Federal Reserve Earns Record Profits, Largely From Investments In Economy, Banks

The Federal Reserve earned a record $81.7 billion in 2010, largely on investments made to help the economy and banks weather the 2007-2009 financial crisis, and turned the bulk of it over to the U.S. Treasury.

According to audited financial statements, the U.S. central bank transferred $79.3 billion to Treasury's coffers last year, up from $47.4 billion in 2009 and a record turnover for a second straight year.

The figure for the total turned over to Treasury was slightly larger than the Fed had reported in January when it said it had remitted $78.4 billion.

The latest figure was based on additional data, Fed officials said on Tuesday when they issued statements for all 12 Fed regional banks and some of the entities established during the financial crisis.

The Fed said that at year-end, the value of assets in its Maiden Lane investment vehicle -- taken on to help rescue Bear Stearns in 2008 -- had declined slightly to $27.96 billion from $28.14 billion at the end of 2009. This was due largely to payoffs of underlying mortgages, according to Fed officials.

Assets held in vehicles created to rescue American International Group (AIG.N), Maiden Lane II and III, rose slightly, to a combined total of about $40 billion, but these have since been transferred to the Treasury with the payoff of Fed loans to AIG.

The U.S. central bank took unprecedented actions to prop up the economy at the height of the financial crisis, in the process acquiring a swollen portfolio of assets that earns money for it but has also drawn some criticism from lawmakers.

After driving overnight interest rates to near zero in December 2008, the Fed bought $1.7 trillion of longer-term Treasury and mortgage-related bonds as a supplement to its pledge to keep overnight rates near zero for an extended period.

It followed that up late last year with a new $600 billion bond-buying program to spur growth. That program is scheduled to end at mid-year.

The Fed said that at the end of 2010 it had total assets of $2.43 trillion, up $193 billion from a year earlier. It said its balance sheet's makeup was changing, and that holdings of U.S. Treasury securities were up $261 billion while its holdings of federal agency and government-sponsored enterprise mortgage-backed securities had climbed by $86 billion.

(additional reporting by David Lawder)

(Reporting by Glenn Somerville, Editing by Kenneth Barry)

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[Aftab Singh]

09:41 AM on 03/28/2011

Umm, hello? That isn't a good thing!

The market is always trying to find a profit-motive in owning the dollar. It's always trying to respect the truth that the dollar at most as good as what it is backed by. So if the Fed is 'making money' that represents the market saying 'Bernanke, we don't trust you. We're anticipating your future money-printing exercises'. That aint good.

I discuss my theories on this in detail on my site. I say that 'Fiat Currencies trade at discounts from par':

http://greshams-law.com/2011/02/28/fiat-currencies-trade-at-discounts-to-par/

[TruelyFedUp]

02:02 PM on 03/23/2011

The first two minutes of this clip state how I'm feeling about it http://www.youtube.com/watch?v=9bMQsomInnc

[Yank in France]

12:17 PM on 03/23/2011

My friends on both the "left" and the "right" (quotations marks because the Teabagger criticism and hysterical leftists sometimes are on the same page on economic policy!), isn't it about time for you to recognize that the Fed, led by the Great Helsman, Bernard Bernanke was RIGHT ALL ALONG.

To lost lefties, YES, the Fed bailed out the banks, but at a high cost to the banks!!

To Teabaggers, you claimed that the Fed was throwing away money just a short year ago, but the results have been coming in, and it looks like TAXPAYERS are COMING OUT AHEAD.

To normal American who couldn't give a whack about macroeconomics but who have been SCARED SILLY by the drumbeat of ignorant accusations, which I also see on financial news sites, just LOOK AND COMPARE where the two sides stood one or two years ago. The Fed was vilified by ALL for saving the banks, but without the banks (as selfish and as narrow-minded as they are!), there would be very little lending to businesses  and households today, without which any economy would COLLAPSE!

I know. Many of my good friends here are included in my comments, but isn't the lesson here, for both extremes, that there is no substitute for cold, hard analysis and action instead of hot-headed ideology?

[sonofsamphm1c]

08:01 PM on 03/23/2011

I think you make excellent points.

[ruolivert]

06:47 PM on 05/02/2011

The only thing I don't agree with is that the bail outs came at a high cost to the banks? What makes you say that? Weren't many of the loans at little to no interest? Not attacking, just asking

[Yank in France]

12:08 AM on 05/03/2011

The bail-out of AiG was based on over 9% interest bearing loans in the context of 0% inflation. Since the firm was posting losses at the time and was unable to make then current debt payments, it needed the money so it accepted the offer, but 9%+ interest was the kiss of death.

After public anger subsided somewhat, the interest rates were lowered to around 5%, which is a bit more reasonable. In the meantime, the government converted its debt into stock warrants which also helped to alleviate AIG's debt pressure.

