BANNING, Calif. -- Goldman Sachs Group got into the residential mortgage business in 1984, and for 17 years, it ran a staid operation that simply bought and sold loans.

All that changed in 2001, when the elite investment bank leaped aggressively into the burgeoning subprime securities market that was becoming a fountain of money for its Wall Street rivals. The Goldman Sachs Mortgage Co. sold $8.7 billion in subprime bonds that year, amounting to a third of its business.

Soon, the Goldman subsidiary was dealing with some of the most aggressive and controversial subprime lenders -- including Ameriquest (through a subsidiary), New Century, Fremont General, National City and First Franklin.

A spokesman for Goldman, Michael DuVally, declined to explain how a firm of its stature was drawn into a business dogged by questions over its lending practices.

Before they bought pools of thousands of mortgages, Goldman and other Wall Street firms hired contractors to comb through sample batches of the loans to weed out unsound or fraudulent applications.

Not much weeding occurred, however, several of the contractors said, because the Wall Street firms had agreed to accept mortgage lenders' relaxed credit guidelines.

Melissa Toy and Irma Aninger, among scores of contract risk analysts who thumbed through mortgage files for the San Francisco-based Bohan Group from 2004 to 2006, said that supervisors overrode the bulk of their challenges to shaky loans on behalf of Goldman and other firms.

Toy said she concluded that the reviews were mostly ``for appearances,'' because the Wall Street firms planned to repackage ``bogus'' loans swiftly and sell them as bonds, passing any future liabilities to the buyers. The investment banks and mortgage lenders each seemed to be playing ``hot potato,'' trying to pass the risks ``before they got burned,'' she said.

``There was nobody involved in this who didn't know what was going on, no matter what they say,'' she said. ``We all knew.''

DuVally said that the firm's standards for reviewing the loans were ``at least as high, if not higher, in 2006 than they were in 2002.''

In 2007, attorneys general in New York, Connecticut and Massachusetts subpoenaed reports that now-defunct Bohan and another due diligence contractor, Clayton Holdings Inc., provided to their Wall Street clients about the loan reviews.

Clayton is cooperating with New York's inquiry in return for immunity from prosecution.

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