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Should I Expect a Bail Out? From the end of Chapter 15, complete pr
oblem 19: Suppose that you manage a small S&L that has a net worth o
f $50 million. You fear that within two years, regulators will discover th
at your firm is insolvent and will shut you down. You have two possible
investment strategies: (a) continue to operate as you have been, offerin
g market interest rates on CDs to finance mortgage loans, or (b) offer hi
gher than market interest rates on CDs and use the increased funds to
speculate in junk bonds and real estate. Your analysis tells you that stra
tegy (a) has a 10% chance of losing $10 million and a 90% chance of gai
ning $20 million, with an expected return of $17 million. Strategy (b) ha
s 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 y
ou follow? Why? What are the consequences of your choice? What shou
ld a regulator do in this situation? How might your behavior change if y
ou expect a government bail out? Your 200 word answer should focus o
n selecting your most relevant thoughts and organizing them in a coher
ent fashion. Respond to at least two of your classmates postings.