The short heard - but not seen - around the world

Questions for Banks That Put Together Deals

C.D.O. transactions are not publicly traded, so it is difficult to get a full picture of the market’s size. But research suggests it is huge. Thomson Reuters estimates that sales of C.D.O.’s peaked at $534.2 billion in 2006, from $68.6 billion in 2000. Even in 2007, when the housing market was starting to crumble, Wall Street created an estimated $486.8 billion in new C.D.O.’s.

Many banks on Wall Street and in Europe were even bigger players in the types of complex investment deals that Goldman is now defending. Merrill Lynch was at the top of the heap, assembling $16.8 billion worth between 2005 and 2008, according to a new report by Credit Suisse.

Once the air started coming out of the housing market and there were no more mortgage bonds to sell, they created synthetic C.D.O.’s, whose supply was unlimited because they did not rely on hard assets.

UBS put together $15.8 billion worth of similar products, according to the Credit Suisse estimates, while JPMorgan Chase and Citigroup each created more than $9 billion worth. Goldman Sachs was a comparatively small issuer, at $2.2 billion.

C.D.O.’s, which produced much of the financing for the mortgage explosion, are at the heart of the Securities and Exchange Commission’s civil fraud case against Goldman Sachs — as well as a broader S.E.C. investigation of sales and disclosure practices at many Wall Street firms.

Until the bottom fell out, these instruments also powered an age of riches on Wall Street. Initially, bundling mortgage bonds into C.D.O.’s helped open the spigot of easy money that allowed Americans to buy more house than they could afford.

But Wall Street, as it is wont to do, took the concept to another level, creating securities that allowed investors to make side bets on the housing market. Known as synthetic C.D.O.’s, they did not raise money for home loans or serve any other broad economic purpose.

Instead, like a casino offering blackjack along with slot machines and Texas hold ’em, they were just one more way to bet against the housing market.

Crucial to the case against Goldman is the question of whether the firm should have disclosed that an investor who was betting against the securities in the portfolio also helped select them. In legal filings, Goldman argues that it was not standard industry practice to make such a disclosure.

Magnetar, a Chicago hedge fund, also invested in C.D.O.’s that it then bet against, without disclosing its role, according to an investigation by ProPublica, a nonprofit journalism organization. Magnetar has denied that it picked individual securities, however, adding that its investment strategy was market-neutral.

The threat of more litigation represents the abrupt end to what was a golden era on Wall Street.