In the latest Goldman Sachs (NYSE: GS) controversy, the gilded firm has raised brows for advising big clients to short California-issued municipal bonds, which the firm itself underwrote for the state, reports ProPublica.

The facts are not shocking really. They demonstrate the many ways a bank can generate profits. They issued the bonds. They made markets in the bonds. But they also advised big clients to invest in credit defaults swaps on the California bonds, and made markets in those derivatives, a very lucrative endeavor.

But some on the issuing side wonder if this works against them. They see it as counterproductive to issue bonds and then encourage institutions to trade against them, which in their minds might create some market pressure to tank the bonds. Goldman Sachs no doubt smelled some fat fees in the nascent market for CDSs on municipal bonds. In some ways, it was an ideal situation. Lots of hedging and speculative business to be had, and the bonds back then weren't seen as likely to go belly up. They may have found a way to lay off the risk. The state thinks Goldman should have at least informed it of its efforts to get people to bet against their bonds. 

For more:
- here's the article 

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