NEW YORK — While Goldman Sachs contends with the government's civil fraud charges, an equally serious problem looms: a damaged reputation that may cost it clients.
The Securities and Exchange Commission's bombshell civil fraud charge against Goldman has tarnished the Wall Street bank's already bruised image, analysts say. It could also hurt its ability to do business in an industry based largely on trust.
Damage from the case could hit other big banks as well. The SEC charges are expected to help the Obama administration as it seeks to more tightly police lucrative investment banking activities.
Goldman has denied the SEC's allegation that it sold risky mortgage investments without telling buyers that the securities were crafted in part by a billionaire hedge fund manager who was betting on them to fail. A 31-year-old Goldman employee is also accused in the civil suit that was announced Friday.
The charges could result in fines and restitution of more than $700 million, predicted Brad Hintz, an analyst at Sanford Bernstein. Yet, even if Goldman beats the charge, the hit to its reputation could carry a greater cost.
The company, founded in 1869, grew from a one-man outfit trading promissory notes in New York to the world's most powerful, most profitable and arguably most envied securities and investment firm. From its 43-story glass-and-steel headquarters in Lower Manhattan, Goldman oversees a financial empire that spans more than 30 countries and includes more than 30,000 employees.
It has long attracted some of the world's best and brightest. Some have gone on to lofty careers in public life, enhancing the firm's aura of mystique and influence. Goldman alumni include former Treasury secretaries Henry Paulson and Robert Rubin and former New Jersey Gov. Jon Corzine.
In its corporate profile, the company says its culture distinguishes it from other firms and "helps to make us a magnet for talent." That culture is summed up in the firm's "14 Business Principles," which preach an almost militant philosophy of putting the client before the firm.
Now, it's that very philosophy that has been questioned by the government.
So far, no Goldman clients have publicly condemned the bank's alleged actions. But the negative publicity and regulatory scrutiny could cause some to distance themselves, said Mark Williams, a professor of finance and economics at Boston University.
Goldman earned a record $4.79 billion during the fourth quarter of last year and is expected to report blowout first-quarter results on Tuesday. A big chunk of its profits are from fee-based client businesses, such as investment advising, underwriting securities and brokering billion-dollar mergers.
"Goldman can really only truly be effective in the marketplace if it maintains a strong reputation," Williams said.
Investors are already betting the legal troubles will hurt Goldman's finances. The company's shares plunged 13 percent after the charges were announced Friday, erasing $12.5 billion in market value.
"Reputation risk is the biggest issue in our view," Citigroup analyst Keith Horowitz wrote in a note to clients. He predicted the fraud case won't be a "life-threatening issue" but that it "clearly seems like a black eye for Goldman."