Goldman Sachs risks losing clients wherever politicians hold sway after U.S. accusations the Wall Street powerhouse committed fraud, posing a threat to some lucrative business areas.
A mandate for Goldman to help a country sell a stake in one of Europe's bailed-out banks, or to help syndicate a government bond, would almost certainly spark a media furor, making such deals less likely for now, bankers said.
The UK and the Germans are going to be aggressive on this because of the losses suffered, ultimately by the taxpayers, said one head of debt capital markets.
It's affecting the reputation of GS. It's going to cost them business, he said, asking not to be identified.
There is no sign Goldman's involvement in prominent deals -- such as the flotation of Polish insurer PZU, bidding for Korea Exchange Bank and Anglo American's multi-billion dollar asset sell-off -- is in danger.
But Mn Services -- an asset manager owned by employees and unions which manages 62 billion euros ($83.3 billion) for Dutch pension funds -- said on Thursday it was not happy about Goldman Sachs and does not rule out consequences for its relations with the U.S. bank.
German state bank BayernLB on Wednesday became the first to publicly state it was cutting ties with Goldman after the U.S. markets watchdog alleged the U.S. bank duped clients when selling a complex subprime mortgage product.
Britain launched its own probe after Prime Minister Gordon Brown accused Goldman of moral bankruptcy over its big bonuses and Germany and France are also looking into the matter, highlighting how politically sensitive it is.
The government business is not unimportant for Goldman. Last year, it raked in $146 million in fees from selling government and supra-national agency debt outside the United States, according to Thomson Reuters data.
Goldman is vigorously defending itself against the accusations, rubbishing the idea that it knew a collateralized debt obligation (CDO) it worked on with hedge fund manager John Paulson was going to collapse.
The bank also pointed out it has been working on bond sales for Belgium and Sweden since the SEC charges were filed, as well as deals with German agricultural agency Rentenbank and the European Investment Bank (EIB).
Yet damage to Goldman's reputation may already have been done regardless of the outcome of the various regulatory probes, which come earlier controversies such as Chief Executive Lloyd Blankfein's assertion in a newspaper interview that the bank was doing God's work.
Goldman's role in helping Greece reduce its budget deficit through the use of derivatives to help it enter the euro was also criticized this year -- despite the fact that such deals were legal and had been vetted by authorities.
This is about reputation. If Goldman can't defend against this, government deals may be switched off, a senior London investment banker said, requesting anonymity because he was not authorized to speak to the press.
But it was much less of an issue for private sector mergers and acquisition (M&A) deals, he added, and other people in the financial industry backed that view.
We won't stop dealing with Goldman Sachs just because something happens in some remote derivatives corner of their business, a fund manager at a UK investment firm said.
Goldman's mandate on the $2.9 billion flotation of Poland's PZU Group also looks safe, with a person familiar with the matter saying he was not aware of any questioning of its role on the deal.
This hasn't been an issue and it would be too late in the process to kick them out anyway. But if the deal was mandating today I'm sure questions would be asked about their presence, the person said.
Goldman is an important corporate broker in London, a relationship banking role specific to the UK in which it liaises between clients and investors, enabling it to land key mandates in capital markets underwriting and advisory.
None of the companies it maintains that relationship with have so far made signs they are about to cut the ties.
(Additional reporting by Alex Chambers, Victoria Howley and Raji Menon in London and Gilbert Kreijger in Amsterdam; Editing by David Holmes)