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The Goldman Sachs Hearings’ Unspoken Lesson

The Goldman hearings left the illusion of chastening the out-of-touch investment bankers with forgotten lessons about honesty and decency, morals and moral hazard.

Jeff Kutler

The Carl Levin-Lloyd Blankfein smackdown ended Tuesday night, but Goldman Sachs Group’s comeuppance is hardly over. In his climactic one-on-one with Goldman’s CEO, but for the advancing hour, Senator Levin seemed entirely satisfied to keep on punching, even if he failed to demolish Blankfein’s cold logic about everyday Wall Street practice. But winning at this event didn’t require knockouts.

The spectacle was the thing, and the 11-hour grilling of Goldman principals served the political point-scoring purposes of Levin and his colleagues on the Senate Subcommittee on Investigations. It left the illusion, at least, of chastening the out-of-touch investment bankers with forgotten lessons about honesty and decency, morals and moral hazard. On the other hand, Blankfein was under oath and at least arguably telling the truth when he said that Goldman’s deep-seated culture “prizes teamwork, depends on honesty and rewards saying no as much as saying yes.” (A message that clearly missed its target as well.)

Some day in the not-too-distant future, with or without Blankfein at Goldman’s helm, the economy will be chugging along again and Goldman will still more or less be Goldman, an amalgam of various tools and talents that will again outlast and outperform many a lesser competitor.

Where Goldman really needs to do some homework is in an area that wasn’t mentioned in the “risk management framework” that chief risk officer Craig Broderick described in his carefully structured prepared remarks. This company needs a reputation transplant. If someone was responsible for reputational risk, sometimes called headline risk — becoming front-page news for the wrong reasons — then he or she fell down on the job.

Thanks to its consistently high profitability and general, if at times begrudging, admiration among its peers, Goldman enjoyed high corporate reputation rankings without much extra effort. It often topped all financial companies in Fortune magazine’s annual surveys. The once genteel Goldman aura may have been sullied by public ownership and the growing dominance of its sharp-elbowed trading side, but it took the current crisis to knock the firm off stride, and the Securities and Exchange Commission’s civil lawsuit to pile on the indignity.

The firm has — belatedly — launched a lobbying and public relations counter-offensive. It retained Skadden Arps lawyer and former White House counsel Gregory Craig; it supplemented the hearing testimony with supporting documentation on its Web site; and Bloomberg reported Tuesday that the firm’s 12-person government affairs office in Washington had embarked on a “ franchise protection strategy.

They have a lot of ground to cover and make up. It will take time to compensate for the tone-deafness of Blankfein’s “doing God’s work” claim and the impression of hubris and recklessness left by the “fabulous Fab” and his and others’ e-mail messages.

Less noticed, but just as indicative of the hole it was digging for itself, was Goldman’s April 20 earnings call after it posted a $3.3 billion first-quarter profit. Executive vice president and general counsel Gregory Palm defended the SEC-disputed transaction without contrition. Then, questioned by UBS analyst Glenn Schorr about whether the firm faced any other Wells Notices (letters the SEC sends out to people or firms prior to bringing an enforcement action against them) indicating other investigations under way, Palm replied (transcript courtesy of seekingalpha.com):

“What I would say about that is our policy has always been to disclose to our investors everything we consider to be material. That would include investigations, obviously lawsuits, regulatory matters, anything. Whether there is a Wells or not a Wells, if we consider it to be material we go ahead and disclose it, and that is our policy. To get to your question, we do not disclose every Wells we get simply because that wouldn’t make sense. Therefore we just disclose it if we consider it to be material.”

Now that Goldman is officially under siege, with a reputation-rebuilding imperative, it would make sense to can those sorts of responses and start erring on the side of transparency.

Jeffrey Kutler is editor-in-chief of Risk ­Professional magazine, published by the Global Association of Risk Professionals.

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