Goldman, Sachs & Co. urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds.

The giant investment firm did not inform the office of California Treasurer Bill Lockyer that it was proposing a way for investment clients to profit from California’s deepening financial misery. In Sacramento, officials said they were concerned that Goldman’s strategy could raise the interest rate the state would have to pay to borrow money, thus harming taxpayers.

It could exaggerate people’s worries about our credit, said Paul Rosenstiel, head of the public finance division of the treasurer’s office.

Such worries would tend to drive down the price of California bonds. That, in turn, would drive up the interest rate the state and its municipalities pay to borrow money. An increase of a single percentage point on a $1-billion bond issue would cost taxpayers an additional $10 million a year in interest.

That’s especially troublesome at a time of severe budget turmoil and tight credit. Gov. Arnold Schwarzenegger has warned that the state could run out of cash as early as February.

Some experts said the investment bank’s actions, while not illegal, might be inappropriate. That’s not a good way to do business, said Geoffrey M. Heal, professor of public policy and business responsibility at Columbia University. They’ve got a conflict of interest and they’re acting against the interest of their customers. You act in the interests of your clients. You don’t screw them, to put it bluntly.

Goldman declined to discuss the details of its trading strategy. We continue to support our clients and underwrite transactions, spokesman Michael DuVally said in an e-mail response to written questions on Oct. 28. He said Goldman as a firm was no longer giving the trading advice to clients. He declined to elaborate.

Goldman’s strategy was embodied in a 58-page report presented to institutional investors in September. The document, stamped Proprietary and Confidential, was obtained by ProPublica, a New York-based nonprofit organization specializing in investigative reporting. This article was reported jointly by ProPublica and the Los Angeles Times.

Goldman stood to profit from several aspects of California’s borrowing, which involves the sale of bonds to investors. First, it collected millions of dollars in fees for bringing the bonds to market and finding buyers. Then it marketed a financial instrument known as a credit default swap that is essentially an insurance policy against a bond default.

The bond investor buying the instrument pays a fee in exchange for a promise of a full refund of the bond’s face value should a state such as California abruptly refuse to pay back what it owes. Such defaults are extremely rare — California, for example, has never defaulted — but the swaps’ prices rise as states or municipalities slide into tough times economically.

Goldman, according to sources familiar with municipal bond trading, has been a leading dealer in municipal credit default swaps. The New York-based firm was trying to expand that niche market into one with broader appeal to major investors.

The company also is an important underwriter of California municipal securities. Over the last five years, it has earned about $25 million in underwriting fees from California issues.

The 58-page document advised big investors how they could profit from — or hedge against losses in — financial markets that had become extremely volatile and unpredictable. The firm advised shorting — that is, betting on a price decline — in markets for corporate junk bonds, European banks, the euro and British pound currencies, and U.S. municipal bonds.

Several large states, including California, faced worsening fiscal outlooks, the report said. It cited the recent bankruptcy of the Bay Area city of Vallejo as evidence of the worsening fundamentals of municipal finances.

Meanwhile, muni bond insurers were suffering credit downgrades, it noted, which undermined the quality, and therefore the prices, of the bonds they had insured. And the credit crunch was forcing big investors such as hedge funds to dump their muni bond portfolios, driving down the bonds’ prices.

Goldman recommended making the short bets via credit default swaps, a market in which it played a major role.

These instruments are designed to allow investors and speculators to hedge, or insure against, the risk that bond issuers or other debtors might default on their obligations. In their customary form, they are contracts that require their sellers — in this case Goldman Sachs — to buy back from a swap holder a defaulted bond at 100 cents on the dollar, thus insuring against any loss.