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The Fed's making a profit?
The Federal Reserve has indeed made $14 billion on hundreds of billions of dollars in loans injected into the financial system, according to the Financial Times. But of course, that's not whole story.
This is an internal estimate from the Fed "based on the difference between the fees and interest" in the lending, and the interest the Fed would've gotten had it invested in three-month Treasury bills instead. From the FT:
The central bank earned about $19bn in income from charging interest and fees to financial institutions and investors that tapped the new facilities to obtain much-needed funds during the turmoil.
The interest the Fed would have earned by investing the same amount in T-bills was an estimated $5bn, leaving a $14bn gain since August 2007.
But here's what the estimate doesn't include:
The figure is not a complete picture of Fed finances as it excludes its company-specific bail-outs and purchases of long-term assets.
The central bank is still exposed to the risk of substantial losses on its Maiden Lane portfolios - pools of assets financed as part of the bail-outs of Bear Stearns and AIG.
The estimates do not include unrealised gains or losses on the Fed's portfolio of mortgage-backed securities and Treasuries purchased as part of its $1,750bn asset purchase programme that provides an additional stimulus to the economy.
Those seem like pretty significant things, and they very well could be. We have little idea what many of those assets will be worth in the end.
Tonight on Marketplace, you'll hear from Douglas Elliott, a former investment banker, who's now a fellow at the Brookings Institution. He's pretty optimistic about both the Fed and the Treasury programs:
We have a lot that's still out there, and so if things go badly, we could end up losing money overall. I think the good news here, though, is not so much that we might make some money. It's that we could be talking about the possibility of making money when that isn't why we even went into this. The government put the taxpayer money into the banks because we were looking at the abyss.
His position is that the investment into the banks was worth it, and that it saved the financial system. But there's another reason it's difficult to be talking about profits.
The $7 trillion deficit projections for one, not to mention the troubling issues elsewhere in the banking system. A story in today's Wall Street Journal says the FDIC is piling on the risk -- to itself. That the dollar figure is exactly the same as the Fed's reported profit is a coincidence.
I think...
To encourage banks to pick through the wreckage of their collapsed competitors, the Federal Deposit Insurance Corp. has agreed to assume most of the risk on $80 billion in loans and other assets. The agency expects it will eventually have to cover $14 billion in future losses on deals cut so far. The initiative amounts to a subsidy for dozens of hand-picked banks.
Insert the word "profits" for "playoffs":
Hard to lose money when you are a bank that can legally print all the money you want, and cannot be audited or compelled to answer questions.
Hello:
I listened to your show today. At one point, you discussed the story, apparently from the financial times, that the federal government had made some “profits†from some of their loans to financial institutions. The commentator and a person from the Brookings Institute discussed this point in a positive light. To paraphrase, they assumed apparently that such profits indicated the money injected by the federal government to have been a success as it kept the economic system from the brink of disaster. I strongly disagree as I believe any reasonable person who kept track of the hearings underlying the “injections†of capital into financial institutions would. “Profits†for the federal government are simply immaterial.
The true measure of success would be whether the institutions used the money to invest in the economy, through business loans, venture capital, or whatever, that result in jobs. The theory goes that the money helps mitigate the impact of “toxic†mortgage based investments resulting in enhancing the institutions’ ability and discretion in issuing other loans. It appears that this point is being lost in more and more institutional capital “injections.†Generally, the scenario follows roughly the same pattern. The institution assets become more sound by getting rid of he bad loans, it then avoids risk by simply tightening up on nearly all lending, this “sound institutional model†results in their stock going up, the stock holders making profits push the price up further, and the institution then can pay back the federal government with interest almost as an afterthought.
I believe a lot of people forgot this point. This program is supposed to mitigate the recession and eventually stabilize the economy. Despite the simple, but profound pain this economy is causing to many people, in many cases the primary purpose of this stimulus approach appears to be limited to stabilizing financial institutions. For example, Bank of America, using their stimulus funds on at least one acquisition which made them a small fortune, but hardly produced any jobs. To summarize, the production of jobs, not the creation of capital sufficient to pay back the federal government with interest, is the point of pouring trillions of dollars on institutions.
As an aside, I believe Roosevelt had a much better approach to achieve the same result. He bypassed the financial institutions and their profit incentives. He simply created agencies such as the WPA to directly employ people. People would no doubt scream socialism initially, but abruptly stop when they find themselves employed.
