American Express Wins Federal Reserve Approval to Become Bank

By Ari Levy and Scott Lanman

Nov. 11 (Bloomberg) -- American Express Co. won Federal Reserve approval to become a commercial bank, gaining access to funds as credit losses build and sales of asset-backed bonds plummet.

The Fed waived a 30-day waiting period on the application ``in light of the unusual and exigent circumstances affecting the financial markets,'' according to a statement released yesterday in Washington. Chairman Ben S. Bernanke and his colleagues unanimously voted for the action.

Credit-card holders failed to repay loans in the third quarter at almost twice the rate of a year earlier, New York- based American Express said last month. With defaults rising along with the unemployment rate, October marked the first month since 1993 that card companies were unable to sell bonds backed by customer payments.

``That business has totally dried up,'' said Frederic Dickson, who helps oversee about $20 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. ``If I were a shareholder, it wouldn't send a very warm and fuzzy message to me,'' he said in a phone interview.

American Express, the largest U.S. credit-card company by purchases, joins former investment banks Goldman Sachs Group Inc. and Morgan Stanley, which were allowed by the Fed in September to become commercial banks. The company said the conversion won't require any ``significant divestitures.''

American Express fell $1.33, or 5.3 percent, to $23.98 yesterday on the New York Stock Exchange. It has tumbled 54 percent this year, the fourth-biggest decline in the Dow Jones Industrial Average.

Company's Assets

American Express has total consolidated assets of about $127 billion, the Fed said. The company already owns two bank units: American Express Centurion Bank, which operated as an industrial loan company under Federal Deposit Insurance Corp. supervision, and American Express Bank, which was regulated by the Office of Thrift Supervision. Each has assets of about $25 billion and controls deposits of about $7.2 billion, the Fed said. Centurion is being converted to a bank, the Fed order said.

``It puts them in a better position to shift activities to the bank and to gain additional resources through use of the Fed's discount window,'' said Gil Schwartz, a former Fed counsel and now a partner at law firm Schwartz & Ballen in Washington.

In an Oct. 6 filing, American Express said that its bank units have access to the Fed's discount window and the company already had enough cash to last more than a year.

Profit Is Declining

The company has posted four straight quarterly profit declines and lost about half its market value this year as it set aside more funds 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.

``Given the continued volatility in the financial markets, we want to be best positioned to take advantage of the various programs the federal government has introduced,'' Chief Executive Officer Kenneth Chenault said in a statement. ``We will continue to build a larger deposit base to broaden our funding sources.''

American Express used the Fed'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.

The move to become a commercial bank comes almost 15 years after American Express spun off investment bank Lehman Brothers Holdings Inc. to investors. American Express got into the brokerage business in the 1980s with acquisitions, including the purchase of Lehman Brothers Kuhn Loeb in 1984. Amid losses that stretched into the 1990s, the company shed its investment-banking operations.

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net