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Fed Chairman Ben Bernanke (Win McNamee/2010 Getty Images)
Fed Chairman Ben Bernanke (Win McNamee/2010 Getty Images)

U.S. Fed books windfall from crisis Add to ...

Add Federal Reserve Board Chairman Ben Bernanke to the short list of investors who made a profit off the financial crisis.

The U.S. Federal Reserve System, which includes the Board of Governors in Washington and 12 regional banks based in cities such as New York and San Francisco, returned a record $78.4-billion (U.S.) to the Treasury in 2010 - a remarkable 65-per-cent increase from 2009.

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Such profits could help temper the criticism of the Fed's bailout of Wall Street, which tends to be characterized as a big money-loser that inflated two things: the federal budget deficit and bankers' pockets.

"Because our cost of funding is so low, we will continue to remit back to the Treasury a significant amount of money," Mr. Bernanke said in defence of his crisis strategy during testimony at the Senate budget committee last week. "From a fiscal point of view, this is most likely to be beneficial, not harmful, to the government's fiscal position."

As a matter of policy, the Fed pays back any profit it earns to the government, rather than build up reserves. The Fed's return to the Treasury in 2010 came from profit of $80.9-billion. In 2009, it remitted $47.4-billion of $53.4-billion in profit.

The central bank's hefty earnings reflect the hundreds of billions of dollars it spent to buy financial assets to keep interest rates low.

With the Fed's benchmark interest rate near zero, Mr. Bernanke led the purchase of $1.7-trillion of mortgage and government debt through March 2010, a strategy that most economists call quantitative easing. The Fed late last year embarked on a second round of quantitative easing, announcing plans to buy $600-billion in longer-term Treasuries by the end of June.

The Fed is able to make so much money on its investments because its costs are so low. To finance its asset purchases, the Fed creates money that takes the form of private bank reserves deposited with the central bank.

Financial institutions in the U.S. are required to keep a minimum amount on deposit with the Fed. At the end of 2010, however, those institutions had placed $991-billion in excess of that minimum with the central bank, according to Bloomberg News. The central bank pays a mere 0.25 per cent on those deposits - much less than the yield paid on the assets that policy makers have added to their books.

For example, in $7.8-billion of purchases made Monday as part of the Fed's second quantitative easing program, the central bank bought Treasuries with coupon values ranging from 2.75 per cent to 9.125 per cent, according to Bloomberg.

Still, it's unlikely Mr. Bernanke will actively seek comparisons with investors such as John Paulson, the hedge fund manager who made billions by betting on the collapse of the U.S. housing market.

The Fed is facing greater scrutiny from newly elected Republican lawmakers who say the unelected policy makers at the central bank have grown too powerful. While questioning Mr. Bernanke last Friday, Jeff Sessions, the ranking Republican on the Senate budget committee, told the Fed chief that buying federal debt and transferring the profit back to the government sounds like a "zero-sum game."

Mr. Bernanke proposed an alternative way to look at the situation, saying: "It's interest the Treasury didn't have to pay to the Chinese." The Chinese government is the biggest holder of U.S. Treasury debt.

 
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