Tuesday, June 29, 2010

Assistance to Banks to Reap Billions in Profit: Part II, Federal Reserve

As discussed in a post last week, the assistance to banks through the TARP program has generated a large return for taxpayers. However, the government’s stability programs and taxpayer returns were not only limited to TARP. Assistance through numerous Federal Reserve programs helped stabilize and jumpstart financial markets while providing billions in profit to taxpayers as well.

In 2009, the Federal Reserve recorded a profit of $52.1 billion, the biggest profit on record dating back to 1913 when the Fed was created. After retaining a portion of its profit to cover future operating expenses, the Fed transferred $46.1 billion of the remaining profit to the Treasury, a direct benefit to taxpayers. Of the net income to Treasury, the Fed noted “$2.9 billion in earnings on loans extended to depository institutions, primary dealers, and others” with additional profits coming from its LLC investment that facilitated JPMorgan Chase’s acquisition of Bear Stearns.[1] The remaining profits were from open-market operations which includes the purchase of GSE debt.

Over the past year, the Fed purchased riskier assets than its traditional Treasury security holdings. The increased risk translates into a greater return for the Fed and ultimately taxpayers, which the Congressional Budget Office estimated to be over $70 billion in profit for 2010.


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