An Addendum on the Treasury's Plan to Buy Bank Assets-Becker

In my post on Sunday I gave an example to illustrate the Treasury's plan to buy the "toxic" assets of banks. Since I left a few quite important implications of the example unclear, this addendum will consider the same example in more detail. Recall that the Plan would encourage hedge funds and other financial institutions to bid for bank assets. These institutions would only have to put up about 7% of their bid price since the Treasury will supply another 7%, and the FDIC will loan the remaining 86%. If assets appreciate in value over the bid price, the Treasury and funds share the profits equally after the FDIC is repaid. If the asset declines in value, funds are only liable for 7% of the decline, and the FDIC and Treasury absorb the rest. In my example, there is a 10% chance that an asset will be worth $1000, and a 90% chance that it will be worthless, so that the full expected value of the asset is $100. Assuming competition among funds forces them to bid the expected value of this asset to them, how much will they bid? When the asset pays off $1000, a fund would get half the difference between $1000 and 86% of its bid price, while if the asset becomes worthless they would be compensated for everything but 7% of what they bid. The expected value of these outcomes is approximately $243, and that would be the price that competition forces hedge funds and other funds to pay for the assets. Since the expected value of the asset is only $100, government subsidies would encourage funds to bid about 2 1/2 times the true worth of the asset! The government would pay the difference between the bid price and the worth of an asset, or $143 in this example. Contrary to many assertions made about the Treasury Plan, this subsidy does not on average go to successful bidders since the expected cost of the asset to them equals the expected value of the asset to them. Of course, the luckier buyers of these assets can make a lot of profits, and they could be subject to Congressional wrath that they profited at the government's expense. The $143 subsidy goes to banks, for they would receive almost 2 1/2 times the worth of their "toxic " assets. Perhaps good reasons motivate the government to use this indirect way to subsidize banks rather than to give them the subsidy directly. However, it is a strange program indeed where banks get subsidized in proportion to how many "bad" assets they hold. This will make banks wish that they had made even greater mistakes, and held more assets that are likely to be truly worthless. However, these worthless assets could be worth a fortune to banks.

Comments

[neilehat]

A possible "moral hazard" in the works? One question, "Which is the greater hazard, the possible hazard of Financial Institutions becoming more deeply involved in risky investments as their "raison de etre" due to Government support when the whole thing goes sour. Or the known hazards of freeze/seizing up of credits and investments within Business and Industry"?

Ahh ... the joys and terrors of unregulated exotic financial instruments flooding the Financial world. When will we learn?

[dirmark.ru]

