Federal Reserve made record profit of $78.4 billion in 2010

Reporting from Washington — The Federal Reserve said it made a record $78.4-billion profit in 2010 as the central bank’s unprecedented intervention into the financial system continued to produce a side benefit to the federal government.

The profit, which is paid to the U.S. Treasury, is a 65% increase over last year’s payment of $47.4 billion, which had set a record then. As the Fed’s balance sheet has more than doubled to about $2.4 trillion since the 2008 financial crisis, it has pumped about $125 billion back into the government’s coffers.

“This is at this point … a profitable program from the perspective of the federal deficit,” Fed Chairman Ben S. Bernanke told the Senate Budget Committee on Friday in alluding to the numbers released Monday. He was referring to the central bank’s wide-scale purchase of mortgage-backed securities and other assets.

But analysts point out that the Fed still could lose money on the huge amount of assets on its balance sheet when it starts selling them in the coming years.

The Fed’s purchase of troubled assets during the Great Recession includes mortgage-backed securities from home loan finance leaders Fannie Mae and Freddie Mac, and securities from the 2008 rescue of insurance giant American International Group Inc. and the Fed-engineered sale of Bear Stearns to JPMorgan Chase & Co.

Senate Budget Committee Chairman Kent Conrad (D-N.D.) asked Bernanke on Friday about the potential for large taxpayer losses when the Fed eventually reduces its balance sheet to historic levels.

“I don’t see that it’s likely,” Bernanke said. “And our record so far, not only in this program, but in all the lending and other special credit programs we’ve done ... has been very positive from a perspective of returns to the Treasury.”

Based on the Fed’s valuation of its assets, the central bank is in the black on its investments. Most of the Fed’s income came from the purchases of mortgage-backed securities and U.S. Treasury securities.

The Fed said it also earned $2.1 billion in interest from credit extended to AIG, as well as $1.3 billion in dividends from holdings in AIG subsidiaries, such as American Life Insurance Co., known as Alico.

The increase in profit last year “was due primarily to increased interest income earned on securities holdings in 2010,” the Fed said. The central bank’s holdings will increase as it buys about $600 billion more in assets as part of its planned quantitative easing to try to boost the recovery.

Before the crisis, the largest Fed profit since it began operations in 1914 had been $34.6 billion in 2007.

[email protected]