After wiggling out of its “vampire squid” moniker for a while, Goldman Sachs is of course back again as the industry’s poster boy for bad practice. Could its ever-mounting reputational risk force real change at Goldman Sachs despite its formidable push-back power? In our view, reputational risk of the magnitude now visited upon Goldman Sachs is akin to the fat-tail risk that confronted financial firms in the fall of 2008 – it’s hard to predict and difficult to manage, but it can do a whole lot of damage. In fact, it can do lots more harm than other fat-tail risk because — unlike those in the credit, market or liquidity arenas – management and boards often have so much contempt for their critics that they fail to see the risk coming.

That reputational risk can take out a financial firm is demonstrated by past history. A major case was Drexel Burnham Lambert, which went bye-bye in the mid-1980s solely because its junk-bond business was predicated in part on inside information and other misdeeds. Junk bonds then as now had a purpose – one might not be able to say the same for synthetic CDOs. But, even then, they couldn’t save the firm when legal actions and public opprobrium surrounded it. Another case in point is smaller, but more recent: Riggs Bank in Washington, D. C. It was done in by bad doings with Chilean dictators and ill deeds for other big clients, leading to a takeover that took it out, along with much of the interests of the family that had long run the regional bank.

Perhaps warned by Drexel Burnham, Goldman has always been unique among financial firms because it had far more invested in the political process than any other Wall Street behemoth. This is most evident in the parade of Goldman CEOs and senior officers holding various gavels in the U.S. government. In fact, Goldman has long made a stint in Washington a de facto requirement for most people going anywhere in the firm. This was designed not only to teach the boys who hoped to be big on Wall Street the ways of Washington, but also to embed a political contact network at the highest level.

Goldman also does something else done by few firms: meet Washington half way in order to turn problematic proposals to its advantage. The best case of this in recent years is the counterparty risk-management group headed by Goldman managing director Gerald Corrigan (a former head of the Federal Reserve Bank of New York). Goldman understood in the middle of this decade that the FRB was at least partly right about problems in the CDS market, especially with regard to the forward-trading of CDS that assigned credit risk to parties who hadn’t a prayer of actually taking it on. Anticipating tough rules that would have cost Goldman a lot, the industry group met, determined that most of the problems were caused by the small fry, established a set of new operational standards and marched on to even more market clout.

So why is Goldman now so tarnished? In part, it’s the plethora of problems that makes it hard for even the most experienced reputational-risk manager to cover all its bases. To say the least, there’s a pile-up of allegations. Some of these come from regulators like the SEC, who are facing their own fat-tail reputational risk. In part because of questions about its critics, Goldman appears to have retreated to its fortress, convinced the peasants will go back to their hovels once convinced by higher powers of their wayward mistakes. Only in a fortress could a CEO confuse his firm’s profit-making activities with “God’s work” or suggest that the SEC’s action, however mistaken he may think it, does harm to the United States as we know it. All of the king’s fixers and all of his men can’t handle reputational risk when it grows so large as to lead a firm to think itself above those supposed to govern it. Thus, at Goldman, they should be very, very afraid – or they would be if they peeked over the battlements.