Lush Earnings Alone Won't Restore Goldman Sachs's Reputation

Following last week's revelations of civil fraud charges from the Securities and Exchange Commission, Goldman Sachs Group (GS) now confronts a public relations headache that many experts say may get only worse.

Investors are waiting to see whether another shoe -- or shoes -- will drop at the storied Wall Street firm, which reported earnings today. As expected, Goldman announced way-beyond-estimated earnings of $3.5 billion, or $5.59 a share, trouncing analysts' average expectations of $4.01 per share.

OK, one less shoe to worry about. But the real challenge Goldman now faces is in the court of public opinion, particularly as the U.S. Congress debates the highly controversial financial services reform legislation.

For Goldman, getting the American people on its side won't be easy. Most Americans view Wall Street as an amorphous blue-pinstripe-suit-wearing blob. Nuances such as who has repaid bailout money don't interest Main Street. In this worldview, all banks are crooked criminal enterprises that created the worst financial crisis since the Great Depression. For a legendary company such as Goldman Sachs, this is a dramatic change -- especially to find itself repeated vilified as the poster boy for underhanded financial manipulation.

No Time to Hunker Down

"This is entirely new territory for them," says Michael Robinson, senior vice president of Leverick Strategic Communications and a former public affairs and policy chief at the SEC. "They are not accustomed to it. . . . The larger issue for Goldman is how do they restore their reputation. How do they get back to business?"

It's an issue the company has faced before.

In December 1928, Goldman Sachs launched an investment trust called Goldman Sachs Trading Corp. in an initial public offering valued at $104 million (several billion dollars today). Goldman Sachs Trading, which also acquired other trusts, was marketed to small investors who largely didn't understand what they were buying.

Shares of Goldman Sachs Trading hit $222 at the height of the stock market bubble, about $54 above where the company's shares currently trade. Goldman Sachs Trading eventually plunged to $2, wiping out most investors.

"This was really some kind of hot air," (but not a scandal anything like today's) says financial historian Ron Chernow in an interview with DailyFinance. "The firm's reputation was completely besmirched by the experience of the Goldman Sachs Trading Corp."

Goldman, founded in 1869, didn't recover from the Goldman Sachs Trading debacle until World War II. The company doesn't have much time to mull its predicament. Today's 24-hour news cycle doesn't allow for such luxuries. It has issued a vigorous defense against the SEC's fraud charges, but the temptation may be to hunker down and keep mouths shut. That strategy may backfire, though, and make it appear that the bankers are trying to hide. For companies, effective crisis communications is important at times like these in order to protect brands they've taken decades to build.

Michael Cherenson, the head of Success Communications Group of Parsipany, N.J., says this crisis is an opportunity for Goldman Sachs to show its corporate character.

"It's a huge opportunity for Goldman, " says Cherenson, the former chairman of the Public Relations Society of America. "They can show they are the organization they espouse to be."

Tainted Donations

Already, the luster of the Goldman brand has been tarnished. Bloomberg News reported Monday that Congressman Mark Kirk is returning political contributions from Goldman Sachs employees to his campaign for President Obama's old Senate seat in Illinois, after his Democratic opponent, Illinois Treasurer Alexi Giannoulias, criticized him for taking money from the firm's employees.

On the same day that Goldman investors fretted about the SEC probe, Citigroup (C) wowed Wall Street with better-than-expected results. It wasn't that long ago that Goldman was the golden child and Citigroup was a basket case. Goldman may still be minting profits seemingly at will, but its gloss has a different tint these days.