The Federal Reserve has made a $14bn profit on loan programmes that have provided hundreds of billions of dollars in liquidity to the financial system since the start of the crisis two years ago, according to Fed officials.
The internal estimate is based on the difference between the fees and interest on the lending facilities and the interest the Fed would have earned had it invested the funds in three-month Treasury bills.
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.
The Fed assessment underlines the possibility that other central banks could make a profit on their crisis-fighting measures – at least before adjusting for the risk they assumed.
The calculation by Fed staff, which has neither been audited, published or risk-adjusted, only deals with its liquidity facilities.
Those include discount window and Term Auction Facility loans to banks, currency swaps with other central banks, purchases of commercial paper and financing for investors in asset-backed securities.
The most profitable liquidity programmes were the commercial paper one, which is one of the riskier facilities for the Fed because participants do not post collateral, and the foreign exchange swap agreements, followed by the TAF, according to the New York Fed staff.
However, the recent improvements in many markets have caused a drop in the profitability of some of the Fed programmes, partly because demand has fallen as investors and banks returned to dealing with one another. Demand for the TAF, for example, has slowed down considerably in recent weeks.
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.
And 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.
The central bank earns interest on these securities as it does on its loans. But it could face losses if it has to sell them when interest rates are higher than when it purchased them.
The Fed declined to comment.
Critics have warned the central bank might lose money on its vast efforts to avoid financial collapse and ease financing conditions for the economy as a whole.
But the internal estimates suggest that the Fed might well make a cash profit on the crisis. They show that the fees earned on the loans were high enough to more than cover defaults to date – leaving a sizeable cushion against future losses on these loans and other parts of the Fed portfolio.
Some politicians have criticised the Fed for using billions of dollars of public funds to support the market and stricken groups such as AIG and Bear Stearns. The Fed’s balance sheet has ballooned from $800bn in 2007 to about $2,000bn. A recent Gallup Poll found the Fed had the worst public approval rating of nine government agencies, even lower than the tax authorities.