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The World's Most Profitable Hedge Fund Is About To Make The US Treasury's Life Much Easier

Tyler Durden's picture


We know its not Paulson, Ackman, or SAC; is it Dalio's Bridgewater? No, the world's most profitable private entity that is in business to generate profits via speculation in financial markets is, drum roll please, the Federal Reserve. Stone & McCarthy (SMRA) estimates the Fed will make around $90bn profits in 2012. Of this around $87.5bn will be remitted to the US Treasury - a new record high (quite helpful when one is trying to avoid a debt ceiling using 'extraordinary measures' though we assume this is already penciled in due to its consistency). Since 1947 the Federal Reserve has paid the Treasury roundly $975 bln, about 1/3 of which has been paid over the past 6 years. In other words, the cumulative Federal deficit since 1947 has been reduced by nearly $1 trillion since 1947 due to the repatriation of Fed earnings to the Treasury Department. SMRA estimates that this profitability, thanks to the spread between SOMA coupon income and IOER will likely lift the Fed's profitability to around $120bn in 2013, but a 1% rise in yields would translate into a $275bn loss.



As SMRA notes:

The Fed doesn't have to mark securities in SOMA to market. Only if securities are sold are the profits or losses booked.


Moreover, even with the onset of the ultimate exit, the Fed won't start selling securities until some time later. But as we approach the onset of the exit and later the onset of Fed asset sales, the likelihood is that yields on these securities will be higher than at the time these securities were purchased. This implies capital losses on securities to be sold, and this would negatively impact on Fed earnings...


Ultimately, the Fed will be faced with booking losses on asset sales, while also suffering from declining net interest income as the interest rate on reserves is increased to effect a higher Fed funds target.


The bottomline is that there will come a time when the Fed may not be profitable. But this has to be viewed in the context of the Fed's repatriation of what will be several hundreds of billions of dollars in the years immediately ahead, and the nearly $1 trillion paid between 1947 and 2012.

The Fed can account for losses without eroding its capital, simply by suspending payments to the Treasury until such time as the Fed returns to profitability.


Source: Stone & McCarthy


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Thu, 12/27/2012 - 10:09 | 3098638 SheepDog-One
SheepDog-One's picture

OMG we just figured out the 'Underpant Gnomes economic model'?


Step 1- Print money.

Step 2- Print moar money.

Step 3- PROFIT!

Thu, 12/27/2012 - 10:11 | 3098642 fightthepower
fightthepower's picture

Its not a hedge fund when you can paper over losses.  Fuck the Fed!

Thu, 12/27/2012 - 10:28 | 3098684 MillionDollarBonus_
MillionDollarBonus_'s picture

Hedge funds buy credit default swaps which are toxic derivatives. As long as the government refuses to regulate these derivatives, we will continue to experience financial turmoil. Capitalism can't work without smart well-meaning politicians looking out for the little guy. I want the government to watch my back so I don't have to. That's what I expect in return for voting and supporting Barack Obama for president. 

Thu, 12/27/2012 - 10:35 | 3098696 reload
reload's picture

that was very lame,

we have come to expect `better`from you.

Thu, 12/27/2012 - 10:37 | 3098699 Tirpitz
Tirpitz's picture

"I want the government to watch my back so I don't have to."

But O'bummer is carefully watching your back already. While sharpening the knife in one hand, and pulling the change out of our pockets with the other one.

Thu, 12/27/2012 - 11:48 | 3098950 Manthong
Manthong's picture

It’s just a darn good thing anti-trust laws, RICO laws, morality and ethics don’t apply to the government or its affiliated enterprises.

Thu, 12/27/2012 - 10:39 | 3098706 SilverMoneyBags
SilverMoneyBags's picture

You mean FREE MARKET CAPITALISM can't work under these conditions. But what we have transitioned to is STATE CAPITALISM. We are much more like Cuba now where the government absorbs over 50% of what you earn either through taxes or from taking value through printing. The State has become the sole capitalist. Whatever is left over is your "allowance" in which you can then spend at divisions of the Corporate Commissary ie; retail - Walmart, GE - energy/healthcare/etc, GM auto, etc.)

