Bailouts, failures and big losses and job cuts continue to dominate the US as the credit crunch and impending recession damage more and more businesses and boost job losses.
In a decision that says everything about the still fraught state of financial markets, the US Federal Reserve has approved card giant, American Express becoming a bank.
The move came after the bailout of AIG, the big insurer, was boosted to $USS150 billion and mortgage giants; Fannie Mae revealed huge losses tolling $US29 billion.
Fannie Mae also indicated that the $US100 billion bailout of it might not be enough. Judging by the pressures at AIG, that could be very true.
AIG also said it lost $US24.5 billion in the September quarter as well.
In a statement issued well after markets had closed, the Fed said that it had approved Amex’s full status as a bank holding company.
That’s similar to moves made in September by Goldman Sachs and Morgan Stanley to become bank holding companies, which would enable them to access the loans on offer from the Fed for banks and to deal on a more cost-efficient basis.
It’s a sign that Amex has been finding it tougher to finance its credit card business in an open market, without the implied support of the Fed behind it. Amex has been losing billions of dollars this year in credit loan losses and in defaults on cards and other forms of credit.
The Fed said that both American Express Company and its affiliate American Express Travel Related Services would be allowed to form bank holding companies, as the Amex group converts its Salt Lake City, Utah-based American Express Centurion Bank into a full bank.
"In light of the unusual and exigent circumstances affecting the financial markets, and all other facts and circumstances, the (Federal Reserve) Board has determined that emergency conditions exist that justify expeditious action on this proposal," the Fed said in the statement.
According to the Fed, Amex had $US127 billion in total assets but retail deposits of just $US7.2 billion: that’s not really a bank, in the conventional sense.
But these are not ordinary times. It’s another indicator of how the financial crisis is forcing regulators to accept bank holding applications from companies with little retail banking presence and experience.
Several other financial groups, including GMAC, 49% owned by General Motors, is trying to go the same route as Amex.
GMAC has a small bank buried in its business structure. It also has a toxic time bomb called ResCap, a mortgage lending operation that has lost billions of dollars in dodgy subprime lending and associated credit derivatives.
It wants to become a bank so the Fed can lend it enough money to maintain car lending in the US in the coming year or so.
Last month, Amex reported a 24% drop in third quarter profits and a 50% jump in the provision for credit losses (and an 84% rise in consumer lending losses over the year to September).
US analysts say the move also increases the chances of Amex being acquired by an existing bank.
The move to call Amex a bank came hours after the Fed confirmed that it had restructured its $US123 billion in total bailout and assistance package for the troubled giant insurer, AIG (Soruce).
The upshot of the restructure is that the funding package for AIG is boosted to a massive $US150 billion from the original $US85 billion (and a $US38 billion loan deal).
The increase is likely to generate more criticism of the pace of the bailouts ahead of a decision by the US government on aid to the teetering domestic car business.
The Fed found another $US27 billion for AIG: there are suggestions the Big 3 US car companies have asked for a combined loan of $US25 billion.
At the same time the country’s second largest electrical retailer, Circuit City went broke and moved into bankruptcy to restructure and DHL, the big German-owned parcels and freight group stopped operating in the US domestic market and sacked 9,500 people, on top of more sacked last week. US reports put the total at more than 14,900. Nortel, a big telecoms company sacked another 1,300.
Circuit City went into bankruptcy owing over $600 million and after two years of losses.
It is the biggest retail failure so far in this crunch and it won’t be the last. Later this week we will get retail sales figures for October and before then an earnings up date from Wal-Mart
The collapse came a week after the company tried a last ditch attempt to slash store and staff numbers. That seems to have frightened suppliers and other creditors who started demanding cash on the knocker for every deal, or refused to trade, forcing this announcement to be issued by the company.
The company’s move to protect itself came as two other large chains, Linens ‘N’ Things, a homewares chain, and Mervyns, a small department store group, started end of business wind up sales with stock liquidations in their remaining stores.
Circuit City’s failure is the biggest of around 10 chains to go bust this year in the US. Linens ‘N Things and Mervyns failed earlier in the year and management and creditors abandoned attempts to restructure and keep trading as the US retail slump deepened.
The subprime crisis, the credit crunch and freeze and nearly 1.2 million job losses this year have battered
