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Credit Cards Get BailoutPublished 12/29/08 Craig Harrington - Print ArticleE-mail - editor@economyincisis.org With so much money being spent by the various government programs, it is hard to keep track of who and what is getting the attention. In a time when everyone feels entitled to stimulus checks and government bailouts, it should be no surprise that the TARP mandate has grown to include such an assortment of lending institutions. Regardless, we should still be concerned about what the Treasury is doing with our money, and how the recipients intend to use it. American Express has confirmation that it will receive $3.39 billion from the Troubled Asset Relief Program (TARP) upon its conversion to a commercial bank. American Express is leading the charge of major credit card companies who are now receiving federal funding in order to stay afloat in our stumbling economy. American Express has long catered to the rich and famous of the United States with high fee cards only available to exclusive members. Despite being privy to a business model which charges exorbitant fees for the use of and access to personal credit lines, major credit card companies in the U.S. are lining up for government aid. Capital One and Discover, some of the nation’s largest card issuers, also expect to receive confirmation of their requests for $3.6 billion and $1.2 billion respectively. The most alarming part of the deal is not that the government is handing out money to institutions who fleece their customers. What is truly troubling is that most analysts projected American Express to be fully capable of paying off its debts for the fiscal year. The company – along with most other card issuers – is likely to cut credit limits (to rein in spending) and increase interest rates in coming months and was expected to cover its debts. Nonetheless, American Express still received federal funding. The TARP program will buy shares in the credit card giants as part of its capital infusions. With American Express, the TARP will receive annual dividends of 5 percent for 5 years, and 9 percent in the following years. Other card issuers will likely be given similar conditions. In the long run these conditions should stand to make money on their investment, but that comes with the assumption that the companies do not continue to lose value. Shares of American Express are down over 60 percent in 2008 – other card issuers have seen similarly abysmal returns – and a continued slide (or out right collapse) would wipe out any government gains. Furthermore, there is a distinct possibility that the nominal returns of 5 and 9 percent will not keep pace with inflation. The Federal Reserve is currently doing everything it can to avoid the devastation of deflation, but in doing so it is crippling our long-term currency position and making the prospect of runaway inflation a serious dilemma. Source Bloomberg:
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The new stimulus package should roll back credit card interest to 10% or less for all credit cards - more than sufficient to make a pile of money (some cards even make money at 5%). As a rough guess - this could add $300+ billion to the stimulus package on its own.