By Yali N’Diaye

WASHINGTON (MNI) – The Federal Reserve Tuesday announced that the
amount of earnings transferred to the U.S. Treasury for 2011 declined by
$2.4 billion to $76.9 billion, which remains the second highest amount
on record following the record $79.3 billion in 2010.

The size of the balance sheet keeps earnings on the high side, and
the September 2011 monetary policy decision to implement a so-called
‘Operation Twist’ — a maturity extension program consisting in selling
shorter-dated Treasury securities for longer-dated ones — contributed
to boost earnings.

The Federal Reserve intends to sell $400 billion of shorter-term
Treasury securities by the end of June 2012 and use the proceeds to buy
longer-term Treasury securities, hence extending the average maturity of
the securities in the Federal Reserve’s portfolio.

Since longer-dated paper tends to have higher coupons, Fed
officials told reporters that Operation Twist contributed to push up
interest earnings.

Realized gains to the tune of $2.3 billion in 2011 was another
effect of Operation Twist through the sale of shorter-dated securities.

Federal Reserve Banks’ 2011 estimated net income was $78.9 billion,
the Fed said in a statement earlier, adding that “was derived primarily
from $83.6 billion in interest income on securities acquired through
open market operations (U.S. Treasury securities, federal agency and
government-sponsored enterprise (GSE) mortgage-backed securities, and
GSE debt securities).”

“Additional earnings were derived primarily from realized gains on
the sale of U.S. Treasury securities of $2.3 billion, foreign currency
gains of $152 million, and income from services of $479 million,” the
Fed said.

While the balance sheet was larger in 2011 than it was in 2010, the
net income was $2.8 billion lower at $78.9 billion in 2011 vs. $81.7
billion in 2010.

Fed officials explained that loans related to AIG rolled off,
depriving from a source of earnings, also noting that those rates of
earnings were much higher than those on a lot of the Treasuries held
currently.

In addition, liquidity facilities have been more flat in 2011
relative to 2010, when they provided a lot of the earnings.

That said, the net income remained high by historical standards, as
a result of a still enlarged Fed balance sheet.

The results announced Tuesday were preliminary unaudited results
and the Federal Reserve Board will announce final audited results likely
in the March time frame, Fed officials said.

The unaudited results “include valuation adjustments as of
September 30 for Term Asset-Backed Loan Facility (TALF) loans and
consolidated limited liability companies which were created in response
to the financial crisis.”

The final results will reflect adjustmenst as of the end of
December 2011.

The transfers to Treasury are an annual event and never linked to
monetary policy by the Fed and the Fed briefing did not address any
policy implications, other than the impact of Operation Twist on
earnings.

The payments to Treasury represent the Fed’s net interest earnings
over and above interest paid to reserve and term deposit holders and
other deductions.

Under the Federal Reserve Board’s policy, the residual earnings of
each Federal Reserve Bank, after providing for the costs of operations,
payment of dividends, and the amount necessary to equate surplus with
capital paid-in, are distributed to the U.S. Treasury.

On the expenditure front, the Fed said $282 million was used to
fund the operations of the Bureau of Consumer Financial Protection ($242
million) and Office of Financial Research ($40 million).

** Market News International Washington Bureau: (202) 371-2121 **

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