The Fed's Big Banking Risk

Last week's headlines were dominated by talk of better economic times, but this morning's Wall Street Journal highlights just how big a risk the federal government is taking to shore up the U.S. financial sector. It reports that the FDIC is assuming most of the risk on nearly $80 billion in loans and other assets as it encourages a handful of healthy banks to help clean up the toxic banking environment through a series of takeovers and consolidations. As the FDIC moves into an aggressive "clean up mode," the agency's total exposure "is about six times the amount remaining in its fund that guarantees consumers' deposits," a huge potential risk for taxpayers. But with high risk comes the opportunity of high rewards. The New York Times reports that the federal government has made a $4 billion profit in interest payments from just eight of the biggest banks that have fully repaid their obligations under the emergency Troubled Assets Relief Program. So far, the government has taken profits of about $1.4 billion on its investment in Goldman Sachs (GS), $1.3 billion on Morgan Stanley (MS), $414 million onAmerican Express (AXP) , and some $334 million from five other bailout investments. According to the Financial Times, the Federal Reserve has made a $14 billion profit on its various loan and bailout deals since the start of the crisis two years ago. "The central bank earned about $19bn in income from charging interest and fees to financial institutions and investors that tapped the new facilities to obtain much-needed funds during the turmoil. The interest the Fed would have earned by investing the same amount in T-bills was an estimated $5bn, leaving a $14bn gain since August 2007," it writes.

It may just be one of the wackiest political alliances of the year. House Financial Services Committee chairman Barney Frank and the Libertarian-leaning, outspoken, small-government crusader and Texas Republican Ron Paul appear to be teaming up on a plan to limit the powers of the Federal Reserve. Paul, the notorious Fed-basher, told the WSJ he has Frank's word "to advance the Texas Republican's legislation opening the Federal Reserve to broader federal audits." The way the bill is now written up, the Government Accountability Office, the investigative arm of Congress, would audit the Fed's monetary-policy operations. Paul, of course, ran a dark-horse campaign for president last year, advocating the eventual elimination of the central bank. It took a financial crisis of this kind to get more support for his ideas. "Barney told me, 'It's going to come. You're going to get what you want,'" Mr. Paul told the Journal. "We're going to have some hearings and we'll get a vote." According to Reuters, the Fed audit proposal would be incorporated "in broader legislation to revamp U.S. financial regulation that would likely pass the House in October."

The stock market's summer party may be over, according to a NYT story saying that some analysts are predicting a "sharp pullback" in stocks. Shares are up more than 15 percent since mid-July, part a prolonged rally following the market's historic slump this winter, but September is a notoriously bad month for Wall Street, and now the smart money may be voting with its feet. “The people who know are getting out early,” Art Cashin, the director of floor operations at UBS, tells the NYT. “This rally’s a little long in the tooth.”

Are hardback books going to be relegated to the scrap heap of history, just like eight-track audio tape and anything with the name Betamax on it? That's the thinking of Arnaud Nourry, CEO of the French publishing group Hachette, who warned this weekend that e-books like Amazon's(AMZN) Kindle and Google's (GOOG) vast digital literary library could kill off the original handheld, the hardback book. According to the Financial Times, Nourry's big concern is the new pricing model that will be ushered in by the age of digital distribution. "On the one hand, you have millions of books for free where there is no longer an author to pay and, on the other hand, there are very recent books, bestsellers at $9.99, which means that all the rest will have to be sold at between zero and $9.99," Mr Nourry told the FT. In closing, Nourry admitted he'd like for Hachette to work with Google, but only if they can be "more reasonable" with French publishing houses.

Staying with the world of creative destruction: Sony has hatched a plan to create a new market for its movies, releasing them on-demand to home audiences just after they hit the movie theaters but before they are available on DVD, Business Week reports. Sony, which provides both TV hardware as well as producing content, is canvassing the other major studios for support. Under one plan it is floating, "owners of the Sony's Internet-connected Bravia TV could pay as much as $40 to watch a movie that would be streamed over the Internet to their set," the magazine writes.