Fed handed record US$96.9b profit to government last year

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21 Mar12:19 AM

[NEW YORK] The Federal Reserve handed US$96.9 billion to the US Treasury last year, audited financial statements showed on Friday, a record payday for the US government thanks to interest on the central bank's massive stable of assets.

The interest in 2014 totaled US$115.9 billion on the Treasury and mortgage bonds the Fed has purchased over three rounds of bond-buying, which were meant to stimulate the US recovery from a 2007-2009 recession. The Fed's 12 reserve banks held US$4.5 trillion at year end, up US$500 billion from 2013.

The annual audit of the central bank's payment to the government, done by Deloitte, has political undertones this year. Republicans in Congress have proposed a bill, known as Audit the Fed, that would allow politicians to second-guess monetary policy decisions.

Some Republicans say the Fed is opaque and has imperiled the country with massive stimulus efforts. The Fed says its operations are transparent and has noted that it is already extensively audited.

Fed Chair Janet Yellen has repeatedly warned against politicizing the Fed's independence. Last month, she waved a copy of the audit in the air at a congressional testimony.

The 83-page audit showed the Fed had interest expenses on depository institutions' reserve balances of US$6.9 billion last year, due to the quarter of a percentage point the central bank pays banks on their excess reserves.

The Fed has kept its key policy rate near zero for more than six years. Strong economic and jobs growth has it aiming to begin to tighten policy later this year. Last October, it halted any new bond buying.

As the recovery proceeds and interest rates rise, the Fed's assets may decline in value on paper, although the central bank would only generate losses from its portfolio if the assets were sold. It has said it does not intend to sell assets for quite some time, if at all.

A Fed official who asked not to be named said that future remittances or losses will depend on economic conditions, adding that the currently rising dollar has the effect of trimming profits.

The US$96.9 billion in remittances to Treasury is not earmarked for anything in particular, said the Fed official. It tops the US$79.6 billion paid in 2013, and US$88.4 billion in 2012.

Preliminary results in January showed 2014 profits of US$98.7 billion.

REUTERS

      

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Money as Debt 3: Evolution Beyond Money

2011

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Money as Debt 3: Evolution Beyond Money

2011
Money as Debt 3: Evolution Beyond MoneyThis third and final movie in the Money as Debt trilogy presents a comprehensive picture of how "money" could work in the future.
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You might also want to watch Money as Debt 1 and Money as Debt 2: Promises Unleashed.

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Shopping for a mortgage? Why you shouldn't ignore posted rates

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Tamsin McMahon, The Globe and Mail
7:59 AM, E.T. | March 19, 2015
Real Estate

Tags: Mortgages, Real Estate

 

