The Goldman Sachs hearings in the US Senate have properly made headlines across the country as Senators attack the investment bank for betting against investments they thought would fail. That was just one of the many ways Goldman Sachs and other investment banks have been accused of unethical, and possibly illegal, behavior – others have pointed out the common practice of using Credit Default Swaps to profit off of failed investments. As Matt Taibbi put it:

Even if he stands to make a buck at it, even your average used-car salesman won’t sell some working father a car with wobbly brakes, then buy life insurance policies on that customer and his kids. But this is done almost as a matter of routine in the financial services industry, where the attitude after the inevitable pileup would be that that family was dumb for getting into the car in the first place. Caveat emptor, dude!

A similar process is at work with California bonds – except in this case, the car is a state that constitutionally cannot default on its debts. California is not Greece, our debt-to-GDP ratio is just 4.5% (Greece’s is 112%), and despite our budget problems there’s no real chance we would miss a payment.

That hasn’t stopped investment banks from betting against California debt, however – even when they’re the ones selling it. Treasurer Bill Lockyer is demanding an end to the practice in a letter he wrote late last month:

“We have information that indicates your firm, which sells California GO [General Obligation] bonds, may participate in the municipal credit default swaps market,” the letter said. Lockyer wanted to know why, and to what extent. The treasurer posted the banks’ responses on his Web site last week….

What was Lockyer concerned about? “Data reported in the news media and other sources show that the prices, or spreads, on California CDS wrongly brand our bonds as a greater risk than those issued by such nations as Kazakhstan, Croatia, Bulgaria and Thailand,” he wrote. “The perception of risk could adversely affect the price of our bonds when we go to market.”

As I explained above, the “perception of risk” about California debt is vastly overstated. But if the big investment banks are betting against CA by buying up these CDSes, it signals to the market that maybe there is a risk and that CA should be paying more.

This isn’t a new issue – Goldman Sachs has previously been accused of encouraging investors to bet against California debt, and other banks have been implicated in a scheme to cheat municipal governments by paying below-market rates to those governments.

All of this matters not just for California’s debt, but for California’s future. As we learn more about the ways Wall Street is systematically cheating Americans and our state governments out of billions of dollars, destroying our economy in the process, we should be asking ourselves “why would we want to elect a former Goldman Sachs board member as our governor?” Wall Street Meg Whitman’s ties to GS aren’t going away:

Republican front-runner Meg Whitman tried again to put her prior relationship with the bank behind her, telling the Associated Press she regrets taking part in a now-banned stock sale practice involving the firm and that she left its board after 15 months because it “wasn’t a good fit.”…

Steve Smith of the California Labor Federation, which represents a coalition of more than 1,200 unions, said in an e-mail that Whitman’s remarks were “dumbfounding” and that while “she’d like to sweep her dealings with Goldman under the rug, the evidence points to a close, lasting relationship that continues to this day.”

These are the practices Meg Whitman is associated with, and the practices she presumably plans to bring to California’s government.