Thursday, October 11, 2012

How to restore confidence in the financial markets

In his Wall Street Journal column, BlackRock's Laurence Fink tackles how to restore trust in the financial markets and concludes that what is needed is 'greater clarity for investors'.

Specifically, he observes
Investors have adopted a wait-and-see attitude because markets are missing the two components essential for confidence: trust and certainty. 
Investors large and small are angry and cynical. For five years,... scandal after scandal in the financial industry has left many individual investors believing that the markets are stacked against them.... 
Continued progress, however, requires action from both the financial sector and government to restore the trust and certainty missing today. 
In the financial services and banking industry, we must be seen as part of the solution to what ails our markets, not the cause. This requires constructive engagement with regulators on mechanisms that, without choking off investment opportunity, introduce greater clarity for investors....
For example, it means banks providing ultra transparency and disclosing on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

For example, it means structured finance securities providing observable event based reporting of all activities like payments or defaults involving the underlying collateral before the beginning of the next business day.
Financial firms have a responsibility to be crystal clear about how their interests are aligned with those of their clients, and should be transparent about the fees and risks associated with the products they sell—from investment vehicles such as mutual funds to credit cards and mortgages. 
Financial education and transparent investment products that are easy to understand and apply can allow investors to capture market opportunities and achieve the returns they need to achieve their objectives even in a complex and challenging new world. This too will help restore trust in the markets, and help those who doubt in the future today take their first steps back to being investors again. 
Investors cannot be expected to do this alone. Business leaders and our elected representatives also need to take a long-term view and restore a measure of confidence about the future in their stewardship. 
As the head of one of the world's largest investment firms, it is not surprising that Mr. Fink is essentially advocating bringing transparency to all the opaque corners of the financial system.

It is not surprising that Mr. Fink sees a need for investors to have all the useful, relevant information in an appropriate, timely manner so that investors can independently assess this information and make a fully informed investment decision.

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