Traditionally, Goldman Sachs (NYSE:GS) has made its money from advisory services. However, over the past few years, the company has been using its own capital to make money -- such as in proprietary trading, investing in private-equity transactions, and even financing hostile takeovers. Basically, Goldman Sachs looks more like the traditional European model of a merchant bank, in which said merchant bank would advise a corporate client on an acquisition and also provide a part of the financing for the deal. In other words, a merchant bank acts as an agent and a principal in a transaction.

But merchant banking has its problems -- especially with hostile takeovers. Essentially, a hostile takeover happens when a company or investment group makes a bid for another company that the targeted company didn't solicit. With capital bulging at private-equity firms, there has been an uptick in hostile-takeover activity over the past few years. For example, according to Dealogic, there were 38 hostile bids worldwide totaling $234 billion in the first quarter of 2006.

Well, Goldman has experienced a backlash from its role in a variety of hostile deals in the U.K. Apparently, corporate clients are beginning to complain. And why not? If you are a Goldman Sachs client -- and pay premium fees for the privilege -- you'd have reason to grumble about the potential for a major conflict if the firm represented a hostile attack on your company. What's more, Goldman Sachs has access to highly sensitive information on many companies because of its long-term relationships. Might this advantage be abused?

According to a story on FT.com, the CEO of Goldman Sachs, Henry Paulson Jr., has warned his ranks about financing such deals. True, hostile takeovers are a lucrative business. But Goldman risks alienating top corporate clients by engaging in this practice, and Goldman's relentless service to its clients has been critical to its long-term success.

Such conflicts, however, are inevitable for major firms like Goldman Sachs, and the demand remains to service hostile deals. Wall Street will certainly fill the void, as it always does, and effectively so. This is also an opportunity for the mid-tier banks, such as Lazard (NYSE:LAZ) and Greenhill (NYSE:GHL), which have more focus on M&A and fewer engagements with existing clientele. In other words, there is enough business in this area for all of the investment banks.

Fool contributor Tom Taulli does not own shares of companies mentioned in this article.