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merely a “market maker” in these transactions—implying that it had no stake in the economic performance of the securities it was selling to clients—became less true over time. And even those early deals made a mockery of the notion that most investors understood what they were buying. For one thing, the synthetic deals were stuffed full of multiple kinds of risks. Take Abacus 2005-3, another early deal. The reference obligations—that is, the securities the CDO referenced—consisted of 130 credits. Those credits included everything from tranches of mortgage-backed securities issued by Long Beach Mortgage, Countrywide, Ameriquest, and New Century, to commercial mortgage-backed securities, to trusts backed by Sallie Mae student loans, to credit card debt issued by MBNA and Chase. Who could possibly understand all the risks contained in these securities? Is it any wonder that investors were essentially buying ratings instead?

Nor was it possible for investors to know Goldman’s own position. Was Goldman merely standing between two customers, the way a true market maker did? Or was Goldman using—and designing—the CDO in order to hedge an existing position or to “express” its own view about the referenced securities? For instance, Goldman could attempt to profit by having, say, a long position in triple-A-rated securities, and then use a synthetic CDO to establish a short position in triple-B-rated securities. Or, if Goldman was long in New Century mortgage-backed securities, the firm could hedge its position by constructing a synthetic CDO that referenced those securities, and take the short side of that trade. Buyers had no way of knowing whether Goldman was the dealer at the card table, a player, or both. Goldman supporters would later argue that buyers shouldn’t have cared what Goldman’s position was—they were responsible for doing their own analysis of the underlying securities. “The deal is the deal,” Dan Sparks, the former head of the Goldman mortgage desk, later told the Senate Permanent Subcommittee. But many buyers didn’t do that analysis. And it would later become clear that at least some certainly did care what Goldman itself was doing.

Just as a cash CDO was the perfect mechanism for laundering risky mortgages, so was a synthetic CDO the perfect vehicle for laundering positions a firm wanted to get off its books. For instance, if you owned a bunch of New Century mortgage-backed securities, it might be hard to find someone who wanted to own the risk that New Century loans were going to go bad. But if you could establish a short position for yourself by selling your clients the long position in a synthetic CDO—thereby insulating yourself from your unwanted junk by creating new triple-A securities—well, voilà! Given that Goldman was a big warehouse lender to New Century—and far more likely than its clients to have early knowledge that New Century mortgages were doomed—the whole edifice begins to take on a very dark hue. As Janet Tavakoli, a structured finance expert who became a fierce, prescient critic of CDOs, later put it, “They had reason to know what they were hedging shouldn’t have been created in the first place.”

In addition, Goldman, says one person who has looked into these deals, “had a stranglehold on every aspect of the transaction.” The fine print of one Abacus prospectus says that the “Protection Buyer”—i.e., Goldman—“may have information, including material, non-public information,” which it did not provide to the buyers. Thus, if Goldman did have knowledge of New Century mortgage defaults, it was under no legal obligation to share that knowledge with a client who was about to buy a synthetic CDO that referenced New Century securities. In some of the Abacus deals, Goldman could unwind the trade after three years if it didn’t like how it was going. (One blogger later called this “Heads I win, tails you lose.”) Another prospectus notes that Goldman’s many roles “may be in conflict with the interests of the investors in the transaction.” In fairness to Goldman, these pitfalls were identified in writing.