Goldman Sachs: a market maker or trading firm run amok?

When it comes to the ethics of a market maker, Goldman Sachs and a Senate panel don't see eye to eye.

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    Sen. Tom Coburn (R) of Oklahoma (right) watches as Sen. Carl Levin (D) of Michigan questions Goldman Sachs CEO Lloyd Blankfein at a Senate subcommittee hearing Tuesday. A big issue at the hearing was whether Goldman was acting properly as a market maker or looking out for itself when the housing market was collapsing.

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The grilling of Goldman Sachs executives by a Senate panel Tuesday illustrates the wide chasm that divides Wall Street from the rest of America.

It's not just big pay and bonuses. When it comes to business practices, neither understands the ethics of the other.

When Goldman managers tried to explain how their business operates at Tuesday's hearing, the senators just didn't get it. When senators on both sides of the aisle asked how the company could hawk an investment with one hand while selling short that investment with the other, Goldman executives didn't seem to understand why that might be a problem.

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Congressional hearings are political theater, of course, so both sides may understand each other better than they let on. Still, there's clearly a disconnect.

One big reason for it is a lack of consensus over the proper role of a market maker.

Market makers are not your run-of-the-mill business. They're individuals or companies who make markets function more efficiently, whether it's stocks or currencies or derivatives that are being traded. They do that by offering buy and sell prices, sometimes stepping in to buy when there aren't enough buyers or sell when there aren't enough sellers.

It's a key role that provides markets with much-needed liquidity.

The challenge is figuring out what limits should apply, if any. Goldman, for one, argues that it should be able to do just about any kind of trading as a market maker, including aggressively selling investments that, in effect, it is also betting against. It's not only sophisticated about trading products, it has a culture that brags about it.

Several of the assembled senators, by contrast, suggested that some of those practices were wrong -- and would have to be regulated.

In one instance, for example, Goldman banker Fabrice Tourre is alleged to have tried to sell a derivative with mortgages picked by a hedge fund that planned to bet against the derivative. Mr. Tourre explained the deal and vigorously denied any wrongdoing. The Securities and Exchange Commission has sued Goldman over what it says was a lack of disclosure on that deal.

The senators also honed in on other deals, which, while perhaps legal, they questioned on ethical grounds. Sen. Carl Levin, chairman of the Permanent Subcommittee on Investigations, repeatedly asked Goldman executives Tuesday if they had an obligation to their clients not to peddle products they didn't believe in. Goldman executives, trained to sell anything in their role as market maker, couldn't answer him.

The panel's hearings are occurring against a larger backdrop. Democrats are trying to push sweeping financial reforms through Congress.

If they can cut a deal with Republicans, who have balked so far, Congress may well rein in some of the practices and business of financial institutions, bringing them more in line with Main Street.

That wouldn't eliminate the chasm. But it would narrow it.

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