Saturday, November 15, 2008

The Cost of My Economic Righteousness Part 2: The Return of the Blog Post Titled "The Cost of My Economic Righteousness"

So, as you're all fully aware after reading that last post, I am very much against the idea of a bailout for U.S. auto makers.

I'm so against it, in fact, that it would actually make me feel bad if it happened. I would literally lose [some] faith in [some] politicians that I've recently put [some] faith in. Not only that, but it would to a certain degree make me feel less confident in my government. Though you shouldn't get me wrong: I don't have that much confidence now. Also, I'm very flippant with my confidence-giving. And forgetful. I often misplace it...

Anyways, I really do not want to see a substantial bailout for the Big Three - GM, Ford and Chrysler, nor even the multiple suppliers that depend on them. They don't need it, nor do they deserve it, and it would be a terrible waste of money and resources to subsidize any of these companies' continuing survival.

But it still might happen. In fact, I put the odds on a multi-billion dollar "aid package" to any or all of the big U.S. auto makers at better than 50/50 over the course of the next year. Probably more like 75% likely, I would guess. But I'm not positive, of course.

So on one hand I'm facing a reality in which a bailout for the Big Three does not happen. Let's just assume that there's a 25% chance for this, maybe more, maybe less. I'm not sure. That's probably a decent guess. But if the bailout does not go through - if we allow GM, Ford and/or Chrysler to be privately bought out, bankrupted or simply left to barely eek by, the world will be a better place for me now, and in the future. Not having a bailout could potentially mean any or all of these:

- Our politicians in charge understand and prefer good economics over bad politics. Big win!

- We just saved billions of dollars on our tax bill by switching to not-bailing-out-crappy-corporations.

- GM, Ford and Chrysler might all become better, more efficient, more competitive and sustainable companies in the long run.

- Lobbyists for the auto industry are losing their grip...

- I might see fewer taxpayer subsidized enormous GM SUVs on the road in front of me when I'm driving my little ol' '96 Honda. Maybe...

All of these are big wins for Davis McDavioid.

On the other hand, let's assume there's a 75% chance that more than a few billion dollars of taxpayer money will be given to the Big Three as a bailout.

All the big wins turn to big losses for Davis McDavioid. Also, Hard Company Registration - AKA Hardcoreg - is on record saying that she will become a "Cranky bear" should taxpayer money be spent on "bailing out businesses who suck at business..."

Becoming a cranky bear is not a big win. For anybody. Nobody wants a cranky bear.

So how do I solve this problem? Clearly, my "Economic Righteousness" - my inability to stop being arrogant and to not care about the economic decisions other people make - is causing some hardship.


Here's how I hedge my concern:

As of the writing of this post, GM stock is selling for $3.01 That's per share. Compared to October of last year, when it hit a high of $42, it is down around 93%. That's a phat load of losses, freres.

So let's assume I buy 50 shares of GM stock at $3.01 and hold them for as long as I can. This will cost $150.50. If there is no bailout and GM goes bankrupt, I lose all $150.50. This is the cost of my economic righteousness. If there is a bailout, however, we can reasonably assume that GM will at some point over the next year (or few years) shoot straight up to at least its "cautious but safe" levels of, say, around where it was a couple months ago - In September, it was at $13.00. That's a good safe bet for a post-bailout price, I would think.

But there's no guarantee, so let's change our percentages a little to reflect this:

If there is a bailout, the odds of the stock necessarily going at least that high are not certain, so let's change that 75% chance of a bailout into, say, a 60% chance of a bailout-and-return-to-reasonable-stock-levels, and a 40% chance of losing everything (even with one or two bailouts, GM still could go bankrupt over the next few years.)

So now we've assumed a 60% chance that GM stock will rise to $13.00, and a 40% chance that it'll fall to zero... A 60% chance of making $499.50 profit (50 shares * $13.00 = $650 - $150.50 = $499.50) and a 40% chance of losing $150.50.

The expected payoff from this bet is:

(.60 * $499.50) + (.40 * -$150.50) = $299.70 - $60.20 = $239.50

So that's $239.50 in profit if my estimate of the odds is correct. That's a pretty good deal just by itself, iddnit? In fact, the expected break even point is at P(Bailout) = .232. In other words, if there is greater than a 23.2% chance that Congress bails out GM, or simply that the company returns to profitability on its own, I'll make money. This seems to suggest that either GM's current stock price is too low due to panic, or pricing in a far-too-long horizon for return to profitability (in which case the returns stockholders are ultimately expecting would be eaten up by inflation over the course of many years...)

But that's just the expected value. When reality arrives, all probabilities go to 0 or 1, so let's sum up where I'll be when Congress makes that fateful decision:

When an announcement comes that GM is filing for bankruptcy, and Congress stays silent, I will be out 150 bucks and feel very proud that the politician(s) I voted for are kickin' ass and making the world a better place (by simply ignoring lobbyists, no less!)

- OR -

When the announcement comes that GM is receiving billions of dollars of taxpayer money in order to produce more crappy vehicles, I will be annoyed. I'll have decreased optimism for our politicians, the near-term future of our economy, and - most importantly - I'll have to fend off cranky bears.

But I will have $499.50 to spend on booze, ice cream and video games. Good distractions, all.

No comments: