Question: What would happen if the government let Citibank and Bank of America, et al., just fail?
Paul Solman: The possibilities are various, intriguing, and terrifying. Let’s say Citi goes under. The government has to honor all of the company’s accounts up to $250,000. But what about accounts larger than that, maintained by businesses, say, or big depositors? What about all Citi’s long- and short-term debts?
The reason Lehman laid the world economy low was that IT was allowed to fail, and its suddenly worthless debts imperiled so many who owned them, including money market funds that the government then had to guarantee.
What about everyone with a Citi credit card? What about everyone whose mortgage is serviced by Citi? You get the idea.