You /can/ manage short term liability mismatch against long term assets in one sense but it's actually useless when you think about why you have long term assets at all.
Just like you can manage the risk by selling your long term assets and buy short term to make the mismatch not exist.
The cost of managing using swaps will be about the same as selling your long term assets and buying t-bills. If it isn't, you hit it as hard as you can knowing it won't last and it's free money.
Take on /less/ long term assets (sell them and buy t-bills) to remove the existential risk.
It's not going to be much different in cost. You see it? Derivatives aren't magic pixie-dust insurance. They will cost about the same as a rebalance on that scale or you hit them as hard as you can because they're mispriced and represent free money.
I understand your point, and your first sentence is the point I (and probably others) are making too: they either take on less long term assets, or bar that, have to hedge them properly (which is equivalent to taking less assets). The hedge was meant to be done at the same time of taking such a massive risk.
Ok so you take deposits, which are a short term liability and you've got cash money you have to do something with.
1) Buy loads of long term debt and some swaps.
2) Buy less long term debt than that and t-bills.
These two options are exactly equivalent from a financial perspective. Same risk, same reward, quite similar costs.
If instead you've bought loads of long term debt and not hedged, why did you do that? This is the nub of the thing. Why? Because you couldn't make it pay otherwise with the given market conditions? So you took a punt on inflation and the official rate staying low? Could you have done that differently? Should you have? What were the implications for your business if you didn't take a massive bet on interest rates?
Swaps are entirely beside the point here. Swaps here are just "hey let's not actually make the bet we just went out of our way to make." It's likely going to cost you a little more than not exposing yourself to that risk in the first place. It's like betting on both teams in the superbowl. The house takes a cut.
"Should have hedged with swaps" misses: "why did they have an exposure of that size at all?" Recklessness? Idiocy? Should they be prosecuted for extreme negligence? Were they between a rock and a hard place and took a fairly desperate measure? (Which I'm also not excusing either fwiw).
