Does Everybody Get To Be a Bank? Now Amex Joins the Club

James Carville said that when he died, he wanted to come back as the bond market, that way he could intimidate everybody. If asked today, i suspect he’d ask to come back as a bank. They get all the bennies.

Seriously, Amex becoming a bank? This is patently ludicrous. Amex poses no systemic risk, so they don’t have a case for needing access to the Fed window. They once owned a bank in connection with their wealth management business, but that is a thing of the past.

The process has now become ludicrous. Amex gets to become a bank to help with its credit card business, which in case you have not been paying attention, has been cutting credit lines to existing customers en masse (I have heard of a case with eight figure net worth, infrequent user, impeccable credit score, who nevertheless had his credit line cut by 50%).

And since no credit card bonds were sold last month, the purpose of this exercise is so that Amex can borrow against its credit card receivables at the Fed window at preferred rates. I am not making this up.

Willem Buiter once said that US regs permitted the Fed to lend against any collateral, including a dead dog. We are getting perilously close to that.

America needs to get its consumption down, but apparently the powers that be are going to use any trick possible to try to keep the American shop-a-holic habit going.

From Bloomberg:

American Express Co. won Federal Reserve approval to convert to a commercial bank.

The Fed waived the normal 30-day waiting period on the application “in light of the unusual and exigent circumstances affecting the financial markets,” the central bank said ….

Sales of credit card asset-backed bonds have plummeted, hindering the company’s ability to raise cash to fund new loans. The Fed lets banks post consumer debt, such as credit card receivables, as collateral for loans from its discount window, which carry a 1.25 percent interest rate….

The company has posted four straight quarterly profit declines and lost about half its market value this year as it set aside more for soured credit-card debt. American Express makes loans to consumers, exposing it to defaults fueled by more than 700,000 U.S. job losses this year, unlike Visa Inc., which just processes payments and said yesterday that quarterly adjusted profit doubled to $448 million.

American Express used the Federal Reserve’s commercial paper facility for the first time on Oct. 29, joining a growing list of borrowers that have sold tens of billions of dollars of the short-term debt to the central bank as credit became more difficult to obtain.

So Amex, because it has a different business mix than Visa (remember, Amex is in the corporate travel business business but not payments processing) gets to cry to the Fed for help? These were business decisions. You eat your own cooking. That is, unless you are in the US and have the right friends in power.

You can read the Fed press release here.

I suppose the upside is if they fail to restore your credit line, you can now complaint to your Congressman and Barney Frank.

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  1. Owner Earnings

    Bailouts’ Unintended Consequences

    Within the next 12 months the yields on treasuries will begin to rise. This is because the fools (China etc.) who have been willing to accept low interest rates will be tapped (China has a stimulus package of their own to fund etc.) out.

    This will cause all interest rates to rise, which will make the housing market worse. If it gets too much worse then the stability of the financial system will once again be the main concern.

    Shorting treasuries seems like a rational investment, but yields may decrease before they increase.

  2. Anonymous

    @ owner earnings:
    won’t we just be asked to buy bonds a la wwII.

    Like that Rosie the Riveter poster: We can do it.

    Yes we can.

  3. Viv

    The scam goes on.

    It’s become too much at this point to even keep track of all the bailouts, bail ins, bail all’s. Stimulus packages, rate cuts, countries faltering, shipping crisis, credit crunches, banking madness etc etc etc. Pretty soon we’ll start talking about real money! ;)

  4. Anonymous

    Just 2 weeks ago, I received a letter from AmEx to INCREASE my credit line by $5k… guess I must be a (really) good customer…

  5. SlimCarlos

    @ Yves:

    You were shocked and indignant re TARP. You were shcoked and indignant re the AIG top-up. Now you are shocked and indignant re Amex “bank protection.” In passing, you were shocked and indignant at most of the many measures in between.

    I am not sure why. I mean, the way they are going about this is crooked and inefficient — agreed. But that they are going about it — that is, pumping money like a dancing firehose run amok — should hardly come as a surprise.

    The US financial system is insolvent, both by a balance sheet test and a cash flow test.

    The Fed’s balance sheet has ballooned to $2t. It will balloon to $5t. Then $10t. Then $20t. Once all is said and done it will be brimming with on-the-run treasuries.

