Simon Johnson points out today that Goldman Sachs' contention that it has nothing to apologize for after helping Greece mask its debt for purposes of gaming the European Union's financial rules pokes a hole in yet another shibboleth about the virtues of unregulated finance. And that is the laughable notion that the fear of damage to one's reputation makes self-regulation work and government oversight unnecessary.

Sorry to toot my own horn here (and to link to this article of mine for the umpteenth time), but I made the same point several years ago when I discussed the doubts harbored about the efficacy of this reasoning by Richard Portes of the London Business School.

Specifically, Portes pooh-poohed the Federal Reserve's contention that reputational risk would restrain banks' temptation to help clients skirt accounting rules, as they did at Enron.

And the finance professor, who specializes in game theory, used a particularly colorful analogy to do that. As he put it, how does the thinking about reputational risk account for the fact that used-car dealers stay in business given that their practices are held in widespread disrepute?

His explanation is that customers who do business with car dealers with dicey reputations believe they are smart enough to negotiate favorable terms for themselves nonetheless, and he says companies do the same with banks. So banks have nothing to fear from harm to their reputation.

In fact, Portes' comparison between banks and car dealers was cut out of the article because my editor found the analogy inadequate on the grounds that used car dealers simply preyed on ignorant consumers. But I never understood how that invalidated Portes' premise. Certainly it looks quite valid today, not that I want to burn any bridges here.

In any case, banks clearly don't worry about looking like shady car dealers today. Why else would Goldman vice chairman and former New York Federal Reserve president Gerald Corrigan not feel compelled to provide at least some regret for helping spark the E.U. crisis?

One might think, after all, that there at least some threat to Goldman's business from the potential damage to its reputation that arises here, and that Goldman would see fit to counter it? Evidently not, at least in Corrigan's view.

Then again, maybe Goldman can convince the EU that it's doing God's work here as well.

I should point out that specious thinking about reputational risk isn't limited to banks. When I asked a group of executives at Standard & Poor's earlier in the decade whether their push into consulting didn't represent a conflict of interest with their ratings business, they scoffed, citing the restraint that reputational risk imposed on their actions. There's no way they would let the fees from the consulting business threaten their reputation for supplying dependable credit ratings, they insisted.

Sure enough, the ratings agencies were excoriated a few years later by the Securities and Exchange Commission, as well as other critics, when their consulting with banks over the securitization of subprime mortgages was clearly shown shown to have inhibited their ability to produce reliable credit ratings on the securities.  Not that anything much has been done about that.

We'll see whether the Fed abandons similar thinking about banks.