Thu, 12/27/2012 - 10:48 | 3098723 Tirpitz
Tirpitz's picture

"the government absorbs over 50% of what you earn..."

This doesn't go for all the monopoly capitalism corporations which successfully keep the billions in extortet profits out of the hand of any taxman. The same corporations that desperately need the states' giant enforcement system to keep the billions pouring in, day after day, year after year, without contributing to it in the slightest way.

Thu, 12/27/2012 - 11:19 | 3098839 jekyll island
jekyll island's picture

the fed generated $2.5 billion in profit for it's owners.  What is 2.5 billion divided by zero?   Damn, gotta get me a central bank.  

Fri, 12/28/2012 - 00:22 | 3100852 MeelionDollerBogus
MeelionDollerBogus's picture

Sneeeeeaky, gollum, start with something mostly honest & move on to statism knowing half the sheeples, even ZH-lurking sheeples, have clicked a greenie.

I'd say my hat's off to ya but I'm not editing my icon just for that. And out of principle, red arrow for you.

Thu, 12/27/2012 - 10:32 | 3098691 daxtonbrown
daxtonbrown's picture

Sinnce any income stream to the Federal government must come from somewhere, this $96 bn must be a tax. Taxation without representation.

Thu, 12/27/2012 - 10:57 | 3098770 FL_Conservative
FL_Conservative's picture

It won't come close to making up for the losses they will realize as they unwind their B/S full-o Treasuries.

Thu, 12/27/2012 - 12:10 | 3098997 cranky-old-geezer
cranky-old-geezer's picture



There won't be any unwind.  Fed's balance sheet will be $10 trillion, then $20 trillion, and keep growing.

It's already that big most likely if you count all the "off balance sheet" stuff.

When will this FRN game end?  When somebody else comes out with a PM-backed currency.

Until then Fed will print and slowly debase FRNs down to nothing.  They've lost 99% of their value already. 

Just 1% left to go, and that's where the curve turns parabolic.


Thu, 12/27/2012 - 10:10 | 3098639 francis_sawyer
francis_sawyer's picture

The Treasury should ask for payment in gold...

Thu, 12/27/2012 - 10:12 | 3098643 Eireann go Brach
Eireann go Brach's picture

Just a few strokes on a keyboard....,,

Thu, 12/27/2012 - 10:12 | 3098645 Cognitive Dissonance
Cognitive Dissonance's picture

Since they can basically make the rules up as they go along there can never be any accountability, either in their so-called book of 'bidness' or with the public.

<A Ponzi scheme made in heaven.>

Thu, 12/27/2012 - 10:48 | 3098722 CPL
CPL's picture

Otherwise allowing 'friends' to pardon 85 billion in debt.  


Now if they would only do that across all public and private sectors and do a jubille properly.  But that won't be happening until something really bad happens.

Thu, 12/27/2012 - 12:11 | 3099009 rwe2late
rwe2late's picture

 "Trust me, I'm from the Fed."

Thu, 12/27/2012 - 10:14 | 3098646 fuu
fuu's picture

Parabolic blow-torched bagholder top off.

Thu, 12/27/2012 - 10:20 | 3098662 GMadScientist
GMadScientist's picture


Thu, 12/27/2012 - 10:52 | 3098683 fuu
fuu's picture

"The Fed can account for losses without eroding its capital, simply by suspending payments to the Treasury until such time as the Fed returns to profitability."

We have just lost cabin pressure.

Thu, 12/27/2012 - 10:15 | 3098650 Cursive
Cursive's picture


The Fed can account for losses without eroding its capital, simply by suspending payments to the Treasury until such time as the Fed returns to profitability.


I don't follow.  The Fed will be eroding its capital by selling assets at a loss.  Did SMRA mean to say that the Fed can staunch the erosion of capital by suspending payments to the UST?

