Spill now the worst ever in US

COVINGTON, La. (AP) -- The Gulf oil spill has surpassed the Exxon Valdez as the worst in U.S. history, according to new estimates released Thursday, but the Coast Guard and BP said an untested procedure to stop it seemed to be working.

A team of scientists trying to figure out how much oil has been flowing since the offshore rig Deepwater Horizon exploded April 20 and sank two days later found the rate was at least twice and possibly up to five times as high as previously thought.

Even using the most conservative estimate, that means the leak has grown to nearly 19 million gallons, surpassing the size of the 1989 Exxon Valdez disaster, which at about 11 million gallons had been the nation's worst spill. Under the highest estimate, nearly 39 million gallons may have spilled.

U.S. Geological Survey Director Marcia McNutt said two different teams of scientists calculated that the well has been spewing between 504,000 and more than 1 million gallons a day.

BP and the Coast Guard estimated soon after the explosion that about 210,000 gallons a day was leaking, but scientists who watched underwater video of well had been saying for weeks it was probably more.

Last week, BP inserted a mile-long tube to siphon some of the oil into a tanker. The tube sucked up 924,000 gallons of oil, but engineers had to dismantle so they could start the risky procedure known as a top kill to try to cut off the flow altogether by shooting heavy drilling fluid into the well.

If that works, BP will then inject cement into the well to seal it. The top kill has been used above ground but has never before been tried 5,000 feet beneath the sea. BP pegged its chance of success at 60 to 70 percent.

Lt. Commander Tony Russell, an aide to Coast Guard Adm. Thad Allen, said Thursday that the flow of mud was stopping some oil and gas but had a ways to go before it proved successful.

"As you inject your mud into it, it is going to stop some hydrocarbons," he said. "That doesn't mean it's successful."

BP spokesman Tom Mueller also discounted news reports that the top kill had worked.

"We appreciate the optimism, but the top kill operation is continuing through the day today -- that hasn't changed," he said Thursday morning. "We don't anticipate being able to say anything definitive on that until later today."

Oil has been coating birds and delicate wetlands along the Louisiana coast, and the political fallout from the spill has reached all the way to Washington, where Democratic sources said Thursday that the Obama administration has fired the head of the U.S. Minerals Management Service in response to blistering criticism over lax oversight of offshore drilling.

The sources, speaking on condition of anonymity before the official announcement, told The Associated Press that President Barack Obama would announce the decision Thursday. Elizabeth "Liz" Birnbaum had run the service in the Interior Department since July 2009.

Fishermen, hotel and restaurant owners, politicians and residents along the coast are fed up with BP's failures to stop the oil, and the anger has turned toward Obama and his administration. Polls show the public is souring on their handling of the catastrophe.

On Wednesday, the Coast Guard pulled commercial fishing boats from oil cleanup efforts in Breton Sound off the Louisiana coast after several people became ill. Crew members on three vessels reported nausea, dizziness, headaches and chest pains, the Coast Guard said. Four people were hospitalized, including one who was flown to a hospital.

If the top kill fails, BP says it has several backup plans, including sealing the well's blowout preventer with a smaller cap, which would contain the oil. An earlier attempt to cap the blowout preventer failed. BP could also try a "junk shot" -- shooting golf balls and other debris into the blowout preventer to clog it up -- during the top kill process.

The only permanent solution is drilling a second well, but that will take a couple of months.

Though the spill is now the biggest in U.S. history, it's not the biggest ever in the Gulf. An offshore drilling rig in Mexican waters -- the Ixtoc I -- blew up in June 1979, releasing 140 million gallons of oil.

Chrysler 1.9B loss to tax payers

Martin Crutsinger, AP Economics Writer, On Monday May 17, 2010, 9:25 pm

WASHINGTON (AP) -- The Treasury Department said Monday it will lose $1.6 billion on a loan made to Chrysler in early 2009. Taxpayer losses from bailing out Chrysler and General Motors are expected to rise as high as $34 billion, congressional auditors have said.

