In 2008, the U.S.Treasury and the U.S.Federal Reserve took action to save large financial firms such as Bear Stearns and AIG from failing.Which of the following is one reason why these measures were taken?
A)The Emergency Economic Stabilization Act required the Fed and the Treasury to provide financial assistance to firms that participated in regular open market actions with the Fed.
B)The bankruptcy of a large financial firm would force the firm to sell its holdings of securities, which could cause other firms that hold these securities to also fail.
C)The Fed and the Treasury wanted to allow Freddie Mac and Fannie Mae more time to buy the firms before they went bankrupt.
D)The failure of these firms would have forced the Fed to increase interest rates, which could have led to a severe recession.
E)The bankruptcy of these firms would have damaged the value of government employees' pension funds.

Question

Quizplus · Accepted Answer

The bankruptcy of a large financial firm would have caused it to sell off its securities holdings, which could trigger a widespread panic and cause other financial firms that hold these securities to also fail. This could lead to a systemic financial crisis and severe economic downturn. The actions taken by the Fed and Treasury were to prevent such a scenario. The other options presented are either inaccurate or not directly relevant to the situation.