In the end, the Fed recovered the entirety of its loans and cashed in some juicy stock warrants to generate far more income than even the loans.

The Fed posts its balance sheet every year. In 2009, it gained $72 billion and in 2010 about $90 billion.

All the Fed's gains are transferred almost immediates to the US Treasrury.

Not bad, considering the hysterical comments by Teabagges and leftwing "populists" in 2008!

As for the low-interest loans, that is an entirely different matter. The Fed's overnight lending rates to member banks has been 0.25% for about 18 months now. The idea was to increase liquidity on a very, very illiquid interbank market (banks lending to each other) in a climate where banks simply did NOT have any faith in other banks. It was an attempt to stop or at least reduce the bleeding of the smallest banks, which are crucial to maintaining competitive bank rates and providing service for the poor and moderate income Americans.

Today, the interbank market is far more liquid, but the huge banks are doing all in their power to press their advantage in these times of economic hardship for their smaller rivals.

The Fed led by Ben Bernanke has been fighting for BALANCED GROWTH of the American economy whereas the big banks, backed by the Pubs and the Teabaggers, are just fighting for the big banks.

The Fed needs our support instead of more attacks from the ideological far right.

I hope I have responded to your question with this short response, but if not, I will be happy to respond further.

Best regards

[nothingchanges]

11:07 AM on 03/23/2011

If the Federal Reserve made $81.7 Billion off of this mess, just think about how much those in the private sector (the ones that created the mess in the first place) made.

I suspect the Feds profits amount to little more than a "sales tax" by comparison.

[spoonerrothbard]

01:30 PM on 03/23/2011

The Federal Reserve IS a privately owned bank.

[sonofsamphm1c]

08:02 PM on 03/23/2011

Yes, lots of privately owned banks turn over the majority of their profit to the US Treasury. With thousands of privately owned banks, it happens every day.

[totaldisbelief]

10:57 AM on 03/23/2011

the only real question here is:
How long do you want to put up with this institutionalized thievry ?

[sonofsamphm1c]

12:06 PM on 03/23/2011

For a very long time. It works.

[guveqzero]

10:14 AM on 03/23/2011

What a scam on the people. Public corruption in the open. There is one redeeming fact about it all, it is not sustainable. The system will eventually fail under its own weight given enough time. Like the gangsters in the last century, greed allows them only to survive untouched for a while.

[muck-raker]

09:48 AM on 03/23/2011

1913. Section 5 of the Act calls for a member bank to buy and hold stock in a district Federal Reserve Bank equal to 6% of its capital and surplus. For example, as of 1983, ten major New York City banks owned approximately 66% of the outstanding stock in the Federal Reserve Bank of New York. That Bank in turn owns a portion of the stock in the Federal Reserve Bank of the U.S. together with the eleven regional member banks. A review of the major stockholders of the ten New York city banks clearly shows that a few families related by blood, marriage or business interests control those 10 New York city banks, which in turn, hold the controlling stock in the Federal Reserve Bank of New York. In addition, approximately 38% of the stock of the Federal Reserve Bank of New York (as of 1983) was held by banks that are subsidiaries of foreign banks, namely the House of Rothschild which controls the Bank of England. The fact that the Federal Reserve System is controlled by private interests is one of the best kept secrets in American history.

[Mr Hankey]

09:43 AM on 03/23/2011

2008 - Ron Paul Blasts Secret Government Running Economy

http://www.youtube.com/watch?v=UD4kayWV1tk

[usna73]

09:34 AM on 03/23/2011

Sucked directly from the oxygen of the average American. Don't buy any of the hocus pocus. This is the biggest transfer of wealth in the history of mankind,...... and the major money center banks are still insolvent, with expend and pretend real estate on their books. The magic of fiat money. The fuse is still lit.

[firstep]

09:28 AM on 03/23/2011

Okay thats cool. So who got the other 2.4 billion dollars? Why do we have a bunch of private bankers taking their cut from the taxpayers money? Why do we have a bunch of private bankers loaning out our money and doing their best to keep us in the dark about what they are doing.
This is the greatest swindle ever cast upon the people.

[PharmaCan]

09:24 AM on 03/23/2011

Someone correct me if I'm wrong about this. I'm just trying to understand how this all works.

If the Fed netted $79.3 Billion then it probably earned at least $90Billion before expenses.

If the Fed earned $90 Billion last year, those earning came from money it loaned, right?

If the Fed was charging 0.075% interest, then it had $12 Trillion in outstanding debt to earn that $90 Billion, right?

So wouldn't that mean that the record profits the banks are making is all due to the fact that they are getting almost "free" money from the Fed?

