American Express to Buy GE Money Unit for $1.1B
American Express Co. agreed to purchase General Electric Co.'s GE Money's corporate-payment services, which provides commercial payment and purchasing cards to corporations, for $1.1 billion.
The sale, expected to be completed by the end of the month, follows a deal announced earlier last Thursday, under which GE would sell its GE Money operations in Germany, Finland and Australia as well as its credit-card and auto businesses in the U.K., in return for assets held by Spanish banking giant Banco Santander SA.
The deals come as GE seeks to redeploy its capital in the financial-services industry amid the turmoil in the stock markets.
GE created corporate-payment services in 1992 to issue corporate travel and entertainment cards and purchasing cards to employees. The unit, which now caters to more than 300 large corporate clients, generated more than $14 billion in 2007 global purchase volume and maintained $1.1 billion in receivables at Dec. 31, the companies said. Its billed business has grown at a compounded rate of 18% over the last five years. It employs about 350 people, largely in Salt Lake City.
The transaction calls for GE, the unit's largest client, to become a client of American Express under a multi-year pact, the companies said.
For American Express, the deal is part of an ongoing strategy to focus on the payments sector and follows the sale last month of its international banking subsidiary. Corporate-payment products are similar to those offered by American Express' commercial card business, which handles the travel, entertainment and purchasing spending by employees of large corporations and mid-sized companies. Accounts typically are paid in full at the end of each month, rather than through a revolving credit account.
The sale also includes the purchase of GE's vPayment technology, which permits the processing of large payments with fraud controls.
Mark Begor, president and chief executive of GE Money's operations in the Americas, said the unit "has been a terrific GE growth story, and [last week's] announcement underscores the value we've created from a business that essentially had a single client only about a decade ago. This transaction meets GE's strategy of redeploying assets in financial services and is a win for GE, our shareowners, and our customers." - Mike Barris, Dow Jones, for American Banker
Investment Banks Slated to Become More Accountable
By John Morgan
Treasury Secretary Henry M. Paulson, Jr. said Wall Street investment firms should provide more information on their financial condition as a caveat to the groundbreaking decision by the government to permit them to borrow money from the Federal Reserve.
"The Federal Reserve acted promptly to resolve the Bear Stearns situation and avoid a disorderly wind-down," Paulson said Wednesday. "It is the job of regulators to come together to address times such as this, and we did so. At this time, the Federal Reserve's recent action should be viewed as a precedent only for unusual periods of turmoil."
Paulson said investment firms should be subject to the same type of regulation and supervision as commercial banks if they're looking for regular access to the discount window, but he stressed that regular access will be unlikely.
"Despite the fundamental changes in our financial system, it would be premature to jump to the conclusion that all broker/dealers or other potentially important financial firms in our system today should have permanent access to the Fed's liquidity facility," Paulson said.
Flows to Emerging Market Debt Top $5.5 Billion
By John Morgan
JPMorgan said emerging market external debt increased inflows marginally from $4 billion in February to $5.5 billion.
Mutual funds continued their rotation from external to local debt, Asia saw and increase in overweight positions, Latin America underwent a decrease, and emerging Europe, Middle East and Africa were unchanged in terms of overweights.
Investors are becoming "increasingly wary of the rise in inflation across [emerging markets]," the bank said. "Investors widely expect [emerging market foreign exchange and fixed-income markets] to perform best between now and year-end; they expect corporate external debt and cash to be the worst performers."
Beyond Mortgages: A Keen Look at Consumer Credit
By Harry Terris, American Banker
In the current downturn, rooted in the bursting of the housing bubble, mortgage credit quality was the first to falter.
Now with defaults on credit cards, auto loans and other types of consumer debt accelerating, a fuller picture of overextended American households is emerging.
Though additional pain is inevitable, panelists in a roundtable discussion American Banker hosted last week predicted that the mortgage losses that have shaken the foundations of the global financial system would not be matched by other consumer loans.
"Mortgage losses are so far off the scale," said Kenneth A. Posner, a Morgan Stanley analyst. "There's mortgages and everything else."
Though the credit markets have seized up broadly, the funding environment is less dismal for credit cards at least, panelists said.
Struggling borrowers are giving added momentum to a range of measures legislators are contemplating. Panelists saw room for additional oversight in certain areas, but they worried about overreach and the possibility of unintended consequences.
