Lower level Goldman Sachs executives tried to fend off accusations they inflated the housing bubble, sold clients shitty deals and made billions off the market's collapse, in a high stakes Senate hearing.

Facing tough questions from a panel of Senators, the current and former employees said Goldman was managing risk on individual positions rather than making a broad bet against the future of the housing market.

In his first public appearance since being charged with fraud for failing to disclose information to investors, Fabrice Tourre said he categorically denies regulators' allegations.

When asked if Goldman has a duty to tell clients when it is betting against them, Tourre said the firm has a duty to buy and sell securities from clients, adding We do not have a duty to be investment advisors.

The Senate subcommittee fired a broad fusillade against investment banks, but focused on Goldman Sachs, one of the oldest investment banks on Wall Street. Goldman has become a lightning rod for criticism for traders' behavior before and during the worst economic decline since the Great Depression.

Legislators are working on financial reform laws now, and trying to learn from past mistakes in crafting new rules.

The hearings recalled the Pecora Commission hearings that started in 1932 and investigated the causes of the 1929 stock market crash. Those hearings found unethical practices ranging from investors linking up to manipulate stock prices to selling stocks to friends of J.P. Morgan at discounted prices.

Senators routinely tried to pin the employees down on whether particular deals were evidence of ethical lapses, and Goldman employees largely refused to regret their actions.

In a tense exchange, Senator Carl Levin, chairman of the Permanent Subcommittee on Investigations, asked Dan Sparks, former head of the mortgage department at Goldman Sachs, whether he felt obliged to tell clients when he was betting against their trades.

Levin pointed to a particular transaction that one of Sparks' bosses termed a shi**y deal. The Senator used the phrase shitty deal at least a half dozen times at the hearing.

Sparks did not respond directly, and said it was not his own description of the transaction.

Other Goldman officials are also expected to testify before the Senate subcommittee on Tuesday, including Chief Executive Lloyd Blankfein.

Goldman Sachs shares were up 1.1 percent to $153.72 in afternoon trading, defying the drop in the broader market that was hit hard by downgrades in Greek and Portuguese debt.

LOOSE STANDARDS

At one point in the hearings, Senator Mark Pryor asked a group of current and former employees if they take responsibility for their contributions to the financial crisis.

Sparks said he takes responsibility. He said evenly and deliberately, I think it's clear that credit standards got loose. His voice dropped when he said loose, and Pryor asked him to repeat it.

Early in the hearings, Senator John McCain said that he did not know if Goldman Sachs did anything illegal, but added there was no doubt that Goldman Sachs behaved unethically.

That issue may be important for clients, and raises problems for Goldman itself. The bank famously tells new bankers, sales staff, and traders that they should not do anything that would embarrass the firm if printed on the front page of a major business newspaper.

A 6 billion euro ($8 billion) Dutch transport pension fund said it had dropped Goldman as its fiduciary manager, but said the decision had no connection to the SEC charges.

The fraud charges are linked to a particular trade, where the SEC says Goldman failed to disclose key information to a ratings analyst and investors. The transaction is known as Abacus 2007-AC1, and the subcommittee focused on it.

Goldman's actions demonstrate that it often saw its clients not as valuable customers but as objects for profits, Levin said.

Its conduct brings into question the whole function of Wall Street, Levin said.

The SEC charged Tourre and Goldman with fraud on April 16 because of this transaction, pushing the company's shares nearly 13 percent lower.

We think this situation is somewhat similar to the turn of last century when you had John D. Rockefeller and Standard Oil under attack by the U.S. government, said Edward Rogers, CEO of Tokyo-based hedge fund advisor Rogers Investment Advisors.

The subcommittee is looking at causes of the financial crisis. Previous hearing have looked at rating agencies and at the failure of Washington Mutual.

(Reporting by Steve Eder and Dan Margolies; Additional reporting by Jonathan Stempel and Dan Wilchins, editing by Dave Zimmerman and Tim Dobbyn)

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