Fed makes $14 billion on risky loans
Aug 31st 2009 7:00AM
Updated Dec 3rd 2009 12:52PM
Taxpayers and Congress worried that the Federal Reserve was making dangerous bets by lending money to troubled banks during the credit crisis. Big banks could default on the loans and cost the government tens of billions of dollars.
At it turns out, putting money into America's large financial firms has been a profitable enterprise, very profitable.
The Financial Times has gotten access to documents from the Fed that show it has made $14 billion providing money to the financial system. According to the paper, "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 news is not terribly important for several reasons. The Fed still has large sums of money invested in other areas of the financial system as part of its very broad rescue efforts. Some of those investments may eventually show losses.
In addition, the Fed was virtually forced to loan large banks hundreds of billions of dollars to keep them afloat. The profits that the agency made are very modest compared to the risks it took. The $14 billion may seem like a lot of money, but, given the capital exposure involved, it really isn't.
Finally, the Fed may not be finished putting money into the credit system. Defaults on business loans and problems with commercial real estate could send banks back to the agency with requests for more capital. These new "investments" may not do as well, which means that the Fed could give back its $14 billion profit fairly fast.
Douglas A. McIntyre is an editor at 24/7 Wall St.