Hit to Goldman’s Reputation Will Be Harder to Recoup

Analysts say the U.S. Securities and Exchange Commission’s civil fraud charges could force Goldman to pay hundreds of millions in fines and restitution. The blow to the firm’s reputation may be harder to salvage.

(April 19, 2010) — Goldman Sachs, regarded as a Wall Street powerhouse, faces a tough road ahead: While the firm could pay more than $700 million in fines and restitution, according to analysts, it must also seek to salvage its tarnished image amid bad publicity and regulatory scrutiny.

“Reputation risk is the biggest issue in our view,” Citigroup analyst Keith Horowitz wrote in a note to clients, the AP reported, adding that the fraud case won’t be a “life-threatening issue” but that it “clearly seems like a black eye for Goldman.”

The government has accused the most profitable firm in Wall Street history of defrauding investors by failing to disclose conflicts of interest in risky mortgage investments it sold to buyers in early 2007, as the U.S. housing market crumbled. Investors, such as Royal Bank of Scotland Group Plc and Germany’s IKB Deutsche Industriebank AG, reportedly lost about $1 billion from the trade, yet Goldman Sachs denies wrongdoing, asserting that the government’s claims are “completely unfounded.”

The charges could result in fines and restitution of more than $700 million, Brad Hintz, an analyst at Sanford Bernstein, told the AP. Even if Goldman avoids the charge, Hintz predicted, the blow to Goldman’s image could possibly cost the investment firm clients.

Other analysts and academics predict the government’s fraud suit against Goldman may lead President Obama to push more rapidly for financial overhaul, resulting in more extensive probes of collaterized debt obligations and stricter regulation on Wall Street, possibly threatening earnings. According to Reuters, U.S. Representative Barney Frank said Goldman Sachs’ fraud case increases the chance that Obama’s financial package will pass.

Goldman, which became the target of public resentment following the financial crisis, earned a record $4.79 billion during the fourth quarter of 2009 and is expected to report strong first-quarter results tomorrow morning.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742