    I am only shocked and indignant at the financial community’s state of denial at this most obvious reality.

  6. Matt Dubuque

    Amex did not become a bank, despite what the perennially uninformed American press is howling about.

    They became a bank holding company.

    An enormous difference.

    Look for them to acquire a retail bank of some sort in the near to intermediate term.

    New business model.

    Matt Dubuque

  7. Anonymous

    I’m shocked and indignant that they are pumping money into all these financial companies. Like we need more financial companies …

    Now if you want me to shut up, allow ME to convert to a Bank Holding Company and get a line from the Fed, and I’ll be a good boy.

  8. Jonathan Bernstein

    Maybe this is slightly off-topic, but Ritholtz flagged a WaPo article that was the first thing I have seen about the specifics of the type of tax break that was involved when Wachovia went on the block. I remember that you mentioned the possibility that tax breaks for prospective Wachovia acquirers could be substantial but you I remember you (and the rest of us) being short on details at the time (maybe you have covered it since and I missed it.) I found WaPo's article short on specifics but it provided enough clues for me to search out more detail.

    Apparently the Treasury "repealed" by fiat, Internal Revenue Code section 382, which formerly limited the use by acquirers, of target company Net Operating Loss Carryforwards (NOLs) and Net Unrealized Built-in Losses (NUBILs). Now an acquirer can take advantage of these built-in tax losses, which otherwise would have expired for the most part due to change in control.

    Washington law firm Arnold & Porter, has told clients that repeal of section 182 could cost taxpayers $140 billion, though I couldn't see how they calculated this.

    Any way you slice it this was a very big deal, and Paulson showed more of his breathtaking arrogance by undoing this key provision of the Tax Reform Act of 1986. W raised many people's hackles by signing new bills into law and then undoing provisions he didn't like with Presidential signing statements. Paulson did Bush one better in repealing an important piece of settled law, by issuing a Treasury Department bulletin.

    Looks like the law is anything the Executive says it is. So much for the separation of powers.

  9. Yves Smith


    Goldman and Morgan Stanley also both became bank holding companies. The purpose, the SOLE purpose, was to give them easier access to Fed facilities and programs.

    And had you bothered to read the press release, both American Express Company and American Express Travel Related Services became BHCAs. There is NO way TRS is acquiring a bank, none. And knowing Amex (they have been a client) I sincerely doubt they are interested in acquiring a retail bank (and per my comment in the post, they owned one earlier without being a BHCA).

  10. ruetheday

    Maybe GM and Chrysler are doing it wrong. Maybe they should abandon their pursuit of the government loans and convert to bank holding companies instead.

    Seriously, I’m not fan of government bailouts in general. But it is getting increasingly difficult to understand how the current administration can insist on NOT bailing out the auto industry, which directly employs hundreds of thousands and indirectly employs millions when you count suppliers and dealers, all the while throwing money at any financial services firm out there.

  11. EEgineer

    One bank to rule them all…

    At some point the Fed may wind up holding a significant fraction of the world’s assets as collateral, either directly or indirectly. What’s to stop them from calling their loans in a deflationary crunch and essentially taking possession or control of the majority of the world’s financial system?

  12. S

    Amex has said that becoming a bank or acquiring one would entail some restrictions and resulgations, namely capital, would kill its 25%+ ROE model. Guess the affluent model doesn’t work either.

  13. tv

    “One bank to rule them all…

    At some point the Fed may wind up holding a significant fraction of the world’s assets as collateral, either directly or indirectly. What’s to stop them from calling their loans in a deflationary crunch and essentially taking possession or control of the majority of the world’s financial system?”

    Nothing except nuclear weapons of another superpower.

    The Fed is the Superbank.

    To quote T Jefferson:

    f the American people ever allow banks to issue their currency, first by inflation and then by deflation [by having to maintain a vital circulation by perpetually re-borrowing principal and interest as subsequent sums of debt, increased perpetually so much as periodic interest], the banks and [bank owned] corporations which will grow up around them will deprive the people of all property, until their children wake homeless on the continent their fathers conquered.


  14. Stephen

    EEgineer said,

    “One bank to rule them all…”

    Let me add,

    “And in the darkness, bind them.”

