Don’t be cowed by the Fed’s smaller profits

FORTUNE — When your cow gets bigger but produces less milk, it’s usually time to worry that something has gone wrong with the beast. That’s the first thing that came to my mind when I heard that the Federal Reserve, a cash cow for U.S. taxpayers ever since the worldwide financial bailout began five years ago, sent less money to the Treasury last year than it did in 2012. This despite the fact that the Fed had increased its securities holdings by about $1.1 trillion.

I got this interesting news from a Fed watching firm, Stone McCarthy Research Associates, which told its clients earlier this month that it estimated that the Fed had sent $76.5 billion to the Treasury last year, down from $88.4 billion in 2012. Assuming Stone McCarthy’s number is reasonably accurate, the Fed has sent the Treasury (and thus U.S. taxpayers) a total of $366 billion for the past five years, compared with the $150 billion or so it would have probably sent had it not made massive securities purchases in an attempt to force down interest rates.

The Fed doesn’t send all this money to the Treasury to be nice. It does this because it’s required to turn over essentially all its profits to the Treasury, which counts them — quite properly — as revenue, the same way it counts your income tax payments.

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To continue milking my metaphor, what accounts for the Fed sending substantially less money to the Treasury last year than in 2012? Has the Fed been chowing down on inferior fodder? Nope.

What happened is that in 2012, the Fed made some nifty one-time profits as a result of its bailout activities.

First, it sold the once-toxic securities it acquired in 2008 from Bear Stearns and AIG (AIG) as part of the federal bailout of those firms’ creditors. It made a $6.1 billion profit on these securities, which it bought at distressed prices during the financial meltdown and sold into a yield-hungry market.

In addition, the Fed realized $13.3 billion of profits by selling shorter-term securities it held in its portfolio, in order to raise money to reinvest in longer-term securities, a move called Operation Twist.

These one-time profits, offset by currency losses, totaled $18.5 billion in 2012. That’s why the Fed earned $90.1 billion in 2012, but only an estimated $78.5 billion last year. Subtract the one-time profits from 2012 and plug in Stone McCarthy’s estimate for 2013, and the Fed’s profits were up about 10%.

The Fed released its 2012 numbers just about a year ago, so we’ll probably get its official 2013 numbers reasonably soon.

I also suspect that the Fed’s announcement will trigger the usual discussions about the huge risks the Fed is running by holding $3.8 trillion of securities, many of them long-term, whose market value will continue falling if — make that when — interest rates continue rising.

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Critics will say this value decline could well wipe out the Fed’s capital. But guess what? That won’t happen, thanks to a little-noticed accounting change the Fed adopted in 2011 and that Ray Stone told me about yesterday.

The rule, as best I can explain it, allows the Fed to avoid having to mark down the value of securities that it intends to hold. That way, it can sit there, collect interest on the securities, wait for them to mature, and collect their full face value when that happens. Regular banks can’t make up their own accounting rules, but our central bank can.

And one final note. At some point, which I hope comes reasonably soon, short-term interest rates will rise above 4%, which will put a big damper on the Fed’s profits, possibly even generating losses. In any event, it will send far less money to the Treasury than it’s been sending. And you can bet that this decline will generate political pressure by politicians to increase oversight of the Fed.

I’m no Fed fanboy. But if Fed remittances stop for a year or two, we shouldn’t get too upset with old Bossy and try to put her out to pasture. We should remember that taxpayers got to skim the cream off the Fed’s securities portfolio when the Treasury really needed the money. Nuff said.

UPDATE: The Fed announced Friday that it sent $77.7 billion to the Treasury in 2013, and had earned $79.5 billion for the year, including $143 million from the remnants of its Bear Stearns and AIG holdings.

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