Wall Street’s response to public criticism has mainly been exercises in “never apologize, never explain.”

Which makes today’s mea culpa by Lloyd Blankfein all the more extraordinary. Bloomberg News reports:

“We participated in things that were clearly wrong and have reason to regret,” Blankfein, 55, said at a conference in New York hosted by the Directorship magazine. “We apologize.”

Such a simple and direct admission should have been made by a number of financial executives months ago, but it is to Blankfein’s credit that he has made it even as the pressure on Wall Street from Washington seems to be diminishing.

Reining in bonus pay and doing more on the charitable front would go a long way toward improving the image of a firm that is still associated in the public’s mind with a large vampire squid. But these words from Blankfein will be felt just as keenly.

----Not to beat a dead-horse here, but I thought I'd blog one last interesting thing on Goldman. This from today's conference call. (Transcript via Thomson Street Events, no link)----

Guarantees for certain liabilities aren't the only way Goldman has benefited from government largesse. They've also made money handling trading volume that is driven by the Fed...

Meredith Whitney, Analyst: I have a few questions. The government purchase program was supposed to end this quarter. They've extended it to next quarter. How much of that us a driver of velocity of flows? And how are you positioned when they exit, if they exit, for any type of principal risk? And what do you think that impact is going to be in the larger market? That is my first question. Start off with an easy one.

Is MW on to something here? Perhaps: Note the non-answer answer.

David Viniar - Goldman Sachs Group, Inc. - EVP, CFO: Not a problem. Look, I think, as you know and I think the Fed knows this, exiting their support of various markets is a very tricky thing. I think that they are going to do it carefully. They are going to do it slowly and over time. I think they are signaling the market. I think they are doing a very good job of letting people know they are going to continue for a while, but they aren't not going to continue forever. As far as our positioning, I don't think it really matters at all. As you know, as I said, most of what has happened has been the velocity, not the positioning. And I think that they are going to slowly extricate themselves for that as the markets get healthier and can pick up slack.

MW: Okay, but in terms of the flow volume, right -- so you have been the greatest beneficiary of increased flow volumes. How are the flow volumes going to be influenced as they exit?

DV: I think that they will try to time their exits for the market being healthy enough to pick up that flow. And so I think the flow will continue.

Another non-answer. But MW persists...

MW: And then who would you imagine would be the substitute buyers?

DV: The various market participants. I think it will be the various financial institutions, funds. I think the whole variety of buyers. And there is a lot of cash out there to buy.

MW: Okay. And then just a last one. I was teasing when I said it's the easiest one. But it was easy for you. The last one, of the principal revenues, almost $1 billion, how much of that was cash sales, and how much were markups?

DV: Oh, I would say that it was much more markups than sales...I don't have the exact number, but it would be much more markups than sales.

What do you get when you put a U.S. automaker, a leveraged buyout and commercial real estate together - a soon-to-be bankrupt company. Caroline Humer of Reuters reports that that Capmark - formerly the commercial real estate business of GM financing arm GMAC - is teetering on the brink of bankruptcy, with the final blow coming possibly by the end of next week?

The company, which owns a bank that will continue to operate while it is in court, is in negotiations with lenders, bondholders and the Federal Deposit Insurance Company that will result in a filing by the end of October at the latest, the source said.

They are working on details of a debt-for-equity swap that will take place to bring the company back out of bankruptcy, he said. It is not certain how long the court process could take.

Those that swooped in and bought the unit in March of 2006 in an LBO may be out of luck if the company files for bankruptcy.

Kohlberg Kravis Roberts & Co KKR.UL, Goldman Sachs Group (GS.N) and Five Mile Capital, which bought Capmark in March 2006 for $1.5 billion in cash plus more than $7 billion in debt at the peak of the housing market, will not receive payment through the bankruptcy.

The source said the company will belong to its creditor group, which is made up of more than 50 banks and more than 50 hedge funds among others. The lead banks are Citigroup’s (C.N) Citibank and JPMorgan Chase (JPM.N).

