Marketplace Scratch Pad

The Fed’s making a profit?

Scott Jagow Aug 31, 2009

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”:

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