Treasury said Monday that Chrysler repaid $1.9 billion of a $4 billion loan, which was extended before the company filed for Chapter 11. The government hopes to get another $500 million from the company that emerged from bankruptcy, Chrysler Group LLC.

Treasury officials said that the government had no plans to boost its stake in the new Chrysler to cover those losses. It also acknowledged another $1.9 billion in potential losses from a separate loan that had been made to the company that went through bankruptcy proceedings. It indicated slim hopes of recouping much if anything from that separate $1.9 billion loan.

The original $4 billion loan was made in January 2009, when the Bush administration was scrambling to rescue Chrysler, GM and their auto financing arms.

The Congressional Budget Office estimated in March that the government's $85 billion bailout of the automakers would cost taxpayers $34 billion.

Much of it will depend on how much the government recovers from its eventual sale of nearly 61 percent of GM and about 10 percent of Chrysler.

GM has said it could conduct a public stock offering later this year. Chrysler officials have said a public stock offering is not likely before 2011.

The Treasury Department made the announcement about the loss from Chrysler on a day when GM reported its first quarterly profit in nearly three years. That moved GM closer to a stock offering that would repay at least part of the $43 billion it owes the government.

Chrysler Holding is the parent company of the old Chrysler. It is owned by private equity firm Cerberus Capital Management. Cerberus bought Chrysler from Daimler AG in 2007.

Chrysler came close to running out of money at the end of 2008, so the U.S. government stepped in, authorizing $15.5 billion in aid and appointing Fiat SpA to run the new Chrysler after it emerged from bankruptcy protection. The old Chrysler's assets, along with its finance arm, became Chrysler Holding.

Treasury said it has received repayments of $3.9 billion to date, including the $1.9 billion repayment and a $1.5 billion loan paid off by Chrysler Financial. Chrysler also assumed $500 million of Old Chrysler's debt, reducing the debt to the government.

Dome doesn't work

(Reuters) - BP Plc suffered a setback on Saturday in an attempt to contain oil gushing into the Gulf of Mexico with a huge metal dome when crystallized gas filled the structure, a blow to hopes of a quick, temporary solution to a growing environmental disaster.

U.S. | Green Business

Word of the snag came as balls of tar appeared in waters off a popular Alabama island beach in what may be the first evidence of spilled oil washing into a populated area.

BP engineers have moved the four-story containment dome -- which was seen as the best short-term way to stem the flow from a ruptured oil well -- off to the side on the sea floor and will take two days trying to come up with a solution, Doug Suttles, chief operating officer, told reporters.

The problem is gas hydrates, essentially slushy methane gas that would block the oil from being siphoned out the top of the box. As BP tries to solve it, oil keeps flowing unchecked into the Gulf in what could be the worst U.S. oil spill.

"I wouldn't say it's failed yet. What I would say is what we attempted to do last night didn't work because these hydrates plugged up the top of the dome," Suttles said.

"What we're currently doing, and I suspect it will probably take the next 48 hours or so, is saying, 'Is there a way to overcome this problem?'"

The company, under pressure from the Obama administration to limit the damage to the Gulf and coastlines of four states, expected hydrates, but not the volumes encountered after a crew lowered the dome nearly a mile to the sea floor.

Possible solutions may involve heating the area or adding methanol to break up the hydrates, Suttles said.

Officials had already warned there was no guarantee that the technology would work at such water depth. It hopes to attach a pipe to the 98-ton dome to pump oil to a tanker, with the aim of capturing about 85 percent of the leaking crude.

The spill threatens an economic and ecological disaster targeting beaches, wildlife refuges and fishing in Louisiana, Mississippi, Alabama and Florida. It has forced President Barack Obama to rethink plans to open more waters to drilling.

On Dauphin Island, Alabama, a barrier island and beach resort full of weekend swimmers and beachcombers, workers assisting the protection operation found tar balls and tar beads washing ashore on Saturday.

