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As Banks Struggle, Fed Racks up Huge Profits — for Taxpayers

This is a difficult time for America's large banks. Bank of America, still suffering from an intense mortgage hangover, is a single-digit stock. Morgan Stanley has been getting hammered for its exposure to European banks. New regulations, consumer anger, and a slowing economy are taking a toll.

But America's largest bank continues to rack up impressive quarter after impressive quarter.

Unlike the type of banking that Bank of America and Citi conduct, the type of banking that the U.S. central bank conducts is reliably profitable. We noted a year ago that the Federal Reserve, America's central bank, is a big moneymaker.

The Fed is a collection of regional Federal Reserve banks that are in turn owned by their members. But when the Fed and its banks generate profits, they turn them over to the Treasury Department via weekly payments. The books have just closed on another disastrous fiscal year for the Federal government — fiscal 2011 ran from October 2010 through September 2011, and the government is likely to report a deficit nearing $1.3 trillion. But the figure would be at least $80 billion higher if taxpayers weren't receiving the lion's share of the Fed's profits. (Here's a chart of recent Fed disbursements to Treasury.)

The Fed doesn't make money the way regular banks do — by charging ATM fees and making mortgage and credit card loans. Rather, it collects interest on the securities it acquires, by lending money to banks, and by charging fees for certain services. So long as the people and institutions behind the securities (usually, the government or government agencies) make their interest payments, this is a business so easy even bankers could make a profit doing it. The Fed's 2010 annual report has tables that show profits going back to 1914. Through 2010 the Fed had funneled more than $767 billion into Treasury. Until recently, the figures were pretty steady and relatively small — between $20 billion and $30 billion from 2000 to 2008. But after the Panic of 2008, the Fed rapidly increased its balance sheet, creating new money and swapping it with banks for trillions of dollars in Treasury bonds, mortgage-backed-securities. The Fed also lent money directly to insurance company AIG, and created vehicles to remove toxic assets from Bear Stearns and AIG.

At the end of 2010, the Fed held $2.16 trillion in mortgage-backed securities, government bonds, and securities issued by government agencies, up from $1.845 trillion at the end of 2009. So for calendar year 2010, comprehensive income — interest on bonds plus about $7 billion in earnings from crisis-era rescue operations — rose from $53.4 billion in 2009 to $81.735 billion. As a result, the Fed transferred $79.3 billion to Treasury in calendar year 2010, up from 53 percent from the 2009 total of $53.4 billion, and more than double the 2008 total of $31.7 billion.

Those numbers are likely to rise for the 2011 calendar year, which ends in December, and in the 2011 fiscal year, which ended last Friday. Thanks to the second round of quantitative easing, in which the Fed purchased $600 billion in Treasury securities, the Fed's holdings have expanded. The Fed reported (see Table 23 on page 25) that in the first six months of 2011 it turned over $40.45 billion to Treasury. Last week, the Fed's balance sheet stood at about $2.83 trillion, including more than $2.6 trillion in securities. And through September 29, the next-to-last day of Fiscal 2011, Fed earnings had contributed $82.5 billion in revenues to the government for the fiscal year, according to the Daily Treasury Statement.

Daniel Gross is economics editor at Yahoo! Finance

Email him at grossdaniel11@yahoo.com; follow him on Twitter @grossdm

His most recent book is Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation