UPDATE 1-Fed transferred $88.9 bln to U.S. Treasury last year

Thu Jan 10, 2013 11:40am EST

WASHINGTON Jan 10 (Reuters) - The Federal Reserve pumped a record $88.9 billion into the U.S. Treasury last year, the spoils of big profits made on its vast holdings of securities.

The U.S. central bank said on Thursday the money was earned primarily from interest payments on the securities in its multi-trillion dollar portfolio of U.S. government debt and bonds related to the housing industry.

Each year, the central bank sends its earnings, minus operating costs and other expenses, to the Treasury.

The 2012 figure eclipsed the prior record of $79.3 billion deposited into government coffers in 2010.

The Fed estimated its net income for last year at $91 billion.

The increase in the amount of cash forked over to the fiscal authority largely came from a profit of $13.3 billion earned on sales of U.S. Treasury securities. That reflected the surge in prices for U.S. government debt last year to record highs.

The Fed also earned $6.1 billion through holding companies created in response to the fi nancial crisis that began in 2007.

The creation of those holding companies was part of a massive bailout aimed at r estori ng confidence in the country's banking system, which at the time was under extreme duress.

T he Fed provid ed crucial funding in the bailout, which propped up firms like B ear Stearns and AIG hit by s piraling losses re lated to a then-imploding ho using market. Bear Stearns was eventually sold to JPMorgan.

T he Fed announced in June that loans made in the bailout had been repaid with interest. Profits from the sale of remaining Bear Stearns and AIG assets g o mainly to the central bank.

Fed transfers to the Treasury are effectively payments to U.S. taxpayers. They have soared along with the Fed's sharp expansion of its balance sheet via massive bond purchases t o shore up a fragile recovery fr om the 2007-09 recession.

Fed critics, warning these actions represent a threat of future inflation, worry the central bank may suffer losses on its portfolio if it is forced to sell assets quickly to keep price pressures in check. H ow ever, Fed Chairman Ben Bernanke has played down the risk of losses.

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