They will be tested to determine if they come from the oil slick in the Gulf. Such balls were not uncommon and previously had washed up on the Gulf coast.

"No, we cannot confirm that it's from the oil spill, but we certainly assume that to be the case. We won't know for certain until some tests are completed," Dauphin Island Mayor Jeff Collier said.

The only shore contact so far has been in the uninhabited Chandeleur Islands off Louisiana, mostly a wildlife reserve.

"I have never seen this and I am here once a week every summer. This is the first time I have seen any thing like this here," said Molly Hunter, 34, of Mobile, holding up a chunk of tar about the size of an open hand.

RELIEF WELL

Suttles said BP may now try to plug up the damaged blowout preventor on the well or attach a new one on top of it.

It also is drilling a relief well to halt the leak -- which began after the Deepwater Horizon rig exploded on April 20, killing 11 crew members -- but it could take three months.

In the initial blast, a natural gas cloud enveloped the rig and exploded just as visiting BP officials were celebrating seven accident-free years in the rig's crew quarters, according to accounts by survivors of the blast.

According to transcripts of interviews obtained by Robert Bea, a University of California Berkeley engineering professor, a giant methane bubble rushed up the drill pipe and filled the air above the deck of the drilling platform with flammable gas, followed by a scalding flood of crude that spilled onto the drill deck and ignited.

After several days of calm weather, winds began to pick up on Saturday, preventing controlled burns of the thickest concentrations of oil. Crews conducted five burns on Friday.

Nearly 200 boats deployed protective booms and used dispersants to break up the thick oil on Saturday. Crews have laid almost 900,000 feet of boom, and spread 267,000 gallons (1 million liters) of chemical dispersant.

In Bayou La Batre, the heart of Alabama's seafood industry, the docks were largely quiet as thousands of shrimpers and seafood processors remained idled by fishing restrictions.

About 30 oyster-processing plants have run out of product and shut down, putting as many as 900 people out of work, said Wayne Eldridge, owner of J&W Marine Enterprises and an oyster plant operator himself.

"I'm screwed," Eldridge said. "The biggest thing is I've got 35 people unemployed there."

LIABILITY

BP Chief Executive Tony Hayward said a $75 million legal cap on the liabilities for economic damages under federal law, which some U.S. lawmakers now want to raise, would not be a limit and renewed promises to meet all "legitimate" claims.

BP suffered another blow on Friday when ratings agency Standard & Poor's lowered its outlook to negative from stable and indicated a ratings downgrade was likely.

S&P also cut its outlook for Anadarko Petroleum Corp, which has a 25 percent stake in the ill-fated well, to stable from positive, saying it is "potentially liable for significant costs and liabilities relating to the clean-up."

Oil has been gushing into the Gulf at a rate estimated at a minimum of 5,000 barrels (210,000 gallons/795,000 liters) a day since the well ruptured. Ian MacDonald, biological oceanographer at Florida State University, told Reuters this figure was too conservative, putting his guess as high as 25,000 barrels (1.05 million gallons/4 million liters) a day.

In New Orleans, about 200 people holding banners saying "Clean It Up" protested on Saturday against BP, the spill and its environmental consequences.

The rally, organized by the environmental group Sierra Club, is one of a series of demonstrations due to take place across the country in the next 10 days, organizers said.

A sheen of oil has engulfed much of the Chandeleur Islands, barrier islands that are part of Louisiana's Breton National Wildlife Refuge, the first confirmation of the oil slick hitting land. Some oiled birds have been found in recent days.