    Well up here in Canada Amex became a bank a long time ago. But yes this is about accessing cheap funding. I know GE is an Industrial Bank, can they access the fed window as one of those? If not then I suspect GE will become a Bank Holding Company soon.

  15. doc holiday

    This should be stored under Banana Republic and Buffett Corruption — this is just awful! Paulson is on drugs and is out of control and needs to be stopped at all costs ASAP!

  16. Anonymous

    I share the anger and frustration, but on a lighter note have to say this becoming like the crucifixion scene at the end of ‘The Life of Brian’.

    “…I’m a Bank and so is my wife.”

  17. doc holiday

    It also hits me that FTC is nowhere to be found in terms of antitrust impacts or to review this in terms of what will happen to other credit card companies or financial service organizations.. The y are literally making this carp up on the fly and have no idea what they are doing. This is like a coup and an attempt to add chaos to the insanity of The TARP Circus which is related to probably 14 new fed programs which essentially usurp more and more control from Congress and taxpayers …. there is chaos, otherwise we would have some leadership stepping up to the plate to see wait — slow down we need to discuss this and have a debate on the merits of what is happening here…. Very unreal stuff here! Very illegal in my mind!!!

  18. Anonymous

    It’s only a mater of time before this phony banana republic economy and it’s corrupt political system come tumbling down. The sooner the better. Got Guns?

  19. SlimCarlos

    @ anon (8:31)

    >> I'm shocked and indignant that they are pumping money into all these financial companies. Like we need more financial companies …

    Agreed. This is inefficient and smacks of log-rolling. A massive fiscal effort, with broad-based liquidity injections, makes far more sense. And the deficits funding needs should be financed by the Fed. Otherwise, the exercise is pointless — you are just taking from Peter to prop up Paul.

    Frankly, I believe the current brain trust is too deer-in-the-headlights to know what to do. They saw the system as their wonderful creation and are gobsmacked that it is now coming apart at the seams. You need some distance to make good choices. There is no distance here.

    We shall see what Obama does. God, I hope he chooses someone for Treasury who's done something else in life besides peddle bonds or work M&A. We all will need someone with some old fashioned common sense.

  20. Owner Earnings

    All these “new founded banks” will be ok as long as they don’t get downgraded. See GNW as an example of what happens if they do…

    “@ owner earnings:
    won’t we just be asked to buy bonds a la wwII.”

    No one has any money to buy them! HA! (Not sure why that’s funny, but right now it is.)

  21. Eric

    I’ve said it for years. Why can’t I have a window at the Fed?? Frankly, with the computerization that is available, the Fed could disintermediate the rest of the banks and handle everybody’s checking, cd’s, auto/house loan, etc. Who needs all those hangers on in the financial services industry?? Let them do meaningful work… like wait tables.

  22. Anonymous

    "We shall see what Obama does. God, I hope he chooses someone for Treasury who's done something else in life besides peddle bonds or work M&A. We all will need someone with some old fashioned common sense."

    Paul Volcker is worth at least 1000points on the Dow, either as Treasury Secretary (for which he is too old) or top Presidential Economic Advisor.

  23. Anonymous

    When can I put my “Road Warrior” leather jacket on and carry a shot-gun?

    Seems like it could be as much as months!

  24. Anonymous

    More money to AIG, now AMEX gets to suck on the spigot too.

    It’s very obvious that the Bush administration has every intention of leaving the earth scorched for Obama.

  25. tompain

    I don’t know, is this really so terrible? So they will get to borrow from the Fed if they need to. They’re pretty unlikely to default, are they not? They are after all still profitable, and their collateral is ok, and the loan is overcollateralized. And in exchange for access to the Fed, they will submit to a huge increase in regulation and oversight – exactly what almost everyone is clamoring for. In general I am not crazy about having the Fed grow and grow its balance sheet but in the scheme of what’s going on, this doesn’t seem to me to be such a big deal. Put the question another way: if AXP wants to become a bank holdco, what would be the grounds for turning them down? The only real unusual thing here is waiving the 30 day period, but what difference would that have made to the ultimate decision?

  26. SlimCarlos

    @ anon (11:02)

    >> Paul Volcker is worth at least 1000points on the Dow, either as Treasury Secretary (for which he is too old) or top Presidential Economic Advisor.

