American Express, often referred to as Amex, has decided it will become a commercial bank. Like Morgan Stanley and Goldman Sachs before it, Amex has determined it is better off under the more regulated role of a bank holding company. With it comes the good and the bad.
The good:
The Fed will loan you money, and maybe, if you wish real hard, Henry Paulson will give you some of that $700 billion parachute he’s holding.
The bad:
The Fed will regulate you. You have to do more than issue an overprice credit card.
The Fed approved their bank-holding status earlier this week. Amex took a gamble when the credit crunch started, and bit off more than they could chew. As the other credit card firms were tightening lending, Amex continued to offer credit. Their primary sources of funding (debt markets) have since dried up, so they need more money to continue operations. Approval of bank holding status allows Amex to sell bonds that are guaranteed by the government (and thusly cheaper).
Another source of funding for Amex now is deposits. Like JP Morgan, Bank of America, and your local banks they can now set up checking and savings accounts, allowing customers to deposit their money with the bank. This funding gives Amex the liquidity it needs to keep running and they can issue more secure loans, unlike their previous business of credit cards. Don’t get me wrong, they ain’t giving up that business anytime soon.
But the kicker here is access to the Paulson Prize. Cheap infusions of money from the government. It has to be paid back, but when you can borrow at really cheap rates, you’re a fool not to take advantage.
What was predicted to be an industry consolidation has, in fact, become and industry expansion. True WaMu is dead, Wachovia is gone, and many other banks have merged, but now some huge brands are entertaining the business for the first time. Morgan Stanley, Goldman Sachs, and American Express are all national brands and they won’t have any trouble attracting customers if they intend to do the legitimate banking thing. If you’re wondering whether or not they can make it as commercial banks, keep this in mind:
Two guys started American Express back in the 1800s. They wanted to expand west of the Mississippi but the rest of the company did not. So they set up a company just like American Express (at the time) and over time, that company became a financial services company. They named it after themselves, Wells Fargo.
Amex Becomes a Bank
Amex Wants Some Monies
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. |
| Related Websites |
Be First To Comment!