Riskiest Bank is now the Fed. Who bails it out?

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/11/AR2010011103892.html?hpid=topnews The Fed.... takes money that banks keep on deposit, at a rate of 0.25 percent, and lends it to the U.S. government by buying Treasury securities and, lately, to home buyers and other private borrowers though more exotic investments. While that resulted in higher earnings in 2009, it exposes the Fed to... [more]

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/11/AR2010011103892.html?hpid=topnews The Fed.... takes money that banks keep on deposit, at a rate of 0.25 percent, and lends it to the U.S. government by buying Treasury securities and, lately, to home buyers and other private borrowers though more exotic investments. While that resulted in higher earnings in 2009, it exposes the Fed to more risks down the road. "They've moved up the risk-return curve, as they have more long-term assets and more things that involve credit risk," said Diane Swonk, chief economist at Mesirow Financial. If the price of Treasury bonds or mortgage-related securities issued by Fannie Mae and Freddie Mac were to fall in the years ahead, and Fed leaders decided they need to drain money from the financial system by selling off some of their portfolio, the central bank would lose money. "If they do enough asset sales and rates go high enough, that could eat into future profits pretty substantially," said Michael Feroli, an economist at J.P. Morgan Chase. [less]