There’s also a Warren Buffett angle to this tale. Reuters said Capmark has will sell the company’s loan servicing and mortgage business to Berkshire Hathaway and Leucadia National for $490 million in what would be a 363 bankruptcy when good assets are separated from the bad and then spun out into a stronger standalone.

It’s not surprising that a commercial real estate financing company is in trouble given the woes in the sector. Property prices are down between 35%-40%,  a good chunk of borrowers are underwater and new financing is almost non-existent. The government’s TALF program has done little so far to jump start the CMBS market, with just a measly $400 million deal from Developers Diversified the only beacon of hope so far.

Who needs a chief executive officer? Well, Lazard perhaps, when it’s Bruce Wasserstein (which is why his serious illness is also serious for the shareholders) but not ITV, it seems. On Monday, when its leadership saga had a better plotline than Corrie, the shares went up.

Perhaps it was the thought of all the money saved from that empty c-suite, or perhaps it was renewed hope for the end of Michael Grade’s disastrous tenure as executive chairman, or perhaps it was the upGrade (sorry) from Goldman Sachs, but the shares joined in the general stock market fun and rose to their best for three weeks.

The golden boys “had concerns going into the CEO announcement and Contract Rights Renewal decision. Neither announcement fulfilled our upside scenario” - whatever that means - “but they were consistent with our base-case assumptions.” They now reckon the shares are worth 58 pence, against Monday morning’s 46 pence, because advertising revenues at Britain’s leading free-to-air commercial channel are starting to rise after last year’s plunge.

This is surely the point.  ITV has a Golden Shot at puncturing the myth that without a powerful ceo, a business just can’t function. Michael Bishop was offered the job of (non-executive) chairman, and the result of his due diligence  was enough for him to run away.  Chief operating officer John Cresswell likes acting above his pay grade so much that he’s promised to resign as soon as a new chief executive can be found.

Given the disfunctional ITV board, Cresswell could find himself acting for quite a while. Perhaps in atonement for their sins, all the directors should be forced to make a special edition of I’m An Executive, Get Me out Of Here.

There’s more evidence today about the big profitability of computer-driven high-frequency trading.

The Wall Street Journal says Ken Griffin’s Citadel Investment Group hedge fund empire made $1 billion from proprietary trading with HFT last year. The profitability number came out during testimony in an ongoing lawsuit Citadel has filed against a group of former HFT employees who left to start their own firm.

This is the same upstart firm that alleged Goldman Sachs HFT computer code thief Sergey Aleynikov had gone to work for before being nabbed July 4 weekend at Newark Liberty Airport. Aleynikov, who has pleaded not guilty and is trying to work out a plea deal, is set to be in court again on Oct. 16.

What’s worth remembering is this $1 billion figure is just the money raked in by Citadel’s prop trading HFT business. It doesn’t include the dollars Griffin’s empire takes in from market making–a business that’s also driving by HFT computer programs.

None of this is really a surprise given the way big HFT players like Goldman and Citadel have gone to protect the secret sauce of their lightening fast trading platforms.

The nation’s top commercial banks are poised to generate record revenue from trading derivatives this year. And that’s as good a reason as any why no one should expect the nation’s bank to go along peacefully with a plan to regulate the trading of these sophisticated instruments.

In the first half of the year, the 25 biggest commercial banks took in $15 billion from trading derivatives, with JPMorgan Chase and Goldman Sachs being two of the biggest beneficiaries. And as things stand now, the nation’s banks will easily surpass the record $18.8 billion in derivatives trading revenue taken in during 2006.

In short, there’s a lot of money to be made from trading derivatives. So don’t expect banks to easily accept new rules that will put a crimp in this important source of income.

Oh, and just where did Goldman get most of its derivatives trading revenue from? Trading credit default swaps and other credit derivatives. The OCC reports that Goldman, in the second quarter, raked-in $1.48 billion from trading CDS-like transactions.

That ain’t chump change.

The number of London’s trademark black taxis booked and waiting outside the European headquarters of Goldman Sachs — meters running — was once used by some as a barometer of the health of London’s investment banking business.

