Despite its extraordinary intervention to prop up a broken financial system, the Federal Reserve is so far maintaining its own ability to run at a profit.
On Thursday, the Fed provided the first post-bailout snapshot of its own cash flows.
The upshot: Despite all the tumultuous events and the central bank’s big responses, the Fed was able to transfer surplus funds of $32 billion to the US Treasury for the 2008 calendar year. That was down, but only by about $3 billion, from the year before.
What this means for ordinary Americans is that, at least so far, the operations of the central bank remain a source of net gains for federal revenues. The Fed’s various rescue programs, such as lending money to banks and others to offset the impact of chaos among private-sector banks, were mostly profitable during 2008. Those rescue efforts ramped up in a big way last fall, as stresses in credit markets became extreme.
Still, the emergency bailouts of specific companies – Bear Stearns and AIG – took a toll on the Fed’s finances for the calendar year. The report said that “income was … reduced by $5.2 billion due to the decline in the fair value of investments” acquired in the federal bailout of those firms.
It is possible that those assets, held in separate accounts dubbed the “Maiden Lane” portfolios (for a street near the Federal Reserve Bank of New York), will decline further in value before the Fed is able to sell them. The Fed took on those assets as part of larger deals designed to prevent a meltdown in the financial system. In the case of Bear Stearns, for example, the investment bank was saved from bankruptcy when JPMorgan Chase agreed to purchase the firm. But JPMorgan only agreed to participate in the rescue after the Fed took on a portfolio with $29 billion of risky Bear Stearns assets.
The Fed’s other rescue efforts have been more mundane in style but very large in scope. Its overall balance sheet has roughly doubled in size as the central bank has lent freely to help provide short-term financing for banks and industrial firms.
The Fed cited “$7.1 billion in interest earned on loans to depository institutions and others.”
Income from some Fed accounts declined compared with the year before, which doesn’t seem surprising given that the central bank was cutting its short-term interest rate sharply in an effort to buoy the economy. The report covered all the Federal Reserve system from the Board of Governors in Washington to the 12 regional Fed banks to the Maiden Lane portfolios.