Fed earns record profit amid crisis

Tuesday, January 12, 2010 - 12:59pm

WASHINGTON (AP) — The Federal Reserve generated record profits last year, reflecting money made off its extraordinary efforts to rescue the country from the worst economic and financial crisis since the 1930s.

The central bank announced Tuesday it logged a record windfall of $52.1 billion. Of that total, a record of $46.1 billion gets turned over to the Treasury Department.

It marks both the biggest profit and payment to Treasury on records dating back to 1914, when the Fed began operating. The previous record payment turned over to the Treasury — of $34.6 billion — was registered in 2007. In 2008, the Fed reported a payment of $31.7 billion.

The Fed's efforts to end the crisis are separate from the $700 billion taxpayer-funded financial bailout program authorized by Congress in 2008 and overseen by the Treasury Department.

Originally set up to shore up banks, money from the publicly-derided program also has been doled out to rescue other types of companies, including General Motors, Chrysler and GMAC. President Barack Obama is weighing a levy aimed at recovering tax dollars from government-rescued financial institutions.

The bigger profit reported by the Fed came from $46.1 billion in earnings from the securities it held last year.

Such income went up as the Fed's holdings of securities mushroomed.

The Fed launched several securities-buying programs last year to help revive the economy. Its goal is to drive down rates on mortgages and other consumer debt.

Under one program that ended last year, the Fed snapped up $300 billion worth of government debt. Under another program, the Fed is on track to buy $1.25 trillion in mortgage securities from Fannie Mae and Freddie Mac, and an additional $175 billion in debt issued by the mortgage giants. Those programs have boosted the value of securities held by the Fed.

The Fed faces a risk, however. The Fed could lose money if the central bank had to sell those securities and their prices were to fall. The Fed might need to sell the securities to sop up some of the unprecendented amount of money pumped into the economy during the crisis.

The Fed is funded from the interest earned on it vast portfolio of securities. It is not funded by Congress.

After covering its expenses, the Fed gives what is left over to the Treasury Department.

Besides the income from its securities, the Fed said it earned $5.5 billion from holdings related to the takeover of investment firm Bear Stearns and insurance company American International Group. The Fed also earned $2.9 billion from loans extended to banks, investment houses and others.

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