In the summer of 2006, as Goldman Sachs (GS) was poised to make massive bets against the mortgage market, the financial world mourned the death of longtime former firm head John Weinberg. Called the "Gentlemen's banker," Weinberg had built Goldman Sachs into a firm a cut above all of the other houses on Wall Street.

Other Wall Street firms fell over themselves to compete for the frenzied buyout business in the 1980s. But Goldman under Weinberg had forsaken the lucrative hostile takeover business because it would create conflicts of interest with clients.

A little over a year later in 2007 and with little sense of irony, Goldman executives cited the firm's culture as a key to success while taking victory laps for amassing billions in profits by betting against mortgages "There is no mystery, or secret handshake," Goldman director Stephen Friedman told The New York Times in a celebratory article. "We did a lot of work to build a culture here in the 1980s, and now people are playing on the balls of their feet. We just have a damn good talent pool."

Shares Plunge

Shares of Goldman Sachs got hammered on Friday, falling more than 9% to close at $145.20 as Wall Street finally woke up to the enormous reputational damage done to the franchise following reports that a criminal investigation was being considered against the firm. And while much has been made of Goldman's public image as of late, investors should note that the firm's discordant self-image is also contributing to the tensions.

Senior executives at Goldman seem to see themselves as the heirs of Weinberg's Goldman. The firm took to the offensive following the SEC fraud allegations, saying it would dispute the charges vigorously even as others on Wall Street, such as Citigroup (C) CEO Vikram Pandit, have scored major points through a combination of apologies and thanking the public for its generosity.

Yet outside Goldman, Fabrice Tourre (pictured) -- the Goldman executive who lined up investors to lose billions on dubious mortgage securities while still finding the time to gloat about his activities repeatedly -- has instead become the face of the firm.

Tourre's chronicles of his own exploits have now become legendary. Emails show him joking about bankrupting widows and orphans through sketchy securities, describing meetings with out of touch clients as "surreal" and noting that only the "Fabulous Fabrice" would make it out of the mortgage collapse alive.

Public Has Wrong Image of Goldman

Goldman executives, though, seem incapable of understanding how damaging this is to the firm's image. Reports noted that Goldman CEO Lloyd Blankfein planned to declare Tourre's conduct as merely "immature" if asked about it at Tuesday's Senate hearing. The understatement was met with a predictable ripping by The Daily Show's Jon Stewart.

Indeed, the most revealing and least scripted exchange to emerge from the hearing was Goldman CFO David Viniar's declaration that "I think that's very unfortunate to have an email" when asked what he thought about internal conversations among Goldman employees berating the financial products they were selling.

The comment was met by laughter and Viniar interjected on several occasions that he was apologetic for the conduct itself and not just because it was caught on email. But the apologies appeared contrived.

Goldman executives seem convinced that rather than having done anything unseemly they are simply misunderstood. Immature, unfortunately captured emails, have painted the wrong picture for the public of what they think is actually the same venerable firm that built its reputation as a discrete and restrained corporate advisor decades ago.

But the realities of Goldman's business have changed dramatically since then and so has the firm. "Bringing to a close a multibillion-dollar merger or underwriting a bond issue can take months, if not years, and might entitle the firm to a fee in the millions or tens of millions," some commentators have noted about Goldman's prior business staples. "By contrast, Goldman's bet against the mortgage market -- engineered in just two months at the end of 2006 and the beginning of 2007 -- made the firm a profit of nearly $4 billion alone in 2007."

Goldman has gone from being the Wall Street's most revered investment bank to the world's most scrutinized hedge fund, in other words. Far from a sanctimonious culture built in the 1980s, its profits are now driven by a talent pool that includes the likes of Tourre and his fellow mortgage traders on display during Tuesday' hearings.

And investors should note that a much less forgiving air will surround the firm whether its executives choose to acknowledge it or not.

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