Great companies have to distinguish between what is legal and what is right.

An important cause of Goldman’s problems — a problem shared by the financial services industry — is that they fail energetically and rigorously to make this distinction in their communications with regulators and the public.

Whether Goldman’s past behavior was “legal” — either in the particular matter being pursued by the SEC or its pattern and practice in the mortgage market under scrutiny by the Congress — is judged under at least three related standards:

• Did the behavior conform to specific legislative or regulatory rules (i.e. proper disclosure of role of “shorts” or of its receipt of a Wells notice from the SEC)?
• Did it conform to broad precepts of law, like its fiduciary duties, that may be created by judges in evolving series of cases (and then, at times, incorporated into regulatory regimes)?
• Did it comport with “common industry practices” of the time which were not then illegal?

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