The Federal Reserve paid a record $46.1 billion to the U.S. Treasury last year as aggressive bond purchases and lending to fight the financial crisis swelled its net income by 46.8 percent.
The Fed's payment represents an increase of $14.4 billion over its 2008 contribution and was the largest since the U.S. central bank was launched in 1914. Its 2009 net income of $52.1 billion also was a record.
This is a silver lining in that big cloud of the Fed having to intervene massively and expand its balance sheet. The good news is, there's a little extra money. Nariman Behravesh, chief economist of Global Insight in Lexington, Massachusetts.
The 12 Fed regional banks are required to transfer their profits to the Treasury after paying dividends to member banks and retaining some of their surplus.
Fed Chairman Ben Bernanke and the Fed Board in Washington took unprecedented actions to prop up the financial system in 2008 and 2009, bailing out major financial institutions and launching a massive array of emergency lending facilities, and drawing withering criticism from lawmakers in the process.
Bernanke is fighting legislative efforts to limit the Fed's regulatory authority and to open its policy making up to more political scrutiny. His nomination to a second four-year term as Fed chief also faces an unusual amount of opposition, although he is expected to win the Senate's needed backing.
While the record profits may aid the Fed's case and could ease some pressure on U.S. budget deficits, the central bank still holds billions of dollars' worth of risky assets from bailouts and needs to start unwinding its balance sheet that has risen to more than $2 trillion as recovery gains steam.
Bonds that rose when the Fed was buying could lose value when it starts to unload them.
BOND PROFITS REACH $46.1 BILLION
The largest previous payment to the Treasury was $34.6 billion in 2007. From its total 2009 net income, the Fed paid dividends to member banks of $1.4 billion and kept $4.6 billion of earnings as paid-in capital.
The Fed said much of its income, $46.1 billion, came from its open-market buying of U.S. Treasury debt, debt of mortgage finance sources Fannie Mae and Freddie Mac , and mortgage bonds and other securities. The program was aimed at holding down interest rates to spark an economic recovery.
The Fed also earned a net $5.5 billion from limited liability companies created in response to the financial crisis to make loans and take over assets from financial rescues of big institutions such as Bear Stearns and insurer AIG .
Three Maiden Lane portfolios hold a variety of assets from Bear Stearns and residential mortgage-backed securities and collateralized debt obligations from AIG. Those assets are worth $68.3 billion.
Those holdings are being managed with a view to holding them over time and selling them off in a way that maximizes the value of the underlying portfolio, a Fed official told reporters in a conference call.
The Fed earned $2.9 billion from earnings on loans to banks, primary dealers and other institutions.
Currency swap arrangements created with 14 central banks during the crisis, along with foreign currency investments, netted profits of $2.6 billion in 2009, the Fed said.
It said net operating expenses of the 12 reserve banks totaled $3.4 billion in 2009 and they paid interest to banks on reserve balances totaling $2.2 billion. Banks were assessed for Fed Board expenses, including the cost of new currency, of about $900 million. (Additional reporting by Mark Felsenthal; Editing by W Simon and James Dalgleish)