    Why would a guy with a "hard money" image goose the Dow for 1000 pts? You'd think it would be just the opposite.

    Maybe Volker was the right guy for the time, but aren't times now quite radically different? Who would he "get tough" with?

    I would instead look for a guy like Paul O'Neil, a guy with real world business experience. The finance guys screwed this up. We need a businessman to fix it.

    On a related note, Greenspan was in my hometown last week where he gave a lunchtime speech to the local CFA society. I was not there, but was told that he said all he needed to fix the current problem was for asset prices to go back up.

    Scoff, scoff — I know. But truth be told, the guy is right. Inflate the assets or shrink the debt. T'is the only way out.

    Which is really just another way of saying we need devaluation.

  27. Anonymous

    I’ve got a ceramic piggy bank…

    onik, I’m a bank.

    Interesting, the historical fusion of
    pig + bank!

  28. alexblack

    I like the idea above of GM just becoming a bank. The Fed can add a drive-up window to their regular window. Seeing how the Fed is valuing collateral, GM can just have its employees drive over in unsold SUV’s:

    “Hi, I’m with GM. Need a loan on this.”

    “Hi, welcome to the Fed. Let’s see, that’s a beauty of a car. I’d say it’s worth about half a million. We’ll lend you $450,000 on that. Just drive up to the window and get your check, and leave the keys in the car.”


    “Now, you be sure to pay back that $450,000. If you don’t, we won’t give your car back to you.”

    “Oh, don’t worry. I love this car.”

    “Ok. Have a nice day. Next! Oh, gee, that one’s a beauty as well. Nice color…..”

  29. alexblack

    Who would Paul Volcker get tough with? Middle-aged women who have suddenly stopped shopping, and instead saving what they can in case they lose their jobs. He’ll pimp-slap them all back to Nordstrom.

  30. cent21

    I think I’m pretty much in the same frame of mind. Get consumption to a sustainable level. Don’t do too many stupid things.

    Only a couple side thoughts. One, don’t bank holding companies come with more regulation? Don’t know if we need Amex to be more regulated, but the first two, Morgan and Goldman, I thought there was some interest in bringing them into a regulatory framework. Two, I suspect some damping on the way down isn’t a bad idea, to limit collateral damage, though it may be better to simply flush the various extra banks and retail vendors rather than dragging things out for a couple decades.

    Anon, I agree that shorting treasuries makes logical sense, but it’s no fun being way ahead of an inevitable shift in sensibilities, especially with mark to market accounting. Seeing all the folks who’re lining up for some TARP, I guess that in itself is a form of shorting treasuries. But it seems likely that any panic is likely to simply shift money into short treasuries, unless there is some other stable and liquid option out there.

  31. Anonymous

    tompain above was asking about why the waiver of the 30 day application period and I would respond, DUH, Georgie is out of office in 60 days or so and they need to have all the time possible to participate in the looting.

    if I shake my head any more it will fall off……

  32. Walther von Reinbach (spain)

    Robert A. Heinlein way back in time wrote in “The door into summer”.

    “But I got along. The job I found was crushing new ground limousines so that they could be shipped back to Pittsburgh as scrap. Cadillacs, Chryslers, Eisenhowers, Lincolns-all sorts of great, big, new powerful turbobuggies without a kilometer on their clocks. Drive `em between the jaws, then crunch! smash! Crash!-scrap iron for blast furnaces.
    It hurt me at first, since I was riding the Ways to work and didn’t own so much as a gravJumper. I expressed my opinion of it and almost lost my job . . . until the shift boss remembered that I was a Sleeper and really didn’t understand.
    “It’s a simple matter of economics, son. These are surplus cars the government has accepted as security against price-support loans. They’re two years old now and they can never be sold, so the government junks them and sells them back to the steel industry.”

  33. Anonymous

    All I can say is America has become one big joke. I am trying my best to laugh but all I can do is cry.

    What ever happened to this once great country?

