American Express 2007 Annual Report Download - page 86

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
EXPOSURE TO ASSET-BACKED SECURITIES
The Company’s asset-backed holdings are classified as follows:
Classification (Millions) Market Value
Trading $1,576
Available-for-Sale:
Continuing operations 79
Discontinued operations 838
Total asset-backed holdings $2,493
The following is a summary of the Company’s asset-backed
holdings at December 31, 2007:
(Millions) Market Value
Mortgage-Backed Securities
Government Sponsored Entities (GSEs) $1,070
Non-GSE
Prime 258
Alt-A 468
Sub-prime 140
Total Non-Agency 866
Total mortgage-backed securities 1,936
Other asset-backed securities 198
Commercial mortgage-backed securities 359
Total asset-backed holdings $2,493
Of the securities backed by residential mortgages, 99 percent
are rated AAA and the remaining 1 percent are rated AA.
There were no holdings rated below AA backed by residential
mortgages. More than 55 percent of the securities backed by
residential mortgages, or $1.0 billion, were primarily guaranteed
by three GSEs: Fannie Mae, Freddie Mac or Ginnie Mae.
These consisted primarily of pass-through securities in which
a mortgage pool’s cash flows support one class of securities.
The remaining non-GSE securities backed by residential
mortgages consisted of securities in structured transactions,
or Collateralized Mortgage Obligations (CMOs). Of these
securities, 97 percent are rated AAA; the remaining 3 percent are
rated AA. The $140 million of subprime mortgages represented
underlying assets within AAA-rated classes of asset-backed
structures whose cash flows are given priority over other classes
and thus offer greater protection from credit deterioration in
the underlying assets. The cash flows the Company is currently
receiving from these securities exceed the coupon amount and
the excess amount has been retiring principal. The $198 million
of other asset-backed securities were backed by assets other
than first-lien residential mortgages, including auto, student,
lease and credit card loans. Of these securities, 98 percent are
rated AAA.
Total gross unrealized losses remaining in accumulated
other comprehensive income (loss) related to those asset-
backed holdings classified as Available-for-Sale amounted to
$11 million ($10 million related to discontinued operations) at
December 31, 2007.
Valuations of asset-backed holdings will continue to be
impacted by external market factors including default rates,
rating agency actions, and the prices at which observable
market transactions occur. The Company’s future results may
be impacted by the valuation adjustments applied to these
holdings.
EXPOSURE TO FINANCIAL GUARANTORS
Approximately 73 percent of state and municipal securities
owned by the Company classified as Available-for-Sale are
insured by financial guarantors. Financial guarantors guarantee
timely payment of interest and ultimate payment of principal on
insured obligations. Certain private sector financial guarantors,
the so-called monoline bond insurers, have recently experienced
credit downgrades and difficulty obtaining cost effective capital
due to the insurers’ exposure to mortgage related product
guarantees. As of December 31, 2007, approximately 98
percent of the Company’s state and municipal securities insured
by financial guarantors were rated AAA, the remaining were
rated AA. The ratings of these securities will depend in part
on the ratings of the financial guarantors as well as in part on
the underlying issuers’ ratings without respect to the guaranty,
among other factors. The Company has not, to date, incurred
any significant losses in the value of its holdings as a result of the
financial guarantors’ credit problems. Continued deterioration
in the ratings and investor confidence in the claims-paying
abilities of the financial guarantors, or their inability to pay
guaranty claims, could result in declines in the values of these
securities.
NOTE 5 LOANS
Loans at December 31 consisted of:
(Millions) 2007 2006
USCS $ 43,318 $ 33,596
ICS 11,187 9,710
Cardmember lending, gross 54,505 43,306
Less: Cardmember lending reserve for
losses 1,831 1,171
Cardmember lending, net $ 52,674 $ 42,135
Other loans, gross(a) $ 807 $ 1,017
Less: Other reserve for losses 45 36
Other loans, net $ 762 $ 981
(a) Other loans primarily represent installment loans, revolving credit due
from U.S. Card Services’ customers, and loans to airline partners. At
December 31, 2007, there were no airline advances or loans outstanding.
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