Tuesday, January 6, 2009
In exchange for the funds, AmEx agreed to issue and sell to the Treasury Department preferred stock worth approximately $3.39 billion and warrants for common stock worth up to 15 percent of that amount. The preferred shares will pay dividends at a rate of 5 percent annually for the first five years and thereafter 9 percent annually.
When the U.S. Federal Reserve approved AmEx's application to become a commercial bank in November 2008, the company gained access to a portion of TARP. Previously, the company would package securities backed by consumer loans and sell them to raise capital.
TARP was originally conceived to purchase mortgage-backed securities and other investments that became nearly impossible to sell in the wake of the housing market meltdown. These assets poisoned balance sheets, leading to massive write-offs that resulted in the collapse or near collapse of some of the country's biggest financial institutions.
Financial services firms have faced dwindling funding options as the credit crisis has mushroomed in recent months. AmEx said it sought funding from the government to replace operating capital it could no longer raise in the securities market. The securitization market, which AmEx exploited to raise operating capital, all but evaporated when investors avoided purchasing the company's stock.
Becoming a bank holding company allowed AmEx to apply for an array of government funding and lending programs. Regulators said they approved AmEx's application for TARP funds because of the "unusual and exigent circumstances" roiling the financial markets.
"The ability to avail themselves of government funding takes the dire scenarios off the table," said Richard Shane, Analyst for San Francisco-based consulting firm Jefferies & Co. "The company was staring at $24 billion of debt maturing over the next 12 months. While they may have been able to pay that off, gaining access to TARP funds removes any concerns about financial insolvency.
"In the long term, the increased regulatory oversight banks face, and the higher capital levels they have to maintain, may require American Express to scale back its lending, thereby reducing profit. This means potentially lower leverage going forward, as well as potentially diminished returns."
AmEx officials said the company was hit hard by mounting credit losses which, in turn, forced the company to cut nearly 10 percent (7,000 jobs) of its global workforce in October 2008 after profits fell 24 percent in the third quarter of 2008. Credit losses rose 50 percent in the same period.
"We are in a significant financial crisis," said Marshall Front, Chairman of Front Barnett Associates, a Chicago law firm. "The Treasury and the Fed are making up a game plan on the fly and they are trying to strengthen many financial institutions in order to get them through this period."
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