(Additional reporting by Matt Bigg in New Orleans; Chris Baltimore in Houston; Tom Brown and Pascal Fletcher in Miami; Steve Gorman in Dauphin Island, Alabama; writing by Jeffrey Jones and John Whitesides; Editing by Xavier Briand)

210,000 Gallons per day leaking into Gulf

Oil Leak in Gulf of Mexico May Be 5 Times Initial Estimate
Chris Graythen/Getty Images

A boat sailed through crude oil that had leaked from the Deepwater Horizon wellhead in the Gulf of Mexico.
By CAMPBELL ROBERTSON and LESLIE KAUFMAN
Published: April 28, 2010

NEW ORLEANS — Government officials said late Wednesday night that oil might be leaking from a well in the Gulf of Mexico at a rate five times that suggested by initial estimates.
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The Oil Spill: Wildlife at Risk
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In Area With Few Options, Rigs Are Mixed Blessing (April 29, 2010)
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Oil Rig Blast Complicates Push for Energy and Climate Bill (April 28, 2010)
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Rising Oil Price Benefits BP Earnings (April 28, 2010)

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In a hastily called news conference, Rear Adm. Mary E. Landry of the Coast Guard said a scientist from the National Oceanic and Atmospheric Administration had concluded that oil is leaking at the rate of 5,000 barrels a day, not 1,000 as had been estimated. While emphasizing that the estimates are rough given that the leak is at 5,000 feet below the surface, Admiral Landry said the new estimate came from observations made in flights over the slick, studying the trajectory of the spill and other variables.

An explosion and fire on a drilling rig on April 20 left 11 workers missing and presumed dead. The rig sank two days later about 50 miles off the Louisiana coast.

Doug Suttles, chief operating officer for exploration and production for BP, said a new leak had been discovered as well. Officials had previously found two leaks in the riser, the 5,000-foot-long pipe that connected the rig to the wellhead and is now detached and snaking along the sea floor. One leak was at the end of the riser and the other at a kink closer to its source, the wellhead.

But Mr. Suttles said a third leak had been discovered Wednesday afternoon even closer to the source. “I’m very, very confident this leak is new,” he said. He also said the discovery of the new leak had not led them to believe that the total flow from the well was different than it was before the leak was found.

The new, far larger estimate of the leakage rate, he said, was within a range of estimates given the inexact science of determining the rate of a leak so far below the ocean’s surface.

“The leaks on the sea floor are being visually gauged from the video feed” from the remote vehicles that have been surveying the riser, said Doug Helton, a fisheries biologist who coordinates oil spill responses for the National Oceanic and Atmospheric Administration, in an e-mail message Wednesday night. “That takes a practiced eye. Like being able to look at a garden hose and judge how many gallons a minute are being discharged. The surface approach is to measure the area of the slick, the percent cover, and then estimate the thickness based on some rough color codes.”

Admiral Landry said President Obama had been notified. She also opened up the possibility that if the government determines that BP, which is responsible for the cleanup, cannot handle the spill with the resources available in the private sector, that Defense Department could become involved to contribute technology.

Wind patterns may push the spill into the coast of Louisiana as soon as Friday night, officials said, prompting consideration of more urgent measures to protect coastal wildlife. Among them were using cannons to scare off birds and employing local shrimpers’ boats as makeshift oil skimmers in the shallows.

Part of the oil slick was only 16 miles offshore and closing in on the Mississippi River Delta, the marshlands at the southeastern tip of Louisiana where the river empties into the ocean. Already 100,000 feet of protective booms have been laid down to protect the shoreline, with 500,000 feet more standing by, said Charlie Henry, an oil spill expert for the National Oceanic and Atmospheric Administration, at an earlier news conference on Wednesday.

On Wednesday evening, cleanup crews began conducting what is called an in-situ burn, a process that consists of corralling concentrated parts of the spill in a 500-foot-long fireproof boom, moving it to another location and burning it. It has been tested effectively on other spills, but weather and ecological concerns can complicate the procedure.

Such burning also works only when oil is corralled to a certain thickness. Burns may not be effective for most of this spill, of which 97 percent is estimated to be an oil-water mixture.

A burn scheduled for 11 a.m. Wednesday was delayed. At 4:45 p.m., the first small portion of the spill was ignited. Officials determined it to be successful.