Thu, 12/27/2012 - 10:29 | 3098686 Tirpitz
Tirpitz's picture

As much as a central bank can create the trillions out of a good morning's sunshine, it can write the losses off as if they never had happened.

How much trust all this evokes in the monetary system is another case, though.

Thu, 12/27/2012 - 16:08 | 3099694 BullionTweet
BullionTweet's picture

And that's the real lynchpin, break that and no more power to the prop. It's all a confidence Ponzy game ... until it's not then no more power to the prop (pun intended).

Thu, 12/27/2012 - 10:49 | 3098726 Raymond K Hessel
Raymond K Hessel's picture

I think it's done by booking accruals.  You hit your books for interest expense but instead of crediting cash you credit interest payable.

Thu, 12/27/2012 - 11:04 | 3098786 Cursive
Cursive's picture

@Raymond K Hessel

Interest payable is still a liablity and effectively an erosion of capital.

Thu, 12/27/2012 - 10:16 | 3098652 overmedicatedun...
overmedicatedundersexed's picture

what are the payments to it's bank owners about 6%y/y over the past several decades?? we are told..small change went to the treasury.

Thu, 12/27/2012 - 10:58 | 3098772 Goner
Goner's picture

I dont understand the details of this article, can anyone help a bit. Is the 90 Billion profit from the interest (6% as you mention) and if so why does the FED owe 87.5 to Tresury? Is the 2.5 Billion left over what the Private owners of the FED get to keep

Sorry for the basic questions but much of this stuff is over my head but I am trying to comprehend

Thu, 12/27/2012 - 10:17 | 3098654 Eastwood
Eastwood's picture

A DV01 of $2.75 BB? Sweet. Imagine how much you'd have to sweet talk the margin clerk to put that one on.

Thu, 12/27/2012 - 10:18 | 3098658 cranky-old-geezer
cranky-old-geezer's picture



Hedge funds can't print their operating cash on a printing press.

Thu, 12/27/2012 - 10:23 | 3098669 GMadScientist
GMadScientist's picture

But they have friends who can.

Thu, 12/27/2012 - 10:21 | 3098663 morning_glory
morning_glory's picture

Awesome, how do I buy in to this hedge fund?

Thu, 12/27/2012 - 10:24 | 3098671 GMadScientist
GMadScientist's picture

You probably have several shares in your pocket.

Thu, 12/27/2012 - 11:11 | 3098735 cranky-old-geezer
cranky-old-geezer's picture



You probably have several shares in your pocket.

Are they preferred or common shares?  What stock exchange are they listed on?  What's the symbol?  Do they pay a dividend? 

What company issues stock that's used as national currency and charges interest on it?  None that I know of.

No, they're not shares.  Currency isn't shares of stock.

What are FRNs?  Bank notes?  Ok, what is a bank note? 

"note" usually means debt owed to the bank.  Like the note associated with a home mortgage.

Is Federal Reserve Note a debt owed to the Fed?  They charge interest on it.  Whoever borrowed that FRN from the Fed originally has to pay interest on it.

What would they pay off that debt with?  Dollars?  But we don't have dollars anymore. Dollars have been taken out of circulation.

Again, what would the borrower pay off that debt with?  

Some FRNs are issued to buy (worthless) securities, like MBS.  There's no interest due on those FRNs.  In fact the Fed PAYS interest on those FRNs, like the trillions of FRNs sitting in Wall Street banks' reserve accounts at the Fed. Fed PAYS interest on those FRNs.

What the fuck?  Somebody borrows FRNs from the Fed and has to pay interest on them, like the federal govt, but other people can sell (worthless) securities to the Fed for FRNs they EARN interest on?

Thu, 12/27/2012 - 11:17 | 3098830 GMadScientist
GMadScientist's picture

The symbol is '$'. Dividend? LOL

Learn to take a joke as a joke, slick.

