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By John Goff
The U.S. Federal Reserve
estimates it raked in close to $19 billion from charging
interest and fees to financial institutions and investors that tapped government
facilities during the finance meltdown, an article on the Financial Times website
claims.
By way of comparison, the Fed reckons
in would have earned around $5 billion if it had invested the same amount of
money in Treasury notes since August 2007. That means the bank earned $14
billion more than it would have with straight investments in government paper,
a return that would likely push the Fed’s EVA score right off the chart.
The Fed’s internal calculations included
the money the bank generated off its discount window, the Term Auction Facility,
currency swaps with other central banks, purchases of commercial paper and
financing for investors in asset-backed securities.
Not surprisingly, the Fed says it
turned its highest profit by buying up commercial paper. Since there’s no
collateral backing the corporate paper, issuers generally have to pay higher
interest rates to attract lenders. The return on its commercial paper purchases
has been so high, in fact, the Fed has been able cover losses from CP issuers
that defaulted. Indeed, the sizeable profits could help buffer future losses on
other parts of the bank’s portfolio.
Of course, reaping a sizeable
return on bailout funds now won’t matter if, later on, the government must come
to the rescue again—a point made by CFOZone’s Ronald Fink. Fink argues that the
Fed and Treasury may face future bailouts if lawmakers fail to reform the U.S. capital
markets system.
Critics also point out that the
merchant bank formerly known as the United States government still has plenty
of financial bullets to dodge. The Treasury Department, for one, could get smacked by its guarantees on billions of dollars of toxic
mortgages.
Uncle Sam could also take a
substantial hit from its Maiden Lane portfolios. Those investments consist of toxic
assets the Federal Reserve bought as part of the bailouts of Bear Stearns and
AIG. In addition, the Fed’s internal calculation does not factor in the bank’s
big big bucket of mortgage-backed securities, nor equity stakes it took in
troubled companies such as Citi Group, General Motors and Chrysler.
But early returns on the Fed’s
equity investments are promising. The New York Times claims the central bank
has so far generated a 15% percent annual profit off its Troubled Asset Relief
Program. Under that program, the government spent $240 billion to purchase
equity stakes in a number of battered financial institutions. The Times says
the central bank has thus far generated a $4 billion profit off its TARP
investments in eight big banks that have since repaid their obligations to the
government.
Specifically, the government
has turned a profit of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and
$414 million on American Express.
The five other banks that
repaid the government (Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T) each
brought in $100 million to $334 million in profit, according to the Times.
The Fed made the bulk of its
money from reselling equity warrants to the banks. The monetary authority
purchased the warrants at a cut rate and has benefited greatly from the recent
run-up in the price of bank stocks.
(Front page photo courtesy of PocketAces)
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