Federal Reserve reports record profit

The Federal Reserve turned a record $81.7 billion profit in 2010, up 53 percent from 2009, the central bank reported Tuesday.

The vast majority of the Fed's profit — $79.3 billion — will be turned over to the Treasury Department, with the rest being paid out to member banks in dividends.

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A substantial chunk of that profit came from increased interest income from the $1 trillion in mortgage-backed securities the Fed purchased during the financial crisis to help stabilize the housing market. The Fed made $24.4 billion more in interest on those holdings in 2010. The central bank also made $3.5 billion in interest from its increased holdings in Treasury bonds, as it buys up Treasury debt in an effort to boost private lending.

While the Fed is still reaping profits from its intervention into the financial system during the crisis, it is beginning to wind down other areas where it had stepped in. Loans given to insurance giant American International Group, Inc. (AIG) declined slightly in 2010 to $20.6 billion, from $21.3 billion in 2009. As a result, the Fed made roughly $1 billion less in interest on those loans.

In addition, the Fed nearly halved its investment in the Term Asset-Backed Securities Loan Facility, which shrank to $24.9 billion from $48.2 billion in 2009. That program, created by the Fed, was designed to boost credit lending by offering loans to back the issuance of securities filled with various consumer loans, like auto loans and student loans. The Fed stopped issuing new loans under the facility on March 31, 2010. The Fed reported Tuesday that its investment in the program shrank mainly due to early repayments from borrowers.

The combined annual financial statements for the Federal Reserve Bank system revealed that it had increased its asset holdings by $193 billion in 2010, reaching a total of $2.428 trillion.

The balance-sheet boost was driven in large part by the Fed's second effort at quantitative easing, which has the Fed buying up hundreds of billions of dollars in Treasury bonds in an effort to boost private lending.

The bond-buying program, dubbed "QE2," is evident on the central bank's balance sheet. The Fed's holdings in Treasury securities increased nearly $261 billion in 2010, to a total of $1.06 trillion. The Fed expects to buy roughly $600 billion in Treasury bonds under QE2, which is due to conclude at the end of June.