42,000 Gallon per day leaking into Gulf

As efforts failed Tuesday to contain the flow of tens of thousands of gallons of oil leaking from an exploded well deep in the Gulf of Mexico, emergency response teams are considering a controlled burn-off of the oil on the water's surface as early as today.

Tuesday night, the expanding oil slick was about 20 miles off the coast of Louisiana and stretched 100 miles wide by 45 miles long at its greatest expanse.Workers were girding to protect environmentally sensitive areas nearby in the Mississippi River delta that are home to migratory birds and a nursery for nearly a quarter of the seafood production in the continental United States.

"It is the closest it's been to shore throughout this response, and we're paying attention to that, very careful attention to that," said U.S. Coast Guard Rear Adm. Mary Landry. She added that if the spill isn't contained, it has the potential to become "one of the most significant oil spills in U.S. history."

Watch video of the spill

Crews with BP Exploration and Production are using as many as eight remote-controlled submersible vehicles in an effort to trigger a shutoff valve, called a blowout preventer, that could stop the estimated 42,000 gallons of oil a day leaking from a well more than 5,000 feet below the surface of the Gulf. Those efforts came up short again Tuesday, and other alternatives to permanently containing the spill could be three months away.

NASA imageA closeup of the oil spill in the Gulf of Mexico, still 20 miles from the Louisiana coastline.

BP officials do not know why the blowout preventer did not engage after an explosion on the Deepwater Horizon drilling rig last week, in which 11 workers are still missing and presumed dead. A BP official estimated that the company is spending more than $6 million a day in efforts to contain the oil spill.An official with the Minerals Management Service, which regulates offshore drilling and mineral resources, said that the failure of the blowout device would certainly be the focus of an accident investigation. In the event the blowout preventer cannot be activated, BP is also working to build a series of containment domes that would be placed underwater to corral the oil and allow it to be pumped to storage tanks on nearby ships.

The company is also about to begin drilling separate "relief wells" that would intersect the leaking well and allow the company to pump a heavy drilling fluid into the well to counteract the flow. Eventually it would be plugged with concrete. That process could take up to three months, and the containment domes will not be finished for at least two to four weeks.

Meanwhile, the rhetoric ramped up Tuesday in Washington, with energy committees in both the House and Senate pledging to investigate the cause of the explosion.

First hearing on Capitol Hill is May 6

At the request of Sen. Mary Landrieu, D-La., the Senate Energy and Natural Resources Committee will hold a hearing May 6 on the rig disaster. A separate investigation by the Departments of Interior and Homeland Security has been under way since last week, and the heads of both agencies said Tuesday they will have the power to issue subpoenas and hold hearings to figure out what triggered the explosion and subsequent oil spill.

"This major accident and its potential implications to the environment need to be better understood," Landrieu said. "The public deserves a full hearing on this matter to ensure that everything that can be done is being done to maximize worker safety and minimize environmental damage."

Another environmental group, the Sierra Club, Tuesday joined Friends of the Earth in saying that the accident is another reason for Congress to reject the Obama administration's call for new drilling in the Eastern Gulf and the Atlantic Coast.

"This terrible tragedy is a sad reminder that oil is dirty, dangerous and deadly," said Athan Manuel, director of the Sierra Club's Lands Protection Program. "Instead of risking our lives, our coasts, our clean air, and our security by perpetuating our addiction to oil, it's time to build a clean energy economic that means more jobs, less pollution and real energy independence."

Chris John, a former Louisiana Democratic congressman who now is president of the Louisiana Mid-Continent Oil and Gas Association, said the accident is tragic, but that the oil and gas industry generally has a very good record of safety and avoiding major oil spills.

Goldman Sach's Gaming the market

By LOUISE STORY

WASHINGTON — The legal storm buffeting Goldman Sachs intensified on Monday as Senate investigators claimed the Wall Street giant had devised not one but a series of complex deals to profit from the collapse of the home mortgage market.

