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* Blankfein says Libor scandal hurts public trust
* Tells economic group fiscal cliff must be resolved
By Emily Stephenson
July 18 (Reuters) - The unfolding scandal involving global banks' attempts to manipulate benchmark interest rates undermines the financial system by chipping away at public trust, Goldman Sachs Chief Executive Lloyd Blankfein said on Wednesday.
Blankfein said financial scandals like the one surrounding the London Interbank Offered Rate, or Libor, create uncertainty that only builds on the American public's mistrust of the industry after the 2007-2009 financial crisis.
"The biggest impact is once more undermining the integrity of a system that is already undermined substantially," Blankfein said, speaking before the Economic Club of Washington. "There was this huge hole to dig out of in terms of getting the trust back, and now it's just that much deeper."
Goldman Sachs was not involved in setting Libor, which is based on daily lending rates reported by some global banks. But during the financial crisis, Goldman Sachs and its chief became public symbols of greed on Wall Street.
The Libor scandal, in which Barclays paid $453 million to settle allegations it reported false lending rates in an attempt to influence the index, has stirred up frustration with the financial industry and with regulators in Washington.
Officials say more banks may have tried to fiddle with the index, which is the basis for interest rates on many consumer loans, such as mortgages. Submitting false lending rates could allow a bank to make profits or hide weakness but also could artificially influence rates for borrowers.
Blankfein said uncertainty as a result of scandals, as well as fiscal policy decisions facing the U.S. Congress, can make business more difficult.
He said debates in Congress over whether to extend expiring tax cuts and prevent sharp spending cuts before the end of the year, the so-called "fiscal cliff," need to be resolved.
Blankfein declined to spell out his preferences for how to settle the standoff but said compromise is needed so that U.S. policy is not reversed every time a new party wins the majority. He said decisions such as tax rates can always be adjusted later as circumstances change.
"I would almost capitulate to either side rather than have these things go on," Blankfein said. "Everyone comes out ahead if there is a resolution."