|
||||||||||
As the fall-out from the subprime mortgage crisis spurred a worsening worldwide credit crisis in the last half of 2008, U.S. financial institutions underwent massive restructuring in an effort to navigate the global credit crunch and a slowdown in consumer spending.
At the end of 2008, credit card issuer American Express won approval from the Federal Reserve to become a bank holding company. The approval was part of a broad reshaping of the U.S. financial services industry, as it sought ways to deal with the worst economic crisis in decades.
Becoming a bank gave Amex a two-fold advantage. It enabled it to build a larger deposit foundation, creating a broader, and more stable funding base. In addition, the conversion gave Amex access to Federal funding and government rescue programs, particularly to the $700 billion Troubled Assets Relief Program (TARP), which was created at the end of 2008 to bail out troubled U.S. financial institutions and stabilize the financial services sector.
As a result of its new status as a bank holding company, American Express by the end of 2008 was approved to get a $3.39 billion capital infusion from the TARP bailout money to bolster it for the challenges in an extended economic downturn. In return for the TARP funds, Amex agreed to issue preferred stock to the Treasury of $3.39 billion with a 5% annual dividend rate to the Treasury for the first five years and 9% annually thereafter.
In addition, Amex gained permanent access to Fed funds like other bank holding companies. The company also raised $4.6 billion by selling certificates of deposit in order to repay long-term debt.
2008 proved a challenging year for Amex with dropping profits and a layoff of 7000 people, 10% of its global work force. American Express saw the value of its primary assets decline as financially strapped consumers had trouble paying their bills. That made it increasingly difficult for the company to borrow the money it needed to pay for daily operations and to sell bonds backed by customer payments.
American Express became the third financial company to convert to a bank holding company in 2008, following in the foot steps of stand-alone investment banks Goldman Sachs and Morgan Stanley, which both converted to bank holding status in the wake of the Lehman Brothers bankruptcy. While the transition to a bank does give Amex access to TARP money and any future government bailout programs, it also subjects it to increased oversight by the Federal Reserve.