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As the housing market thaws from a cold winter, mortgage rate specials are popping up like spring flowers. But even as they compete to offer rock-bottom rates, banks have largely kept their posted mortgage rates unchanged.
Few borrowers give posted rates a second glance, since they’ll rarely be paying the actual sticker price on a mortgage.
But those posted rates aren’t just for show. They play an important – and profitable – role in the mortgage businesses of Canada’s major banks, one that many borrowers ignore at their peril when they go shopping for the lowest rates.
First, posted rates matter for borrowers seeking a variable rate mortgage. The federal government views variable rate mortgages as more risky and it has sought to limit their growth by requiring borrowers to meet the qualifying standards for the higher posted fixed rate. (For instance, posted five-year mortgages currently average 4.75 per cent, while banks are offering variable rates as low as 2.20 per cent).
Meanwhile, fixed-rate borrowers can qualify based on the actual rate they’ll be paying, which is almost always much lower than the posted rate.
Usually, that means borrowers can qualify for much more money than if they applied for a variable rate mortgage. As a result, the majority of borrowers opt for fixed-rate loans. That works for lenders since they generally make more money off of fixed-rated mortgages.
More importantly, banks use posted rates to calculate fees for borrowers who break their fixed mortgages early.
When interest rates are rising, banks typically charge a penalty that works out to three months’ worth of interest payments on a mortgage. But when rates are falling, and when people are more likely to try to get out of their mortgage, banks often base their penalties on something called an “interest-rate differential.”
Each bank calculates this slightly differently, but it usually involves the difference between the posted rate on a mortgage at the time borrowers signed the contract and the posted rate on an equivalent mortgage at the time they cancel. Some banks also add in the discount borrowers are actually getting off the posted rates.
In most cases, a penalty based on an interest-rate differential can be tens of thousands of dollars higher than a penalty based on three months’ interest. (The penalty to break a variable rate mortgage is based on the three months’ of interest payments).
There is a logic behind the interest-rate differential. When borrowers break their mortgages earlier to take advantage of falling rates, banks lose the profits they would have made off the mortgage, since they must now lend out the money to a new borrower at a lower rate.
However, the practice has raised the ire of many borrowers and brokers, who object to banks calculating these penalties based on posted mortgage rates rather than rates that homeowners are actually paying. It is also the main reason why prepayment penalties haven’t shrunk even though mortgage rates have come down.
Take Brian, for example. With three years and $520,000 left on his five-year mortgage, Brian (who didn’t want his last name used) is getting ready to sell his Vancouver home in order to downsize. He’s now facing nearly $30,000 in fees to break his mortgage early, a calculation based on the difference between the 5.24 per cent posted rate on his mortgage when he first signed it two years ago and the 3.39 per cent posted rate his bank is offering today on a three-year mortgage (because Brian has three years left on his mortgage.) The bank uses these numbers despite the fact that Brian’s actual mortgage rate is just 2.79 per cent. Had the penalty been based on three months’ of interest payments, it would have been around $3,627.
Brian was prepared to pay some kind of penalty for breaking his mortgage early, but expected it would have been one based on the rate he is actually paying and not the posted rate. “The idea is sound. I’m even OK with how the calculations are done,” he said in an e-mail. “It’s just they use numbers completely unrelated to my actual commitment.”

Bank of New York Mellon to pay $714 million over claims it misrepresented currency exchange rates

• MICHAEL VIRTANEN, ASSOCIATED PRESS

• MAR. 19, 2015, 8:53 PM
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ALBANY, N.Y. (AP) — New York and federal authorities reached a $714 million settlement Thursday with Bank of New York Mellon in lawsuits alleging the bank fraudulently represented rates for client currency transactions for a decade.

Lawsuits filed in 2011 said BNY Mellon misrepresented rates it would give in currency exchanges, providing clients nearly the worst rates of the trading day while promising the best, obtaining the best rates for itself and keeping the difference.

New York Attorney General Eric Schneiderman and U.S. Attorney Preet Bharara said their joint effort showed the bank misled customers and breached their trust. The bank has agreed to terminate certain executives involved, they said.

"Investors count on financial institutions to tell them the truth about how their investments are being managed," Schneiderman said. "But Bank of New York Mellon misled customers and traded at their expense."

Bharara said: "The bank, after three years of litigation, has finally admitted what was always clear from the evidence — contrary to its various representations, including a claim of 'best rates,' the bank in fact gave clients prices at or near the worst interbank rates reported during the trading day. The bank repeatedly deceived its customers and is paying a heavy penalty for it."

The bank said the agreement fully resolves lawsuits and enforcement proceedings concerning its standing instructions on foreign-exchange services for custodial clients before early 2012.

"We are pleased to put these legacy FX matters behind us, which is in the best interest of our company and our constituents," the bank said in a prepared statement. "We continue to improve our product offerings to ensure they are meeting client demand and positioning clients to succeed in an increasingly complex financial environment."

The investigation began with a 2009 whistleblower complaint. Clients included public pension funds and nonprofits.

"The Bank was generally buying low from, and selling high to, its own clients," according to a statement of facts attached to the court settlement. "The bank recorded the difference or 'spread' between the rates it gave clients and the interbank market price at the time the ... transactions were priced as 'sales margin.'"