“Net income” is a weird term for an organization that buys trillions of dollars worth of securities with money it created itself.
By Wolf Richter for WOLF STREET.
The Federal Reserve’s balance sheet is a gigantic pile of assets on one side and liabilities and statutory capital on the other. This balance sheet, which is published weekly and which we discuss frequently, generates a lot of income and a lot of expenses. In addition, the Fed derives revenue from fees. It has a ton of operating expenses. It pays dividends to its shareholders. And he hands over to the Treasury Department what’s left. The Fed discloses all of this every year in its financial statements.
On Friday afternoon, the Fed released its unaudited report preliminary financial statement for 2021. Audited financial statements will be published later in 2022.
For what it’s worth: The Fed’s audit firm KPMG has been embroiled in countless scandals — such as using stolen regulatory information to fool audit inspections — and audit failures massive, like that of British outsourcing giant Carillion, which suddenly collapsed in early 2018. So there is nothing to worry about.
The Fed’s total “net income” for 2021: $107.8 billion.
The Fed is a very profitable organization. For 2021, it reported “net income” of $107.8 billion. But the Fed’s term “net income” is somewhat bizarre for an organization that buys trillions of dollars worth of securities with money it created itself. But hey, we’ll go with the flow.
The Fed does not pay income taxes, but it pays almost all of its “net income” to the Treasury Department, as required by the Federal Reserve Act.
By comparison, Apple posted a pretax profit of $109 billion in its fiscal year 2021, just ahead of the Fed’s $107.8 billion. Apple’s auditor is Ernst & Young, which is embroiled in its own long string of audit scandals and failures.
Total Fed revenue: $123.1 billion, from:
- $122.4 billion in interest received on its holdings of securities, mostly Treasury securities and MBS that it purchased as part of its QE.
- $275 million in net income from its pandemic emergency programs that are being unwound, such as holdings of corporate bonds and bond ETFs that it sold by November 2021.
- $457 million in service fees, mostly paid by banks.
Total Fed spending of $15.5 billion, from:
- $5.3 billion in interest on reserves, paid to banks; the Fed pays 0.15% interest on cash that banks deposit with the Fed.
- $1.9 billion in foreign currency revaluation losses
- $414 million in interest paid to reverse repo counterparties.
- $1 billion in costs related to the production, issuance and withdrawal of currency (the paper dollar).
- $5.3 billion in operating expenses of the 12 regional Federal Reserve banks, including the salaries of marquee traders who run these FRBs.
- $970 million in spending by the Board of Governors (the federal agency, of which Powell is chairman)
- $628 million to fund the Consumer Financial Protection Bureau.
The Fed paid dividends: $585 million.
The Fed paid $583 million (with an M) in statutory dividends to shareholders of the 12 regional Federal Reserve Banks. The amount represents approximately 0.55% of his net income. These 12 FRBs include New York Fed, St. Louis Fed, San Francisco Fed, Dallas Fed, etc. Their shareholders are the largest financial corporations in their districts.
The Fed paid the Treasury Department $107.4 billion.
Almost all of the net income was “returned,” as the Fed calls it, to the Treasury Department, as required by the Federal Reserve Act. The $107.4 billion for 2021 was the second highest amount, behind the 2015 record.
That record in 2015 was made up of two components: $97.7 billion in revenue and $19.3 billion in its “capital surplus.” The Fed had a statutory limit on its “excess capital” of $10 billion, set by Congress in the Fixing America’s Surface Transportation Act of 2015.
In 2018, the $65.3 billion payout included a “capital surplus” of $3.28 billion, as required by Congress under the Bipartisan Budget Act of 2018 and the economic growth, regulatory relief and consumer protection, to reduce the capital surplus to $6,825. billion.
For 2021, the $107.4 billion payout included $40 million to reduce the capital surplus to $6.785 billion, as required by Congress under the National Defense Authorization Act for 2021.
This “excess capital” is disclosed in the Fed’s weekly balance sheet. According to its current balance sheet, the Fed had $33.7 billion in “paid-up capital” plus $6.785 billion in “excess” capital, for a total capital of $40.5 billion.
The $107 billion handover to the Treasury Department means that the portion of US debt purchased by the Fed (currently $5.68 trillion) is essentially interest-free to the Treasury Department.
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