EDITORIAL: Who's managing the nation's financial risk?

On the spot before the cameras and the Senate Tuesday, Goldman Sachs executives talked a lot about managing risk. Their own. Unfortunately no one was managing the risk that toxic mortgage-backed securities posed to the economy. That's a failing that financial reform legislation has to change.

Predictably, Tuesday's hearing was more political theater than fact-finding. Looking askance at casino-like practices, senators slammed the bank for peddling mortgage-backed securities without disclosing to customers that Goldman and the firm that recommended some of the underlying mortgages were betting the securities they created would lose money. By "shorting" these securities, Goldman was able to cover losses it absorbed on other mortgage-backed derivatives as the housing market collapsed.

Chairman Lloyd Blankfein and others insisted that investors who bought the exotic securities were sophisticated players who knew what they were doing. In other words, they were savvy enough to manage their own risks. Still, it was stunning to see Goldman executives tongue-tied when asked if they had a duty to act in the best interest of their clients. After much fumbling, the consensus seemed to be no.

Investment bankers look out for themselves. Big investors do, too. Washington has to look out for the rest of us. hN