Presenting The World's Most Profitable Hedge Fund Ever: FRBNY LP
When one has $2.9 trillion in costless AUM (because if the cost is breached, one just doubles down, especially if one prints the money), it is not all that surprising to generate $77 billion in profits in one year (think of the hubris emanating from that particular year end letter), or even $385 billion in profits in the past 10 years. Yet it is still a stunning number considering the rest of the $2 trillion hedge fund industry lost about 10% in 2011. Which is why we all bow down to what is without doubt the world's most lucrative and profitable generator of P&L in history: the Federal Reserve, which for the second year in a row has printed (pun intended) over $70 billion in profits. And who is the lucky LP? Why the US Treasury of course, which for the second year in a row will pocket all the proceeds from PM Ben's immaculate trading perfection. Of course, there is one caveat for this spotless performance sheet: what happens when Fed interest expense surpasses interest income? But why worry - everyone tells us this can never happen, so it obviously can never happen...
The Fed's P&L:
From the Federal Reserve:
The Federal Reserve Board on Tuesday announced preliminary unaudited results indicating that the Reserve Banks provided for payments of approximately $76.9 billion of their estimated 2011 net income to the U.S. Treasury. 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' 2011 estimated net income of $78.9 billion was derived primarily from $83.6 billion in interest income on securities acquired through open market operations (U.S. Treasury securities, federal agency and government-sponsored enterprise (GSE) mortgage-backed securities, and GSE debt securities). Additional earnings were derived primarily from realized gains on the sale of U.S. Treasury securities of $2.3 billion, foreign currency gains of $152 million, and income from services of $479 million. The Reserve Banks had interest expense of $3.8 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 $3.4 billion in 2011. In addition, the Reserve Banks were assessed $1.1 billion for the cost of new currency and Board expenditures and $282 million to fund the operations of the Bureau of Consumer Financial Protection and Office of Financial Research. In 2011, statutory dividends totaled $1.6 billion and $375 million of net income was used to equate surplus to capital paid-in.
The preliminary unaudited results include valuation adjustments as of September 30 for Term Asset–Backed Loan Facility (TALF) loans and consolidated limited liability companies, which were created in response to the financial crisis. 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.
The attached chart illustrates the amount of Federal Reserve Banks' residual earnings distributed to the U.S. Treasury from 2002 through 2011 (estimated).