Thu, 12/27/2012 - 11:52 | 3098959 mvsjcl
mvsjcl's picture

The "interest" the Fed "earns" are the real assets of the people. The Fed scam is a strip mining operation.

Thu, 12/27/2012 - 12:38 | 3099090 blunderdog
blunderdog's picture

A FRN is a zero-interest perpetual bearer bond.

Thu, 12/27/2012 - 13:48 | 3099302 Boxed Merlot
Boxed Merlot's picture

I'll agree with that.  What should happen is the people of the US should treat them with zero interest and demand our representatives in Congress to begin immediately to issue constitutional currency to chase this crap out of circulation. 

They should simultaneously prosecute every individual guilty of foisting this plague on the Union and sentence them forthright to proper punishment as traitors and terrorists against the prosperity and tranquility of the nation.



Thu, 12/27/2012 - 10:59 | 3098777 CPL
CPL's picture

They pardoned their debt on a pile of money yeilding a fraction of a percent on that 85 billion, which would be a yearly 6.5 billion in interest alone.


  • So, who's money were they using to pay the interest if they couldn't manage the payments on the loan of 85 billion?
  • How did they get into such big trouble to begin with?
  • And how empty are their clients accounts?


They didn't bail them out exactly, they gave them breathing room to avoid an instant financial heart attack.  Bear Sterns instant replay.  One day they were assing around with debt forgiveness, a week later the company disappeared.

Thu, 12/27/2012 - 10:23 | 3098667 Swarmee
Swarmee's picture

It's amazing how profitable inside information can be, isn't it?

Now, the Fed has remitted roughly $1 trillion in NOMINAL dollars since 1947, but the purchasing power of the currency has been eroded by, what, 90% in that timeframe? So what have they really contributed to the treasury in terms of wealth? Doubtful it's even break even when other costs are figured in. And as other have mentioned, how much was paid to FED private banks in that time?

Thu, 12/27/2012 - 10:24 | 3098670 Water Is Wet
Water Is Wet's picture

A few points:

1.  The Fed has no exit strategy.  WTF is this guy smoking?

2.  The Fed actually declared that if it loses money, the losses are the responsibility of Treasury, so it's worse than just having the Fed suspend payments.

3.  WTF does the Fed do that costs $2.5 billion to operate?  They've got 12 governors, some lackeys, and a computer a.k.a. printing press.  Sounds like a couple million in operating expenses a year to me.

Thu, 12/27/2012 - 11:45 | 3098679 francis_sawyer
francis_sawyer's picture

It's that damn Bloomberg Terminal [They have the DELUXE model with the coffee cup holder]... [Plus ~ the heavily fortified underground bunker complex that they can hightail it to when it all hits the fan]...

Thu, 12/27/2012 - 10:28 | 3098685 adr
adr's picture

For point 3, I'm pretty sure the Cleveland Fed has solid gold toilets that are replaced every year. That way the Fed governors are actually telling the truth when they say they are pissing on gold as sound money.

Thu, 12/27/2012 - 10:46 | 3098718 XitSam
XitSam's picture

WTF does the Fed do that costs $2.5 billion to operate?

Inflation my good man. At 1% that's $25 million in real value. Sounds legit.

Thu, 12/27/2012 - 10:54 | 3098757 CPL
CPL's picture

Weird huh.  Look at operating costs of soda factories and the scale of them versus a closed and tiny "business" like the fed.  Where does that fiat go?  


Then again, who cares, it's only fiat now, as good as toliet paper.

Thu, 12/27/2012 - 11:19 | 3098838 GMadScientist
GMadScientist's picture

It's mere pennies a day for the precious zeroes to keep our stock "market" from going 'Dorian Gray' all at once.


Thu, 12/27/2012 - 11:55 | 3098899 cranky-old-geezer
cranky-old-geezer's picture



Buildings all over the country, upkeep on those buildings, computers, computer rooms, vaults, security, thousands of staff all over the country, expense accounts, benefits and other perks, huge pensions, thousands of Fed police all over the country, vehicles & equipment for all those police, etc, ad nauseum.

