Fed payments to Treasury up sharply in first 9 months of 2012
WASHINGTON, Nov 29 (Reuters) - The U.S. Federal Reserve sharply increased its payments to the Treasury during the first nine months of the year, data released on Thursday showed, with part of the gain due to the repayment of emergency loans to help rescue Bear Stearns and AIG.
The Fed's unaudited quarterly financial report showed payments to the Treasury of $67.7 billion in the nine months through September versus $57.5 billion over the same period in 2011.
Part of the increase stemmed from a net $5.1 billion gain for emergency Fed loans to back the 2008 purchase of assets held by Bear Stearns and American International Group Inc, compared with a net $3.3 billion loss in the year-earlier period.
The Fed also recorded an $8.7 billion non-interest gain on its holdings of Treasury securities, versus zero in the first nine months of 2011.
Bear Stearns and AIG's spiraling losses from massive bets on the U.S. housing market heralded the escalating global financial crisis. Both had to be rescued by the government, with the Fed providing crucial funding.
The bailout, and other government aid to restore confidence in the country's banking system, was extremely controversial at the time, with critics warning it would cost taxpayers dearly.
However, the Fed announced in June that the loans had been repaid with interest. Profits from the sale of remaining Bear Stearns and AIG assets, held in portfolios named after Maiden Lane, the street in lower Manhattan where the New York Federal Reserve Bank is located, go mainly to the central bank.
Fed transfers to the Treasury are effectively payments to U.S. taxpayers. They have soared along with the Fed's sharp expansion of its balance sheet via massive bond purchases.
The bond purchases are aimed at driving down U.S. borrowing costs to shore up a fragile economic recovery, and the balance sheet has more than tripled in size to around $2.8 trillion since before the financial crisis.
Fed critics, warning these actions represent a threat of future inflation, worry the central bank may suffer losses on its portfolio if it is forced to sell assets quickly to keep price pressures in check.
Such losses could be politically damaging for the Fed and could fuel calls by some lawmakers for greater oversight of the institution. Some Republicans have already accused the central bank of veering into fiscal policy, and away from monetary policy, with its bond purchases.
Many economists consider the notion that the Fed could suffer serious balance sheet losses as very unlikely, because they do not believe the danger of inflation will ever be so great that it would force the Fed to sell assets at a loss.
Fed Chairman Ben Bernanke has also played down the risk of losses. He noted in a speech in Jackson Hole, Wyoming, in August that the Fed had returned over $200 billion to the Treasury in the last three years, and said that the "odds are strong" that its asset purchases would make money for U.S. taxpayers.