How the Fed made a record profit

Nancy Marshall-Genzer Jan 12, 2010
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How the Fed made a record profit

Nancy Marshall-Genzer Jan 12, 2010
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Kai Ryssdal: For all the criticism that Ben Bernanke has gotten for the way the Federal Reserve has handled the financial crisis — and he has gotten plenty — you’ve gotta give him this: The guy does deliver to the bottom line. The Federal Reserve made a record profit last year. It turned a nice deposit of about $46 billion back to the Treasury Department. So we asked Marketplace’s Nancy Marshall Genzer to explain the Fed’s investment strategy.


Nancy Marshall Genzer: The Fed usually invests in things like U.S. Treasury bonds. Not glamorous, but safe. Last year was different. The Fed bought things no one else wanted. You know, those toxic assets, like mortgage-backed securities. Highly risky investments backed by pools of mortgages.

Economist Axel Merk of Merk Mutual Funds says the strategy paid off.

AXEL MERK: The Federal Reserve has been buying specific securities that were deeply undervalued during the crisis and have now appreciated in value.

During the financial crisis, the Fed, in essence, printed money and used it to buy assets that pay interest. It’s a pretty cool business model. Imagine if the Fed didn’t have to worry about the economy. If it could invest Goldman-Sachs style. High risk, purely for profit.

Douglas Diamond is an economist at the University of Chicago.

DOUG DIAMOND: So if they could sort of run the Fed as a hedge fund, which some people have accused them of doing recently, they could be the most profitable hedge fund, because they could borrow more money than anybody else.

But they could lose more money, too.

Vincent Reinhart is a former Fed official who’s now at the American Enterprise Institute. He says the Fed isn’t crowing about its profits, because of what could happen when it has to sell some of its investments.

VINCENT REINHART: In Washington, normally you’d have a band and a parade. Well, they don’t want to draw attention to the profits they made because as it comes time to actually shrink their balance sheet, they may very well have to post losses.

And another thing? The Fed’s profit is dwarfed by how much the government has spent to shore up the economy.

In Washington, I’m Nancy Marshall Genzer for Marketplace.

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