WASHINGTON — The Federal Reserve transferred $47.4 billion, a record sum, to the Treasury Department last year, a result of the central bank’s actions to support the fragile housing market.
The transfer to the public coffers rose roughly 50 percent, or $15.7 billion, from $31.7 billion transferred in 2008, the Fed announced on Wednesday in releasing its annual financial statements, which were audited by Deloitte.
“Central banking is a great business,” joked Vincent R. Reinhart, a former director of monetary affairs at the Fed.
Unlike private banks, the Fed does not exist for the purpose of making a profit, though it inevitably does so. Historically, it paid no interest on the currency and bank reserves that represent its liabilities, while it made interest on the Treasury securities that make up its assets.
The Fed’s profitability increased as an incidental result of the financial turmoil that began in 2007.
To hold down long-term interest rates and support the housing market, the Fed greatly increased its holdings of Treasury securities and acquired mortgage-backed securities and debts owed by Fannie Mae and Freddie Mac, the mortgage-finance companies that are now controlled by the government. The Fed made $20.4 billion in interest on those mortgage-related securities and debt holdings in 2009.
In addition, the Fed profited as troubled banks turned to its discount window and other emergency lending programs.
The Fed paid for the assets by creating reserves and, although it began paying interest, currently 0.25 percent, on those reserves in October 2008, the payments are only a small drag on the central bank’s profitability.
Those seeking to use the Fed to help cover the nation’s steep deficits and debts, however, will inevitably be disappointed.
“The Fed can only play this game as long as the public is willing to hold its liabilities,” said Mr. Reinhart, now a scholar at the American Enterprise Institute, a conservative research organization. “If it tried to increase its balance sheet tenfold, say, the public would be unwilling to hold those reserves. You’d get dollar depreciation and inflation.”
As it is, the Fed’s balance sheet is now roughly $2.3 trillion, about 2.5 times its size before the crisis. Its chairman, Ben S. Bernanke, now faces a set of challenges as the Fed prepares to eventually tighten monetary policy and return its balance sheet to a more normal size.
All told, the Fed’s comprehensive income was $53.4 billion in 2009, a $17.9 billion increase from 2008. After deducting operating expenses, the Fed transferred $47.4 billion to the Treasury.
Along with financial statements for the Fed’s board of governors in Washington and the 12 Fed district banks, the Fed released details about the assets held by five limited liability companies that were created by the Federal Reserve Bank of New York in response to the crisis.
Three of those companies, known as Maiden Lane I, II and III, were created to hold troubled assets, including mortgage-backed securities and collateralized debt obligations, acquired as a result of the government-brokered sale of Bear Stearns to JPMorgan Chase in March 2008 and the takeover of the American International Group, the stricken insurance giant, that September.
The Fed expects to recover the full value of the loans made to those special entities and does not expect any loss to taxpayers from them, senior Fed officials said in a conference call.
The Fed spent $243.7 million on salaries for its roughly 2,200 employees in Washington in 2009. Those numbers could change substantially if Congress creates an independent Consumer Financial Protection Bureau within the Fed, as a Senate bill to overhaul financial regulations seeks to do.
The annual financial statements also showed that the Fed spent $479.3 million on currency printing last year. “In just the past 25 years, the value of Federal Reserve notes in circulation has grown from $180 billion to $890 billion, an increase of almost 400 percent,” Mr. Bernanke said at a news conference on Wednesday at the Treasury Department to unveil a new design, incorporating additional anticounterfeiting features, for the $100 note.
“And while in the past, most U.S. dollars were held domestically, today many of these notes circulate outside of our borders,” he added.
Then we'll see what kind of house of cards they are really playing with.