During 2009, the U.S. government took unprecedented steps in providing financial support to the “Big Three” large automobile manufacturers, General Motors, Ford, and Chrysler. All three companies were in severe financial trouble. The rationale for the bailout was genuine concerns about a domino-effect collapse of the U.S. economy and financial markets that could have been triggered by the fall of the domestic auto industry. What type of risk was the U.S. government attempting to mitigate with this action?

Question

During 2009, the U.S. government took unprecedented steps in providing financial support to the “Big Three” large automobile manufacturers, General Motors, Ford, and Chrysler.  All three companies were in severe financial trouble.  The rationale for the bailout was genuine concerns about a domino-effect collapse of the U.S. economy and financial markets that could have been triggered by the fall of the domestic auto industry. What type of risk was the U.S. government attempting to mitigate with this action?

BlackTom AI · Accepted Answer

The prompt describes a government action aimed at preventing a chain reaction that could destabilize the broader economy due to problems in a single sector, namely the auto industry. This concept points to systemic risk, which is the risk that the failure of one institution or sector can trigger widespread instability across the financial system or economy.
Option 1: Fundamental Risk. This term generally refers to risks inherent to a specific asset or business fundamentals. It does not capture the idea of market-wide contagion or cascading effects across the financial system. Therefore, this is not the best fit for the described scenario.
Option 2: Systemic Risk. This choice directly aligns with the scenario: the concern was that the auto industry’s collapse could trigger a domino effect harming banks, credit markets, supply chains, and overall economic activity. Mitigating systemic risk involves actions intended to preserve stability across the entire system, not just the isolated entity.
Option 3: Market Risk. Market risk refers to the risk of losses due to movements in market prices (e.g., interest rates, stock prices). While the bailout has market-implications, the primary rationale described is broader—avoiding systemic collapse—rather than simply hedging against price fluctuations in a given market.
Option 4: Specific Risk. This term denotes risk confined to a particular asset, issuer, or project. The bailout rationale goes beyond a single asset or entity; it concerns the wider economy, so labeling it as specific risk would be inaccurate.
In summary, the scenario emphasizes preventing widespread economic disruption resulting from interconnected financial and industrial linkages. That is the essence of systemic risk, which is why this option best matches the described rationale.

ERMCPS5250_006_2025_1 - EXTERNAL STAKEHOLDER REQUIREMENTS Quiz 3 - Systemic Risk/Dodd-Frank Act

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