The claims suggested for the first time that the inquiries into Goldman were stretching beyond the sole mortgage deal singled out by the Securities and Exchange Commission.

S.E.C. accusations that Goldman defrauded investors in that single transaction, Abacus 2007-AC1, have thrust the bank into a legal whirlwind.

The latest claims came on the eve of what is expected to be a contentious Senate hearing on Tuesday, at which Goldman Sachs executives plan to defend their actions.

The stage for that hearing was set with a flurry of new documents from the panel, the Permanent Senate Subcommittee on Investigations. That was preceded by a press briefing in Washington, where the accusations against Goldman have transformed the politics of financial reform.

In the midst of this storm, Lloyd C. Blankfein, Goldman’s chairman and chief executive, plans to sound a conciliatory note on Tuesday.

In a statement prepared for the hearing and released on Monday, Mr. Blankfein said the news 10 days ago that the S.E.C. had filed a civil fraud suit against Goldman had shaken the bank’s employees.

“It was one of the worst days of my professional life, as I know it was for every person at our firm,” Mr. Blankfein said. “We have been a client-centered firm for 140 years, and if our clients believe that we don’t deserve their trust we cannot survive.”

Mr. Blankfein will also testify that Goldman did not have a substantial, consistent short position in the mortgage market.

But at the press briefing in Washington, Carl Levin, the Democrat of Michigan who heads the Senate committee, insisted that Goldman had bet against its clients repeatedly. He held up a binder the size of two breadboxes that he said contained copies of e-mail messages and other documents that showed Goldman had put its own interests first.

“The evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients,” Mr. Levin said.

Mr. Levin’s investigative staff released a summary of those documents, which are to be released in full on Tuesday. The summary included information on Abacus as well as new details about other complex mortgage deals.

On a page titled “The Goldman Sachs Conveyor Belt,” the subcommittee described five other transactions beyond the Abacus investment.

One, called Hudson Mezzanine, was put together in the fall of 2006 expressly as a way to create more short positions for Goldman, the subcommittee claims. The $2 billion deal was one of the first for which Goldman sales staff began to face dubious clients, according to former Goldman employees.

“Here we are selling this, but we think the market is going the other way,” a former Goldman salesman told The New York Times in December.

Hudson, like Goldman’s 25 Abacus deals, was a synthetic collateralized debt obligation, which is a bundle of insurance contracts on mortgage bonds. Like other banks, Goldman turned to synthetic C.D.O.’s to allow it to complete deals faster than the sort of mortgage securities that required actual mortgage bonds. These deals also created a new avenue for Goldman and some of its hedge fund clients to make negative bets on housing.

Goldman also had an unusual and powerful role in the Hudson deal that the Senate committee did not highlight: According to Hudson marketing documents, which were reviewed on Monday by The Times, Goldman was also the liquidation agent in the deal, which is the party that took it apart when it hit trouble.

The Senate subcommittee also studied two deals from early 2007 called Anderson Mezzanine 2007-1 and Timberwolf I. In total, these two deals were worth $1.3 billion, and Goldman held about $380 million of the negative bets associated with the two deals.

The subcommittee pointed to these deals as examples of how Goldman put its own interests ahead of clients. Mr. Levin read from several Goldman documents on Monday to underscore the point, including one in October 2007 that said, “Real bad feeling across European sales about some of the trades we did with clients. The damage this has done to our franchise is very significant.”

As the mortgage market collapsed, Goldman turned its back on clients who came knocking with older Goldman-issued bonds they had bought. One example was a series of mortgage bonds known as Gsamp.

“I said ‘no’ to clients who demanded that GS should ‘support the Gsamp’ program as clients tried to gain leverage over us,” a mortgage trader, Michael Swenson, wrote in his self-evaluation at the end of 2007. “Those were unpopular decisions but they saved the firm hundreds of millions of dollars.”

The Gsamp program was also involved in a dispute in the summer of 2007 that Goldman had with a client, Peleton Partners, a hedge fund founded by former Goldman workers that has since collapsed because of mortgage losses.

According to court documents reviewed by The Times on Monday, in June 2007, Goldman refused to accept a Gsamp bond from Peleton in a dispute over the securities that backed up a mortgage security called Broadwick. A Peleton partner was pointed in his response after Goldman refused the Gsamp bond.

“We do appreciate the unintended irony,” wrote Peter Howard, a partner at Peleton, in an e-mail message about the Gsamp bond.

Bank of America ended up suing Goldman over the Broadwick deal. The parties are awaiting a written ruling in that suit. Broadwick was one of a dozen or so so-called hybrid C.D.O.’s that Goldman created in 2006 and 2007. Such investments were made up of both mortgage bonds and insurance contracts on mortgage bonds.

While such hybrids have received little attention, one mortgage researcher, Gary Kopff of Everest Management, has pointed to a dozen other Goldman C.D.O.’s, including Broadwick, that were mixes of mortgage bonds and insurance policies. Those deals — with names like Fortius I and Altius I — may have been another method for Goldman to obtain negative bets on housing.

“It was like an insurance policy that Goldman stuck in the middle of the sandwich with all the other subprime bonds,” Mr. Kopff said. “And it was an insurance policy designed to protect them.”

An earlier version of this article misidentified Senator Levin’s home state.

A Wall Street Invention Let the Crisis Mutate

By JOE NOCERA

Can it get any worse?

Every time you pick up another rock along the winding path that led to the financial crisis, something else crawls out. Subprime mortgages were sold as a way to give low-income people a chance at homeownership and the American Dream. Instead, the mortgages turned out to be an excuse for predatory lending and fraud, enriching the lenders and Wall Street at the expense of subprime borrowers, many of whom ended up in foreclosure.

The ratings agencies, which rated the complex investments that were built with subprime mortgages, turned out to be only too happy to be gamed by firms that paid their fees — slapping AAA ratings on mortgage bonds doomed to fail. Lehman Brothers turned out to be disguising the full reality of its horrid balance sheet by playing accounting games. All over Wall Street, firms pushed mortgage originators to churn out more loans that were doomed the moment they were made.

In the immediate aftermath, the conventional wisdom was that Wall Street had simply lost its head. It was terrible, to be sure, but on some level understandable: Dutch tulips, the South Sea bubble, that sort of thing.

In recent months, though, something more troubling has begun to emerge. In December, Gretchen Morgenson and Louise Story of The New York Times exposed the role that some firms, including Goldman Sachs and Deutsche Bank, played in putting together investment structures — synthetic C.D.O.’s, they were called — that were primed to blow up. They did so, reportedly, because some savvy investors wanted to go short the subprime market.

On Friday, the Securities and Exchange Commission dropped the hammer, charging Goldman Sachs with securities fraud for its purported failure to disclose that the bonds that were the basis for one particular synthetic C.D.O. had been chosen by none other than John Paulson, the billionaire hedge fund investor, who was shorting them.

Oh, and one other thing is starting to become clear: synthetic C.D.O.’s made the crisis worse than it would otherwise have been.

•

Remember in the months leading up to the crisis, when the Federal Reserve chairman, Ben Bernanke, and Henry Paulson Jr., then the Treasury secretary, were assuring everyone that the “subprime problem” could be contained? In truth, if the only problem had been the actual mortgage bonds themselves, they might have been right. At the peak there were well over $1 trillion in subprime and Alt-A mortgages that were securitized on Wall Street. That’s a lot, to be sure — but it was a finite number. You could have only as much exposure as there were bonds in existence.

The introduction of synthetic C.D.O.’s changed all that. Unlike a “normal” collateralized debt obligation, which contained the bonds themselves, the synthetic version contained credit-default swaps — derivatives that “referenced” a particular group of mortgage bonds. Once synthetic C.D.O.’s became popular, Wall Street no longer needed to feed the beast with new subprime loans. It could make an infinite number of bets on the bonds that already existed.