–° –∫–∞–∂–¥—ã–º –≥–æ–¥–æ–º –¥–∏—Ä–µ–∫—Ç –º–∞—Ä–∫–µ—Ç–∏–Ω–≥ –ø–æ–ª—É—á–∞–µ—Ç –≤—Å–µ –±–æ–ª—å—à—É—é –ø–æ–ø—É–ª—è—Ä–Ω–æ—Å—Ç—å –∫–∞–∫ –æ–¥–∏–Ω –∏–∑ —ç—Ñ—Ñ–µ–∫—Ç–∏–≤–Ω—ã—Ö –∏–Ω—Å—Ç—Ä—É–º–µ–Ω—Ç–æ–≤ —Ä–µ–∫–ª–∞–º—ã. –ü—Ä–∏–º–µ–Ω—è—è –∏–Ω—Å—Ç—Ä—É–º–µ–Ω—Ç—ã –º–∞—Ä–∫–µ—Ç–∏–Ω–≥–∞ –≤ –±–∏–∑–Ω–µ—Å–µ, –≤—ã –Ω–µ —Ç–æ–ª—å–∫–æ –æ–±—Ä–∞—â–∞–µ—Ç–µ—Å—å –Ω–∞–ø—Ä—è–º–∏–∫ –∫ –∫–ª–∏–µ–Ω—Ç–∞–º, –Ω–æ –∏ —É—Å—Ç–∞–Ω–∞–≤–ª–∏–≤–∞–µ—Ç–µ –≤—ã—Å–æ–∫–æ—ç—Ñ—Ñ–µ–∫—Ç–∏–≤–Ω—É—é –æ–±—Ä–∞—Ç–Ω—É—é —Å–≤—è–∑—å, –ø–æ–ª—É—á–∞—è –æ—Ç–≤–µ—Ç–Ω—É—é —Ä–µ–∞–∫—Ü–∏—é –Ω–∞ —Ä–µ–∫–æ–º–µ–Ω–¥–∞—Ü–∏–∏ –æ—Ç —Å–≤–æ–∏—Ö –ø–æ—Ç—Ä–µ–±–∏—Ç–µ–ª–µ–π.
–°–∞–π—Ç dirmark.ru –ø—Ä–µ–¥–æ—Å—Ç–∞–≤–ª—è–µ—Ç –¥–µ—Ç–∞–ª—å–Ω—É—é –∏–Ω—Ñ–æ—Ä–º–∞—Ü–∏—é –æ–± —É–ø—Ä–∞–≤–ª–µ–Ω–∏–∏ –º–∞—Ä–∫–µ—Ç–∏–Ω–≥–æ–º, –º–∞—Ä–∫–µ—Ç–∏–Ω–≥–µ –≤ –ò–Ω—Ç–µ—Ä–Ω–µ—Ç–µ, –ø—Ä–∞–≤–∏–ª—å–Ω–æ–π —Ä–µ–∫–ª–∞–º–µ –≤ —Å–µ—Ç–∏, —Ç–µ–ª–µ–º–∞—Ä–∫–µ—Ç–∏–Ω–≥–µ –∏ –º–Ω–æ–≥–æ–º –¥—Ä—É–≥–æ–º.

[Anonymous]

I'm sorry professor but I don't follow your numbers, shouldn't the price that the fund would bid obtained by solving the following equation?

0.1 x ( $1,000 - 0.86 x P ) / 2 + 0.9 x 0 = 0.07 x P

which implies a price of

P = $442.48

The intuition is with 10% probability the fund collects half of the $1,000 minus what is paid to the FDIC and with 90% probability the fund collects nothing.

In any case, this is done assuming that the interest rate on the loan is 0% and how can we talk about subsidized loans without talking about the interest rate on the loans?

[Anonymous]

I'm sorry professor but I don't follow your numbers, shouldn't the price that the fund would bid obtained by solving the following equation?

0.1 x ( $1,000 - 0.86 x P ) / 2 + 0.9 x 0 = 0.07 x P

which implies a price of

P = $442.48

The intuition is with 10% probability the fund collects half of the $1,000 minus what is paid to the FDIC and with 90% probability the fund collects nothing.

In any case, this is done assuming that the interest rate on the loan is 0% and how can we talk about subsidized loans without talking about the interest rate on the loans?

[Terry Johnson]

This sounds like a prime opportunity for someone to coin a new financial term to characterize the issue.

Let's see: the problem is that bankers will acquire gobs of bad debt for which they will be rewarded. Humm.

It is sort of like an "Agency" problem except upside down.

Here are some ideas for starters:
1. Toxiholics - heard it here first!
2. Zombie Banks
3. CBOverdosed

You get the idea. Any others?

[drcms]

Anonymous posted at April 1, 2009 11:19 AM

I am so glad that you have addressed the numerical example. I came to exactly the same result of 442.48

(I was already quite desparate because I thought I missed something really obvious).

I think Professor Becker calculates:

0,1√ó(1000-0,86√óP)/2+0,9√ó0,93√óP=P

which implies a price of

P=242,72

[drcms02]

Dear Anonymous

I was happy to see your post as I agree with your calculation and was already quite desparate as I thought I missed something obvious.

I think Professor Becker calculates

0,1√ó(1000-0,86√óP)√ó0,5+0,9√ó0,93√óP=P

242,72=P

This calculation seems to ignore that that the fund will have to provide only 0.07√óP and also that that in the 90% event of failure the fund will not receive any compensation of 93% of the asset price. The 93% ignores also the treasury which owns 50% of the equity.