When times were good, the queue was long and it was impossible for anyone else in the vicinity to hail a cab. But when the fees dried up, or markets turned, the cabbies who’d been at Goldman’s beck and call suddenly had to find new customers.

Last year, Goldman was reported to have stopped free taxis home for staff working in the office after 9pm, extending this to 10pm.

Now it looks as though taxis may be in vogue again at Goldman, at least indirectly.

Goldman Sachs Capital Partners — is that a taxi in the picture on the website? — now appears to be following in the tracks of the maker of many of London’s black cabs by cosying up to Geely Automotive — China’s 10th largest vehicle maker.

For Manganese Bronze — which has made more than 100,000 London taxis at its Coventry plant since 1948 — it was a case of turning to Geely for help and selling it a stake as well as entering a joint venture.

But in this case, it is Goldman that is providing the money — buying about $250 million of convertible bonds and warrants. Geely will use the proceeds to ratchet up its production.

Geely Automotive will no doubt be pleased with the celebrity endorsement. By persuading the U.S. investment bank to buy its convertibles, the Chinese carmaker is showing it is a force to be reckoned with.

Until recently, Geely has been seen as a somewhat optimistic “me-too” carmaker that was doing little more than window-shopping.

But it is one of the few privately-owned Chinese carmakers with a green light from Beijing to go shopping abroad. And its recent interest in buying Ford’s unwanted Volvo brand and its approach to Magna about an Opel production partnership shows its real ambitions.

So the Goldman Sachs private equity fund could end up owning Geely shares. Goldman may soon have taxis made by a UK firm in which it has an indirect stake through China queueing at its London doors.

That’s assuming its clampdown on taxi use is lifted by then of course.

Wall Street would like you to believe that when investment banks take on risk they are largely doing it for the benefit of investors — maybe even you and me.

Bankers say much of the capital that their firms put at risk each day is to complete trades for big corporations, mutual funds, pension funds, hedge funds and university endowments. And contrary to the conventional wisdom, proprietary trading — bets made for a bank’s own behalf — is really just a small part of their business.

Lately, Wall Street’s captains of capitalism have been aggressive in pushing the “we take big risks for our customers, not for ourselves” line of argument.

That’s especially so in the wake of the public furor over the outsized trading gains at the big banks like Goldman Sachs Group, JPMorgan Chase and Barclays and even Citigroup, so soon after the collapse of Lehman Brothers.

The notion that risk is being taken for customers as opposed to for the firm’s own benefit is somehow supposed to make it seem more palatable and somehow less risky.

Still, for many, the image persists that investment banks spend a lot of time and resources gambling on stocks, bonds, commodities or currencies to generate fat profits and big bonuses. And there’s good reason for that image: Wall Street firms don’t break out the dollars they take in from client trades versus those generated by prop trading.

Yet from the perspective of Wall Street bankers, it’s perfectly logical to see much of their risk taking simply as part of trades for their customers.

Here’s how:

Let’s say a hedge fund calls up an investment bank and asks it to help buy a large block of shares, but it doesn’t want to pay much more than a given sum and intends to finance part of the transaction. That may force the investment bank to commit some of its own capital to acquire those shares in a series of separate transactions, so as not to create an undue spike in the stock’s price.

To protect itself from losing money, the investment bank may go out and enter into a number of other trades or derivatives transactions — all intended to reduce, or lay off, its risk of a loss on the customer transaction.

And in all likelihood those follow-on trades will prompt the investment bank to engage in a series of other trades to minimize its exposure to something going awry with those hedges.

At the end of the day, what looks like a simple customer order to buy stock on margin may end up creating a daisy chain of transactions that the customer wasn’t even aware were taking place. But in the mind of a Wall Street banker, all these follow-on trades are simply part of the process of completing the customer’s order.

Not surprisingly, some of these follow-on transactions can rake in sizeable revenues for a bank’s trading desk. That’s how an ordinary customer request to buy stock can generate revenues far in excess of whatever fees the initial trade may have produced.

