Feb 17, 2011 12:07 PM

Fed Emergency Programs Generated $13 Billion Profit

By Michael S. Derby

The financial crisis was a money-maker for the Federal Reserve.

Research published by the Federal Reserve Bank of New York found the central bank’s various emergency lending and liquidity efforts helped generate $13 billion in profit between August 2007 and December 2009, when the tools were most used. The programs generated $20 billion in gross income against $7 billion in costs.

The contribution to the Fed’s bottom line was notable, the paper said, given that the Fed handed over $47.4 billion of its $52.4 billion net income in 2009. By law, the Fed must hand over its profits to the Treasury.

The New York Fed paper, written by economists Nicholas Klagge and Michael Fleming, helps shed new light on the cost of the Fed’s emergency lending programs. Over the course of the financial crisis, the central bank embarked on a series of unprecedented actions to help support the financial system and ensure the flow of credit to the economy.

The programs generated widespread worries about the Fed losing money, which would become politically difficult to deal with and could potentially compromise the Fed’s independence. Officials were confident they wouldn’t lose any money, and so far, they’ve been borne out by events. What’s more, government budget projections expect the Fed to return a significant amount of money to the Treasury Department for years to come.

The programs studied by Klagge and Fleming include those supporting banks and financial markets. These things contributed to a massive expansion in the Fed’s balance sheet, from $800 billion at the start of the crisis, on its way to $2.6 trillion by June.

A series of Fed papers have already praised the construction of the programs, arguing they did what they were intended to do. The paper Wednesday advanced this theme further by divining the positive financial impact to the central bank, while noting making money wasn’t an explicit aim for the Fed.

The biggest positive financial contributions came from the Fed’s liquidity swap arrangements with foreign central banks, along with Commercial Paper Funding Facility and the Term Auction Facility, which provided funding to deposit taking banks. The paper said the commercial paper facility produced the greatest net income — $5.3 billion — and $5.9 billion in gross income, despite being only the third-largest liquidity facility in terms of average amount outstanding. “It generated high income because of the wide spreads and fees required to participate in the program,â€