Traditionally the Las Vegas Home Bank made only prime loans-providing mortgages only to people who were very likely to repay the loans. However, Leonardo, a senior executive at the bank, is considering offering subprime loans-mortgages to speculators and other less creditworthy borrowers. If he makes only prime loans, the bank will earn \(\$ 160\) million. If he also makes subprime loans, the bank will make a very high profit, \(\$ 800\) million, if the economy is good so that few people default. However, if the economy is bad, the large number of defaults will cause the bank to lose \(\$ 320\) million. The probability that the economy is bad is \(75 \%\).

Leonardo will receive \(1 \%\) of the bank's profit if it is positive. He believes that if the bank loses money, he can walk away from his job without repercussions but with no compensation. Leonardo and the bank's shareholders are risk neutral. Does Leonardo provide subprime loans if all he cares about is maximizing his personal expected earnings? What would the bank's stockholders prefer that Leonardo do (given that they know the risks involved)?