Goldman Again

It was a relatively small piece of business that cost Goldman Sachs billions in market cap, revealing a crucial lesson in reputation risk management.

By DAN REYNOLDS, senior editor of Risk & Insurance®

BOSTON---Is Goldman Sachs one of the best in the business at risk management? You bet it is, according to an expert in reputational risk management who presented at the Risk and Insurance Management Society Inc.'s annual conference in Boston on the afternoon of April 26.

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Speaking during an afternoon presentation on the science of tying reputation to the cost of credit and the value of equity, Nir Kossovsky, the CEO of Pittsburgh-based Steel City Re, a company that measures the bottom line relationship between reputation and equity, outlined how Goldman Sachs has the management buy-in, the resources and all the processes in place to manage risk.

"This is a company that is aware of what this means to them," Kossovsky said. "They do what are considered to be the best practices at managing risk. All of you would love to be doing all of this stuff," Kossovsky told the audience.

So how did Goldman end up losing what amounts to almost 18 percent of its market cap in the last 10 days? The fraud charges brought against Goldman by the Securities and Exchange Commission for allegedly shielding conflicts of interest in the sale of collateralized debt obligations stem from business that amounts to hundred of millions of dollars. That's a lot of money to many, but to Goldman, it's not.

And that's exactly the point that Kossovsky was trying to drive home as he balanced a complex topic perilously close to an impending happy hour.

All it takes is a small nick in the armor of your reputation to create an outsized loss of market cap. Just look at accounting firm Arthur Andersen, which was so famously caught up in the Enron debacle in 2002. The company was accused of fraud and exploded, leading to the loss of 28,000 U.S. jobs. Sure, in 2005, the U.S. Supreme Court ruled 9-0 that Arthur Andersen was innocent of the charges brought against it.

But it was too late. The company was decimated.

Many believe that Goldman Sachs will never again have the burnished reputation that it had before the SEC brought its charges on April 16. And that's just how powerful, in real monetary terms, reputation is.

April 27, 2010

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