[andy]

I think the most interesting example is this:

What if I can declare myself a hedge fund, get cash advances from all my credit cards to use as my 7% contribution, then go to Las Vegas and play roulette with the money under the same rules as if I bought toxic assets?

My average proceeds are 35/37 of whatever I bet

(which is to say I win 35 X the bet every 37th time I play)

and my average lost is 36/37 X 0.07 of whatever I bet.

So presuming I can bet often enough to not be at wild risk from statistics (that is, I can make a few hundred bets) my profit is

35/37 - 36/37X0.07 = 0.87784

on the 0.07 money I put in to start.

To make it more concrete, let us say I could get $70,000 in cash advances on all my credit cards (which I actually could do if I were idiotic enough to use all those 'low rate balance transfer' checks they keep sending me - makes one wonder about the existence of a credit crisis) and the government came up with $930,000.

This means I'd have $1,000,000 to bet.

I would lose $972,973 of that million, but $904,865 would be the government's problem - loans on which they had no recourse.

I would win $945,945 with the million. Of this, I'd have to pay back the $23,243 in loans from the FDIC. That would leave $922,702 for the treasury and I to split evenly.

Thus for my initial ZERO DOLLAR investment and $70,000 credit card advance I would end up making $461,351. This is enough to pay lots of interest to both the credit cards and the FDIC and still be ahead.

The government gets left holding the bag for $836,757 in bad loans. They get back $461,351 against their additional $70,000 investment, and $23,243 in loans actually do get repaid. Thus the government's situation is a net loss of $445,406.

I make $461,351.

The government loses $445,406.

I don't need any money to start, just my credit cards.

Where do I sign up?

[Michael F. Martin]

Anybody who believes that markets are both the cause of and solution to the crisis should see the new proposal by Zingales and Hart:

http://experts.foreignpolicy.com/posts/2009/03/30/to_regulate_finance_try_the_market

[dogovornedv.ru]

–ï—Å–ª–∏ –í—ã –Ω–∞–¥—É–º–∞–ª–∏ –æ–±–∑–∞–≤–µ—Å—Ç–∏—Å—å –ª–∏—á–Ω—ã–º –Ω–µ–¥–≤–∏–∂–∏–º—ã–º –∏–º—É—â–µ—Å—Ç–≤–æ–º, –í—ã –æ–±—Ä–∞—Ç–∏–ª–∏—Å—å –ø–æ –∞–¥—Ä–µ—Å—É. –ú—ã –∑–Ω–∞–µ–º –æ–± –æ–±—ä–µ–∫—Ç–∞—Ö –Ω–µ–¥–≤–∏–∂–∏–º–æ—Å—Ç–∏ –≤—Å–µ –∏ –≥–æ—Ç–æ–≤—ã –ø–æ–¥–µ–ª–∏—Ç—å—Å—è —Å –í–∞–º–∏. –ü–æ–∫—É–ø–∫–∞, –ø—Ä–æ–¥–∞–∂–∞, –∏–ø–æ—Ç–µ–∫–∞, —Å—Ç—Ä–∞—Ö–æ–≤–∞–Ω–∏–µ, —Å—Ç–æ–∏–º–æ—Å—Ç—å - –í—ã –∏–º–µ–µ—Ç–µ –≤–æ–∑–º–æ–∂–Ω–æ—Ç—Å—å —É–∑–Ω–∞—Ç—å –æ–± —ç—Ç–æ–º –Ω–∞ –Ω–∞—à–µ–º —Å–∞–π—Ç–µ. –ú—ã –¥–∞–¥–∏–º —Å–æ–≤–µ—Ç—ã –æ —Ç–æ–º, –∫–∞–∫ –≤—ã–≥–æ–¥–Ω–µ–µ –≤—Å–µ–≥–æ –∫—É–ø–∏—Ç—å –∂–∏–ª—å–µ –≤ –Ω–æ–≤–æ—Å—Ç—Ä–æ–π–∫–µ, –∫–∞–∫ –ø—Ä–∞–≤–∏–ª—å–Ω–æ –ø–æ–¥–æ–±—Ä–∞—Ç—å –∞–≥–µ–Ω—Ç—Å—Ç–≤–æ –∏ –∫–∞–∫ —Å–æ–±—Å—Ç–≤–µ–Ω–Ω—ã–º–∏ —Å–∏–ª–∞–º–∏ –æ—Ü–µ–Ω–∏—Ç—å –∫–≤–∞—Ä—Ç–∏—Ä—É. –ù–µ –∑–Ω–∞–µ—Ç–µ —á—Ç–æ —Ç–∞–∫–æ–µ —Ä–µ–ª–∞–∫–∞—Ü–∏—è, –ø—Ä–∏–≤–∞—Ç–∏–∑–∞—Ü–∏—è –∏–ª–∏ –∫—Ç–æ —Ç–∞–∫–æ–π —Ä–∏—ç–ª—Ç–æ—Ä. –ú—ã –¥–∞–¥–∏–º –æ—Ç–≤–µ—Ç—ã –Ω–∞ –≤—Å–µ –í–∞—à–∏ –≤–æ–ø—Ä–æ—Å—ã.
–ù–µ–¥–≤–∏–∂–∏–º–æ—Å—Ç—å

