Fed To Remit A Record $78.4 Billion In Ponzi Cash To Treasury

Tyler Durden's picture

After the Fed bought over $1 trillion of US Treasury bonds in the past 2 years, it is now reverse payback time, in which the Fed gives the Treasury just a little more cash. The FRB announced that per "unaudited" 2010 results (obviously), the Fed is provisioning to pay the Treasury $78.4 billion, a 50%+ increase from the $47 billion paid to the Treasury in 2009. What is the basis of this payment? Why the Fed's charter of course: "Under the Board's policy, the residual earnings of each Federal
Reserve Bank, after providing for the costs of operations, payment of
dividends, and the amount necessary to equate surplus with capital
paid-in, are distributed to the U.S. Treasury." Which means that as the Fed buys up ever more Treasurys, and as rates continue their inexorable rise higher, the Fed will continue to receive interest payments from the US Treasury, which, at the end of every year, it will promptly remit back to whoever the current incarnation of Tim Geithner is, in essence nullifying the "checks and balances" impact of cash out interest expense on Treasury, and thus government, deficit decisions. In fact, the greater the amount of debt issued, and therefore monetized, the less the Treasury actually has to pay in interest. And in the meantime, the higher interest rates go, the greater the duration-adjusted loss on Fed holdings. But who cares about those: after all, results are all "unaudited" and the Fed will hold all securities to the earlier of "maturity" or default - as if anyone doubts which will happen first.

The chart below shows all annual distributions from the Fed to the Treasury.

And full release from the Fed:

The Federal Reserve Board on Monday announced preliminary
unaudited
results indicating that the Reserve Banks provided for
payments of approximately $78.4 billion of their estimated 2010 net
income of $80.9 billion to the U.S. Treasury. This represents a $31.0
billion increase in payments to the U.S. Treasury over 2009 ($47.4
billion of $53.4 billion of net income).  The increase was due primarily
to increased interest income earned on securities holdings during 2010.

Under the Board's policy, the residual earnings of each Federal
Reserve Bank, after providing for the costs of operations, payment of
dividends, and the amount necessary to equate surplus with capital
paid-in, are distributed to the U.S. Treasury.

The Federal Reserve Banks' 2010 net income was derived primarily
from $76.2 billion in income on securities acquired through open market
operations (federal agency and government-sponsored enterprise (GSE)
mortgage-backed securities, U.S. Treasury securities, and GSE debt
securities); $7.1 billion in net income from consolidated limited
liability companies (LLCs), which were created in response to the
financial crisis; $2.1 billion in interest income from credit extended
to American International Group, Inc.; $1.3 billion of dividends on
preferred interests in AIA Aurora LLC and ALICO Holdings LLC; and $0.8
billion in interest income on loans extended under the Term Asset-Backed
Securities Loan Facility (TALF) and loans to depository institutions.
 Additional earnings were derived primarily from revenue of $0.6 billion
from the provision of priced services to depository institutions. The
Reserve Banks had interest expense of $2.7 billion on depository
institutions' reserve balances and term deposits.

Operating expenses of the Reserve Banks, net of amounts
reimbursed by the U.S. Treasury and other entities for services the
Reserve Banks provided as fiscal agents, totaled $4.3 billion in 2010.
 The Reserve Banks' operating expenses included assessments of $1.0
billion for Board expenditures and the cost of new currency. In 2010,
statutory dividends totaled $1.6 billion and approximately $0.6 billion
of net income was used to equate surplus to paid-in capital.

The preliminary unaudited results include valuation adjustments
as of September 30 for TALF loans and consolidated LLCs.  The final
results, which will be presented in the Reserve Banks' annual audited
financial statements and the Board of Governors' Annual Report, will
reflect valuation adjustments as of December 31.