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Goldman Sachs Bank To Pay $5 Billion To Settle Charges About Mortgage Abuses

Department of Justice logo The U.S. Justice Department announced on Monday a $5.06 billion settlement agreement with Goldman Sachs for the bank's conduct with packaging, marketing, and sales of mortgage-backed securities (RMBS) between 2005 and 2007. Terms of the agreement require the bank to:

  • Pay $2.385 billion in a civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA),
  • Pay $875 million to resolve claims by other federal and state entities. This includes $575 million to the National Credit Union Administration, $37.5 million to the Federal Home Loan Bank of Des Moines (as successor to the Federal Home Loan Bank of Seattle), $37.5 million to the Federal Home Loan Bank of Chicago, $190 million to the state of New York, $25 million to the state of Illinois, and $10 million to the state of California. And,
  • Provide $1.8 billion in other relief for underwater homeowners, distressed borrowers, and affected communities. Some of that relief includes loan forgiveness and financing for affordable housing.

The announcement described activities by specific departments in the bank:

"Goldman’s Mortgage Capital Committee, which included senior mortgage department personnel and employees from Goldman’s credit and legal departments, was required to approve every RMBS issued by Goldman.  Goldman has now acknowledged that “[t]he Mortgage Capital Committee typically received . . . summaries of Goldman’s due diligence results for certain of the loan pools backing the securitization,” but that “[d]espite the high numbers of loans that Goldman had dropped from the loan pools, the Mortgage Capital Committee approved every RMBS that was presented to it between December 2005 and 2007.”  As one example, in early 2007, Goldman approved and issued a subprime RMBS backed by loans originated by New Century Mortgage Corporation, after Goldman’s due diligence process found that one of the loan pools to be securitized included loans originated with “[e]xtremely aggressive underwriting,” and where Goldman dropped 25 percent of the loans from the due diligence sample on that pool without reviewing the unsampled 70 percent of the pool to determine whether those loans had similar problems."

U.S. Attorney Benjamin B. Wagner of the Eastern District of California described the settlement agreement:

“Today’s settlement is yet another acknowledgment by one of our leading financial institutions that it did not live up to the representations it made to investors about the products it was selling... Goldman’s conduct in exploiting the RMBS market contributed to an international financial crisis that people across the country, including many in the Eastern District of California, continue to struggle to recover from. I am gratified that this office has developed investigations, first against JPMorgan Chase and now against Goldman Sachs, that have led to significant civil settlements that hold bad actors in this market accountable. The results obtained by this office and other members of the RMBS Working Group continue to send a message to Wall Street that we remain committed to pursuing those responsible for the financial crisis.”

The Working Group was formed in 2012, and Goldman is the last of the banks to reach at settlement. Prior RMBS settlement agreements included $16.65 billion with Bank of America, $13 billion with JPMorgan, $7 billion with Citibank, and $1 billion with SunTrust. Yes, there have been so many it can be confusing or difficult to keep track.

The settlement agreement has already received much criticism. The New York Times reported:

“They appear to have grossly inflated the settlement amount for P.R. purposes to mislead the public, while in the fine print, enabling Goldman Sachs to pay 50 to 75 percent less,” said Dennis Kelleher, the founder of the advocacy organization Better Markets, referring to the government announcement. “The problem all along, with all of these settlements — and this one highlights it even more — is that they are carefully crafted more to conceal than reveal to the American public what really happened here — and what the so-called penalty is.”

And:

"... Goldman bought loans issued by subprime mortgage specialists like Countrywide Financial. Goldman then packaged these loans into bonds that were able to get the highest rating from credit rating agencies. The loans were sold to investors, who sustained losses when the loans went sour. Over the course of 2006, Goldman employees took note of the decreasing quality of loans that it was buying... When an outside analyst wrote a positive report about Countrywide’s stock in April 2006, the head of due diligence at Goldman wrote in an email: “If they only knew.”Despite the worrying signs, Goldman did not alert investors who were buying the bonds it was packaging..."

Also, Goldman Sachs will receive credits that reduce the total amount of taxes the bank will pay:

"... any money that Goldman spends on consumer relief will be deductible from its corporate tax bill. If Goldman spends $2.5 billion on consumer relief, and pays the maximum United States corporate tax rate of 35 percent, it could, in theory, reap $875 million in tax savings. But Goldman could easily pay less than $2.5 billion in consumer relief because of the sections of the settlement that give it extra credit for certain types of activity."

This means that taxpayers effectively pay for part of the fine or penalty payment. That is nuts, since taxpayers did nothing wrong. The bank did. Unfortunately, we've seen tax-deductible portions before with multi-billion- dollar bank settlement agreements. The Justice Department comment about "pursuing those responsible" seems directed at companies and never at individuals. Nobody has gone to jail, even after reports last year about possible criminal charges against bank executives.

It seems that the threat of criminal charges is a "stick" or feeble attempt the Justice Department uses during settlement negotiations. The Justice Department announcement also stated:

"The settlement expressly preserves the government’s ability to bring criminal charges against Goldman, and does not release any individuals from potential criminal or civil liability."

Enough words. We taxpayers demand action. Many consumers lost homes and others had lives disrupted during and after the financial meltdown of 2007-08, fueled largely by banks' wrongdoing. The settlement agreements haven't been only about mortgage abuses. Several banks paid billions in fines to settle foreign exchange market abuses, and unlawful foreclosures on homeowners. Add to this: a 2012 survey found many bank executives view unethical or illegal behavior as necessary to advance. A 2013 survey of bank executives found two key results: a) bad actors don't act alone nor unseen, and b) junior executives were more likely than older executives to know about, accept, and participate in illegal and/or unethical activities.

The long list of multi-billion settlements suggest the industry is unable (or unwilling) to fix its ethics problem. Those junior executives are now several years older, more experienced, and probably in managerial positions. When for criminal prosecutions of bank executives?

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