TARP money used to raise credit lines for "credit worthy" customers

When I was a young teenager, a mentor advised me that in order to maximize the value of my money, I should invest in companies that I patronize.  At the time, he put it this way: “If you like to eat at McDonald’s, research the company, and if you like what you see in terms of growth potential and good management, invest in it.” 

This basic advice stuck with me. It made sense then, and it makes sense now.  While I haven’t always bought stock in companies that I patronize, I do often read their prospectuses, investigate annual reports, and browse 10-Ks.  Such has been the case with American Express. 

While listening to American Express’ Q4 2008 Earnings Call recently, I heard many things that sparked my interest—I have plenty to share in later posts—but the following statement by Chief Financial Officer Daniel Henry explains how American Express plans to use its TARP funds to extend credit: 

“Without TARP we may have needed or had a desire to increase our total risk based capital ratio. If we had done that we may have had to constrain the granting of credit. However, with TARP we do not believe this is the case. As Ken [Chenault] indicated, a good indicator of this is the unused line of credit. While we have been reducing lines on customers we viewed as risky, we were also increasing lines to our existing customers who were credit worthy, and we were bringing on new card members. So in total we think the unused line of credit at the end of this year will be on par with the amounts that we had at the end of last year. TARP is enabling us to continue to provide credit to the marketplace.”

The previous statement makes American Express’ strategy clear.  In short, it has raised the bar for who is credit worthy, made moves to choke or get rid of risky customers, given more credit to less risky customers, and accepted new cardholders.  In other words, the people who thought they would receive the benefits of TARP are getting a really bad deal.  Instead of reaping the benefits directly and immediately of TARP funds, they are helping to give credit to those who don’t necessarily need it and financing new business in the name of “providing credit to the marketplace”. 

This new strategy, which many of the other banks are employing for consumer lending, is part of the reason Americans across the country are not seeing the credit markets improve.  The banks would say: “It is improving, just not for you.”  Of all the thousands of e-mails I have received over the last few months, I haven’t read one e-mail from a customer whose credit line has increased or someone who just opened an account. I wouldn’t expect them to complain or boast anyway. 

In conclusion, as presented in this American Express example, the majority of American taxpayers lose big in the TARP deal, especially in the short term.  If great customers continue to be reclassified as risky through new stringent and questionable risk models—and it is likely they will be—the only possible benefit taxpayers will see is years away when companies can repay TARP money with interest.  I don’t think that is what most taxpayers had in mind. 

Note: If your credit line has been raised in the last two months or if you have opened a new account, please send me an e-mail or post a comment. 

Comments

[cheap jordans]

Love is ever the beginning of knowledge as fire is of light.

[Edgar Q.]

When you are entering into a transaction such a securing a credit always make sure to follow the C's of credit namely, Condition, Character, Collateral, Capacity. As much as possible avoid any default so that you won't have any difficulty the next time you will extend your credit.Neil Barofsky is an Inspector General, who has been given the task to audit any and all use of the personal loans that the taxpayers have made to troubled firms. The main concern he will be on the lookout for will be susceptibility of TARP funding to scams. The idea is that taxpayers want to know where their money is going--many of us hope it isn't going towards funding underwater basket weaving. At any rate, the aim is for the audits to repair credit of TARP disbursements, which Neil Barofsky should be able to do.

[Dan McKeithen]

Your comments here are interesting. I am a small business owner and AMEX Cardmember for 14 years. After ignoring all the "pre-approved" solicitations from AMEX and others, I opened an AMEX Business Open account last fall to support the small business I started in 2007. As my business has grown, so have my monthly charges, which I have fully and religiously paid each month. However, I just received the notice that the account was placed on a "global limit," a spending limit, which it turns out - after numerous conversations - is code for "customer downgrade." The last person I spoke with actually said that was a "fair assessment." So you are right...my taxpayer contribution to the bailout has actually hurt my business.

[Tim Marvin]

Hey Kevin- Just recently found your blog and Great Job!

Also, you bring up great points. The fact is if Americans are bailing out the companies we should get something in return for our investment. Not just additional credit lines but also better terms and fairer practices. If you want to check it out we blogged about it here: http://www.defendyourdollars.org/2009/02/will_our_tax_dollars_be_used_t.html
And would love to hear your comments.

[Timothyphx1]

Did you know Amex closed all Business LOC's in January? (including mine).

I have been shorting AMEX stock for 4 months now.

Amex has managed to leave my CL's alone for a few months now- (not that they could be put much lower).

To say I am unhappy with Amex becoming a BHC and what they are doing with tax payer $ would be an understatement.

[Kumar]

Let me try to understand the AMEX risk model - lend to people who are low risk (?) Do low risk people go around creating new jobs? As far as I know, low risk people play it safe - I don't expect THEM to be engines of economic growth. Don't get me wrong, we need low risk people in the world to keep our society stable. However, the innovators, the entrepreneurs, the business people, the folks with ambition, hint the "successful people" all come from the high risk strata of society and as far as I know they don't play it safe to get ahead in life. Yes, there are "high risk" folks who don't know how to manage their money and took out the sub-prime mortgages that started this economic downturn. But remember there is another category of "high risk" people who go about transforming society in a positive way.

[Carole May]

This still doesn't address why the banks who took the TARP funds then turned around and jacked up the interest rates of good customers who paid on time and paid more than the minimum every month. (Are you listening WaMu(Chase)??) Then the "experts" on TV tell you to find a lower interest rate card and transfer the balance. However, since banks are no longer opening new accounts for people, that is a moot statement. I just opened accounts at a credit union and hope within the next few months they will offer me their VISA. As soon as they do, I'll transfer my WaMu balance and kick them out the door!

[Andrew Lewis]

What were the requirements for taking the TARP money?

[The Voice of Reason]

I didn't think about it this way. This seems totally WRONG even though it makes perfect business sense. Why would AmEx want to lend to people who are likely to use their entire credit line and then default?

But I think you are right in your conclusion: no one imagined that is what the companies would do with the TARP money and it's a bad deal for taxpayers. There has got to be more of a balance so that not only the "really really low risk" people get MORE credit. Seems pretty backwards to me.