FIRST IT WAS Goldman Sachs (GS) and Morgan Stanley (MS). Then American Express (AXP) jumped onboard. Becoming a bank holding company seems to be all the rage these days as financial-services firms seek to use this new status to tap into the $700 billion in taxpayer-funded aid offered through the government's Troubled Asset Relief Program, or TARP.

As a bank holding company, American Express gains access to low-cost consumer deposits and Fed lending facilities. Its deposits will also be federally insured. (In return, the firm agrees to stricter government regulations and capital requirements.) But perhaps the biggest incentive for the move is that AmEx will gain greater access to federal bailout money under TARP. (A spokeswoman for American Express refrained from commenting on whether or not AmEx plans to participate in TARP.)

Among small-business owners — many of whom hold American Express accounts and have seen lending windows shut over the past year — the hope is that these firms' newfound source of liquidity will trickle down to them, allowing them to more easily attain loans and lines of credit. Small-business consultants and banking analysts, however, are quick to counter such a notion. While they believe access to the government's emergency funds should help eligible banks weather the economic downturn, they don't see any significant amount of aid finding its way to small businesses — at least not anytime soon.

After American Express announced its move last week, Chairman and Chief Executive Kenneth Chenault said that the company will continue to build a larger deposit base to "broaden its funding sources."

However, some people, like Peter Cohan, a business strategy professor at Babson College in Wellesley, Mass., are skeptical. Despite the government's intention to loosen the viselike grip of the credit crunch, he's doubtful that any of that freed-up liquidity will actually reach AmEx's small-business customers anytime soon. A more likely scenario, he says, is: “[American Express will] use it for internal operations such as paying people and keeping the lights on.”

David S. Waddell, senior investment strategist at Waddell & Associates in Memphis, Tenn., believes that AmEx will use any funds over and above that to bolster its financial strength "[It's a] pre-emptive strike against increasingly risky financial markets by increasing their capital base," he says.

That's bad news for the growing number of business owners who've been denied new loans and credit lines over the past year. A recent Senior Loan Officer Opinion Survey compiled by the Federal Reserve found that, at the end of October, 75% of domestic banks said they tightened credit for small firms — up from 65% in the Fed's July survey. Moreover, about 70% of respondents reported reducing both the maximum size and the maximum maturity of loans or credit lines to smaller firms.

One possible way small-business owners can gain rapid access to federal bailout money is if the government mandates it, says George Cloutier, chief executive of American Management Services, a small-business consulting firm in Orlando, Fla. While such lending mandates aren't being seriously considered by the government, there have been numerous calls among small businesses and advocates in support of the notion.

"It's too early to say when [or if] the government will succeed in making banks pass the money on to the rest of the economy," says Gregg S. Fisher, president and chief investment officer at New York financial advisory firm Gerstein Fisher. Instead, Fisher believes that AmEx's conversion will serve small-business owners in a different way — by protecting them from further fallout in the financial markets. "That would allow AmEx to keep credit flowing to its card members [who are] typically affluent consumers and small-business owners," he says.
"While these firms may not extend more loans to small businesses, at least they’ll [likely] stop cutting line limits,” adds Charles Ou, a senior economist with the U.S. Small Business Administration's Office of Economic Research in Washington, D.C.

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