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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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!

fightthepower's picture

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

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. 

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.

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.

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.)

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.

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.  

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.

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.

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.

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.


francis_sawyer's picture

The Treasury should ask for payment in gold...

Eireann go Brach's picture

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

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.>

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.

rwe2late's picture

 "Trust me, I'm from the Fed."

fuu's picture

Parabolic blow-torched bagholder top off.

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.

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?

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.

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).

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.

Cursive's picture

@Raymond K Hessel

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

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.

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

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.

cranky-old-geezer's picture



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

morning_glory's picture

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

GMadScientist's picture

You probably have several shares in your pocket.

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?

GMadScientist's picture

The symbol is '$'. Dividend? LOL

Learn to take a joke as a joke, slick.

mvsjcl's picture

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

blunderdog's picture

A FRN is a zero-interest perpetual bearer bond.

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.



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.

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?

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.

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]...

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.

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.

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.

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.


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.

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."

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.

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.

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.