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It’s not a matter of being prescient. They made an explicit bet. “Rates won’t go down, so let’s get as much yield as possible via long term securities” They
by mathattack 4y ago
It’s not a matter of being prescient. They made an explicit bet. “Rates won’t go down, so let’s get as much yield as possible via long term securities”
They could have just as easily done what most other financial institutions do: match the duration of their liabilities with the duration of their bonds. If people can quickly pull their money, then keep the money in short term bonds and money market funds.
The problem with that is it’s harder to make big bonuses when you’re being fiscally conservative.
- dboreham 4y agoThey also had to pay out significant interest to depositors. The graph of those outflows looks like a hockey stick. So seeking a high return on their assets wasn't unreasonable. Presumably if they had paid low interest on deposits, depositors would have moved their money to some other institution, leading to the same outcome.
- mathattack 4y agoThey chose to. They didn’t need to. If they were getting too many deposits, they could lower the interest they paid on them. The problem is they bought a bunch of long dates securities yielding 1.5-2% and when the deposits flooded in they started paying more than 1.5-2%. They have been better off buying T bills or something else without duration risk and paying something less than Fed Funds. This is what most banks do.