Of course, if things go wrong, an investment bank can just as easily lose money on some of these follow-on transactions, and that’s why there’s risk involved in the process.

It’s hard to see what distinguishes some of these transactions from what an outside observer might label as prop trading — a group of traders sitting around with a pile of firm capital to do with as they please. But that’s not the way that bankers think about customer trades.

Maybe it’s all just a case of semantics, and trying to make a distinction between customer trades and prop trading is fruitless. Ultimately, maybe all trading activities by investment banks should just be viewed as risky.

The key to taming the giant banks is to put them in a position where they must turn away customer business because of the potential risk associated with all these follow-on trades.

One way to do that would be to impose hard-and-fast caps on the size of bank balance sheets, as it would deter them from engaging in transactions that add to their assets and liabilities. To avoid any unfair advantage, the caps on bank balance sheets would have to be agreed by regulators and policy makers around the globe.

But a balance sheet cap would be easier to impose and monitor than the increased capital holding requirements Treasury Secretary Timothy Geithner is proposing for global banks.

And better yet, a balance sheet cap would have the added benefit of fostering more competition between banks by driving some business to smaller institutions.

It’s way too soon for the federal government to contemplate reducing its considerable equity stake in Citigroup.

If anything, now’s the time for the feds to finally get tough with the troubled giant and establish a firm deadline for forcing Citi to shrink itself.

What better way to mark the anniversary of Lehman Brothers’ chaotic collapse and the birth of bailout nation than with a presidential directive giving Citi one year to reduce its $1.8 trillion balance sheet by half?

Harsh? Yes, but that’s the point. To restore the principle of moral hazard, the managers of giant banks need to know that there must be some consequences for their reckless actions.

Any “too big to fail” bank that gets bailed out shouldn’t be able to simply walk away to live another day as if nothing has happened.

Now don’t get me wrong. The bailout of the banking system was necessary to prevent a global financial meltdown. Propping up Citi with a $45 billion cash infusion and a federal guarantee on $300 billion in toxic assets prevented an out-of-control collapse of the mammoth bank that would have made Lehman’s bankruptcy look like a case in small-claims court.

But Wall Street historian Charles Geisst says Citi “hasn’t paid much of a price” for its many misdeeds — including SIVs, CDOs and subprime mortgages, not to mention reckless credit card and auto loans. And I suspect a lot of the populist anger over the bailout stems from the view that the banks have gotten away with murder.

There’s been a lot of silly talk during the healthcare debate about “death panels” that would supposedly decide which elderly citizens should or should not get medical treatment. It’s simply not true.

But I have no problem if the Obama administration wants to establish death panels for the too-big-to-fail financial institutions that exist only because of the taxpayers’ largess. And Citi would be the perfect test case.

If it can’t find a way to shrink its balance sheet — either through asset sales to vulture investment funds, dispositions to other institutions or spinoffs to shareholders — it should go before a government banking death panel.

Earlier this year, Treasury made a big mistake in letting 10 big banks, including Goldman Sachs and JPMorgan Chase, pay back $70 billion in bailout money. In doing so, the federal government lost all control over these banks, which could again threaten the world financial system with their imprudent actions.

So President Obama now has to come to lower Manhattan to more or less plead with the titans of Wall Street to change their ways and not return to the excesses that led to the financial crisis. The Obama administration would be in a much stronger position to push for financial regulatory reforms if the government still had its meat hooks in the banks’ hides.

But Obama and Treasury Secretary Timothy Geithner are afraid of giving the appearance they are micro-managing the banks or fueling cries of “socialism” from the peanut gallery.

So they are moving quickly to reduce the government’s footprint in the banking system and even trumpeting the fact that taxpayers are making a profit on the bailout money that has been returned.

Yet Obama is missing the point: The right wingers opposing him will oppose him no matter what he does. What the president should worry about is winning the support of the rest of the nation worried that the banks that caused this mess are getting off too easy.

