It’s All About the Balance Sheet

I’ve been trolling every piece of paper-based and electronic content I can find to get a better grasp of the bailout. I want to know why it was necessary and what the implications will be on, well, you and me as the plan is finalized and implemented.

I have a solid sense of why it happened, and that sense was driven home when I heard a hedge fund consultant crystallize my thoughts on the radio this morning.

David M. Smick, who is also the author of the recently released The World is Curved: Hidden Dangers to the World Economy (Penguin Portfolio, 2008), told his National Public Radio questioner that the credit crisis that led to the bailout occurred because the CEOs of our investment banking firms did not trust each other – nor did the world’s central bankers trust these CEOs. Why? Because, Smick, said, “they haven’t done the job of proving that their balance sheet is an accurate reflection of their risk.”

Simply put, by Smick, the “global investment community does not have the confidence that these guys are telling the truth.”