In the past, the importance of a home on a borrower's balance sheet may have meant that mortgage payments would be the last to slip, but the cold math of falling home prices may have changed the priorities of rational consumers, according to William Schwartz, senior vice president for financial institutions at DBRS Ltd.
"With people being in a negative equity situation or potentially being there, there is maybe a different dynamic," Schwartz said. "Having a revolving line of credit, having the cash available, if you don't have the ability to extract equity from your home equity loan or mortgage anymore, that might be the preferred way to go."
Adam Levin, the president of the lead generator Credit.com Inc., said the prevalence of a commuter culture shields auto loans. He and Schwartz said the collateral securing the loans is a stabilizing force.
Borrowers "absolutely, positively have to have their car," said Levin, former director of the New Jersey Division of Consumer Affairs. "They have to get to work. They will do everything they can to preserve their relationship with their auto lender."
With some consumers also exhausting unsecured credit lines, cascading losses there are a possibility, Levin said.
"As the alternative borrowing avenues have been closed to them, and they're now running face to face with the fact that they have run out of credit cards, we're going to see greater writeoffs in the future," Levin said.
But Posner said that, in general, recent mortgage lending practices have been weaker than those used in the card industry.
"Credit card underwriting doesnt seem to have become as adventurous as mortgage underwriting did over the last few years," he said. "So we see credit card chargeoffs rising to peak levels over the next few quarters, which will be painful, but we do not expect credit card chargeoffs to reach the kind of unprecedented levels that mortgage losses may hit."
Because of this better credit outlook, issuance of bonds backed by card receivables has fared relatively well, Posner said. Investors have looked to "the long history of data with credit card securitizations."
Still, "securitization markets are struggling [and] are completely shut down for all new or nontraditional assets," including private student loans.
"The card and auto and guaranteed student loan markets are still liquid, but only for the triple-A-rated bonds and at spreads that are much higher than past levels," he said.
Levin identified a range of abusive card practices, but he emphasized the efficacy of consumer education and the hope that card companies would change their policies voluntarily to avoid reputational damage or new regulations.
"Some institutions... would limit the amount of credit that was available and yet make different credit cards available to the same consumer. They were having consumers hitting the limit, going over the limit, being whacked with over-the-limit fees, being whacked with late fees," Levin said. "Some of the proposed legislation may be reflecting a little bit more of [a] rational approach."
Schwartz said issuers "generally have very sophisticated technical capability" and would be able to accommodate "any strong consumer negative sentiment and government regulation."
Implementing any changes "is not really an issue," he said. "The issue is managing the customer expectation and making sure that you don't impact your existing customer base or have an impact on your ability to grow your business."
But Schwartz was quick to add that he was "not necessarily in favor of government interventions or heavy-handed government interference [because] you don't always get the outcome that you intended."
Both he and Levin said promoting consumer education and financial literacy were critical to addressing credit problems. But. Posner expressed doubt over the usefulness of such efforts. "The disclosures that come with mortgages and other financial products are already voluminous and complex," Posner said.
Certainly, that echoes the longstanding argument in the mutual fund industry about prospectuses and prospectus profiles.
Let the debate continue.
In particular, Posner said. "in minority and subprime and other communities where financial literacy is not great, it's very, very hard to improve it."
According to Posner, there is a role for regulation: to eliminate potentially deleterious practices that issuers feel compelled to adopt to keep up with competitors.
"Once one issuer starts using penalty pricing or universal default features, then everybody has to, as well," he said.
Morgan Stanley analysts have talked to bankruptcy lawyers who cite penalty pricing "as a factor that pushes some borrowers over the edge," Posner said. "Others say it just creates a sense of hopelessness."
He also said it would be "tricky" for issuers to adjust to potential oversight of interchange rates by a federal panel, as lawmakers have proposed.
If such a panel lowered rates, "the card companies would probably raise interest rates and annual fees to consumers and perhaps reduce rewards," Posner said. "So you would shift around the revenue and expenses within the system a little bit-consumers bearing more, merchants bearing a little bit less."
Also, the parties in the interchange debate do not break along simple lines, he said.
"If all cards were cobranded cards, then interchange wouldn't really matter, because the merchants would just capture that cost through whatever benefits they get from the card issuers," Posner explained.
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