My own private Goldman testimony By Geoff Colvin, senior editor at large

(Fortune) -- I was not asked to testify at the recent hearings of the Senate Permanent Subcommittee on Investigations, probably because I've never worked at Goldman Sachs or anywhere else on Wall Street, or had any involvement whatsoever in the market for synthetic CDOs, all-natural CDOs, or subprime mortgages of any kind. Nonetheless, had I been invited, I would have been pleased to respond to some of the Senators' remarks as follows:

Edward E. Kaufman Jr., D-Tenn.: The idea that Wall Street came out of this thing just fine, thank you, is just something that just grates on people. They think you didn't just come out fine because it was luck. They think you guys just really gamed this thing really well.

Forgive me, Senator, but have you been in a cave the past three years? You think Wall Street came out of this thing just fine? You might want to ask the thousands of unemployed workers from Bear Stearns and Lehman Brothers, and you might check in with the former shareholders of Merrill Lynch, or the current shareholders of Citigroup (C, Fortune 500). Those are four of the most storied names on Wall Street, and they did not come out just fine.

The reality is that in a historic market dislocation, there were -- guess what -- winners and losers. Last time I checked, that was not a crime or even a scandal. It's the way economies work.

Claire McCaskill, D-Mo.: Let me just explain in very simple terms what synthetic CDOs are. They are instruments that are created so that people can bet on them. It's the La La Land of ledger entries. It's not investment in a business that has a good idea. It's not assisting local government and building infrastructure. It's gambling, pure and simple, raw gambling. They're called synthetic because there's nothing there but the gamble, but the bet.

Gee, Senator, your vitriolic scorn for gambling might surprise the hundreds of thousands of Missouri voters who love to play the Missouri Lottery, and it might really surprise the many Missouri farmers who are glad they can hedge their risks by buying crop and fuel derivatives, which are also "instruments that are created so that people can bet on them."

But that's beside the point. Your description of synthetic CDOs, if stripped of the loaded language, is basically right. They're bets. That's important to remember when you look at the case the SEC just happened to bring against Goldman (GS, Fortune 500) last week. Since the synthetic CDO at the heart of the case was a bet, the two hedge funds that bought it were well aware that someone else was, by definition, betting the other way. The fact that it was John Paulson, which Goldman didn't tell the buyers, is irrelevant; he was just another hedge fund manager, and at the time no one knew whether he'd be right or wrong. The buyers were fully informed about the contents of the synthetic CDO, and they chose to bet as they did. Turns out they lost a billion and Paulson made a billion. That's what happens every day -- every minute -- in the financial markets.

By the way, if it turned out that Warren Buffett had advised the hedge funds in the SEC case to buy the security that Goldman was selling, and the hedge funds didn't tell Goldman, would you urge the SEC to sue those hedge funds? Or if everything had happened just as it did except that Paulson had been wrong and had lost a billion, do you suppose the SEC would still have sued Goldman? Just asking.

Byron Dorgan D-N.D.: If the disclosures at these hearings are not the final nail that persuades the American people to demand this [financial regulation overhaul] be done now, I don't know what would be. To bet against your clients, to bet against your country, all for the sake of big profits.

Could we add some violin music please? Greedy Wall Street bankers! Picking America's pockets so they can bathe in Champagne! Look, Goldman was not betting against its clients and certainly not against its country, and you guys cannot be so dumb that you don't know that. But just in case, here's how it works, in terms even a Senator can understand.

Goldman's clients want to put their money to work, so those clients buy and sell financial instruments. They do it all day, every day. Goldman serves them in part by putting buyers and sellers together, and sometimes by being the buyer or seller. Goldman and a given client could be betting the same way in the morning and the opposite way on a different transaction in the afternoon. And to repeat -- since you all seem to have a really hard time with this central idea -- no one at the time knows who's right. Do you honestly believe that Goldman was withholding its secret knowledge of where the markets were going? If so, you might want to join one of those Area 51 chat groups.

Or think of it this way: If it were wrong to "bet against clients," as you mistakenly call it, then no investment bank could exist, because any position it took would oppose some position held by one of its hundreds of clients. And by the way, the clients know how this all works, and, believe it or not, it doesn't seem to bother them.

As for betting against the country -- you can't be serious. If trading on the belief that securities are mispriced is seditious, then you'd better sponsor a bill to expand the federal prisons, because every investor in America is going to jail.

Carl Levin D-Mich.: You are betting against the same security you're out selling. You've got a short bet against that security -- you don't think the client would care?

No! Have you been hanging out with Dorgan? Of course the client wouldn't care. The client knows very well that someone else has an opposite view on that security -- after all, the client thinks it's worth buying, and somebody else obviously thinks it's worth selling. Otherwise there wouldn't be a transaction. Duh! And both Goldman and the client know exactly what's in the security. Nobody got hoodwinked.

And despite the way that you and your colleagues are foaming at the mouth today, I suspect that all of you actually realize that. To top of page

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