And why did synthetic C.D.O.’s become popular? One reason was that the subprime companies were starting to run out of risky borrowers to make bad loans to — and hitting a brick wall. New Century, a big subprime originator, went bankrupt in early April 2007, for instance. Yet three weeks later, the Goldman synthetic C.D.O. deal, called Abacus 2007-ACI, went through, because it was betting on subprime mortgage bonds that already existed rather than bundling new ones. It didn’t even have to go to the trouble of repackaging old C.D.O. tranches into new C.D.O.’s, which was also a common practice. (Goldman has vehemently denied any allegations of wrongdoing, pointing out that it lost $90 million on the particular Abacus deal that is the subject of the S.E.C. complaint.)

The second reason, though, is that synthetic C.D.O.’s gave people like John Paulson a way to short the subprime market. Mr. Paulson’s bet against the subprime market, which famously reaped the firm billions in profits, was the subject of a recent book, “The Greatest Trade Ever.” Boy, I’ll say.

Both Gregory Zuckerman, the author of that book, and Michael Lewis, who wrote the current best seller “The Big Short,” make it clear that the heroes of their narratives — the handful of people who had figured out that subprime mortgages were a looming disaster — were pushing Wall Street hard to give them a way to short the market. Maybe synthetic C.D.O.’s would have been created even without their urging, but it seems a little unlikely. They were the driving forces.

It is important to note that every synthetic C.D.O. required both investors who were long and others who were short. That is, there needed to be investors who believed the “referenced” bonds would rise in value, and others who believed they would fall. Everyone, on both sides of the transaction, understood that. What makes it feel like dirty pool is the allegation that Paulson & Company and Goldman Sachs were actively involved in choosing the bonds that would be bet on — knowing they were going to be short. In its filing on Thursday, the S.E.C. charged that Goldman never told investors of Mr. Paulson’s involvement. “Credit derivative technology helped people disguise what they were doing,” said Janet Tavakoli, the president of Tavakoli Structured Finance, and an early critics of many of the structures that have now come under scrutiny.

There appear to be other examples of this, as well. Last week, Pro Publica, the nonprofit investigative journalism outfit, reported how a big Chicago hedge fund, Magnetar, helped put together some synthetic C.D.O.’s — precisely so that it could bet against them. In his book, Mr. Zuckerman seems to have stumbled onto Abacus and similar deals. One banker, he writes, “suspected that Paulson would push for combustible mortgages and debt to go into any C.D.O., making it more likely that it would go up in flames.” Which is precisely what the S.E.C. is claiming. But in his quest to lionize his central character, Mr. Zuckerman rushes past what by all rights should have been the most shocking revelation in his book.

Mr. Lewis, for his part, recounts a dinner, late in the game, in which one of his heroes, Steve Eisman, is seated next to a man who is taking the long position on many of the C.D.O.’s he is shorting. They get to talking, and the man says to Mr. Eisman: “I love guys like you who short my market. Without you, I don’t have anything to buy.” He adds, “The more excited that you get that you’re right, the more trades you’ll do, the more product for me.”

As a reader, it is hard not to love that moment, rich as it is in irony and foreboding. The guy on the long side — who was making investments that the housing and mortgage markets would remain strong — is an obvious fool; Mr. Eisman, on the short side the trade, is clearly going to be vindicated. (And, by Mr. Lewis’s account, Mr. Eisman never “helped” a Wall Street firm pick the bonds for the C.D.O.’s he was shorting, the way the S.E.C. says Mr. Paulson did.)

But on second reading, the passage isn’t quite so funny. The people on the short side of those trades were truly savvy investors, who, unlike so many others, did their homework and had insights that made them a great deal of money. But the rise of synthetic C.D.O.’s that they pushed for — and their ability to use credit-default swaps to short subprime mortgage bonds — took an already bad situation and made it worse.

And here we are now, all of us, paying the price.