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They had massive asset / liability duration mismatch. That’s gambling on low rates for an extended period of time.

It’d be like a traditional bank not reselling mortgages to Fannie Mae. You can’t have $1B of demand deposit liability and $1B of 10-year treasuries because a rate hike will wipe you out immediately if you need liquidity.

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Every bank had this, especially during the last two years. They were not the only one. The difference was bad PR and a panic run.

If that’s your theory then buy some puts because anyone that did this will absolutely get ripped a new one

They won’t in the short term. Even the GFC had a multi year slow roll. Markets can remain irrational longer than you can stay solvent and all that

Why can't a bank borrow for liquidity so it doesn't need to sell at a discount?

It can, and when rates are low, many do. But interest rates are rising, so borrowing is getting expensive.

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