A good way for Obama to win over the vast majority of Americans to his side would be to make an example of Citi. His message to Wall Street going forward should be: If you mess up, we’re going to break you up.

Around the time Lehman Brothers’ collapse nearly pushed the global banking system off a cliff, Rose Barrett’s own personal financial crisis began.

Recently separated from her husband, the Kissimmee, Florida resident quickly found it hard to keep making her monthly $1,939 mortgage payment on her salary as a night nurse at a local rehabilitation center. She made a hardship application to her lender, the subprime banking arm of Banco Popular seeking relief from her 40-year fixed rate $200,000 mortgage with a hefty 9.45 percent interest rate.

But by the time she asked for help in mid-September, it probably was too late to alter the trajectory of what is an all-too-familiar tale.

As the stories and commentary marking the one-year anniversary of the failure of Lehman mount, it is also worth remembering that housing was a root cause of the financial crisis — and that it had many victims like Barrett.

And even as the banks that are holding mortgages appear to be getting healthier, the tide of foreclosures, which threatens to keep a lid on consumer spending for months to come, shows no signs of abating,

Indeed, Barrett’s story is also about the post-crisis winners like Goldman Sachs, who snatched up opportunities amid the subprime wreckage.

It was an investment subsidiary of Goldman that began a foreclosure proceeding in Polk County Circuit Court on Barrett’s four-bedroom home in December. The Goldman unit last September paid $731 million for Banco Popular’s $1.1 billion subprime mortgage portfolio in the US.

Like many Americans, Barrett, 52, briefly benefited from what clearly was an unsustainable surge in home values. And subprime lenders like Banco Popular were all too willing to oblige, as long as they could collect a loan origination fee.

Following a series of cash-out refinancings to pay for medical expenses and home improvements, Barrett is left way upside down on her mortgage — meaning her home is worth a lot less than her debt. The house she bought with her estranged husband for $125,000 in 2004 would now fetch just $108,000 on the open market — after nearly doubling in value on paper for a few fleeting moments.

The predicament of Barrett, known to her friends as Jenna, is not unique; only the circumstances that got her to this situation are. In her neighborhood alone, just about every other home is in some stage of foreclosure. The numbers are grimmer in other parts of Florida.

Sure, the federal government has a $50 billion foreclosure prevention program that will keep a lot of people in their homes. But for homeowners like Barrett the terms of the program may not provide enough financial relief, meaning plenty of Americans are going to become renters again.

In some areas of the country, there will be such a large supply of vacant homes that it will be difficult for home builders to get any traction to start new construction projects. And that, of course, means fewer new jobs being created.

The foreclosure crisis will leave many Americans rightfully asking: “What economic recovery?” And until the foreclosure crisis is fixed, it could be years before consumer spending — the long reliable driver of economic growth in the US — returns to anything that resembles normal.

The trouble is there is no easy solution to this problem, and banks holding these mortgages can’t always be cast as villains — as tempting as that might be.

This spring, Litton Loan Servicing, another Goldman subsidiary that services Barrett’s mortgage, offered Barrett a “trial modification” that would have reduced her monthly mortgage payment to $1,100. But Barrett, who says she can’t afford much more than $1,000 a month on her current salary, rejected the offer because she couldn’t afford the $4,000 upfront payment Litton also wanted.

She’s asked Litton for a substantial loan reduction without the upfront payment. In June, Litton sent her a letter saying it was reviewing her request.

A Litton spokeswoman, citing privacy concerns, says the company can’t comment on the particulars of Barrett’s request. But she adds, “We are willing to continue to work with this particular customer on achieving a loan workout solution.”

Over the past year, Litton says it has modified about 44,000 home loans, or roughly 10 percent of its mortgage portfolio. And since joining the federal government’s anti-foreclosure program in early August, the company has offered another 7,000 loan modifications.

Still, Barrett, who recently returned to her nursing job after recuperating from heart surgery, isn’t hopeful that something will be worked out with Goldman and its subsidiaries “I’m assuming they are going to foreclose,” she says. “The stress and uncertainty isn’t good.”