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This isn't really an explanation of why they failed, just applying a macro explanation to a micro phenomenon. The bank bought long-dated treasuries for the 2%

This isn't really an explanation of why they failed, just applying a macro explanation to a micro phenomenon. The bank bought long-dated treasuries for the 2% yield (as opposed to short-term treasuries yielding next to nothing). The moment rates went up they were going to start losing a lot of money mark-to-market. This could be tolerated, except they also had an undiversified deposit base withdrawing money and forcing them to take the losses, and so they blew up.

csomar 4y ago
Hmm, you just repeated what I said. Short or Long term is irrelevant here. They didn't make "risky" investments, they parked their money. They didn't do something unconventional. In 2020, it was perceived or assumed that zero interest rates are here to remain a la Japan and Europe. A 10 year outlook made sense at that time. Of course, hindsight is an completely other thing and everyone has it once the events unfold.
- Panzer04 4y ago
  I suppose - I just find mentions of things like "liquidity" with no specificity pretty meaningless (plus "FED" for referring to the federal reserve; I truly don't understand why it's capitalized as if it's an acronym or something). The thing is, they did make risky investments. Going heavy long-term treasuries is risky, because you lose money if you have to sell them early. Banks get some privileges when holding them on balance, but they are still assuming a lot of interest rate risk when they buy them. Shorter term treasuries would definitely have saved them, but also ruined their profit margins (at least in 2020~2022), so it's neither here nor there.
  - csomar 4y ago
    That's exactly my point, no? This is not about a bank mis-managing itself. Removing liquidity as in the supply of money is going to kill some people. The people who fall are not also necessarily the ones who are mis-managed. Someone out there is insolvent but until an il-liquidity event happens to them, they carry on operations for now. The Fed (meaning, the authority in broad) will continue to remove liquidity and as a consequence kill businesses. This is not an unintended result. This is, in fact, the wanted result and what they are aiming for.
- JumpCrisscross 4y ago
  > Short or Long term is irrelevant here. They didn't make "risky" investments, they parked their money Long-term debt is more sensitive to interest rates. It’s also less liquid than the gold standard for liquidity, on-the-run Treasuries.

csomar 4y ago

Hmm, you just repeated what I said. Short or Long term is irrelevant here. They didn't make "risky" investments, they parked their money. They didn't do something unconventional. In 2020, it was perceived or assumed that zero interest rates are here to remain a la Japan and Europe. A 10 year outlook made sense at that time. Of course, hindsight is an completely other thing and everyone has it once the events unfold.

Panzer04 4y ago
I suppose - I just find mentions of things like "liquidity" with no specificity pretty meaningless (plus "FED" for referring to the federal reserve; I truly don't understand why it's capitalized as if it's an acronym or something). The thing is, they did make risky investments. Going heavy long-term treasuries is risky, because you lose money if you have to sell them early. Banks get some privileges when holding them on balance, but they are still assuming a lot of interest rate risk when they buy them. Shorter term treasuries would definitely have saved them, but also ruined their profit margins (at least in 2020~2022), so it's neither here nor there.
- csomar 4y ago
  That's exactly my point, no? This is not about a bank mis-managing itself. Removing liquidity as in the supply of money is going to kill some people. The people who fall are not also necessarily the ones who are mis-managed. Someone out there is insolvent but until an il-liquidity event happens to them, they carry on operations for now. The Fed (meaning, the authority in broad) will continue to remove liquidity and as a consequence kill businesses. This is not an unintended result. This is, in fact, the wanted result and what they are aiming for.
JumpCrisscross 4y ago
> Short or Long term is irrelevant here. They didn't make "risky" investments, they parked their money Long-term debt is more sensitive to interest rates. It’s also less liquid than the gold standard for liquidity, on-the-run Treasuries.