Goldman and other big banks are not out of the woods

August 10, 2012: 2:01 PM ET

The lack of accountability during the financial crisis, which was a tear in the faith in governmental and banking institutions, is turning into a giant rip that may never be repaired.

FORTUNE -- Goldman Sachs has come into a run of luck -- or so it seems.

The SEC has dropped its investigation into the bank's disclosures related to the sale of subprime mortgages. And the DOJ has dropped its criminal probe into allegations stemming from a 635-page Congressional report that described how Goldman profited by betting against clients and appeared to have misled customers.

And while Goldman (GS) itself appears to be off the hook, Manhattan prosecutors are going after one of its former employees, who allegedly copied Goldman programs before leaving the firm. The defense has raised concerns that this prosecution may be violating the fifth amendment of the constitution since the former employee had already served time for the matter before his federal conviction was overturned, the New York Times reported.

David Wells, a Goldman spokesperson, declined to comment to news outlets on the SEC decision to drop its investigation, but regarding the DOJ decision to drop the criminal investigation, he reportedly told reporters, "We are pleased that this matter is behind us."

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While the heat has been on banks like J.P. Morgan (JPM), Barclays (BCS), and Standard Chartered, Goldman has gotten a bit of a pass for the past few months. But here it is, front and center once more -- and  despite its spokesman's statement, it is not clear that Goldman will ever be able, in full measure, to put these matters behind it.

Goldman's reputation continues to receive low marks. In an analyst report published by CLSA today, Mike Mayo and Matt Fischer -- who rate the bank an outperform -- write that although there was no criminal charge, "we still believe that the CEO performed terribly during the Congressional hearings." Damning with faint praise, they say they "trust this management team …about as much as any large bank."

They may be right that in the very short term, this puts Goldman "relatively less in the political/regulatory cross-hairs." But that is a very short-term horizon because the convergence of dropped investigations has the potential to awaken more public demands.

The lack of accountability during the financial crisis, which was a tear in the faith in governmental and banking institutions, is turning into a giant rip that may never be repaired.  This is causing particular concern now since this may be the last hope for financial crisis-related accountability before November's elections.

While Goldman may not pay the full brunt of the price for the lost trust in the financial system, the outcomes are likely to continue to ripple across the system. In the short run, Goldman and other big banks may be emboldened -- which means we will continue to see more of the same. In the long run, we may see a restoration of common sense, but at what cost?

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In the event these firms enter a tailspin, as they did a few short years ago, it is clear there is potential for real consequences, not just to the firms themselves but for the system as a whole. A Reuters report late yesterday discussed requirements that banks submit not only resolution but also recovery plans. The report included a link to a closed-door presentation that J.P. Morgan made at Harvard Law School in March. Raising the specter of Reg FD (Regulation Fair Disclosure), which prohibits companies from disclosing material information to some groups instead of others, the details presented to the Harvard attendees were in some respect more extensive than those provided to the public in July on J.P. Morgan's resolution plans.

Public J.P. Morgan documents say that the firm provides transparent financial information for "analysts to assess the Firm's financial position." But as Peter Eavis at the New York Times pointed out yesterday, the bank isn't disclosing a number everyone would like to know: the "overall size of the derivatives bets that have led to large losses and much reputational damage for the bank."

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The public documents also state that any wind-down would occur with "minimum systemic disruption and without losses to taxpayers." But J.P. Morgan's Harvard presentation outlines the potential for a $200 billion liquidity infusion from the FDIC in such a scenario. And if J.P. Morgan could not pay the billions back, other banks would have to. "If the FDIC is not repaid it will assess the industry to cover any losses," the presentation states.

Jack Bogle recently told me that the battle for the soul of capitalism was not yet lost but that the system was in need of great repair.  It will take a larger groundswell of business people standing up to demand that their fellows be held accountable and that the proper relationship between government and big business be restored to set us on that path.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (, a board advisory firm.

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Eleanor Bloxham
Eleanor Bloxham
Contributor, Fortune

Eleanor Bloxham, an authority on governance and valuation, is CEO of The Value Alliance and Corporate Governance Alliance, an independent board and executive educational and advisory firm she founded in 1999. She is author of the books Value Led Organizations and Economic Value Management: Applications and Techniques, and publisher of the Corporate Governance Alliance Digest and her blog The Bloxham Voice.

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