If the banks are getting money at 0.075% and then using much of that money to buy T-bills that the government pays 3% to borrow, they are making 2.925% interest. But essentially they borrowed that money from the government and then loaned it back to the same government for a 2.925% profit, right?

Since taxpayers pay the interest on government debt, isn't this just a scheme to allow the banks to rip-off the American taxpayer?

A good portion of the $12 Trillion the Fed loaned to the banks was used by the banks to make consumer loans, right?

The banks are charging anywhere from 4% to 30% on the loans it makes to consumers. But, if they got the money they are loaning from the Fed, which means they got it from the government, which means they got it from the American people, doesn't that mean that they are charging us that 4% to 30% interest on our own money that they are lending to us?

So what exactly is the purpose of privately owned banks, other than to enrich the bankers? It would appear that they are taking government (the people's) money and then loaning it back to us at exorbitant rates. Why don't we just have government owned and run banks that eliminate the exorbitantly paid middlemen? It seems that that would make everything a lot more affordable for everyone, especially the government (taxpayers) who is certainly the biggest borrower of them all.

[muck-raker]

09:30 AM on 03/23/2011

The private banks print the money out of thin air and then charge us interest on it...much of what you talk about is called quantitative easing which is essentially BUYING bad debt from the Banksters and transferring it to the Taypayers debt. Goldman, Sachs is one of the main conspirators here since they make treasury notes out of thin air and sell these on the open market. (it is widely believed that Goldman, JP Morgan are part of the secret private banks that make up the Fed.)

[aheinzm]

09:32 AM on 03/23/2011

The Fed profits get deposited to the Treasury every year as the article mentions. So the Treasury really borrows at lower rates than what bonds are sold at at auctions since they get their interest payments back made to the Fed. The more money/credit the Fed creates the more interest bearing assets they can purchase thus driving up revenues and consequently profits. So the Fed making more money doesn't necessarily mean they are doing things right, but rather they are doing more of what they do (which may or may not be good for the economy, I believe it's not).

It's really a scheme for the banks against those who hold dollars, not necessarily just US Taxpayers.

And I would rather there not be a central bank and maintain privately owned banks and not let banks have a monopoly on creating legal tender like the Fed does.

[JohnnyKay]

08:56 AM on 03/23/2011

Let's stop calling it "the Fed" as if this monstrous entity is controlled by the government aka the people. It's a privately owned rape machine.

Of the people,. not by or for the people.

[headly67]

09:11 AM on 03/23/2011

A rape machine that makes you money and pays off debt? Where can I get one of those?

[spoonerrothbard]

01:35 PM on 03/23/2011

The money it creates is a representation of debt. It is a Federal Reserve NOTE.

[Jeff Mills]

08:48 AM on 03/23/2011

So they transferred $80 billion to the government ... just enough to pay for 8 months in Afghanistan.

[headly67]

09:12 AM on 03/23/2011

$6.7 billion a month.

[sonofsamphm1c]

12:22 PM on 03/23/2011

So, it would be easier to pay for Afghanistan if the Fed had kept its 80 billion, or had never made the economy saving moves that allowed the Fed to make the 80 billion?

[wagthedog1001]

08:43 AM on 03/23/2011

Conspiracy theories are much easier for most people to understand than any concept involving numbers in the millions and billions and trillions.

These numbers are not unlike trying to wrap your mind around the size of the universe in scientific terms. It's easier to just ignore science and go right to a friendly white-bearded Old Man who is taking care of us. That's my conspiracy theory.

[eyecon]

08:23 AM on 03/23/2011

Any article about the Fed is going to bring out the usual suspects with their usual baloney. Much of this advanced by Ron Paul and trumpeted by Stormfron.org. Much of it cloaked in antisemitic code. Most of it based on urban legend.

The Fed has two parts - the central bank and the regional banks. The central bank is under the direct control of the Treasury. The regional banks are nominally owned by the banks in the region who hold "letter" stock that is only redeemable at par value. Any profits earned by the regionals are returned to the US Treasury.

Is there cronyism at the Fed? You bet - just like any other government agency.
Could the Fed be more efficient, do a better job? Sure.
Do we need more oversight and regulations? Indeed.

However, none of that has anything to do with sinister "European" bankers with convenient religiously identifiable last names.

What many of these folks think they want is a return to the gold standard and an end to fractional banking (which none of them understand in the first place). Even if it made sense, and it does not, that ship has sailed a very long time ago.

[JohnnyKay]

08:57 AM on 03/23/2011

"The Fed" is privately owned.

[eyecon]

09:13 AM on 03/23/2011

Nonsense. It is a US government agency. READ1

[firstep]

09:30 AM on 03/23/2011

I understand fractional banking all too well eyecon. A perfect name just like what fractional reserve banking is. A con.