Here’s story you thought you’d never see; a credit card company that wants to pay you.
Forget the teaser rates. Forget the bonus miles or toaster redemptions.
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American Express, the nation’s largest issuer of credit cards, is offering $300 to selected cardholders if they’ll close their accounts.
The details of the plan are not clear. But what is plain is that Amex is trying to get ahead of an anticipated upswing in credit card defaults.
Amex apparently has seen the writing on the wall, and it wants to clean up its balance sheet before further deterioration.
Last week saw several analysts downgrade their outlook for the company. Standard & Poor's kept its "sell" rating on the stock and cut its price target on the company by $3 a share, to $11. UBS also lowered its target from $20 a share to $13 with a neutral rating, and predicted "severe earnings pressure" for the credit card sector in 2009. For its part, Amex shares, at last glance, were trading at $12.50.
Narrowing Credit Access
Reading between the lines, it means that American Express is looking to dump customers that it estimates will not be in position to pay their balances as the recession deepens. Although the credit card giant is trying to get out front of its projected losses, it will also mean that fewer Americans will have access to credit, which, in turn, will continue to put a damper on consumer spending.
From a strictly business point of view, the credit card company's buyout program makes perfect sense. But from a policy standpoint, the move is counter to programs being urged by the Obama administration.
In November of last year, American Express filed an expedited application to convert itself into a regulated bank so that it could benefit from the federal bailout program. At the direction of the Federal Reserve, the normal 30-day waiting period was waived, and Amex became a regulated bank holding company almost overnight.
With this change in status, American Express got into line with other recent converts, like Goldman Sachs and J.P. Morgan Chase, to receive billions in federal bailout monies.
Assessing a Cynical Approach
Within days after getting this taxpayer infusion, Amex started slashing the available credit lines for its cardholders. This move may have helped the company's bottom line, but it put a serious pinch on customers, and especially small enterprises that rely heavily on their cards when business cash flow starts to run low.
No one expects Amex to put patriotism above profit. But, instead of using taxpayer funds to expand already stunted consumer spending, Amex is using our money to buy-off anticipated deadbeats.
Amex is not alone in actions that have put the squeeze on credit card customers. Capital One, known for its aggressive marketing to clients with credit challenges, is also putting the clamps on available credit. After getting its share of the federal bailout monies, the Virginia-based financial concern immediately started lowering the ceiling on available customer credit.
Look for Others to Imitate
Amex has always been a trendsetter and industry leader. Its innovative programs have been an important tool in promoting prosperity for small businesses and middle income earners.
If the Amex program succeeds in helping the company cleanse its books through this buyout program, then it's likely that other credit card issuers will soon follow suit. This may be good news for stockholders, but will significantly slow the pace of economic recovery, particularly for middle income and small business consumers.
What's in your wallet?
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
