A Moot Effort to Burnish the Reputation of Goldman Sachs

I hate to be the bearer of good news for Jamie Dimon, but everything is going to work out O.K.

How do I know? Two words: Lloyd Blankfein.

Will Rogers said it takes a lifetime to build a good reputation and only a minute to lose it. Hardly. In the case of Mr. Blankfein, chairman and chief executive of Goldman Sachs, it took other people’s lifetimes to build the reputation he inherited. Then, he oversaw its destruction. It took just five years to build his own name back up. Not so bad.

As for Mr. Dimon, he had to meet with Attorney General Eric H. Holder Jr. and suffer a modicum of humiliation. But, ultimately, he was personally able to hash out a $13 billion mortgage securities settlement for JPMorgan Chase, the bank he heads.

Now, he can gaze down the street to a ghost of his Christmas future: Once a scourge, Mr. Blankfein now scores his own meetings in Washington. With the president himself. Not three weeks ago, the Obama administration invited him along with other bankers to the capital to lend gravitas to their claims that breaching the debt ceiling would have been catastrophic.

The Wall Street Journal publishes op-ed articles by Mr. Blankfein about how to solve grave matters of state. He is feted at charity galas, where the business media warmly tracks his various facial-hair styles.

With one pretender to his position leaving the firm this week and his successor seemingly identified, Mr. Blankfein is going to leave Goldman on his own terms. He is back in the hearts and minds of people who make decisions and wield influence.

Unfortunately for the rest of us, we are pained by some memories.

Lloyd C. Blankfein presided over what was nearly a collapse of his 144-year old institution, had the Federal Reserve not converted Goldman instantaneously into a bank holding company so that the Fed could make available its extraordinary lending programs, and had the government not bought preferred stock.

Some financial types are given to making the contrarian argument that Goldman would have survived the 2008 financial crisis. They point out the firm had gone short on the housing market to protect itself. It had hedges in place. And it demonstrated an ability to raise capital from private investors when Warren E. Buffett infused money.

But Goldman had recklessly become entwined with the insurer American International Group, which couldn’t have paid Goldman back without being bailed out itself. It’s the same story with the firm’s hedges: They would have worked only because the counterparties were saved by taxpayers.

But grant for argument’s sake that Mr. Blankfein was the best investment bank chief executive during financial crisis. That’s grading on some generous curve there.

The bigger problem is that Mr. Blankfein presided over the implosion of the Goldman Sachs’s brand and reputation. When he arrived in his job in the spring of 2006, Goldman Sachs was a gold-plated name, the premier financial institution in the world.

Seven years later, Goldman is synonymous with exploiting its customers for its own interests. Its good name has collapsed. Among its peers, it has posted the largest decline since 2007, according to Reputation Institute.

It wasn’t just that Goldman arranged the infamous Abacus deal, allowing the hedge fund Paulson & Company to secretly bet against the collateralized debt obligation the bank was creating and selling around the world. It paid a $550 million fine for that. Last year, a disgusted employee, Greg Smith, announced his resignation in a New York Times Op-Ed article, decrying the bank’s “toxic and destructive” environment.

Yet when Mr. Blankfein testified in front of the Senate investigating Goldman’s practices, he claimed that Goldman was merely making a market in mortgage securities. In fact, Goldman was an arranger, more like an underwriter, with more serious responsibilities to those it marketed the securities to.

Postcrisis, Goldman advised the energy company El Paso Corporation to sell itself to Kinder, a deal rife with conflicts of interest. Mr. Blankfein got personally involved in wooing El Paso.

Goldman has repeatedly told the world it is addressing these concerns, trying to convince people that it is a friendly company to hang out with.

In 2010, Mr. Blankfein spearheaded the creation of a business standards committee. This year, the company told us it had put into effect the committee’s reforms. Among them: Goldman says it now evaluates products for their suitability for clients, has stronger procedures to resolve conflicts of interest, has improved its disclosures and links pay and promotions to employees who protect the firm’s reputation.

“One thing for damn sure, this is serious change,” said E. Gerald Corrigan, who is co-chairman of the Goldman committee.

In an early acid test of its independence, the standards committee proposed shifting some securities business to the investment banking unit, a move sure to roil fiefs within Goldman.

“To my astonishment,” it passed the committee unanimously, Mr. Corrigan said.

Transactions are now more carefully scrutinized. They go through an initial categorization: “Approved as proposed”; “conditionally approved” and “declined/withdrawn.” The latter category is small, which, the bank says, reflects improved sensitivities at the bank. About half are “conditionally approved.” They go through a rigorous process to meet new standards. After that, Goldman says, it approves more than 90 percent of them.

Mr. Corrigan voiced strong support for Mr. Blankfein. “I simply do not think any board would have concluded, given the circumstances, that a change at the top in the leadership was necessary or appropriate.”

Goldman Sachs writes in its annual report: “Our reputation is one of our most important assets.” And: “Integrity and honesty are at the heart of our business.”

Oh, whoops. That’s actually from the 2007 annual report, just as it was selling its garbage securities to unsuspecting customers.

Well, maybe we can believe the firm this time.

The real question is: Does Goldman actually need to change? Is having a good reputation worth much? Goldman (and other investment banks) don’t really have customers as much as counterparties, whom it may be as likely to bet against as bet with.

In his recent book, “The Death of Corporate Reputation” (FT Press), the Yale legal scholar Jonathan R. Macey explains that companies, especially financial firms, once depended on their reputations to attract and retain business, but no longer. Instead, clients have no other choice but to use the services of particularly important firms.

“Reputation is no longer an asset in which it is rational to invest,” he contends.

Mr. Blankfein wasn’t personally responsible for all of the problems at the firm. But as chairman and chief executive, he is the embodiment of the culture.

There was one thing Goldman’s board could have done to show it was serious about reforming its culture. That was give Mr. Blankfein the boot.

It never did.

So, Mr. Dimon, don’t lose any sleep.