Reputation risk is an important consideration in risk management. In a crisis, it is always the case that when carefully cultivated reputations, sometimes over centuries, of venerable institutions and individuals are cast a shadow upon, the defense is always offensive. Others are blamed and sometimes innocent lives destroyed to safeguard reputations that do not really exist except cosmetically.
There are important intangibles such as trust, honor, decency, integrity, fairness and credibility which build reputations. These cannot be bought and sold with money. They are about how people interact with each other both in happiness and in distress, in both personal and work lives.
Goldman Sachs and the government are both fighting for their reputations. Whatever may be the subtext of the political theater surrounding the tango, they are risking their reputations to rebuild them. Goldman is going to argue that the government has no case and the government is going to argue that Goldman ought to have behaved better and shown greater corporate responsibility.
Lawyers on both sides are going to be paid ultimately, in part (through profits of Wall Street firms) and in whole (government lawyers), by the tax payers. And neither side may confess to wrong doing while quietly attempting to change their ways by learning something from the expensive legal exercises.
The law, as a matter of ensuring personal freedom, does not take into account behavioral patterns. If it did, it would be Orwellian. But it is in behavior that intent, motive and state of mind can be established, not in the logical proofs of facts.
Through reams and reams of data, the Securities and Exchange Commission (SEC) may not be able to establish much. At the end of the day what would come to relief is a chronic neglect on the part of governments past by defiantly standing in the way of regulatory reform and of the firms on Wall Street to take advantage of the benign neglect and to keep paying through their lobbying operations to perpetuate it.
Firms such as Goldman Sachs are known to acquire clientele by earning their trust through above board behaviors. This means that even if a client intends to pay for inappropriate transactions, Goldman must refuse to safeguard its reputation. This is what went wrong in the case of Greece: Goldman’s behavior borders on fraud. This means that if shaky mortgages are to be funded, knowing full well that when they adjust they could fail, Goldman should not have funded them.
Such behaviors demonstrate integrity of judgment and cannot be entirely legislated, and are more important especially when there is no legislation governing certain aspects of the business of the markets, for the freedom from minimal oversight and checks and balances entails great personal responsibility. In the case of this cumulative crisis, which has been in the making since 1994 warping culture along the way, neither the government nor the financial markets showed any responsibility: propping up the economy through and after bubbles had failed the culture, with crass materialism triumphing over morality.
On the part of the government this market failure represents negligence of its sworn obligation because of myopia and failure of judgment and on the part of the markets it would be their normal behavior, though ideally honesty and integrity must be rewarded by the markets. That they are not being rewarded is indicative of cultural failure (every market failure of consequence in financial history is correlated with cultural failure) and the culture needs repair and rehabilitation. And financial regulatory reform is a good place to start.
The intangibles of trust, honor, decency, integrity, fairness, credibility and hence reputation can only be earned back through sustained better behavior whatever the regulatory regime (for Lloyd Blankfein of Goldman Sachs this means resigning after the SEC case is resolved), for the only true check and balance on the integrity of government and business practice is the conscience.