Washington: The US Federal Reserve banks paid a record $46.1 billion to the U.S. Treasury in 2009 as aggressive bond purchases and lending to fight the financial crisis swelled its net income by 46.8 percent.
The Fed`s payment to the Treasury 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 Mass.
The 12 Federal Reserve regional banks, all located outside Washington, are required to transfer their profits to the Treasury after paying dividends to member banks and retaining some of their surplus.
But it was Fed Chairman Ben Bernanke and the Federal Reserve Board in Washington that 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 -- drawing withering criticism from lawmakers in the process.
Bernanke is fighting legislative efforts to limit the Fed`s authority and to open its policy making up to more political scrutiny.
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 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.
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, Fannie Mae (FNM.N) and Freddie Mac (FRE.N) debt, mortgage bonds and other securities. The program was aimed at holding down interest rates to spark an economic recovery.
The Fed 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 (AIG.N).
It 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.
The Fed 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.