Taxpayers gain $2.7B on bailout 'investment'

Federal Reserve makes billions on interest and Treasury assets, even as its Bear Stearns and AIG bet loses $5.3 billion.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- The government bailout of banks, lenders, Bear Stearns and AIG brought in billions of dollars to the Federal Reserve in the first quarter of 2009.

In the first of a series of monthly reports on its $2.1 trillion balance sheet, the Fed said it earned a net $2.7 billion from January through March. Most of the gains stemmed from new lending facilities that the Fed instituted after the collapse of Lehman Brothers brought the nation's flow of credit to a halt in September.

The U.S. central bank said it took in $1.2 billion on interest in loans in its Term Auction Facility (TAF) and to troubled insurer AIG (AIG, Fortune 500). TAF, which the Fed began at the beginning of the recession in December 2007, lends short-term money to banks in exchange for toxic assets as collateral.

The Fed also made $2.1 billion on its Commercial Paper Funding Facility, in which the government buys up companies' short term debt in exchange for interest and a fee.

Treasury bonds, which performed well in the first three months of the year, made the Fed another $4.6 billion. The Fed began purchasing long-term Treasurys in March in an attempt to reduce bond yields and interest rates that are tied to them.

But the Fed lost a whopping $5.3 billion on assets it took hold of after the Bear Stearns and AIG bailouts. The vast majority ($4.9 billion worth) of the losses were AIG-related, as the central bank bought up nearly $50 billion worth of toxic assets in exchange for loans to the company.

Bailout opponents have voiced strong concern about the government taking hold of toxic assets, claming that the value will only continue to deteriorate over time losing the taxpayers billions of dollars. But the Fed has maintained that market improvements over the next months and year will help increase the value of its holdings, and it may be able to sell many of those assets for a gain.

The report is part of of a Fed effort to increase transparency about its finances and bailout efforts, especially as it ramped up its balance sheet by more than $1 trillion since September. The Fed said it will issue the report on the second Wednesday of each month. To top of page

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