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American Express Isn't Taking Any Chances

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American Express (NYSE: AXP  ) has become the latest victim -- for lack of a better word -- of a credit market thrown completely upside down in the past few months.

Just as Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) did, AmEx gained approval to become a bank-holding company. That means it'll be able to raise deposits and enjoy a source of cheap, stable funding. It'll also be eligible to take part in the government's $700 billion bailout plan, and it'll gain better access to the Federal Reserve's discount lending window, which essentially serves as a lender of last resort.

A couple of thoughts are probably whizzing through investors' minds this morning:

  • Great! AmEx took pre-emptive measures to ensure it'll ride out the storm. Good for them!
  • Huh? I thought AmEx was one of the stronger, more enviable, Buffett-blessed financials out there! Now it might need access to bailout funds? Man, maybe things are quite a bit worse than we thought …

Both are probably legitimate points. Even if AmEx doesn't need a penny of help from the Treasury, why sit back as competitors gorge on the honey pot and line their balance sheets with government funds? If anything, becoming a bank-holding company just gives an already strong AmEx an additional safety net. No qualms there.

Then again, the move also highlights just how frenzied the credit markets have become lately. As demand for anything short of U.S. Treasuries ground to a halt, even creditworthy companies such as AmEx needed to devise a plan B. When fear takes control of the markets, credit ratings and solid reputations don't mean anything; people just want to bury their heads under their pillows and wait out the storm. That's a daunting position to face if your company relies on lending markets, as AmEx did.  

Developments like this emphasize AmEx's two-pronged dilemma in the year ahead. Consumers are almost certain to pare back spending. Since AmEx issues credit -- unlike Visa (NYSE: V  ) or MasterCard (NYSE: MA  ) -- it's going to have to navigate that pullback with an equally challenging hunt for capital, even if that means shouldering the stigma of becoming a member of the bailout crowd.

Crazy times we're living in.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. American Express is a Motley Fool Inside Value pick. The Fool owns shares of American Express and has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (8)

Comments from our Foolish Readers

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  • Report this Comment On November 11, 2008, at 4:58 PM, barbar90015 wrote:

    You should comment on the thousands of 'good standing' AmEx card holders who are suddenly seeing their credit limits reduced to near zero or having their cards canceled completely for various reasons. Lots of angry people out there.

  • Report this Comment On November 11, 2008, at 5:58 PM, SteveTheInvestor wrote:

    Way too many tapped out consumers out there to allow me to have much enthusiasm for Amex earnings potential. And, as barbar90015 points out, they are also dumping a lot of customers or at least severely limiting their credit. None of that sits too well with me from an investment perspective.

  • Report this Comment On November 12, 2008, at 10:24 AM, jblowe999 wrote:

    Why doesent AMEX go begging the Indian government for a bailout instead????

    As a major employeer of Indians, I would think that would be a more logical choice!

    I too canceled my 15+ year AMEX accounts recently when I had my "final straw" with their "customer service"! (customer service reps who I couldent understand, long wait times, incorrect billings, slow to credit payments, etc.)

    Serves this traitorous company right!

    No Bailout!

    Burn Baby, BURN!!!

    Globalism SUX!!!!

  • Report this Comment On November 12, 2008, at 12:55 PM, banjojim wrote:

    My Amex statement is due and payable on receipt. I thought that was what separated them from Visa and others who extend credit. I never think of it as a credit card...almost cash. Just sayin'.

  • Report this Comment On November 12, 2008, at 5:17 PM, drmithra wrote:

    I had a Delta Sky Miles Business card from AmEx for 9 years. Limit was $27, 500. Usually carried about $9-12k per month depending on expenses. Summer business was good, so I paid it down to a zero balance in September. My reward, a new credit line of $1000. Why bother, I just cancelled my AmEx accounts.

  • Report this Comment On November 22, 2008, at 11:23 AM, koolkaty wrote:

    American Express became a bank holding company on November 10...

    The purpose of the bailout and US Taxpayer injection of cash was to provide capital for EASING credit AND making more credit available - to unfreeze the lending markets?!

    Three (3) days later, American Express canceled ALL Small Business Capital Lines and AMEX Credit Lines!!!

    So Paulson, gives them a CHEAP source of capital courtesy of American Taxpayers, and they cut off credit lines to customers who have been PAYING THEM ON TIME FOR DECADES!!!

    Is this illegal fraud or only a moral fraud??

    What was the intent of congress in providing CASH to banks?

    Was it to eliminate credit or to increase credit availability?

  • Report this Comment On November 24, 2008, at 8:30 PM, jessguimar wrote:

    (AMEX) Today they cancelled my credit card with out calling or mailing me anything. They said it had to do with my credit report. I went online to looked to see what it was. It was for non-payment on a light and gas payment from 3 years ago that barely made a notice till today. I was so upset because last year I bought a car and they never mention it to me. It was filed on 06/2007 and I bought the car on 09/2007 and opened my AMEX card on 09/2008 and they never said anything till today. So I called the FTC (federal trade comms.) and they gave me a number to file a complaint. They said if they get enough complaints they would have to investigate. So the number is 1800-842-6929... we have our american rights... use them. ask for consumer affairs

  • Report this Comment On February 03, 2009, at 12:21 PM, foolxxxxx wrote:

    AMEX also cancelled my credit card with out calling or mailing me. They also said it had to do with my credit report. I had paid the bill on time all year. There was a bonus from costco due to me of about $400. They apparently didn't want to pay it so they cancelled my card. I'm thinking of going to the Attorney General with a complaint. Has this happened to anyone else?

  • Report this Comment On June 30, 2009, at 10:18 PM, King8Motley wrote:

    Wow – I just called to notify AMEX that I would be traveling overseas (zero balance, $24,000 credit limit - Platinum Card) over the 4th of July Holiday. Apparently courtesy calls only go one way, because seconds after I had stated that would be traveling over the Holiday’s – I received some new and unexpected news.

    No my wife is not pregnant nor did I find out that my daughter was getting married – but rather - I was told that my card had been canceled due to high revolving lines of credit. I am a little confused because I have no other lines of credit and no debt other than my mortgage which is promptly paid the first of each month.

    Very lame reason for canceling my Card American Express– I would have preferred a little more honesty, perhaps something like–

    “Sorry Sir, you pay your balance in full every month and you seem to know how to manage your finances. Unfortunately we just won’t be able to make any money off of you if you don’t go delinquent EVER!, perhaps if you would try overextending yourself then we will gladly raise your credit limit to $50,000”.

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