DealZone

Repaying TARP on a high

As several large banks rush to the market to raise capital, one question remains: What’s the correlation between their ability to raise equity now and their strength in the face of a deeper recession if the early signs of a possible recovery prove false?

This morning Morgan Stanley joined the bandwagon of banks raising capital to pay back TARP. The Wall Street bank said it intends to raise $2.2 billion in common equity to satisfy a supervisory condition to enable it to redeem TARP preferred capital. It follows JPMorgan Chase and American Express, which announced their plans Monday.

The offerings come after the Fed said Monday the government will announce next week which of the 19 stress tested banks will be allowed to repay the funds. One condition for repayment is that they are able to raise money in the public equity markets.

But these banks are raising money at a time when investors are betting on a recovery. The S&P 500 posted its highest close in seven months on Monday, as reassuring economic data reinforced hopes that demand will stabilize. The Dow climbed to its highest finish since January.

The stress-tested banks have already been tested for their ability to deal with a steeper downturn. So what does their ability to raise capital in this market really prove?

No more rushing to the mailbox for those AmEx bills?

MASTERCARD/AMERICANEXPRESSRemember a couple of years ago, when it was discovered that an executive used his corporate American Express card to pay for $241,000 worth of “services” at a New York-based “gentleman’s club” then tried to stiff AmEx on paying the bill?

How might someone explain a $241,000 charge on his or her statement, to his or her boss (or his or her spouse, for that matter)when it gets sent to the home office — or worse, the home — at the end of the month?

“Wow, those steaks really WERE expensive.”

“We all had dessert.”

“There must be a missing decimal point somewhere. I hope.”

Well now, that problem might be a little easier to manage as American Express said on Tuesday it will no longer send paper copies of their bill to clients at large companies.

American Excess

Credit card icon American Express is joining the ranks of the commercial banks, standing in line with Goldman Sachs and Morgan Stanley. But becoming a bank holding company is probably going to be a whole lot easier for American Express to stomach — they certainly have more experience dealing with the huddled consumer masses than the remaining investment banks. 

Requiring Amex to behave more responsibly than, well, many of its clients, surely cannot be a bad thing for the financial system. The deal gives Amex lower borrowing costs and more access to government money. A cynic might suggest that cardholders won’t see these benefits, but as long as they keep taking the card with them when they buy new plasma TVs, all should be well with the U.S. economy. 
 
Amex is the fourth-largest U.S. credit card issuer. Like its peers, it continued pumping out credit well into the housing crisis. Now, with delinquencies up and incomes falling, and the market for its assets (our cruddy debts) evaporating, its best opportunity for salvation is to turn to heavily indebted taxpayers. 
 
As a bank holding company, Amex will be able to issue bonds that are government guaranteed through June 2012, and apply to receive money under the $700 billion TARP, which is making direct investments in banks, insurers and possibly other financial companies. So getting their capital base up to commercial bank standards should be no problem. Keeping it there will be a neat trick with credit markets having become as flimsy as plastic. 

Deals of the day:

* Japan’s Mitsubishi Rayon said it will acquire unlisted British chemicals producer Lucite International for $1.6 billion.