Thursday, November 13, 2008

Your Next New Bank: American Express

It seems that almost under the radar, and a month late, American Express decided to come in from the cold and convert its status to that of a Federally-chartered commercial bank. As I wrote in this post last month, it seems odd to think of your neighborhood bank as GMAC, Goldman Sachs or Morgan Stanley.

Now, I'll grant you that an Amex store is more ubiquitous than, say, a GMAC location. At least I've never seen a GMAC site. And existing Amex travel stores are more retail in nature than your typical Morgan Stanley or Goldman Sachs location in a major city.

Still, once again, it's hard to visualize Amex being a full service commercial bank. In fact, in the old days, it never would have needed a banking charter, because its Travelers Cheques and credit card businesses nearly perfectly hedged each other. The former took cash deposits against to-be-written cheques, while the credit card paid cash on the cardholder's behalf, for a fee.

Evidently, the model is no longer remotely like that of the old days. Or perhaps the credit card giant's management simply want to avoid standing out in a crowd of Federally-owned financial institutions, lest that difference cause a mass sell off of their equity and a shunning of the firm as a supplier of credit.

My business partner wondered aloud what possible risk to our financial system Amex represents, being primarily a high-end credit card issuer.

No matter. Now even a major standalone revolving credit provider is running into the arms of the evolving US National Bank. And then, immediately upon gaining bank status, puts it hand out for a $3.8B loan from the Fed.

Truly the only financial sector executives who feel capable of running their own businesses will be private equity shops and privately-owned asset managers. And, in time, perhaps those executives sufficiently prudent and confident of their risk management expertise to open up publicly-held loan and investment companies.

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