Plus interest Fed pays on trillions sitting in TBTF reserve accounts, and bribes and kickbacks and hookers other trappings of their royalty style life.

Yea, I can see $2.5 billion operating expenses.

Thu, 12/27/2012 - 10:25 | 3098676 adr
adr's picture

Appearing for one night only, come see the great Bernanke, the greatest magician in the world, who can make billions in profit appear out of thin air.

Expecting a sold out packed house, nobody shows up. The CFOs of the world all say, "Big deal, we do that every three months."

Thu, 12/27/2012 - 10:26 | 3098678 NeedleDickTheBu...
NeedleDickTheBugFucker's picture

With the Fed's balance sheet projected to double in size, "profits" should double as well.  Given the tremendous earnings growth, the time is ripe for a monster-sized IPO of this world-class hedge fund.

Thu, 12/27/2012 - 10:33 | 3098693 Tirpitz
Tirpitz's picture

No way. Privately held and privately managed is the way she goes. Public will be only the damage caused. The vast devastation intended to take down the white man's nations.

Thu, 12/27/2012 - 10:27 | 3098680 falak pema
falak pema's picture

profit and loss, is no longer based on a double entry balance sheet type accounting system. If you print and say its MONEY, if you adjust the interest spread at will, via Zirp and twist, and you buy and sell to yourself or surrogates in circular plays, you can book a profit now and take a mega loss...when kingdom comes! 

WHy should those Oligarchs be the only ones to win by the printing press shenanigans; simple when you think about it. 

Left hand never talks to right hand, but thats all right as they are not in the same time zone! We're home and dry as Mass and energy cannot be made equivalent like in physical world; we can ban the speed of light in virtual electronic money world. This is Hogwarts and its Ben's quidditch. 

Thu, 12/27/2012 - 10:35 | 3098697 adr
adr's picture

I want to play by these rules too. My income isn't actually income, it is debt. That way I get to book $60k is losses for the year. Plus anything I bought counts as debt, and my mortgage counts as untaxable profit, since I am a non profit organization.

One would think a mortgage would count as debt, but it has been sold off and booked as profit, hypothecated hundreds of times over. So this can be booked as a personal asset to borrow against. Which by now should be a couple billion dollars in notional value.

So really I'm a billionaire. I'm off to the bank to get my money.

Wait, who says I don't get to play by bankster rules? That's not fair.

Thu, 12/27/2012 - 10:40 | 3098705 Tirpitz
Tirpitz's picture

That's lack of the right connections...

Thu, 12/27/2012 - 10:31 | 3098689 Seasmoke
Seasmoke's picture

Mark to Bernanke

Thu, 12/27/2012 - 10:37 | 3098701 rsnoble
rsnoble's picture

Collapse of the empire.  My as well make the best of it no one knows how long it can take.  People are still buying my shit that's all that matters for now.  Well that, my pile of pm's, my guns and travel trailer lol.  And of course our wonderful gov't has there eye on all of them.  I've fucking had it.  Pretty sure society collapse will occur before outright collapse people are burnt the fuck out.

Thu, 12/27/2012 - 10:45 | 3098715 dick cheneys ghost
dick cheneys ghost's picture

How much has the Fed earned for themselves since 1913?

Thu, 12/27/2012 - 10:52 | 3098743 CPL
CPL's picture

All of it

Thu, 12/27/2012 - 10:49 | 3098727 The_Passenger
The_Passenger's picture

Since the Fed does not have to mark its holdings to market, how about changing the rules a little more and using that very useful greek method of marking debt to fantasy. Put the value of your US treasuries to par in your books (hey they are risk free anyways) and roll over your holdings at maturity.

That way higher yields now mean higher profits for these new US treasuries the Fed will buy anyways! DV..what?

Problem fixed!


