Burning ambition

Goldman reputation: The Securities and Exchange Commission has lit a fire under all the smoke billowing around Goldman Sachs. The bank has become the popular totem for public anger over Wall Street greed. But so far Goldman has been embroiled in little more than a war of words. Now the SEC has accused Goldman and one of its employees of securities fraud related to how they structured and sold a synthetic collateralized debt obligation backed by subprime mortgages in 2007. The stakes couldn't be higher.

After all, despite all the smoke about Goldman's conflicts of interest, clients have hardly run from the building. The firm still sits atop, or near it, in many investment banking and stock sales businesses. And in 2009 it traded with 6,000 customers, a third more than three years before. That helped the firm make a whopping $13.4 billion last year.

It's unlikely all those clients consider Goldman to be a paragon of virtue. Many probably even scoffed a bit at Chief Executive Lloyd Blankfein's insistence in last week's letter to shareholders that the firm only acts in the interests of its customers.

But the SEC allegations, which Goldman disputes, lay out a scenario customers may have feared: Some clients are more important to Goldman than others, and those without the requisite status can be burned. The regulator also dragged in the most famous beneficiary of the mortgage meltdown, Paulson & Co. The hedge fund made $1 billion shorting the trade the SEC outlines, the same amount lost by investors who bought the bonds. Paulson isn't charged with anything - but the case revolves around allegations that Goldman misrepresented the role Paulson played, and obscured it from investors.

The SEC's flimsy reputation may be at stake over the case, but Goldman's even more so. The charges alone spooked investors, who wiped out more than $10 billion of the bank's equity on Friday morning.

They could scare off some clients too. Some European authorities shunned working with Citigroup after its "Dr Evil" trade in government securities came to light in 2004. And Orange County, California, swore off working with Merrill Lynch - even years after the bank settled charges it sold the region's treasurer too-risky investments.

Goldman may eventually be exonerated. But containing the fire lit by the SEC will be an exhausting endeavor. The bank will be hoping any damage can be contained to the offending product - which of course smoldered long ago.