Opinion

Felix Salmon

The Fed’s earnings

By Felix Salmon
January 12, 2010

Neil Irwin has worked out that the Federal Reserve earned $45 billion in 2009, thanks to the steep yield curve that it engineered and its move into higher-risk, higher return securities. This is good news: all that money is being dividended back to the public fisc, keeping the deficit that little bit lower.

Essentially all that $45 billion was earned by one profit center, the New York Fed: the rest of the Federal Reserve system is basically cost centers. Now if the New York Fed was a commercial investment bank, it would pay half of that money out in bonuses. Let’s be conservative and call it $21 billion. The New York Fed has 3,000 employees, which means that the bonus pool would work out at $7 million per employee: a full order of magnitude greater than the equivalent number at Goldman Sachs.

Of course, making money is much easier when you can print the stuff. But it wasn’t at all obvious, at the beginning of 2009, that the Fed was going to have such a banner year. So let’s file this one — along with the lack of bonuses at the Fed — under “happy” for the time being. Yes, as Irwin points out, it’s still entirely possible that the Fed might end up taking substantial credit losses. But it’s becoming increasingly probable that any such losses will ultimately be more than made up for in higher coupon payments along the way.

Comments
6 comments so far | RSS Comments RSS

but Felix – what happens when the Fed stops its QE and MBS buying programs? said differently, this “$45B” in profits is a classic ponzi scheme – as long as the fed keeps buying the assets it already owns (marking prices favorably), it shows a profit… once it stops, look out.

in other words, if i were to buy a billion shares of MSFT, i’d almost certainly show a profit by the time i was done, as i’d move the stock higher and my average price would be lower… but when i’m done buying, and the stock trades back down….

Posted by KidDynamite | Report as abusive
 

KD: the Fed doesn’t mark to market, profits are pure carry.

Posted by alea | Report as abusive
 

thanks Alea – that’s even sillier though, isn’t it? if they want to make more money, all they have to do it print more money (zero cost) and buy more stuff (positive yield)…

and although they don’t mark to market, they can still recognize losses if and when they eventually sell the assets they bought.

Posted by KidDynamite | Report as abusive
 

yes,it is. if the fed had to mark to market like a commercial bank, it would have been toast long ago, but it’s a central bank, different rules apply and they make them.
they can still recognize losses, of course, but you know who pays for that. for ex, almost half of the portfolio are mbs guaranteed by fannie/freddie themselves guaranteed by you know who.

Posted by alea | Report as abusive
 

so “profits” should be better called “fake alpha.”

Posted by alea | Report as abusive
 

Any talk at all about any Fed “profits” with the deficit at its higher-than-heaven-ever-was level is just too ludicrous to fathom. Only our pathetic gov’t would essentially brag, “Hey, we are big losers(for you)in almost everything we have done in this economic crisis, but here is one (puny)example of a (manufactured)profit we made for you(that is not even real; don’t ask for details). How about them apples, Bubba? Whoo-Hoo”

Posted by bobbobwhite | Report as abusive
 

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