From TPM Reader MD ...

I find it interesting that reader RB makes a moral distinction between bondholders and derivative counterparties.  As if derivative counterparties are degenerate gamblers playing fast and loose with other people's money while bond investors are upstanding patriots. Derivative counterparties are insurance companies, Universities, other banks, hedge funds, corporations, state and local governments, etc... Bondholders are insurance companies, pension funds, other banks, corporations, money market funds, mutual funds, etc... One group does not look that different from the other. Both were just playing by the rules as they were and pursuing their own financial interests. Demonizing derivative counterparties is just silly.

Also, what is missing from these recent discussions about the repercussions of Lehman's bankruptcy was the effect it had on money-market funds, particularly the Reserve Fund which "broke the buck" shortly after Lehman's bankruptcy because the fund was holding commercial paper issued by Lehman brothers. Once this happened, there was essentially a bank run on money-market funds and the debt capital markets froze for about six weeks. Citi is much larger than Lehman was so I think people are afraid of this happening again but on a much grander scale.

So unfortunately I think taxpayers would for the greater good want to guarantee the liabilities of Citi if they were put into receivership or nationalized or "pre-privatized" or whatever. Hopefully, the current administration is figuring out what this would cost and if there were a way to guarantee a portion of the liabilities and prevent a credit market collapse. There could be a way of giving bondholders a "haircut" so they see some loss of principal but not so much so that it would cause panic selling.

What they need to do is at close of business Friday, announce a detailed plan about what they are guaranteeing or not so that by Monday morning when the markets open back up folks would have had time to figure it out. It would be messy but if they do it right, hopefully the dire scenarios could be avoided. Unfortunately, the financial markets are so big and complicated nobody really has any idea what will happen.