American Express 2010 Annual Report Download - page 46

ASSET SECURITIZATION PROGRAMS
The Company periodically securitizes cardmember receivables
and loans arising from its card business, as the securitization
market provides the Company with cost-effective funding.
Securitization of cardmember receivables and loans is
accomplished through the transfer of those assets to a trust,
which in turn issues certificates or notes (securities)
collateralized by the transferred assets to third-party
investors. The proceeds from issuance are distributed to the
Company, through its wholly owned subsidiaries, as
consideration for the transferred assets.
The receivables and loans being securitized are reported as
owned assets on the Company’s Consolidated Balance Sheets
and the related securities issued to third-party investors are
reported as long-term debt. Notes 1 and 7 to the Consolidated
Financial Statements provide a description of the adoption of
new GAAP effective January 1, 2010 and the impact on the
Company’s accounting for its securitization activities.
Under the respective terms of the securitization trust
agreements, the occurrence of certain events could result in
payment of trust expenses, establishment of reserve funds, or in
a worst-case scenario, early amortization of investor certificates.
As of December 31, 2010, no triggering events have occurred that
would have resulted in the funding of reserve accounts or
early amortization.
The ability of issuers of asset-backed securities to obtain
necessary credit ratings for their issuances has historically
been based, in part, on qualification under the FDIC’s safe
harbor rule for assets transferred in securitizations. In 2009
and 2010, the FDIC issued a series of changes to its safe harbor
rule, with its new final rule for its securitization safe harbor,
issued in 2010, requiring issuers to comply with a new set of
requirements in order to qualify for the safe harbor. Issuances
out of the Lending Trust are grandfathered under the new FDIC
final rule. The trust for the Company’s cardmember charge
receivable securitization (the Charge Trust) does not satisfy
the criteria required to be covered by the FDIC’s new safe
harbor rule, nor did it meet the requirements to be covered
by the safe harbor rule existing prior to 2009. It was structured
and continues to be structured such that the financial assets
transferred to the Charge Trust would not be deemed to be
property of the originating banks in the event the FDIC is
appointed as a receiver or conservator of the originating
banks. The Company has received confirmation from
Moody’s, S&P and Fitch, which rate issuances from the
Charge Trust, that they will continue to rate issuances from
the trust in the same manner as they have historically, even
though they do not satisfy the requirements to be covered by the
FDIC’s safe harbor rule. Nevertheless, one or more of the rating
agencies may ultimately conclude that in the absence of
compliance with the safe harbor rule, the highest rating a
Charge Trust security could receive would be based on the
originating bank’s unsecured debt rating. If one or more
rating agencies come to this conclusion, it could adversely
impact the Company’s capacity and cost of using its Charge
Trust as a source of funding for its business.
LIQUIDITY MANAGEMENT
The Company’s liquidity objective is to maintain access to a
diverse set of cash, readily-marketable securities and contingent
sources of liquidity, such that the Company can continuously
meet expected future financing obligations and business
requirements, even in the event it is unable to raise new
funds under its regular funding programs. The Company has
in place a Liquidity Risk Policy that sets out the Company’s
approach to managing liquidity risk on an enterprise-wide basis.
The Company incurs and accepts liquidity risk arising in the
normal course of offering its products and services. The liquidity
risks that the Company is exposed to can arise from a variety of
sources, and thus its liquidity management strategy includes a
variety of parameters, assessments and guidelines, including but
not limited to:
•Maintaining a diversified set of funding sources (refer to
Funding Strategy section for more details);
•Maintaining unencumbered liquid assets and off-balance
sheet liquidity sources; and
•Projecting cash inflows and outflows from a variety of sources
and under a variety of scenarios, including contingent liquidity
exposures such as unused cardmember lines of credit and
collateral requirements for derivative transactions.
The Company’s current liquidity target is to have adequate
liquidity in the form of excess cash and readily-marketable
securities that are easily convertible into cash to satisfy all
maturing long-term funding obligations for a 12-month
period. In addition to its cash and readily-marketable
securities, the Company maintains a variety of contingent
liquidity resources, such as access to secured borrowings
through its conduit facility and the Federal Reserve discount
window as well as committed bank credit facilities.
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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW