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Fed rescue turns profit

Wed., Jan. 13, 2010

Congress demands more information on AIG deal

WASHINGTON – In dual developments that underscored the complex reality of stressful financial times, the Federal Reserve said Tuesday that it returned to taxpayers a record $46 billion in profit from its rescue of the financial system, while a congressional committee announced that it had subpoenaed controversial bailout documents from the central bank.

In a statement, the Fed revealed that its district banks had made a $52-billion profit in 2009 from the purchase of government securities as part of efforts to stabilize the U.S. and global financial systems. After deductions, $46 billion was returned to taxpayers through a payment to the Treasury Department.

Such welcome news was quickly eclipsed by word that the House Committee on Oversight and Government would subpoena documents relating to the Fed’s rescue of insurer American International Group.

Shortly afterward, the top Republican on the panel, Rep. Darrell Issa, R-Calif., released a letter showing that the Fed has sought to block the release of certain AIG information.

“Clearly they have something to hide; what that is we hope to find out,” said Kurt Bardella, a spokesman for Issa.

A Federal Reserve official declined to discuss the details, but pledged to cooperate with Congress.

“We will work with the committee to provide relevant information as appropriate,” said Deborah Kilroe, a spokeswoman for the New York Fed.

The New York Fed has belatedly confirmed that it secretly paid $62 billion to American and European banks to settle at full value exotic bets – called credit-default swaps – guaranteed by AIG.

The House committee has called Treasury Secretary Timothy Geithner to testify later this month about why AIG payments were made to big investment banks in what appears to have been a back-door bailout. Geithner headed the Federal Reserve Bank of New York at the time.

The House panel’s aggressive inquiry reflects widespread anger at the Fed.

“I don’t recall any time in my lifetime that the antipathy toward the Fed was as great as it is now,” said Lyle Gramley, a Fed governor from 1980 to 1985.

Most of the Fed’s record profit last year came from the rising value of mortgage-backed securities it had bought to stabilize the economy. By this March, the Fed will have completed the purchase of $1.25 trillion in mortgage-backed securities issued by Freddie Mac and Fannie Mae.

The Fed purchased these securities in an effort to keep the nation’s housing market afloat. Fannie and Freddie are in government conservatorship, making them in effect federal lending entities. The Fed purchases the safest, top-rated securities to ensure that banks can underwrite mortgages and not have to retain them on their balance sheets.

Mortgage-backed securities have greater investor returns than conventional Treasury bonds, but could become money losers for the Fed if home prices fall further in coming years.

“They make profits today. It doesn’t mean they won’t have losses tomorrow,” said Vincent Reinhart, a former top Fed economist. “An unemployment rate of 10 percent makes every prior investment decision suspect, and the Fed has a lot of those prior decisions.”

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