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They weren't making risky investments. They failed because they over invested in near 0% interest US treasuries, and then the Fed rapidly hiked rates to 5%, qu
by anonporridge 3y ago
They weren't making risky investments.
They failed because they over invested in near 0% interest US treasuries, and then the Fed rapidly hiked rates to 5%, quickly collapsing the value of those low interest treasuries on the market.
The investments themselves, and the promised return, were always "risk free", but the house of cards collapses when everyone demands their money now. And when people are looking at their savings interest rate of 0.1%, and seeing other banks offering 4%, it becomes very easy for a bank run to start as people simply move their money chasing yield.
The problem seems multi-faceted and complex, and like most complex problems, true blame is likely diffuse and shared amongst everyone, the customers, the banks, and the Fed. This is usually the kind of situation where societies elect a scapegoat to murder so they can all go about their business pretending to solved the problem and purged the evil from amongst their ranks.
- Fervicus 3y ago> They failed because they over invested in near 0% interest US treasuries, and then the Fed rapidly hiked rates to 5% Shouldn't they have been ready for that scenario and hedged against it though?
- anonporridge 3y agoSure, although the Fed at the time was signalling no chance of raising rates any time soon, then they turned around and jacked them at the fasted pace in recent history. A big lesson there, beyond don't fight the Fed, is don't trust the Fed.
- _uhtu 3y agoOver investing in treasuries IS a risky investment. Especially when bank accounts are supposed to be the least risky place to put money. Treasuries have interest rate risk that needs to be hedged.
- anonporridge 3y agoWhere else are banks supposed to invest, besides mortgages?
- TheCoelacanth 3y agoTreasuries with a shorter time until maturation would be one option.
- _uhtu 3y agoThey can buy TIPS or interest rate swaps to hedge, for example.
- TinyRick 3y ago> They weren't making risky investments. These banks were not hedging their duration risk, which means that they were in fact making risky investments. Their failures lie solely on the bank management and fund managers.
- hartator 3y ago> They weren't making risky investments. Long terms bonds are risky and they knew it.