At the recent Senate investigations subcommittee hearings on Goldman Sachs, the term “market maker” was brought up so often that weary viewers may have dozed off whenever it was uttered. Every time their ethical astigmatism was raised, the Goldmanites would strike a butter-wouldn’t-melt-in-their-mouths tone as they repeated those two words.

Goldman execs, from CEO Lloyd Blankfein on down, insisted that they were behaving as indifferent middlemen, not moustache-twirling swindlers. Blankfein contended that every day the firm is a market maker on "hundreds of thousands, if not millions, of transactions." Senator Carl Levin, chairman of the subcommittee, felt that the “market-maker defense” was a lot of bunk. "This isn't market making. You aren't just selling this stuff (to) people who walk in the door. You are making calls. You are marketing. You are not just selling from your inventory. That is not what I am talking about," Levin said.

The senator, alas, was wrong. In a manner of speaking, Goldman was indeed acting as a market maker. But the firm’s execs weren’t being entirely honest in comparing what it did to ordinary, white-bread market-making. See, the problem was that the Goldman execs were far too modest. Market makers can be imaginative, creative, and bold—in the most unpleasant sense of each of those three words. As the Christian Science Monitor put it, the question is whether Goldman was a “market maker or a trading firm run amok.”

The correct answer is “both.”

Ordinarily, market makers are dispassionate middlemen, very much as Goldman insists. Here is a good summary of what market makers usually do. Note that their main job is to post prices at which they’re willing to buy and sell shares. It’s dull but necessary stuff, and usually quite profitable when done in volume. Usually there are a dozen or more market makers for every stock. It’s a system that works well, most of the time, providing the best prices for customers.

Most of the time—among the floor traders who make markets on the floor of the New York Stock Exchange, for instance—the system works as stated by the gentlemen from Goldman. Market makers don’t make value judgments; they make merchandise available to customers and stand ready to buy back that merchandise, sort of like LL Bean, at the prevailing market price.

But Goldman wasn’t acting an ordinary market maker in the Abacus derivatives that it designed with the help of short-seller John Paulson. For one thing, ordinary market makers don’t custom-design securities; they’re in a commodity business. Assuming that Goldman could be considered a market maker at all, the firm was functioning very much in the mold of the market makers I encountered a few years back in an odiferous corner of the stock market. It’s not a very pretty comparison, but I think the parallels are compelling.