Fat Stacks

01.14.14

The Insanely Profitable Federal Reserve

On February 1, Janet Yellen will take over America’s central bank, a cash cow that makes the Fortune 500 look like peanuts.

The Federal Reserve is the most powerful and influential financial institution in the world and it is also one hell of a business.

The Fed, like Newt Gingrich, was hatched in secret one hundred years ago, on a small island off the coast of Georgia.  It was created to bring order to a chaotic banking system in the wake of a string of financial crises around the turn of the century. What's gotten the mainstream media buzzing about the bank of late is the fact that, for the first time in it's century-long history, a woman will be running the show. As many have pointed out, incoming chairperson Janet Yellen may in fact become the most powerful woman in the world upon her ascension on February 1st.

The Fed is in a much better business than finding oil or making phones.

The Fed is not quite a government entity but it is not quite a private corporation either; it is something of a hybrid between the two and enjoys the dual benefit of that perception. Its role in the economy is to direct monetary policy (mainly by setting various interest rates), supervise the banking system (LOL), and maintain some semblance of stability in the economy by managing prices and employment to the extent it can. 

It also makes a metric ass-ton of money in the process, kicking this cash back upstairs to the U.S. government that permits it to operate. 

How profitable is the Federal Reserve?

Victoria McGrane's story at the Wall Street Journal tells us about the Fed's incredibly lucrative 2013 (emphasis mine):

The Federal Reserve sent about $77.7 billion in profits to the Treasury Department in 2013.

The Fed in a statement released Friday said it made an estimated $79.5 billion in net interest income, a total largely driven by the $90.4 billion in interest income it made on its portfolio of Treasurys, mortgage bonds and other securities.

Okay, that's a lot of money, topped only by the record $88 billion generated in 2012. And obviously these totals are elevated because of the institution's many stimulus programs, such as the various quantitative easings (QE1, QE2, QE3: The Search for Spock), Operation Twist, and whatnot.

McGrane tells us that the annual cost of running the 12 Federal Reserve Banks and funding the operations of the new CFPB regulatory body is around $5.7 billion. So, while the Fed is not necessarily a private "business" per se, it is an obscenely high-margin quasi-corporation, with around $80 billion in after-cost profits. 

How does the Fed's profitability compare to America's other gigantic businesses? 

For starters, the $90 billion or so in total interest income the central bank's portfolio paid out is equal to about one-third of all corporate dividends paid by U.S. companies in 2013 ($311.8 billion). 

The Federal Reserve, after operational costs, is earning double the profits of Exxon Mobil ($44 billion) and Apple ($41 billion), and those two companies are doing a combined $600 billion in global revenues! The Fed is in a much better business than finding oil or making phones - instead it merely sits atop a $4 trillion portfolio of mostly risk-free bond investments and is the de facto ultimate decider of what the interest payments are going to be. Not bad work if you can get it. 

If we just compare the profits of the Fed's net interest income after expenses to the rest of the banking sector, we see that it is equal to the profits of the ten largest financial institutions put together! The most recent annual profits of JPMorgan, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, American Express, Capital One Financial, US Bancorp, PNC and Bank of New York Melon total up to $78.3 billion, just shy of the Federal Reserve's vig.

According to outgoing chairman Ben Bernanke, the bank has sent more than $350 billion to the Treasury since 2009, which is equal to the total amount it had sent during the entire 18-year period before the financial crisis began. Not a bad flow of funds to find oneself in the middle of. It's good to be the Fed.