[Eric R Weinstein]

Hey Gary,

Thanks for the response in a new addendum.

But Gary, this stylized analysis still wont do from a man I consider the dean of chicago economists; this is if anything even worse than your main post. If I wrote the above on an exam in your class, you would hopefully scold me for skipping the classes on illiquidity and risk aversion.

Check above and you will see that you are implicitly endorsing *risk neutral* expected return rather than properly using risk averse expected valuation. That's the valuation bias I linked to from the main post and an issue we are all responsible for conveying to bewildered and anxious non-expert readers. Or at least I thought so.

And, unfortunately, that's not really a quibble either because the difference can be the main reason for deeply discounting illiquid assets relative to merely risky assets in the first place!

Simply type:

valuation of illiquid assets

or

quantifying valuation bias for illiquid assets

into Google, grab the top paper to help us understand your thinking by really digging in and responding to the question. If you are changing your belief in the virtue of markets, I think that's something that would make headlines and something you likely want to communicate to your many students and admirers. Policy makers chief among them.

So, the same question as before: are you aware that you appear to suddenly be entertaining massive regressive involuntary wealth transfers from workers normally prohibited by law from particpating in the upside of normal hedge funds, to failed perversely incentivized banks and legally restricted capital pools under the patently false pretense that there is no framework in which to simply fairly price illiquid assets? Isn't this a moment for markets rather than non-consensual wealth transfers?

Or is this finally "the night Chicago died".

Hopefully,

Eric Weinstein

[blake]

Um, I don't think Becker likes the plan very much, he's just explaining how he sees it. I'm afraid his view is accurate although I hope it isn't. It sounds like a very stupid plan to me also, it should be titled the "Kleptocrat relief bill". I guess it might buy a little time, but at a high price I fear.

[doskalinks.ru]

