World’s Most Profitable Bank Will Deliver $77B To US Treasury
U.S. taxpayers are in line for a big payday, but it is not quite what it seems.
The Federal Reserve is out with its year-end tally of net income Tuesday, and the central bank says it expects to return $76.9 billion to the U.S. Treasury. While that may seem like a windfall for Uncle Sam, a large portion of the figure amounts to taking money out of one pocket and putting it in another: interest payments on U.S. government bonds account for a sizable chunk of the income.
The Fed, which is bound to return residual earnings of each of its district banks after certain costs, derived 2011 net income of $78.9 billion, chiefly from $83.6 billion in interest income on securities acquired through open market operations. Those securities include bonds and mortgage-backed securities tied to government-sponsored enterprises, primarily Fannie Mae and Freddie Mac, interest paid on U.S. Treasury securities were the biggest factor as a result of the central bank’s massive government bond purchases through quantitative easing.
Net income returned to the Treasury is actually down somewhat in 2011 from a record $79.3 billion in 2010, partially due to the repayment of crisis-era loans by American International Group that had been generating interest.
The Fed’s income details come as the central bank is evaluating the capital plans of America’s biggest banks, which are also due to issue fourth-quarter results in the coming days. JPMorgan Chase is first up Friday, with Bank of America, Citigroup and Wells Fargo to follow next week.
David Trone, who covers bank stocks at JMP Securities, does not expect many earnings surprises from an industry where the traditional business of making loans remains muted and profits from capital markets and banking are likely to falter from what was a fairly active final quarter of 2010.
Trone says surprises may be more prevalent in the Fed’s evaluation of the banks’ stress tests. While some, like JPMorgan, are in better capital positions than others, like Bank of America, the analyst figures the Fed “will still be super cautious on capital return,” given the ongoing threat posed by a meltdown in the eurozone.
Bank stocks were mostly higher amid a broader rally Tuesday, with JPMorgan up 2.2%, BofA 5.7% and Citi 3%, while Wells Fargo trailed with just a 0.3% gain.