Amex to receive $3.39 billion under US TARP program

Credit card issuer American Express has received preliminary approval to receive $3.39 billion in capital injection from the US Treasury's $700-billion Troubled Asset Relief Program Capital Purchase Program (TARP).

Last month the Federal Reserve permitted American Express to changed its structure to become a bank holding company, a development that will cut its borrowing costs and give it access to the Treasury's $700-billion 'Troubled Assets Relief Program', as it had piled huge credit card defaults and found trouble sourcing cheap funds. As a bank it will be able to avail of government funding and lending programmes, including access to the central bank's emergency loan window. (See: AmEx to become a commercial bank, get access to federal funds

American Express has been hit hard from mounting credit losses from the time the US slid into recession, which in turn forced companies laying off thousands of workers all over the US. These massive layoffs have resulted in consumers cutting down on spending as well as massive defaults in credit card repayments with AmexCo reporting in October a 24 per cent drop in third quarter profits and a 50 per cent rise in the provision for credit losses.

Other top Wall Street fiems like Goldman Sachs and Morgan Stanley have changed their status to becoming bank holding companies to gain access to funds available under the US Treasury's TARP programme (See: Goldman Sachs, Morgan Stanley surrender investment bank status

Capital One Financial Corp received preliminary approval for $3.6 billion; while CIT Group received preliminary approval for a $2.33 billion investment by the US Treasury a day after the Federal Reserve approved the commercial finance firm's bid to become a bank holding company (See: CIT Group gets TARP cover after becoming a bank holding company). Discover Financial Services, Illinois received bank holding company status last week. 

Many banks and other financial companies have faced serious financial crisis since the beginning of this year due to rising defaults by cardholders, major mortgage defaults and a freezing of credit markets. This lead to banks to withdrawing financing to customers adding to the credit squeeze for fear of mounting losses.

The US Treasury's TARP programme entails the US Treasury Department to receive preferred stock and warrants to purchase common stock in return for the investment. For the first five years the preferred stock is at an interest rate of 5 percent per year, subsequently increased to 9 percent after a period of five years if the preferred shares are not redeemed.