No matter that Goldman Sachs is trying to clear its name, saying that findings in the report on the financial crisis by the Permanent Subcommittee on Investigations are wrong.  No matter that Goldman says it didn’t have a big short against the housing market.  According to Goldman Sachs protagonist Jesse Eisinger, the size of Goldman’s short is irrelevant.

Mr. Eisinger, in his column for Dealbook, says there's no disputing that, by 2007, the firm had pivoted to reduce its exposure from mortgages and mortgage securities and had begun shorting the market on some scale - and there’s nothing wrong with that strategy.  "Don’t we want banks to reduce their risk when they see trouble ahead, as Goldman did in the mortgage markets?"

And he notes that shorting, in and of itself, shouldn't be seen as a bad thing.  In fact, it's necessary for the efficient functioning of capital markets.  Short-sellers can keep prices from getting out of whack and help deflate bubbles.

Eisinger's Problem with Goldman.   The problem for Mr. Eisinger is how Goldman went short and reduced its risk.  To do so, the Senate report says Goldman created new securities, backed them with its good name, and then strung together misleading statements to its customers about what it was actually doing.  By shorting the way it did, the bank perverted the market instead of correcting it.  For example ...

Hudson Mezzanine, a 2006 $2 billion CDO created by Goldman - in marketing material, the firm wrote that “Goldman Sachs has aligned incentives with the Hudson program.”   I suppose that was technically true: Goldman had made a small investment in the C.D.O. and therefore had an aligned incentive with the other investors. But the material failed to mention the firm’s much larger bet against the C.D.O. — a huge adverse incentive to its customers’ interests.

Goldman told investors that the Hudson assets had been “sourced from the Street,” which most investors would understand to mean that Goldman had purchased the assets from other broker-dealers.  In fact, all the assets had come from Goldman’s own balance sheet, the Senate report found.

In his April 2010 testimony to the Senate, Goldman CEO Lloyd Blankfein argued that the firm was merely making a market in these securities and derivatives, matching willing and sophisticated buyers and sellers.  Mr. Eisinger counters, saying Goldman was acting like an underwriter, not a market maker.  In such a role, Goldman threw its marketing muscle behind Hudson Mezzanine and other CDO’s.  When the bank’s salespeople ran into trouble selling the securities, they begged for help from the executives who created them.  One requested material to give to clients about “how great” the sector was.  One needed the aid to get a client to invest, to be “THERE AND IN SIZE,” according to e-mails cited in the report.

To continue reading, go to:   [DealBook, 6/15/11, "Misdirection in.."]