USA inc. Too big to fail?

FRFI 206 December 2008 / January 2009

US finance capital has gone through extraordinary turbulence in the last few weeks. Through a torrent of financial measures, the US Federal Reserve (Fed) has now become the main participant in the US money market, since it is the only bank that lenders trust. The entire total of handouts, bail-outs, loans and guarantees now comes to a staggering $8.5 trillion – more than half the annual production of the US. The national debt is now over $10 trillion. Debt on this scale is unprecedented. Can it be sustained? Is the US ‘too big to fail’?

In past issues of FRFI we have shown how derivatives, exotic financial instruments, have proved to be so toxic to the financial system that leading US financial institutions have had to be nationalised or taken over to survive – or else allowed to go bankrupt. In our last issue, we showed that since the toxic assets have no market, they are difficult to price, hence cannot be used as security collateral in exchange for loans. The entire US money market began to freeze up; in place of credit, a furious hunt for cash began.

If the credit markets remain halted, non-financial companies will find it impossible to operate, throwing the economy into depression. So Treasury Secretary Hank Paulson insisted, in a three-page memo, that Congress immediately give him $700bn and unlimited authority to use it to fix the financial system. Thanks to popular outcry at donating such an extraordinary sum of taxpayers’ money, his request was initially voted down. After days of wheeling and dealing, Congress finally passed the 2008 Emergency Economic Stabilization Act on 3 October. Paulson’s three-page memo had grown to almost 500 pages, festooned with so many ornaments that it looked like an overburdened Christmas tree. As well as the $700bn for the banks, there was a host of tax cuts for businesses: wooden arrow makers in Oregon, racetrack owners, Puerto Rican rum ... and on and on. All this candy had sufficiently sweetened the legislation to enable previous objectors to swallow it.

The Act created the Troubled Asset Relief Program (TARP), supposedly to buy up all the toxic assets, the derivatives of uncertain value which are the core of the problem, and to purge them out of the system. This would then remove uncertainty about the credit-worthiness of borrowers, free up lending and enable liquidity conditions to return to normal. At least that was the theory. But after it was actually passed, the money markets showed their appreciation by dropping further and locking up tighter.

Clearly, it would take months for TARP to be set up, and purge enough toxic assets to get inter-bank lending moving again. So the Federal Reserve, the Federal Deposit Insurance Corpor-ation (FDIC) and the US Treasury took steps to pump money into the banks, provide loans or provide guarantees. We don’t have space to describe them all, but here are the main ones:

• The Treasury quietly changed the tax code without any public debate to enable firms that acquire other banks which have incurred losses, to use them to offset the taxes on their own profits. Benefit – $140bn.
• FDIC provided deposit guarantees of $1.4bn and arranged $139bn in loan guarantees for General Electric’s financial unit.
• The Federal Reserve made $150bn available to the banks and started paying interest on reserve balances from commercial banks deposited with the Fed.
• The Fed initiated two new programs to unclog the Commercial Paper market and to help Money Market investment funds – worth $2.3 trillion.
• The Treasury has handed out $250bn of TARP money straight to the banks.
• Citigroup, once the world’s largest company and now limping along, received $20bn in a capital injection, together with $306bn of guarantees for toxic and distressed assets.
• Further assistance to AIG insurance company.
• A $200bn ‘facility’ to rescue consumer debt – credit cards and auto loans.
• $500bn to buy up mortgages from Freddie Mac and Fannie Mae, and $100bn to purchase some of their debt.

The accompanying table tells the story, comparing changes in the last two months with changes in the previous year:
• Federal Reserve lending to commercial banks jumped from $309.9bn to almost $1 trillion in the last two months.
• In the year from September 2007 to September 2008, commercial banks’ reserve balances at the Fed remained relatively unchanged –about $8bn – and their cash holdings were around $300bn. But from mid-September to mid-November, reserve balances grew from $8bn to $633.9bn, while cash holdings grew from $286.3bn to $854.3bn. That’s almost $1.2 trillion not being lent, but hoarded!
• The New York Stock Exchange became a cash machine: in the year to September 2008, the Standard and Poor 500 index fell by 250 points; now, in just two months, it fell a further 425 as hedge funds and other investors dumped stock for cash.

Credit Crisis – Critical Indicators1



Federal Reserve Bank ($bn)

Commercial Banks ($bn)

NY Stock Exchange



Total Lending

Reserve balances


Overseas Borrowing

S&P 500 Index


12 Sept 2007







10 Sept 2008







19 Nov 2008







(2) – (1)







(3) – (2)






This is in part being financed by banks borrowing from banks and affiliates outside the US – about $887bn by mid-November. Federal programmes are being financed by huge sales of Treasury securities – $550bn in the last quarter of this year. More money will need to be borrowed for further bail-outs, since US imperialism is clearly far from having surmounted this crisis. But borrowing has its limits: eventually it has to be paid back. Yet, to pay it back, capitalism has to be sufficiently profitable – but it is the lack of profitability of US capitalism which has forced it onto the crutches of credit.