–í –Ω–∞—Å—Ç–æ—è—â–∏–π –º–æ–º–µ–Ω—Ç —É–∂–µ –Ω–∏–∫—Ç–æ –∏ –Ω–µ —Å–æ–º–Ω–µ–≤–∞–µ—Ç—Å—è, —á—Ç–æ —Ä–µ–∫–ª–∞–º–∞ –∏–º–µ–µ—Ç –±–æ–ª—å—à–æ–µ –≤–ª–∏—è–Ω–∏–µ –Ω–∞ –ø—Ä–æ–¥–≤–∏–∂–µ–Ω–∏–µ –∏ —Ä–∞—Å–∫—Ä—É—Ç–∫—É —Å–∞–π—Ç–æ–≤. –î–æ—Å–∫–∞ –æ–±—ä—è–≤–ª–µ–Ω–∏–π - —ç—Ç–æ —Å–∞–π—Ç, –Ω–∞ –∫–æ—Ç–æ—Ä–æ–º –ò–Ω—Ç–µ—Ä–Ω–µ—Ç-–ø–æ–ª—å–∑–æ–≤–∞—Ç–µ–ª–∏ –º–æ–≥—É—Ç —Ä–∞–∑–º–µ—â–∞—Ç—å —Å–≤–æ–∏ –æ–±—ä—è–≤–ª–µ–Ω–∏—è –æ –ø–æ–∫—É–ø–∫–µ, –ø—Ä–æ–¥–∞–∂–µ –∏–ª–∏ –ø—Ä–µ–¥–æ—Å—Ç–∞–≤–ª–µ–Ω–∏–∏ —É—Å–ª—É–≥. –£–∑–Ω–∞—Ç—å –ø–æ–¥—Ä–æ–±–Ω—ã–µ —Å–µ–¥–µ–Ω–∏—è –æ —Ä–∞—Å—Å—ã–ª–∫–µ —Ä–µ–∫–ª–∞–º–Ω—ã—Ö –æ–±—ä—è–≤–ª–µ–Ω–∏–π, —Ä–µ—Å—É—Ä—Å–∞—Ö –ø–æ SEO, —Ä–∞—Å–∫—Ä—É—Ç–∫–µ –∏ –ø—Ä–æ–¥–≤–∏–∂–µ–Ω–∏–∏ —Å–∞–π—Ç–æ–≤ –º–æ–∂–Ω–æ –Ω–∞ doskalinks.ru
–†–∞—Å—Å—ã–ª–∫–∞ –ø–æ –¥–æ—Å–∫–∞–º –æ–±—ä—è–≤–ª–µ–Ω–∏–π

[JT]

This all seems to risky. I realize that the government is trying to keep a number of financial institutions afloat, but why would anyone buy "toxi debt"? It seems counterintuitive, no matter what the math works out to. I don't like where this is heading....

[Pat Hess]

The Treasury description includes lots of pretty talk about how the public interest will be
protected and how the private investors will ensure that the government isn’t overpaying for
assets. I would bet dollars to donuts that it does! The fact that the FDIC is guaranteeing debt is
a pretty big clue. A simplified example here will help. Let’s suppose that the FDIC guarantees
the maximum amount or 85.7% of the purchase price. How will a competitive market value a
PPIF with an 85.7% guarantee? Competition will insure that maximum payment (the winning
bid) will pay just enough for the assets so that there is no excess return to be earned by the
PPIF. What is the payoff to the winning bid when 85.7% of the debt is guaranteed? Ignoring
any intermediate cash flows the payoff is the difference between the terminal value of the
assets and 85.7% of the winning bid, but the FDIC guarantee insures that the payoff is never
negative.

Payoff to Winning Bid = Maximum{Terminal Value of Assets – 85.7%×Value of Winning Bid,0}

This payoff is identical to the payoff to a call option on the assets that are being purchased with
an exercise price equal to 85.7% of the winning bid. Because the winning bidders are only
responsible for 14.3% of the winning bid, 14.3% of the winning bid will equal the value of the
call option. We can summarize this as:

WB = Maximize{VA + FDIC Guarantee}
s.t.
14.3%×WB ≤ C(VA, 85.7%×WB,p)

where WB is the value of the winning bid, VA is the current fair value of the asset that are
purchased, FDIC Guarantee is the value of the FDIC guarantee, 85.7%√óWB is the exercise price,
C is the value of a call option and p are the unspecified parameters of the option pricing model.
We can put some numbers around the value of the winning bids
relative to the value of the assets that are purchased. I’ll make what I regard as pretty
reasonable assumptions:
1. The Term of the PPIF is Five years
2. The Interest Rate for Five Years is 4%
3. The Annualized Volatility of the Asset in the PPIF Range Between 6 and 20%
I’ll use the Black-Scholes option pricing model to solve for the winning bids relative to the fair
value of the assets. The graph below shows the premiums for volatilities between 6 and 20%.
The numbers are impressive. At a puny 6% annualized volatility, the winning PPIF bid will be
almost 20% higher than the fair value of the assets. If banks are able to put together pools with
volatilities of 20% and still get the FDIC to guarantee 85.7%, they will earn a premium of almost
37%. As leverage is reduced bids will fall and hence premiums. But it looks like there is a lot
here for banks; especially those with high risk loans.

