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ECO 316 Week 3 DQ 2 Should I Expect a Bail Out

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Published on January 25, 2016

For more course tutorials visit www.uophelp.com Should I Expect a Bail Out? From the end of Chapter 15, complete problem 19: Suppose that you manage a small S&L that has a net worth of –$50 million. You fear that within two years, regulators will discover that your firm is insolvent and will shut you down. You have two possible investment strategies: (a) continue to operate as you have been, offering market interest rates on CDs to finance mortgage loans, or (b) offer higher than market interest rates on CDs and use the increased funds to speculate in junk bonds and real estate. Your analysis tells you that strategy (a) has a 10% chance of losing $10 million and a 90% chance of gaining $20 million, with an expected return of $17 million. Strategy (b) has an 80% chance of losing $50 million and a 20% chance of gaining $75 million, with an expected return of –$25 million. What strategy should you follow? Why? What are the consequences of your choice? What should a regulator do in this situation? How might your behavior change if you expect a government bail out? Your 200 word answer should focus on selecting your most relevant thoughts and organizing them in a coherent fashion. Respond to at least two of your classmates’ postings.

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