AmEx Holds Out Hand In Bank Bread Line

Not too terribly long ago, American Express spun off American Express Bank and all its related financial services (offerings include checking accounts, financial advice, brokerage services) under the name Ameriprise.

Now, American Express announces it wants to become a bank holding company again, and quick.

What's with the sudden change of heart?

American Express runs a credit card franchise of which you may have heard. Although American Express once was a payment card but not a credit account (one paid balances monthly), AmEx issues a vast array of credit and non-credit charge cards that are functionally challenging to distinguish from cards issued by banks under the Mastercard or Visa marques. Consequenly, American Express has lots of small cardholders making charges to (and hopefully payments on) revolving accounts. This means that American Express needs money to loan these borrowers. So ... where does it come from?

Historically, American Express' clientele were thought to be of a better caliber than regular bank card customers, and to offer superior credit risk. American Express had little trouble issuing commercial paper intended to provide liquidity for the period in which it expected the card accounts to be repaid. Longer-term debt offered other alternatives: buyers looking for a decent return lined up for American Express' offerings of bonds secured with American Express' revolving credit accounts. Now that even inter-bank lending has taken a hit due to confidence concerns in financial-sector firms, American Express hasn't got such easy access to the cash it needs to keep making disbursements under its revolving credit agreeements. Without the cash outlays, AmEx can't generate the fee income it earns from the cards, and without payment on customers' demand to vendors around the world at all hours of the day and night, AmEx would kill the value of its brand. AmEx must keep making payments.

American Express wants some of the government's easy money, and wants to be able to grow deposits (a relatively cheap source of cash, but not without risks).

AmEx is a long-term solid company, one that attracted investment by Warren Buffett when it was battered to irrational levels by news of scandal, and it's a company that bears watching as the economy drives financial companies into the toilet. While entering an investment in a financial just now seems hard to contemplate -- credit markets aren't yet normal again, and financials' capacity to carry on regular business depends critically on the function of credit and capital markets -- it's a situation that is likely to bear a good buy down the road.

AmEx is a definite to watch.