By Steven K. Beckner

NEW YORK (MNI) – Federal Reserve officials said Wednesday that the
Fed is likely to incur no losses from its anti-crisis operations, and
indeed will continue to remit record earnings to the U.S. Treasury, as
the central bank released independently audited financial stastements.

An independent auditor — Deloitte & Touche LLP — declared the
Fed’s 2009 financial statements “present fairly, in all material
respects, the combined financial position of the Reserve Banks as of
December 31, 2009 and 2008, and the combined results of their operations
for the years then ended.”

Fed Chairman Ben Bernanke commented, “I am pleased that an
independent auditor has found that our financial statements present
fairly, in all material respects, the financial position of the Federal
Reserve.” And he added, “The information disclosed in the 2009 financial
statements reaffirms our commitment to transparency and to the
responsible stewardship of public resources.”

The statements show that the Fed paid the Treasury a record $47.4
billion, higher than previously reported, out of net profits on its
lending and investments. This compares to an average of $20-25 billion
over the past 15 years and a previous record of $34.6 billion.

A Fed official, in a conference call with reporters, anticipated
that the Fed will continue to have and pass on to Treasury high levels
of earnings. Officials would not say whether more earnings might be
retained to boost Fed capital.

The statement shows a “maximum loss exposure” of $73.879 billion at
the end of 2009, but a Fed official emphasized that this loss is not
expected to actually be realized.

Indeed, an official said that, when all is said and done, the Fed
will incur no losses from either its special liquidity facilities, its
purchases of mortgage backed securities and other assets or from its
bail-out loans to prevent the failure of Bear-Stearns and American
International Group (AIG) — the so-called “Maiden Lane” entities.

The audited financial statements show that, due to repayments of
principle and interest, Maiden Lane I earned a net $1.319 billion in
2009; Maiden Lane II earned $473 million and Maiden Lane III earned $296
million.

Projecting that pattern of earnings forward, a Fed official said
the central bank should eventually get all of its money back plus some.

Likewise, an official said no losses are expected from the
Commercial Paper Financing Facility (CPFF), the Term Asset-Backed
Securities Loan Facility (TALF) or other programs.

Total Reserve Bank assets as of December 31, 2009 were $2.235
trillion — a decrease of $11 billion from the previous year.

“Although the level of total Reserve Bank assets did not change
significantly, the composition of the balance sheet changed notably,”
the Fed said in a statment.

“Because of improvements in funding markets, assets related to
certain financial stability activities decreased during 2009, including
a $543 billion decrease in central bank liquidity swaps, a $447 billion
decrease in loans to depository institutions, and a $324 billion
decrease in commercial paper held in the Commercial Paper Funding
Facility,” it said.

“These decreases were offset, in part, by a $919 billion increase
in holdings of Federal agency and government-sponsored enterprise (GSE)
mortgage-backed securities (MBS), which were purchased to provide
support to mortgage and housing markets and to foster improved
conditions in financial markets more generally, and a $471 billion
increase in holdings of Treasury securities and GSE debt securities,”
the statement continued.

The Fed said the Reserve Banks’ comprehensive income increased
$17.9 billion over the previous year to $53.4 billion in the year ended
December 31, 2009.

“The increase was primarily attributable to interest earnings on
the Federal agency and GSE MBS holdings of $20.4 billion in 2009,” it
said.

“This increase in comprehensive income was partially offset by a
decrease of $3.8 billion in realized gains on the sale of Treasury
securities and a decrease of $2.8 billion in interest income on loans to
depository institutions.”

The Fed said the Maiden Lane companies “also contributed to the
increase in Reserve Banks’ comprehensive income in 2009, with net
earnings of $5.6 billion for the year ended December 31, 2009, a $7.3
billion increase over the 2008 net loss of $1.7 billion.

The Reserve Banks transferred $47.4 billion of their $53.4 billion
in comprehensive income to the U.S. Treasury in 2009, a $15.7 billion or
50 percent increase from the amount transferred in 2008.

** Market News International New York Newsroom: 212-669-6430 **

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