Ignoring the threat of ex-post penalties by congress, banks will be very anxious to
participate in this program. They will be paid very handsomely for the favor! The government,
by the hand of the FDIC, is paying excessively for the assets. From the perspective of the U.S.
citizens, this is probably the worst plan yet. The FDIC (translation the U.S. Treasury or the U.S.
taxpayer) has not only guaranteed the new debt, they will continue to guarantee the deposits
of the institutions that sell the debt.

[Pat Hess]

I am bothered most by the fact that government regulation has created a financial system with inefficient risk sharing arrangements. FDIC insurance and other government regulations have resulted in excess capital in banks. Anybody that thinks transaction services should be bundled with risk bearing should ask directions before they drive home tonight!

[dosklinks.ru]

–í –Ω–∞—Å—Ç–æ—è—â–∏–π –º–æ–º–µ–Ω—Ç —É–∂–µ –Ω–∏–∫—Ç–æ –∏ –Ω–µ —Å–æ–º–Ω–µ–≤–∞–µ—Ç—Å—è, —á—Ç–æ —Ä–µ–∫–ª–∞–º–∞ –∏–º–µ–µ—Ç –≤–Ω—É—à–∏—Ç–µ–ª—å–Ω–æ–µ –≤–ª–∏—è–Ω–∏–µ –Ω–∞ –ø—Ä–æ–¥–≤–∏–∂–µ–Ω–∏–µ —Å–∞–π—Ç–æ–≤. –î–æ—Å–∫–∞ –æ–±—ä—è–≤–ª–µ–Ω–∏–π - —ç—Ç–æ —Å–∞–π—Ç, –Ω–∞ –∫–æ—Ç–æ—Ä–æ–º –ø–æ–ª—å–∑–æ–≤–∞—Ç–µ–ª–∏ –ò–Ω—Ç–µ—Ä–Ω–µ—Ç–∞ –º–æ–≥—É—Ç —Ä–∞–∑–º–µ—â–∞—Ç—å —Å–≤–æ–∏ –æ–±—ä—è–≤–ª–µ–Ω–∏—è –æ –ø–æ–∫—É–ø–∫–µ, –ø—Ä–æ–¥–∞–∂–µ –∏–ª–∏ –ø—Ä–µ–¥–æ—Å—Ç–∞–≤–ª–µ–Ω–∏–∏ —É—Å–ª—É–≥. –£–∑–Ω–∞—Ç—å –ø–æ–¥—Ä–æ–±–Ω–æ –æ —Ä–∞—Å—Å—ã–ª–∫–µ —Ä–µ–∫–ª–∞–º–Ω—ã—Ö —Å–æ–æ–±—â–µ–Ω–∏–π, –¥–æ—Å–∫–∞—Ö –æ–±—ä—è–≤–ª–µ–Ω–∏–π, –ø—Ä–æ–¥–≤–∏–∂–µ–Ω–∏–∏ —Å–∞–π—Ç–æ–≤ –º–æ–∂–Ω–æ –Ω–∞ dosklinks.ru
–†–∞—Å—Å—ã–ª–∫–∞ –ø–æ –¥–æ—Å–∫–∞–º –æ–±—ä—è–≤–ª–µ–Ω–∏–π

[logeslagnini]

–≤—ã —à—É—Ç–∏—Ç–µ...21 –≤–µ–∫ –Ω–∞ –¥–≤–æ—Ä–µ, –Ω–µ—É–∂–µ–ª–∏ –Ω–µ—Ç –Ω–∏—á–µ–≥–æ –¥–æ—Å—Ç–æ–π–Ω–æ–≥–æ –≤–Ω–∏–º–∞–Ω–∏—è, –∫–∞–∫ —ç–Ω—Ü–∏–∫–ª–æ–ø–µ–¥–∏—è.–ú–∏–ª—ã–µ –º–æ–∏, –≤–æ—Ç –Ω–µ—Ç —Å–Ω–µ–≥–∞ –≤
–≥–æ—Ä–¥–∞—Ö, —ç—Ç–æ —Ç–æ–∂–µ —Ç–µ–º–∞ –∏ –∏—Å—Ç–æ—Ä–∏—è, –ø–µ—Ä–µ—Å–º–æ—Ç—Ä–∏—Ç–µ —Ç–µ–º—ã.–Ø –ø–æ—á—Ç—É –ø—Ä–æ—Å–º–∞—Ç—Ä–∏–≤–∞—é, –º–Ω–µ —à–ª—é—Ç –Ω–µ –ø–æ–π–º–∏ —á—Ç–æ, –Ω–µ –∑–Ω–∞—é –∫—Ç–æ, —Å—Ç–æ–ª—å–∫–æ –º—É—Å–æ—Ä–∞, –º–æ–∂–µ—Ç –æ–Ω–æ –∏ –Ω—É–∂–Ω–æ, –Ω–æ –Ω–µ –≤ –¥–Ω–µ–≤–Ω–∏–∫–µ.–Ø —Ç–∞–∫ –ø–æ–Ω–∏–º–∞—é, –¥–Ω–µ–≤–Ω–∏–∫ —ç—Ç–æ —á–∞—Å—Ç—å —Ç–≤–æ–µ–π –¥—É—à–∏.–ù–∞–º –¥–∞–µ—Ç—Å—è –ø—Ä–∞–≤–æ –≤—ã–±–∏—Ä–∞—Ç—å - –ø–æ–ª—å–∑—É–π—Ç–µ—Å—å. –ê –∏–Ω—Ñ–æ—Ä–º–∞—Ü–∏—è –±–µ—Å–ø–æ–ª–µ–∑–Ω–æ–π –Ω–µ –±—ã–≤–∞–µ—Ç

[Anic]

Hi,

I think Prof. Becker's equation to calculate is correct.

The equation :
0.1x($1,000 - 0.86 x P)/2 + 0.9x0 = 0.07 x P

calculates the price at which 'return=investment', i.e. maximum price that a firm can quote for the asset assuming its value goes up to 1000$.
The result of above equation is P=442.48$, above which, the return (L.H.S.of equation) is less and investment (R.H.S. of equation) is more.
So, this equation returns just the break-even point.

However, to calculate the 'expected value' that will be quoted by a fund, you have to say that:
P(expected value) = (Prob. of value1)*Value1 +
(Prob. of Value2)*Value2

For the equation:
0.1x( $1,000 - 0.86xP )/2 + 0.9X093XP = P;

my best guess would be that Prof. probably facotred in both the bidder and FDIC, which is to say that:
'expected price quoted for the asset = expected
return from the asset at a definite market price + expected investment into the asset after its market price turns to zero'.

Although, I would personally calculate it in the following manner:

0.07*P = 0.1*( $1,000 - 0.86*P )/2 + 0.9*(-0.07P)
which gives P = 284$

Please correct me if I am wrong.

Regards,
Anic

[Steve]

Nice blog!

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[Gary]

Anic,

Apologies but your equation is incorrect. You mistakenly subtract the P(Loss)x(Loss) - where your equation adds 0.9x-0.07xP.

This is apples and oranges. Simple example: heads =1, tails=0, so E(V) =0.5 on which we all can agree. But your computation of E(V) would be expressed by the equation E(V) = 0.5x1+0.5x-0.5 = 0.25! Your equation is E(V) = P(win)x(Gross Winnings) + P(loss)x(Net Winnings). As I said, apples and oranges.

[dushvannas.ru]

