Tuesday, November 11, 2008

Money From The Feds: Don't Leave Home Without It

American Express won expedited approval to become a bank-holding company allowing it to gain access to the $700 billion in bailout money from the Treasury.  Of all the crummy news reported in the past several months, I would rank this high on the list of things I never would've seen coming.  AIG and Fannie losing a combined $50 billion in the last quarter?  Highly predictable.  GM begging for money from the government?  Seen that one coming since 2005.  Circuit City going bankrupt?  Did anyone actually think that any of their 17 attempts to restructure in the past year would make a difference?  Discovering that Lehman's assets were greatly inflated and the company was a ponzi scheme?  Even my toddler knew that one in March.  But American Express becoming a bank holding company?  Why do they need to be a bank holding company if their two bank units already have access to the discount window?  I actually had to read the entire Wall Street Journal story for the answer which I believe was included in this quote from CEO Kenneth Chenault:
"Given the continued volatility in the financial markets, we want to be best positioned to take advantage of the various programs the federal government has introduced or may introduce to support U.S. financial institutions."  Of course, the quote can be interpreted in one of two ways:
  1. Amex views this as a great money making opportunity and wants to take advantage of huge dislocations in the markets by getting cheap money from the Fed and investing in high yielding assets.
  2. Amex is in much worse shape than anyone suspects and they need an equity infusion from the government.
Being a cynic by nature, I'm inclined to go with the latter.  
A few days ago, Bloomberg revealed that it was suing the Fed under the Freedom of Information Act to force the central bank to reveal who is borrowing from its fancy new funding facilities and what type of collateral are they pledging against the loans.  Sadly, I think the answers to Bloomberg's probing questions are fairly easy to answer without a lawsuit.  Which institutions are borrowing from the Fed through these new facilities?  Anyone that is eligible.  If you think that any bank or former broker dealer isn't going to the Fed for financing right now because they are "healthy", you are greatly disillusioned.  The money is cheap and easy so why go anywhere else?  What type of collateral are these banks pledging?  Anything they can get away with.  As I have mentioned many times in my previous posts about the Fed's new facilities, I don't actually believe the Fed can price these securities.  That is precisely why the Fed only accepted Treasuries and agency pass-throughs as collateral for its loans until the banking industry started to implode a year ago.  Even if the Fed does reveal who and what is going on behind the scenes, what difference does it make?  The Fed's balance sheet has already ballooned to $2 trillion.  It's too late to do anything about that.  The Fed can't pull the plug or it would wreak havoc on an already fragile financial system.  Besides, there are limits even to my level of outrage.
I hope that American Express really does see this as a money making opportunity and that it will invest any funds it receives from the TARP wisely.  The alternative, that Amex is just another American-made government money-sucking pit, is far too depressing for me to contemplate.  


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