Despite these vast sums, the credit markets are still incapable of standing on their own feet. As a result, non-financial industries, such as the car manufacturers, are seriously threatened.

The car companies
With the leap in the price of petrol it was made obvious to all, that the ‘Big Three’ car makers – GM, Chrysler, Ford – had strategic problems. With the doubling of prices, the large ‘gas-guzzlers’ that were the cash cows of their business were now headed for the slaughter house. Combined with the credit crisis, which hit lending to consumers for car purchase, as well as routine operational financing, the ‘Big Three’ were now running short of cash, and came to Washington seeking $25bn of bridging finance to support them while they reorganise and retool to produce different, smaller, more energy-efficient vehicles.

In the scale of things described above, $25bn is small change – after all Wall Street has set aside $20bn for bonuses (sorry, ‘retention payments’) for its staff and the US Treasury casually donated $20bn to Citigroup bank over a weekend without any public debate or investigation. Yet the Detroit CEOs were greeted with a brutal, bruising and bitterly hostile series of interrogations and lectures from Representatives, including from Democrats who tried to out-do their Republican counterparts in heaping scorn and criticism on the auto moguls. They were told to return with a plan in a few weeks and skulked out of the room back to Detroit.

However, if the ruling class decides to refuse support, there are serious consequences. First, the ‘Big Three’ directly employ about 240,000 workers, indirectly another 970,000 at suppliers, as well as about 1.7 million workers who are dependent on the spending of the directly and indirectly employed workers.2 So, some 2.95 million jobs depend on the ‘Big Three’. Secondly, the cut in personal incomes, hence consumption, by these workers will be about $398.2bn over three years. Further, loss of taxes and increase in unemployment payments will mean government will lose some $156.4bn over three years. Third, there will be financial consequences: GM has $32.45bn in outstanding long-term debt, Ford has $25bn of long-term debt,3 while private equity fund Cerberus bought an 80.1% stake in Chrysler from Daimler in 2007 and owns 51% of GMAC (GM’s car loan arm). Now bondholders are wrestling with GM over attempts to reorganise its financing and Cerberus has suddenly discovered that Daimler ‘intentionally and materially’ misled it about the state of Chrysler. Defaults on these debts will have consequences for pension funds and other institutional investors. Finally, those 2.95 million workers, unlike the financial sector workers, are contributing substantial amounts of surplus-value to US capitalism: throwing them out of work is going to significantly reduce the profits of US capital and speed the decline into a full-blown depression. Throughout all this, the United Auto Workers leadership has had no independent strategy for its members; it has negotiated away wages, benefits and jobs, despite the severity of the potential consequences of employer bankruptcy to the workers.

The US car industry is just the first of many industries and companies that will suffer as a result of the deepening of the credit crisis. Yet the workers, even if unionised, are really not prepared for the onslaught which is going to develop on jobs and wages.

The entire cost of this crisis – of the financial crisis, of the recession – will be forced onto the working class in the US. Jobs, wages, benefits, public services – all will be coming under the knife as this crisis deepens. The huge mountains of debt the US is building up threaten to overwhelm it. Is the US too big to fail? So far it has demonstrated that it is not big enough to succeed without savagely attacking the living standards of the American people.

Steve Palmer
US correspondent

I want to apologize to readers of FRFI for a factual mistake in the article 'USA inc. Too big to fail?' I had explained that banks were failing to lend and instead hanging on to the cash. I gave a figure of $1.2 trillion being hoarded. Embarrassingly, I had overlooked a note to the relevant tables. The $633.9 billion of a reserve balances with the federal reserve bank are included in the $854.3 billion of cash held by the banks, because they can be withdrawn from the Fed on demand. So the amount being hoarded was just $568 billion, still a huge amount.

This factual error does not alter the major point I was making.indeed the problem has become worse: reserve balances have grown by $164.6 billion to a total of $798.5 billion at the end of 2008; while cash in the banks has grown by $162.2 billion to a new high of $1016.5 billion. This means that the cash hoard has now grown to $730.2 billion showing that the problem is only getting worse.

Steve Palmer

1 Federal Reserve releases: H4.1, H3. Standard and Poor’s.

2 Impact on the US Economy of a Major Contraction of the Detroit Three Automakers, Center for Automotive Research, Michigan, 4 November 2008.

3 ‘GM, Ford, GE debt volumes exceed CDS exposures’, Reuters, 5 November 2008.