–í–∞–Ω–Ω–∞ —Ä–∞—Å—Å–º–∞—Ç—Ä–∏–≤–∞–µ—Ç—Å—è –∫–∞–∫ –Ω–µ –ø—Ä–æ—Å—Ç–æ –∫–æ–º—Ñ–æ—Ä—Ç –∏ –ø—Ä–µ—Å—Ç–∏–∂. –í–∞–Ω–Ω–∞ —Ä–∞—Å—Å–º–∞—Ç—Ä–∏–≤–∞–µ—Ç—Å—è –∫–∞–∫ –∏—Å—Ç–æ—á–Ω–∏–∫ –í–∞—à–µ–≥–æ –∑–¥–æ—Ä–æ–≤—å—è, –æ—Ç–ª–∏—á–Ω–æ–≥–æ –Ω–∞—Å—Ç—Ä–æ–µ–Ω–∏—è. –ù–∞ —Å–µ–≥–æ–¥–Ω—è—à–Ω–∏–π –º–æ–º–µ–Ω—Ç –≤ –º–æ–¥—É –≤—Ö–æ–¥—è—Ç –¥—É—à–µ–≤—ã–µ –∫–∞–±–∏–Ω—ã, –æ–¥–Ω–∞–∫–æ –æ–Ω–∏ –Ω–∏–∫–∞–∫ –Ω–µ —Å–º–æ–≥—É—Ç –∑–∞–º–µ–Ω–∏—Ç—å –ø–æ–ª—é–±–∏–≤—à—É—é—Å—è –≤—Å–µ–º –≤–∞–Ω–Ω—É—é. –†–∞–∑–Ω–æ–æ–±—Ä–∞–∑–∏–µ —Ñ–æ—Ä–º, —Ä–∞–∑–º–µ—Ä–æ–≤, —Ü–≤–µ—Ç–æ–≤ –∏ –æ—Ç—Ç–µ–Ω–∫–æ–≤ –¥–µ–ª–∞—é—Ç –≤–æ–∑–º–æ–∂–Ω—ã–º –≤—ã–±—Ä–∞—Ç—å –≤–∞—Ä–∏–∞–Ω—Ç —Å–æ–±—Å—Ç–≤–µ–Ω–Ω–æ –¥–ª—è –í–∞—Å. –£–∑–Ω–∞–π—Ç–µ –∫–∞–∫–æ–π –æ–±—è–∑–∞–Ω–∞ –±—ã—Ç—å –≤–∞–Ω–Ω–∞, –æ —Ç–∏–ø–∞—Ö –∏ –≤–∞—Ä–∏–∞–Ω—Ç–∞—Ö –≤–∞–Ω–Ω, —Å–∏—Ñ–æ–Ω–∞—Ö, —Å–ª–∏–≤–∞—Ö –∏ —Å–∞–Ω—Ç–µ—Ö–Ω–∏–∫–µ –Ω–∞ –Ω–∞—à–µ–º —Å–∞–π—Ç–µ.
–í–∞–Ω–Ω—ã

[joe.shuren]

Even under the details of the plan announced Monday April 6, it is not clear that bank s or bank holding companies would be prevented from both bidding on each others' legacy assets and enjoying government bailouts to increase their capital so they can do this. This would seem to be a very inefficient way to transfer taxpayer money to the banks. What would be the resulting effect on "misunderstood" housing prices?

[Tyrr]

We can start naming off the reasons for the housing bust, but I think the thing we can all agree on is the culture of fraudulence that underscored the collapse.

The problem with subsidy is you will always get more of what you subsidize. In this instance, we are subsidizing fraud. You can explain the numbers to me as much as you'd like, but at the end of the day, any worthwhile economist will tell you a city of thieves produces no bread. All intellectuals, from time to time, fail to ask what is causing the symptoms of a problem, and instead try to understand just the symptoms.

Piecemeal solutions don't work; When the money is gone congress will act; it may even act so violently so as to declare itself the sovereign deity of finance and nationalize our financial sectors under its control to recoup losses.

Government always says more government is the solution and it has gotten to the point of critical mass; people are angry. All the unfortunate impromptu cop killings in the last month are proof of that.

[trellis]

–†–∞–¥—É–µ—Ç, —á—Ç–æ –≤–∞—à –±–ª–æ–≥ –ø–æ—Å—Ç–æ—è–Ω–Ω–æ —Ä–∞–∑–≤–∏–≤–∞–µ—Ç—Å—è. –¢–∞–∫–∏–µ –ø–æ—Å—Ç—ã —Ç–æ–ª—å–∫–æ –ø—Ä–∏–±–∞–≤–ª—è—é—Ç –ø–æ–ø—É–ª—è—Ä–Ω–æ—Å—Ç–∏.