From the firm that sold the Abacus deal, Libor scandal undermines trust

As reported by Bloomberg,

Allegations of interest-rate rigging by global banks are hurting the financial system by undermining trust, said Lloyd C. Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc. (GS) 

“The biggest impact is once more undermining the integrity of the system that has already been undermined so substantially,” Blankfein, 57, said .... “There was this huge hole to dig out of in terms of getting trust back and now it’s just that much deeper.”...

Mr. Blankfein is certainly in a position to know just how badly trust has been undermined and how big the hole is in terms of getting trust back given his firm's contribution through deals like the Abacus CDO transaction.

Blankfein, whose firm reaped 58 percent of first-half revenue from trading, said financial markets are damaged by a lack of trust. 

“Uncertainty is something that puts a burden on things -- it makes spreads wider, harder to transact,” Blankfein said. “But also a lack of trust is certainly at least a cousin of that.”

There is a relationship between uncertainty and trust.  Both cause spreads to widen and make it harder to transact.

Where they differ is in order of magnitude.  With uncertainty, deals can still be done.  With a lack of trust, the market freezes.

For anyone who doubts, look at the freezing of the interbank lending market because no bank could trust that any other bank could repay a loan.

Regular readers know that the only way to restore trust in the financial markets is by bringing transparency to all the opaque corners of the financial markets.

Trust returns because market participants can use the information provided by transparency to independently assess the risk of any investment and market participants trust their own assessment.

At a minimum, to bring transparency to the financial markets will require:

• banks to disclose on an ongoing basis all of their current global asset, liability and off-balance sheet exposure details; and
• structured finance securities to report on an observable event basis every activity like a payment or default that occurs with the underlying collateral before the beginning of the next business day.