Tensions Rise at Goldman -- As Do Risks to Investors

Wall Street powerhouse Goldman Sachs (GS) has long grown accustomed to its role as whipping boy amid growing public outrage at the financial sector.Wall Street powerhouse Goldman Sachs (GS) has long grown accustomed to its role as whipping boy amid growing public outrage at the financial sector. Indeed, the firm highlighted bad press, a damaged reputation and subsequently demoralized employees as big business risks to its investors months ago.

But formal accusations of fraud leveled against the firm by the SEC are now taking tensions to new levels inside the generally thick-skinned firm.

Business ground to halt on Friday morning as employees dropped what they were doing to watch the allegations unfold on cable television, according to those familiar with the events. With work essentially on hold for more than an hour by mid-afternoon, Goldman management took the unusual step of having the television reception cut off -- a dramatic move for a firm as dependent on information flows as an investment bank.

Here Are Your Talking Points

Email messages from Goldman's top management outlined talking points for employees if they were faced with criticism from the outside. The talking points closely mirrored Goldman's carefully crafted public position denying any wrongdoing.

Goldman's management has responded swiftly to barrages of public criticism before by communicating with employees. Internal calls at the firm had reassured employees that Goldman was just as dedicated to "helping them build wealth" as ever in the wake of outrage following last year's massive bonus payments, according to those familiar with the matter. At the same time, the firm instructed employees not to spend lavishly in public.

Still, the escalation of mere badmouthing to formal charges of fraud is taking tensions to new levels as well. Employees watched anxiously as cable channel CNBC's van pulled up outside its new headquarter building on Friday.

Investors in the firm should be cautious, too. The employees that serve as the firm's profit engines are liable to getting poached by resurgent hedge funds. These firms generally operate far outside the realm of public scrutiny while engaging in even shadier dealings than what Goldman is being accused of.

And What About Paulson & Co.?

Perhaps the most vivid example of this disconnect: Few questions are being asked about Paulson & Co, the hedge fund run by high-profile investor John Paulson, who made $1 billion in months off the bets his firm placed through Goldman.

Indeed, Paulson was "treated like a celebrity by members of a Congressional committee that invited him to testify in November 2008 about the credit crisis," according to The New York Times. "At the time, none of the lawmakers asked how he had managed to set up his lucrative trades; they seemed more interested in getting his advice on how to solve the credit crisis."

Goldman could have done more about disclosure when it comes to the particular trade that elicited the fraud charges. But even if the bank prevails legally and is found innocent of wrongdoing, the damage to its reputation will be harder to clear up. And investors should note that the firm has been upfront about disclosing the risks posed by that kind of damage.
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