The federal government and securities regulators are in the beginning stages of probes into the legality and fair dealing of the financial industry's creation and use of collateralized debt obligations, the New York Times reported Wednesday on its Web site, citing people briefed on the investigations.

Goldman Sachs Group Inc., Deutsche Bank AG and Morgan Stanley were among the investment banks that created CDO's, as was investment company Tricadia Inc., the Times said. Pension funds and insurance companies lost billions by investing in those securities, said former Goldman Sachs employees, who had direct knowledge of the deals. Some financial firms pushed sales of the instruments but also were active in short-selling them as well — betting on a collapse in the housing market.

Congress, the Securities and Exchange Commission and the Financial Industry Regulatory Authority — the industry's self-regulatory body — are now examining how the CDOs were devised, and appear to be looking at whether the firms violated securities laws or rules governing fair dealing in any short sales. One aspect of the investigation centers on whether the firms purposely help select risky CDOs.

A Goldman spokesman said client demand fueled the creation of many of the CDO products, and that those clients knew that Goldman might bet against mortgages linked to the securities. Additionally, the spokesman said buyers of the CDO products were large, sophisticated investors. Deutsche Bank declined comment. A Tricadia spokesman said the firm always has acted in the best interests of clients and investors.

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