Economix Blog: How the Fed Rescue Benefited Banks

A report by Bloomberg News offers a new way of quantifying the Federal Reserve’s vast efforts to save financial companies from collapse during the crisis that peaked in 2008.

The central bank provided emergency loans, asset purchases and other aid totaling roughly $7.8 trillion during a two-year period ending in March 2009, easily the largest component of the government efforts to bulwark the financial system.

In an article in the January issue of Bloomberg Markets, published online Sunday night, Bloomberg offers an estimate that the aid allowed financial companies to book profits of roughly $13 billion during that period, largely by borrowing from the Fed at low interest rates and then using the money to make loans and investments with higher rates of return.

The benefit for the six largest American banks was about $4.8 billion, according to Bloomberg’s calculations, or roughly one-quarter of their total profits over the two years.

The profit estimate is based on the simple expedient of multiplying the amount each firm borrowed from the Fed by its net interest margin – a key indicator of bank profitability that measures the difference between the amount the bank pays to get money and the amount it charges to provide money. In other words, the Bloomberg calculation basically assumes that banks invested the money they got from the Fed at roughly the same rate of profitability as money they acquired from other sources.

The estimate may well overstate the direct value of the Fed’s loans, as banks used much of the money for short-term purposes that tend to have lower profit margins. Importantly, however, it also greatly understates the broader value of the loans: The money helped many recipients to survive.

Citigroup is a case in point. Bloomberg estimates that the Fed’s loans increased the bank’s profits by $1.8 billion. The real story, of course, is that government help saved the troubled bank from collapse.

Article source: http://feeds.nytimes.com/click.phdo?i=a0061e4cce9dae006c31092877c8cf48