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They 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 was
by dboreham 4y ago
They 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.