Suppose you are the sole shareholder of an S&L with deposits of $1. 2 million and assets of $1 million. There is no reserve requirement. Your liability in the S&L is limited by law to your investment (if it fails, you need not make up losses to depositors). You are risk neutral.

a. What is the net worth of the S&L?

b. Suppose you may reinvest your assets into one but only one of the following projects before the examiners audit your books: Project A pays a certain return of 7 percent Project B has a 50 percent chance of a 21 percent net return and a 50 percent chance of a net return of 21 percent Project C has a 10 percent chance of doubling your assets and a 90 percent chance of losing everything Rank the three projects according to which will benefit you personally.

c. How would your ranking change if the assets of the S&L were $1, 200, 000?

d. How would your ranking change if the assets of the S&L were $2, 000, 000?

e. If you have the chance to abscond with $100, 000 at the cost of losing ownership in the S&L, would you do it (setting aside questions of morality)? How does your answer depend on the net worth of the S&L?

f. If S&Ls are covered by government deposit insurance, why should the government take an active role in closing down failed S&Ls as soon as they can be discovered? Answer with references to the examples in this exercise.