Markets indifferent to Amex conversion as auto-maker bail-out looms

Credit spreads on American Express debt narrowed marginally yesterday while equity prices hit a new low as US markets were largely unmoved by news of the credit card company’s conversion into a bank holding company.

In afternoon trading in New York, shares in American Express declined $1.58 to close at a new low of $22.40 – a level not seen since the week following the September 11, 2001 attacks.

Credit default swap spreads contracted slightly, from 435 basis points on November 7 to 410bp on November 10, continuing their trend downward from their October 10 high of 668bp.

American Express announced on Monday evening that it had been granted bank holding company status by the Federal Reserve, making the firm eligible for direct government investment under the $700 billion Troubled Asset Relief Programme (Tarp) while also placing it under the supervision of the US central bank.

Although the Bank Holding Company (BHC) Act requires the Fed to provide 30 days' notice of receiving an application to the appropriate federal or state supervisory authorities, the Fed can reduce or eliminate these notice periods in certain circumstances - as was the case with Amex.

“In light of the unusual and exigent circumstances affecting the financial markets, and all other facts and circumstances, the Board has determined that emergency conditions exist that justify expeditious action on this proposal in accordance with the provisions of the BHC Act and the Board’s regulations,” the Fed said in a statement.

While it is not completely clear at this stage whether American Express will seek to access Tarp funds, chief executive Kenneth Chenault strongly hinted that eligibility for government assistance was one of the main factors behind the firm’s decision.

“Given the continued volatility in the financial markets, we want to be best positioned to take advantage of the various programmes the federal government has introduced or may introduce to support US financial institutions. With Federal Reserve oversight we should gain greater access to the capital on offer under the current and any future government-sponsored programmes,” Chenault said in a statement.

Speculation is mounting that the induction of a credit card company into the scheme might clear the way for opening the Tarp facility to other non-banking institutions, specifically the three ailing Detroit auto manufacturers: General Motors, Ford and Chrysler.

Speaker of the US House of Representatives Nancy Pelosi yesterday announced she has instructed chairman of the House Committee on Financial Services, Barney Frank, to craft legislation providing “emergency and limited financial assistance to the automobile industry under the Emergency Economic Stabilization Act” – the legislation that created the Tarp.

"In order to prevent the failure of one or more of the major American automobile manufacturers, which would have a devastating impact on our economy, Congress and the Bush Administration must take immediate action. I am confident Congress can consider emergency assistance legislation next week," Pelosi said in a statement.

Staffers for President-elect Barack Obama also told reporters yesterday that he discussed the issue of federal assistance for auto-makers with President Bush when they met at the White House on Monday.

See also: More ABS losses to come on Alt-A, auto loans and credit cards

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