What happens if Citigroup fails?
A lot of people have been asking that question, for obvious reasons. The short answer is that no one quite knows, and that’s the problem. During the Lehman failure, the Federal Reserve and other agencies put quite a lot of effort into making sure that the ripple effects didn’t spread too far in the markets where Lehman was a major counterparty. They were successful: the unwinding of Lehman’s positions has actually been rather smooth, though slow and not particularly happy for the counterparties. What they hadn’t known, and indeed, couldn’t really have known, was that the effect on Lehman debt would cause the value of a smallish money market fund aimed at institutional investors would break the buck. And because breaking the buck is so rare–the last major one had occurred in 1994–they certainly didn’t see what would happen next, which is that the commercial paper market would completely freeze up, threatening massive effects in the real economy, like firms not being able to make payro
