, and the two combined have around $14.4 billion in deposits and over $50 billion in assets.
American Express fell 5.3 percent on Monday to close at $23.98 on the New York Stock Exchange. It has dropped by 54 percent this year and is recorded as the fourth largest decline measured by the Dow Jones Industrial Average. AmEx has experienced four consecutive quarterly profit declines, losing about half of its market value primarily due to credit-card debt defaults. AmEx announced in October that it would be laying off 7,000 employees in a cost cutting effort which would include cutting spending on business consultants, travel and entertainment, business development and the streamlining of costs related to rewards programs. Credit rating agency Moody’s downgraded AmEx in October based on concerns regarding the company’s ability to withstand a prolonged recession. Economists are predicting that the global economy will continue weakening well into 2009.
