The Best Income Investor of 2010?

One of the oldest financial jokes around asks the question, “How does one make a small fortune on Wall Street?” The answer, of course is “Start with a big one!”

While the law of large numbers may be at work here, the title of Best Income Investor of 2010 doesn’t go to the money machine at Goldman Sachs (GS), any of the big banks, or the deep thinkers at PIMCO. Nope, once again, the prize goes to one Ben Bernanke as his little “fund” – also known as the U.S. Federal Reserve – produced the tidy sum of $80.9 billion in investment income during 2010.

This means that Bernanke & Co. has handed over somewhere in the vicinity of $78.4 billion to the U.S. Treasury. This is a record payment from the Fed to the Treasury and is a massive increase over last year’s $53.4 billion, which was the prior record.

Granted, Mr. Bernanke and his merry band of central bankers do have an investment pool (i.e. the Fed’s “balance sheet”) worth something north of $3 trillion (and expanding daily) to work with. But if my math is accurate, this means that the yield on the Fed in 2010 was about 2.7%. However, it is a safe bet that based on the performance of most debt class securities last year, that the overall total return on investment was several times that amount.

It is also important to keep in mind that Mr. Bernanke has likely employed another Wall Street cliché to perfection over the past 3 years: Buy low and sell high. Since the Fed was the buyer of last resort for what was then termed “toxic securities” during the depth of the credit panic, the Fed’s basis on many of their investments has to be at or near “bargain basement” levels.

According to the Federal Reserve, the 52% increase in interest income generated in 2010 was attributable to a boost in earnings from the securities it purchased during the credit crisis. Apparently some of these securities started to return to form last year.

“The increase was due primarily to increased interest income earned on securities holdings during 2010,” the Fed said in a statement. In short, the investments in the GSE’s (think Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB)) became more productive as these securities kicked off $76.2 billion in income in 2010 versus the $48.8 billion seen from the same investments in 2009.

The bottom line appears to be that if you have a large enough fund, producing a return of more than $80 billion isn’t all that tough – especially if you are willing to lend money to companies when no one else on earth is willing to.

Disclosure: None