Goldman's Luster May Be Fading

Can Goldman Sachs(GS) get its white shoes clean again?

For a long time, Goldman had largely escaped the criticism that Merrill Lynch(MER), Citigroup's(C) Salomon Smith Barney and Credit Suisse First Boston(CSR) had received for their investment banking practices. Yes, New York state attorney general Eliot Spitzer included Goldman among the Wall Street firms he was investigating. But Goldman has been burnishing its image as "different" in the past few months -- a little cleaner than its rivals -- and the efforts had been successful.

Then came the revelation late Wednesday that Goldman doled out coveted IPO shares to executives at 21 companies and may have engaged in "spinning" -- allocating IPOs to top executives as an incentive to win investment banking business. Goldman denies the spinning allegation, and some analysts agree with the firm. The company's stock eased 4% to $62.90 -- not much damage in these scandal-phobic days.

However, the damage to Goldman's reputation may have long-term repercussions, denting the escutcheon of the 136-year-old firm and undermining its cachet as an underwriter and a stock.

"It's terrible public relations," noted Brad Hintz, an analyst at Bernstein.

Goldman's Stock

Still, Hintz, who has a "screaming" buy on Goldman but doesn't own the stock, said the news is "unlikely to lead to criminal investigations or even civil liability." Although things look bad now, the longer-term effects are probably negligible, he said.

David Trone, an analyst at Prudential Securities, says that nothing has emerged that would serve as evidence of quid pro quo. "As a result, while the headlines are big and the stock may be under pressure, this turn of events appears to have no real legal relevance."

But others aren't so sure that more serious damage hasn't been done to Goldman Sachs as a result of these new discoveries. One of the main reasons that the firm has proven so successful over the years has been because of its solid reputation.