Goldman Sachs, which acted for the state of California in selling bonds, has urged some of its big clients to place investment bets against some of those bonds this year, the Los Angeles Times reported.
The paper said that Goldman declined to discuss the details of its trading strategy.
Goldman spokesman Michael DuVally told the paper that the firm was no longer giving the trading advice to clients. He declined to elaborate.
The newspaper said the company did not inform the office of California Treasurer Bill Lockyer that it was proposing a way for investment clients to profit from California's economic downturn.
"It could exaggerate people's worries about our credit," the paper quoted Paul Rosenstiel, head of the public finance division of the treasurer's office, as saying.
The investment bank's actions are not illegal, the paper said.
Goldman is an important underwriter of California municipal securities and over the last five years has earned about $25 million in underwriting fees from California issues, the paper said.
Goldman Sachs could not be immediately reached for comment by Reuters.