The Fed’s 2010 Profit? A Cool $81.7 Billion

The Federal Reserve made some serious money in 2010. The central bank’s profit soared to $81.7 billion, a record high, primarily from growing interest earnings on federal agency and government-sponsored enterprise mortgage-backed securities.  The Fed’s balance sheet — which also can be monitored monthly — ballooned to $2.43 trillion, up $193 billion from 2009, as holdings of the Treasury Department and mortgage-backed securities increased. The Fed gave back $79 billion to Treasury in last year, an 68 percent increase over $47 billion the Fed returned in 2009.  The Fed’s previous record high earnings was $53.4 billion.

In reaction to the financial crisis, the Fed acquired securities whose value had collapsed due to fear and uncertainty in markets.  Additionally, the Fed created emergency lending programs for banks and firms, which further boosted its balance sheet.  The central bank came under attack for taking too many risks with taxpayer money and putting itself in a position to endure losses.  So far the Fed’s crisis-lending programs have earned handsome profits.  The 2010 income rise primarily resulted from $24 billion in interest earnings from the $1.0 trillion mortgage-backed securities and agency bonds it bought to stabilize the housing market.  As of last week, the Fed held a virtually identical quantity of such securities.

The Treasury Department plans to slowly sell its $142 billion portfolio of mortgage-backed securities.  Although there’s no direct implication for Fed policy, the market reaction to the Treasury sale provides valuable input into how the central bank may go about selling its own significantly larger holdings, which analyst expect to take place early in 2012. That’s a significant increase over the $907 billion it held in August 2008, just before the financial crisis.  To help the nation’s economy recover, the Fed has created massive amounts of credit to support the banking system and buy bonds.

Writing in the Christian Science Monitor, Doug French notes that “Amongst the assets Mr. Bernanke and Co. are shepherding include sub-prime mortgage bonds that once belonged to American International Group (AIG).  The Wall Street Journal reports that AIG would like to repurchase these bonds as a part of its attempt to break free from government control through a public stock offering.  ‘Ahead of that, AIG wants to be able to show investors it is putting its cash to work and boosting investment income in its insurance units,’ reports the WSJ’s Serena Ng.  The rub is that AIG is offering 53 cents on the dollar for the mortgage bonds.  Maybe the Fed can do better in the marketplace.”

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One Response to “The Fed’s 2010 Profit? A Cool $81.7 Billion”

  1. Firstly, sorry for the huge comment: my opinions are particularly subjective but I wanted to supplement this creatively piece of writing with my own experience. Between my wife and I, we’ve worked in private equity for a number of years before dropping out due to the grueling lifestyle. In terms of investing, we’ve seen a number of of people make it! and a huge sum of people LOSE everything. Needless to say, you do NOT want to be the latter. With the inflation and drug wars going on, just seeing the capital gains tax hitting your already negative revenue is not a pretty thing. Sometimes, I really feel that investing is a roll of the dice. I don’t mean like gambling..but for example, I read up on the NOVA article by Delos Chang (talks about technical analysis / chartists and fundamental analysis). Really encouraged me to go invest in the Japanese yen through futures for my hedge fund. A few weeks later, would you know it…the tsunami hits and the yen appreciates in value because all those poor Japanese citizens are cashing in on their insurance who has to liquidate assets from overseas into yen. Basically, supply and demand. Of course, we can’t see everyone in terms of price tags, we have to really consider the drug wars and scandals in Japan right now but that’s what I mean! Really a roll of the dice. Anyway, long story short, if you really want to make some money, I’d consider investing in currency. Just my two cents. Thanks for reading.

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