The Riskiest, Most Profitable Bank of All

Large banks will put up strong numbers for 2009, enhanced by the steroids of a zero-interest rate policy and other policy accommodations. But one bank really shot the lights out, with an annual profit in excess of $50 billion -- about five times what Goldman Sachs (NYSE: GS) is expected to report. In case you're wondering, that bank is our Federal Reserve.

Before reward, there is risk
Before we start whooping and cheering that performance, it's worth taking a look at the risks that go along with it. During the credit crisis, the Fed dramatically expanded the size of its balance sheet, which now exceeds $2 trillion. With a total assets to capital ratio of nearly 43:1 as of Jan. 6, the Fed looks as highly leveraged as any investment bank at the height of the credit bubble, and much more so than major financial institutions now:

*Fannie Mae has a negative net worth.
Source: Author's calculations, based on data from Capital IQ, a division of Standard & Poor's.

A run on the (central) bank
With that magnitude of leverage, a small decline in the value of the Fed's assets would suffice to render it technically insolvent. Of course, that risk doesn't have the same consequences as it would for a private institution -- the Fed's funding sources are secure. Nevertheless, investors cannot and will not ignore this massive balance sheet bloat and the risks it presents (consumer and asset price inflation, to begin with). And while the Fed won't suffer the same fate as Bear Stearns, Lehman Brothers or Northern Rock, a run on the dollar (or even just an orderly decline) could turn out to be the direct equivalent of a run on the (central) bank.

The Fed's policies are creating a new set of tangible risks for investors. Motley Fool Global Gains co-advisor Tim Hanson explains why it's time to get out now.