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3.1.3. Credit Crisis

The credit crisis of 2007 and 2008 has strongly affected American Express' operations. Traditionally, banks lent their money on deposit to credit card holders for purchases. However, American Express (along with the largest credit card issuers such as Discover and Citigroup) does not have enough funds on deposit with its bank subsidiaries to fund all of its outstanding cards. Instead, it has long relied on selling its credit card loans as bonds in what is known as the asset backed securities market. As 2007 and 2008 progressed, investors were scared away from buying mortgage bonds, then business loan bonds, and finally most forms of credit card bonds. To prevent a major collapse of multiple large credit card lenders, the US government enacted a special program where the Federal reserve would purchase various bonds, including credit card, SBA loan, and other bonds, to ensure that the flow of credit would continue for the US economy. The federal reserve also allowed the company to convert into a bank holding company to take advantage of additional programs, such as a program which allows the company to borrow funds by selling bonds guaranteed by the government. These moves have been seen as essential for American Express to survive. One important reason for this is that credit card bonds aren't usually like mortgage bonds insofar as mortgage bonds are often sold with little or no recourse to the seller. Credit card bonds, however, can force American Express to inject cash into the bonds if the earnings within the bonds fall to a certain point, as credit card bonds were traditionally designed not with the purpose of protecting the seller from risks of non payment on the credit cards but rather providing the seller with the ability to lend more of the borrowed money than what would normally be allowed with bank deposits.



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