  34. joe

    On Volcker.
    He was the first, and maybe the only, to demand a “presence” by the taxpayer for ANY bailout money going to the banks.
    “It just makes sense.”
    As for AE coming under regulation in return for owning a newly-defined “bank”, which they already do own – it should be known that there is a two-year grace period(five years, with extensions) before the new BHC would need to bring its operations into compliance with all of the BHC regulations.
    I’m not sure what the penalty for noncompliance would be, but by that time, it would be miniscule compared to BHC’s owesies to the American taxpayers.
    Grin and bear it.

    Or resort to a Treasury system of money creation and let the banks lend real money.

  35. john bougearel


    “Willem Buiter once said that US regs permitted the Fed to lend against any collateral, including a dead dog. We are getting perilously close to that.”

    Thanks for the smile today, it is my b-day!

  36. doc holiday

    Re: God, I hope he chooses someone for Treasury who’s done something else in life besides peddle bonds

    Not a chance Bub, look at who Obama just picked for economic advising — some nobody from nowhere that has no clue! A nobody from Xerox, a company that was dead ten years ago, a company which can hardly survive today — yet this women is going to be part of the obama brain trust — gimmie a friggn break! We need a lot more prayers to God, cause this crap aint gonna cut it and didn’t come close to being anything but pure nepotism! We need better people than have experience, not another Cheny-fest!

  37. S

    Alan Greenspan still doesn;t get that assets values are a function of cash flows and cash flows are a function of profitabilitys / wages. If the two are in disequilibium one falls. Greenspan is truly an idiot. The pre emptive calls to protect the free market is really a hail mary by the powers that be to ensconce their incumbant looting / extorsion regime.

  38. Anonymous

    walther von,

    FYI: While not destitute after the campaign — he had a small disability pension from the Navy — Heinlein turned to writing in order to pay off his mortgage and in 1939, his first published story, “Life-Line”, was printed in Astounding Science-Fiction magazine. He was quickly acknowledged as a leader of the new movement toward “social” science fiction.

  39. mxq

    btw…if anyone is curious, Capital one is a BHC…so that leaves Discover as the only major issuer that remains non-BHC…so maybe we see DFS showing up on the fed’s doorstep this weekend?

  40. Warm, Dry and Well Fed


    My first comment here…

    The claim is that the banks are not lending out the bailout money. But they are. All the credit card debt-backed 30-60 day paper usually packaged and sold and all the Sallie May loans usually bundled are now are stuck on the banks’ books.

    With Christmas coming and consumer confidence in the tank, the U.S. government is rightly trying to keep the ball rolling. . Two weeks ago it was reported that credit card debt had gone up 1.9% in one week, or a rate of 100%/yr. Such rapid growth of credit card use at a time like this hints at truly desperate people. These credit card debts will have a very high default rate, but cutting off the borrowers, which is what the banks should rationally do, is an impossibility, as is a sudden cutoff of the student loans flows.

    If my analysis is correct, this might explain the Treasury’s unwillingness to release details of the commercial paper taken as security from the banks and also the sudden conversion of AMEX into a bank; it can now turn the American Express card receivables into paper, pledge the paper for Treasury loans and keep issuing more credit. With AMEX included, the list of banks up for loans now precisely matches the list of the largest credit card issuers.

    At a time like this the banks would not allow a new wave of probably low-grade borrowing without some sort of implicit government guarantee, which hints at more Treasury borrowing down the road, awhile the extraordinary secrecy about the nature of the commercial paper backing the banks’ Treasury loans hints at real fear about how the markets would react. If the scale is as large as I suspect, then real consumer spending (by rational consumers who will be able to pay for what they purchase) is even weaker that we thought.

    I’d like to see a post from someone who knows the scale and quality issues associated with the credit card commercial paper debt rollovers, and I’d also like to know when the bill comes due for the card issuers and users. Can this system last through Christmas?

    Finally, from both a macro point-of-view and an ethical point-of-view, when I go back to Rhode Island for the holidays should I buy more presents or give a bigger check to the Salvation Army? As Christmas approaches somehow I never expected to feel this blessed after losing 40% of my wealth in the market.

  41. Anonymous


    Where does it end.

    I knew this would happen. After we bailed out the banks everyone would come to the government/taxpayers with so-called hat-in-hand.

    I am not a fan of Larry Summers. Nevertheless, what he lacks in political skills he makes up in intellect and gumption.

    This truly must stop. At some point this will not an ideological issue it will be a practical one.

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