Federal Reserve’s Record 2009 Earnings: $45B

Since its earnings season, and everyone is closely watching the financials, we might as well talk about one more bank’s  record earnings: The Federal Reserve.

An analysis by the Washington Post’s calculates that the Fed return a substantial amount of money to the Treasury.

The central bank’s higher earnings were primarily from two lines of business: Quantitative Easing (QE) saw the Fed aggressively buying bonds, push rates down and value up. The Fed quadrupled its asset allocation of U.S. government debt and mortgage-related securities to $1.8 trillion dollars last year, up from $497 billion in 2008. Bonds rallied strongly as the Fed sent interest rates to zero.

Another source of revenue for the bank was interest income on this paper. The ZIRP policy does not prevent the Treasury from paying about 3% or better ont he 10 year, and higher rates on the lower grade mortgage paper. The central bank also aggressively acquired higher yielding junk paper — non-investment grade — much of it festooned with sub-prime losses. This business line represents potential losses in the future.

All Fed accounting in this report is pro-forma.

The 3rd profitable division was emergency loans to banks and others, along with programs to prop up credit card lending, auto loans, and other consumer and business lending. Central bank interest and fees were also extremely profitible.

Here’s WaPo:

“The Fed will return about $45 billion to the U.S. Treasury for 2009, according to calculations by The Washington Post based on public documents. That reflects the highest earnings in the 96-year history of the central bank. The Fed, unlike most government agencies, funds itself from its own operations and returns its profits to the Treasury.

The numbers are good news for the federal budget and a sign that the Fed has been successful, at least so far, in protecting taxpayers as it intervenes in the economy — though there remains a risk of significant losses in the future if the Fed sells some of its investments or loses money on its stakes in bailed-out firms.

This turn of events comes as the banks that benefited from the Fed’s actions are under the microscope. Starting at the end of the week, major banks are expected to announce significant earnings and employee bonuses. Anger in Washington is at such a high boil that the Obama administration will probably propose a fee on financial firms to recoup the cost of their bailout, officials confirmed Monday.”

Full earnings estimates for the central bank will be released later today. No word on if the Fed will be handing out any bonuses this year . . .

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Source:
Federal Reserve earned $45 billion in 2009
Neil Irwin
Washington Post, January 12, 2010
http://www.washingtonpost.com/wp-dyn/content/article/2010/01/11/AR2010011103892.html