> Citadel has exposure to a short position in GME due to their deal

No, they don't. It's not pedantic - Citadel literally does not have a short position or exposure to a short position in GME.

If you lend money to someone, especially someone on the brink of insolvency, then you are buying whatever they are. Of course, Citadel can be on both or any number sides but they still take on exposure in that direction.

You're missing that they lent the money specifically so they were no longer exposed to the short position.

Yeah this is the central argument and I don't think we have a clear answer yet.