Thu, 12/27/2012 - 10:51 | 3098740 AssFire
AssFire's picture

While banks appear amazingly overcapitalized...This is a real world warning:

On Jan 1st. there will be no unlimited insurance on deposits... it falls to only $250k per account holder. In order to run our business, we will need about 8 accounts. I have been opening 3 accounts per day (all different institutions)..not an easy job when you try avoiding the giant TBTF giants.

Maybe I am wrong, but I don't take a chance.. I only received the friendly reminder from my bank on the 23rd. 1 week before- those slimy f' ers.

Thu, 12/27/2012 - 11:21 | 3098844 GMadScientist
GMadScientist's picture

I'll hold some for ya, don't you worry.

Thu, 12/27/2012 - 10:51 | 3098741 Quinvarius
Quinvarius's picture

Considering they are loaning the Treasury the money to pay them the interest, I say they are unprofitable already.  Give me a printing press and I will show you some real profits.

Thu, 12/27/2012 - 10:55 | 3098758 unununium
unununium's picture

The Fed doesn't have to mark securities in SOMA to market. Only if securities are sold are the profits or losses booked.

Where though, is it written that the Fed doesn't have to report whether securities in its portfolio are performing?

Millions of deadbeats not paying their mortgages. Fed owns $2 trillion of those mortgages. Fed "reinvests" maturing issues as though it received every single dollar of mortgage payments due.

Where does that authority come from?

Thu, 12/27/2012 - 10:59 | 3098774 Downtoolong
Downtoolong's picture

the Fed will make around $90bn profits in 2012

It's still money which they printed out of thin air which is just being passed back and forth between them and the government in a charade of money magic. It's blue smoke and mirrors to hide the fact that it is ultimately a tax on investors and savers which robs them of wealth to fund everyone else's follies and free spending.

I would be even happier to be able to print my own profits than to print my own money.


Thu, 12/27/2012 - 12:43 | 3099111 viahj
viahj's picture


Thu, 12/27/2012 - 10:59 | 3098776 toomanyfakecons...
toomanyfakeconservatives's picture

So one criminal organization "remits" funds to another criminal organization within a larger criminal organization? Did I miss something?

Thu, 12/27/2012 - 11:18 | 3098837 williambanzai7
williambanzai7's picture


Thu, 12/27/2012 - 11:22 | 3098850 GMadScientist
GMadScientist's picture

Debt Ceiling

Credit Downgrade

Only one Porn Break?!

Thu, 12/27/2012 - 14:20 | 3099422 I did it by Occident
I did it by Occident's picture

this is awesome!  I want one, maybe playing this new version of monopoly will help my kids understand this new new economic age we are entering. 

Thu, 12/27/2012 - 17:35 | 3099904 fuu
fuu's picture

no MFG?

Thu, 12/27/2012 - 14:17 | 3099408 AgAu_man
AgAu_man's picture

Friends, ZH'ers, Countrymen:  Why doth the Rules, Games, Moves and Twists of the Flat Earth Reserve vex thou so much?  Hath our friend Isaac Newton not enlightened thou with his (non-Reserve-centric) model?

So, assuming we can't fix their model or change their devotion to it, and rather than lament about this reality, how about we figure out how to benefit? 

E.g.1:  "The minute thou buyest a house (a leveraged real asset), thou hast a vested interest in inflation." 

E.g.2:  Apply the 'Golden Rule':  "The persons with the most gold at the end of the game, win!"

Sorry Uncle Ben, "No converted (p)rice for you!".  Can you blush?  How about you... Twist & Shout? 

Thu, 12/27/2012 - 14:18 | 3099414 I did it by Occident
I did it by Occident's picture

anybody know if the Fed pays taxes on that profit? 

Thu, 12/27/2012 - 19:11 | 3100120 MyKillK
MyKillK's picture

Well looks like low interest rates are now permanent monetary policy. The stupendous Treasury bubble will continue unabated until it spectacularly crashes. Shouldn't take more than 3 or 4 years.

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