Goldman Sachs ’ trading activities in the credit insurance market in 2007 have come under attack from a US senator after e-mails revealed a senior trader urged colleagues to “kill” some investors’ positions.

Carl Levin, chairman of the Senate permanent subcommittee on investigations, told a hearing on Wednesday that the alleged activity “looks like a trading abuse to me”, although he added that at the time in question the credit insurance market was unregulated.

Mr Levin said that in May 2007, Goldman adopted a “short squeeze strategy” to drive down the price of credit default swaps on troubled mortgage-backed securities. Mr Levin alleged the move, which Goldman denies, would have enabled the bank “to purchase the CDSs for itself at artificially low prices”.

The subcommittee’s probe uncovered a document revealing a second trader stating that Goldman “began encouraging a squeeze” – a strategy that never materialised due to market conditions.

Mr Levin’s attack opens a potential new front in the controversy over Goldman’s trading practices. In July, the bank paid $550m (€416m) to settle fraud charges from the Securities and Exchange Commission over an MBS sold during the financial crisis.

Mr Levin produced e-mails in which Michael Swenson, an executive in Goldman’s fixed-income trading division, told colleagues to offer cut-price credit default swaps on MBSs. As the housing market collapsed in 2007, investors, including Goldman, were rushing to buy default swaps to short MBSs that were losing value.

“We should start killing the . . . shorts in the street,” Mr Swenson wrote in an e-mail to Deeb Salem, a trader, in May 2007. “This will have people totally demoralised.”

In another e-mail, he said Goldman should reduce prices on CDSs to “cause maximum pain” for existing holders of credit insurance.

Goldman said on Thursday: “This type of language sounds awful and is very disappointing, but it does not reflect the reality of what happened. There was no short squeeze.”

In his end-of-year evaluation, uncovered by the subcommittee, Mr Salem called the squeeze a “doable and brilliant” strategy but said it ultimately never happened.

Mary Schapiro, chairman of the SEC, told the hearing the language in the e-mails was “troubling”.

Mr Levin, whose subcommittee is due to produce a report on the crisis, noted that in interviews with Goldman employees, Mr Swenson and Mr Salem denied the bank intended to squeeze the market. The two, still with Goldman, could not be reached for comment.

Goldman was given a warning that Mr Levin might mention the e-mails during the hearing, a person familiar with the matter said. The bank conducted its own inquiry, reviewing whether there was any unusual trading activity during the period discussed in the e-mails and concluded that there had been no squeeze.

Additional reporting by Kara Scannell