Since the Federal Reserve began its massive, unprecedented quantitative easing efforts during the financial crisis, we have seen the S&P 500 (SPY) increase about 135% off of the panic-bottom lows of 2009. A lot of this move was the realization that the world was not burning to the ground and that our economy would survive. Some of this move can be attributed to the Fed's massive asset purchases as well, driving risk-on behavior that fuels stocks. As a result of these measures, the Fed's balance sheet has ballooned from $915 billion in 2007 to greater than $3 trillion today. The Fed also has been remitting enormous sums of "profit" to the Treasury each year since the financial crisis on an unprecedented scale. This got me to thinking, what would the Fed be worth if it were a publicly traded bank? This article will examine the relative values of four too-big-too-fail institutions and attempt to assign a value to the Fed's "earning" power.
Of course, it is only fair to point out that the Fed has numerous enormous advantages over private banks, not the least of which is the ability to "print" money. The Fed doesn't literally print currency but does increase the money supply by "creating" money electronically. This means funding is extraordinarily cheap and the Fed also doesn't have to fool with a pesky branch structure, advertising, etc. As another note, I pulled the Fed's financial statements from the Board of Governors website and the banks' information was pulled from the SEC website.
With the disclaimers out of the way and understanding that the Fed doesn't play by the same rules that a private company would, we can attempt to assign a value to the Fed if it were publicly traded.
The "peer group" members I chose are: JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C). I understand the Fed doesn't actually have any peers but these are the closest banks we have in size.
Now, we can use a couple of metrics to attempt discerning a value for the Fed. First, you'd think that after several years of large scale asset purchases the Fed's balance sheet would dwarf any public company. While this is true, the margin may not be as much as you thought. With the Fed at about $2.9 trillion at the end of last year, it is "only" about $550 billion larger than JPMorgan in terms of total assets.
You can easily see when QE began as the Fed went from $914 billion in 2007 to over $2 trillion in 2008. Also, you can see the TBTF banks steadily increasing their balance sheets since the financial crisis after acquiring failing banks.
Next, return on average assets shows us how productive those balance sheets have been for the TBTF banks over the past six years.
Since the Fed doesn't have anywhere near the same cost structure as the banks, its ROAA is a ludicrous 3%+ for most of this time period, even cresting 4% in 2007. The private banks, however, experienced some rough times since the financial crisis, with Citigroup suffering the most. Bank of America has also struggled to produce an acceptable ROAA since the financial crisis but JPM and WFC have been steadily improving profitability.
Finally, we'll look at net income.
We see here that the big banks have suffered from the financial crisis but have pulled away from it and are once again producing monstrous net income figures. JPM and WFC are back to producing $20 billion in annual profits while Citi and Bank of America are still lagging somewhat. The Fed, however, never missed a beat as the financial crisis proved to be a boon in profitability for the central bank. With around $40 billion in net income in 2007, the Fed was near $90 billion in 2012. This amount of profit dwarfs the other four banks combined and then some. The staggering amount of money the Fed has remitted to the Treasury over the last six years can be fully appreciated using this chart.
So what would the Fed be worth if it were a bank? The peer group's current forward PE ratios and market caps are below for comparison.
Mkt Cap $B
The four TBTF banks have an average forward PE of 9.07 currently and an average market cap of $164 billion as of Friday. If we apply the forward PE of 9.07 to the Fed's 2012 earnings, we get a market cap of $821 billion. If we use the more conservative 2011 earnings of "only" $78 billion, we get a potential market cap of more like $712 billion.
Based on the forward PE ratios and market caps of the TBTF banks, we can calculate that the market currently expects the four to earn about $73 billion in 2013 combined. The Fed is widely expected to produce more income than that this year, potentially reaching $100 billion in net income on the back of ever-increasing accommodative policies. This would give a publicly-traded Fed a value of north of $900 billion as a public company.
While the Fed as a public company is nothing more than an interesting exercise, comparing the central bank to the largest of the US banks is an instructive exercise in noting just how large and profitable the Fed has become. This one institution currently makes more in net income than the four largest US banks combined and then some. Assigning a stock market value to such an entity is difficult as the Fed does not have to operate like a company. However, it is interesting to think about just how much money the Fed is making and what a company that size would look like. For instance, with a current capitalization of $13.87 trillion, the Fed would make up roughly 6.5% of the S&P 500 by itself! It would also be roughly the size of Exxon Mobil (XOM) and Apple (AAPL) combined.
The Fed has embarked on an enormous amount of quantitative easing since the financial crisis reared its ugly head. There has been endless argument over the efficacy of such policies but one thing is for sure; the Treasury has been one of the main beneficiaries of the Fed's actions. Remittances to the Treasury have totaled roughly $375 billion over the past six years; imagine if those remittances were to shareholders of a massive, overwhelmingly large public company. It's fun to think about.