WASHINGTON – Goldman Sachs developed a strategy to profit from the housing meltdown and reaped billions at the expense of clients, a Senate investigation has found.

Top Goldman executives misled investors in complex mortgage securities that became toxic, investigators for a Senate panel allege. They point to e-mails and other Goldman documents obtained in an 18-month investigation. Excerpts from the documents were released Monday, a day before a hearing that will bring CEO Lloyd Blankfein and other top Goldman executives before Congress.

Blankfein says in his own prepared remarks that Goldman didn't bet against its clients and can't survive without their trust.

The Securities and Exchange Commission this month filed a civil fraud case against the bank, saying it misled investors about securities tied to home loans. The SEC says Goldman concocted mortgage investments without telling buyers they had been put together with help from a hedge fund client, Paulson & Co., that was betting on the investments to fail.

Goldman disputes the charges and says it will contest them in court.

At the hearing, Blankfein will repeat the company's argument that it lost $1.2 billion in the residential mortgage meltdown in 2007 and 2008 that touched off the financial crisis and a severe recession.

He also will argue that Goldman wasn't making an aggressive negative bet — or short — on the mortgage market's meltdown.

"We didn't have a massive short against the housing market, and we certainly did not bet against our clients," Blankfein says in the prepared remarks released by Goldman. "Rather, we believe that we managed our risk as our shareholders and our regulators would expect."

But Sen. Carl Levin, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations, said Monday: "I think they're misleading the country. ... There's no doubt they made huge money betting against the (mortgage) market."

Goldman "knew of Paulson's involvement in the selection" of securities, Levin told reporters. "They knew Paulson was going short."

"Need to decide if we want to do 1-3 (billion) of these trades for our book or engage customers," a December 2006 e-mail exchange between two Goldman executives says.

On one group of securities, "I'd say we definitely keep for ourselves. On (another), I'm open to sharing to the extent that it keeps these customers engaged with us."

The subcommittee provided excerpts of e-mails showing a progression from late 2006 through the full-blown mortgage crisis a year later. Levin said they show Goldman shifted in early 2007 from neutral to a short position, betting that the mortgage market was likely to collapse.

"That directional change is mighty clear," Levin said. "They decided to go gangbusters selling those securities" while knowing they were toxic.

The issue of how much Goldman executives pushed such policies and were aware of the mortgage trading department's practices is a key one emerging before the Senate hearing.

Some experts say damage to Goldman's reputation has already been done and might be long-lasting.

Regardless of the outcome of the SEC's case, "Goldman Sachs has lost," said James Cox, a Duke University law professor and securities law expert. "It's lost in the arena of public opinion."

The 140-year-old investment house's trading strategy in recent years enabled it to weather the financial crisis better than most other big banks. It earned a blowout $3.3 billion in the first quarter.

Even before the SEC filed its fraud charges on April 16, Goldman denied that it bet against clients by selling them mortgage-backed securities while reducing its own exposure to them by taking short positions.

By the Senate subcommittee's reckoning, Goldman made about $3.7 billion from its short positions in several complex mortgage securities called collateralized debt obligations in 2006-2007. The short positions made up about 56 percent of its total risk during the period, the investigators found.

But the company says it lost $1.2 billion when it sold home mortgage securities in 2007 and 2008.

The firm's correspondence to the SEC dated Oct. 4, 2007 includes this: "During most of 2007, we maintained a net short subprime (mortgage) position and therefore stood to benefit from declining prices in the mortgage market."

In his prepared remarks, Blankfein acknowledges, "We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky."

He adds, "If our clients believe that we don't deserve their trust, we cannot survive."

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