This morning the New York Times had an article about how the Federal Reserve transferred a record sum of $47.4 billion in profit to the United States Treasury last year.
These massive profits are a direct result of the Federal Reserve’s taking on a wide variety of liabilities beyond its traditional holding of super-safe US government bonds (Treasurys).
The 2009 profit was about 50% higher than the previous year’s $31.7 billion:
Unlike private banks, the Federal Reserve, as the central bank of the United States, does not exist to make a profit, although it inevitably does so. Traditionally the Fed holds liabilities of bank reserves and currency (technically those dollars in your pocket represent Fed debt in the form of currency) on which it pays out zero interest; the Fed collects interest on the Treasurys that comprise its assets. Historically this makes the Fed a profitable institution – although nowhere near the levels seen once it took on high-risk assets due to the financial crisis.
The Fed increased its bank reserves and took on assets like mortgage-backed securities and collateralized debt obligations (CDOs) due to the troubled assets coming off the books of AIG and during the sale of Bear Stearns to JP Morgan & Chase. The Fed took on the debt of now wholly-government-owned Fannie Mae and Freddie Mac as well.
While on the face of it, this might seem like a good thing, the Fed’s balance sheet has exploded to $2.3 trillion as a result of the crisis, and all those assets could represent liabilities if they prove to be toxic. The Fed is only as solvent as the public is willing to make it so – it is the public which holds its liabilities. Much of this debt in the form of Treasurys is held overseas by foreign governments, sovereign wealth funds, and the like.
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- Explanation of Goldman Sachs alleged fraud (video)
- Fraud lawsuit against Goldman Sachs names VP Fabrice Tourre; GS share prices fall, sparking financial stock selloff
- Bill Black’s Fiery Testimony at House Financial Services Committee Hearing on Lehman Brothers Bankruptcy (video)