The New York Times delivers a front-page expose on the original Goldman Sachs scandal: How the firm created derivatives (synthetic CDOs) to allow investors to bet on the housing market, sold the CDOs to clients who wanted to bet on additional housing market gains, and then went short the same CDOs because Goldman believed the housing market would crash.

The outcome, of course, was the same as it usually is: Goldman made a killing, on both the product origination fees and the proprietary bets. Goldman's clients, meanwhile, got crushed.

One observer likens this to buying insurance on a house and then burning the house down:

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

But is it really a scandal?

If you view Wall Street the old-fashioned way, yes: The firm sold its clients a product and then bet against it. This allowed Goldman to make money two ways instead of just one: Product origination fees and trading profits, all at its clients' expense.

If you take a more realistic view of Wall Street, however, this is just an everyday reality. Wall Street firms like Goldman sit between buyers and sellers, and they also buy and sell on their own behalf. Every single transaction these firms conduct entails a conflict of interest: Everyone is always making bets, and someone is always winning and losing them. It's just not obvious until later which party that is.

The way we suspect Goldman viewed its behavior in the housing scenario above is as follows:

Clients are desperate for products with which to bet on the housing market

We can help our clients by creating those products and get paid handsomely for doing so.

We're negative on the housing market, so we can use the products bet against the housing market. If we're right, we'll make some money there, too.

Don't forget that the buyers of Goldman's CDOs were among the most sophisticated investors in the world. These investors were paid to analyze the housing market and make smart investment decisions based on that analysis. The investors did their analysis and concluded that the housing market was going to go up. Goldman did its own analysis and came to the opposite conclusion. But it was at least relatively a fair fight.

Don't forget that the clients who bought the CDOs may have turned around and sold them to someone else 30 seconds after buying them. We're not talking about mom-and-pop buy-and-hold investors here. We're talking about institutions who often roll their portfolios over several times a month. We're also talking about institutions that were making an absolute killing going long the housing market--so much so that they were desperate for more products with which to continue making the same bet.

Don't forget also that these particular CDOs were likely a tiny percentage of the total products that Goldman sold to these clients over the period in question. Many of the other products Goldman sold the same clients may have performed superbly, making the clients boatloads of money. When all of the clients' dealings with Goldman are netted out, the clients may have done very well.

Don't forget that, in this instance, Goldman was not hired to manage money for its clients. Goldman in this case was acting as a product dealer. The products Goldman sold allowed clients to bet on or against the housing market (by going short or long). The products appear to have worked the way they were supposed to.

Don't forget that everything is obvious in hindsight. Goldman could have been wrong about the housing market, and its clients could have been right. In that case, we wouldn't be talking about a scandal. We would be talking about how Goldman got greedy and made dumb bets.

So is it a scandal?

If Goldman's traders and salespeople had secret information about the housing market that they did not share with clients, yes, it's a scandal. That's called intentionally screwing your clients, and Goldman deserves to be strafed for it.

If Goldman was merely creating products to address market demand and then using those products itself, however, it's inevitable. As long as brokerage firms are allowed to have proprietary trading desks (which we certainly don't need to allow), there will always be cases in which firms bet against some of their clients. To think otherwise is just being naive.

UPDATE: Goldman responds to the NYT and makes many of the same points. It also makes another important one: In order for these products to exist, someone has to go short and someone has to go long. When a bank sells a product like this, it usually takes the short side of the trade. Thus, it is betting against the client right at the outset, in full view of the client. Either side is then free to sell its side of the bet to anyone else at any time. Bottom line: We're adults here.