Bloomberg's Jonathan Weil: The Trust Deficit

In his Bloomberg column, Jonathan Weil looks at Barclays and asks a simple question:

If Barclays Plc (BARC) would lie about its borrowing costs, what else would it lie about?

What else would it lie about indeed.  Mr. Weil then gives us a few places we might look.

The most important asset any bank has is trust -- especially when it comes to the figures on its own financial statements....

Barclays showed 7.8 billion pounds of intangibles as of Dec. 31 -- things like goodwill and customer lists -- as well as 3 billion pounds of deferred tax assets. Such items would be useless in a crisis. (Barclays discloses full financial statements twice a year and has yet to provide results for the first half of 2012.) 

Additionally, in the footnotes to its annual report, the company said the fair market value of its loans was 14.6 billion pounds less than their carrying value on its books. The bank also said about 32 billion pounds of its financial assets were of the Level 3 variety, which means their values depended on data that weren’t observable in the marketplace, making them easy to fudge.

The bottom line is that Barclays' financial statements are now effectively meaningless as

The less investors trust Barclays, the less they will trust these kinds of subjective estimates.

This was not lost on investment analysts.  In a previous post, a leading City analyst said that until banks take the necessary steps to restore trust, there is no point investing in them as it is impossible to independently value them.

Since the before the credit crisis began, your humble blogger has been trying to bring transparency to all the opaque corners of the financial system as every place there is opacity there have been bankers that took advantage of this opacity.

Libor is an example of one such opaque corner.  How the banks set the rate was opaque.  The rate was not based on actual trades, but rather estimates of what it would cost to raise funds.  Estimates that could and were easily manipulated.

The question now becomes 'how to restore trust in the system'.

There is only one way that has been shown to work:  require transparency.

The benefit of requiring transparency is not only does it restore trust, but it is also the best disinfectant when it comes to cleaning up the culture of the global banking system.

I expect Barclays to voluntarily adopt ultra transparency for without trust there is no reason to conduct business with them.