Goldman Sachs has agreed to a $5 billion final settlement over accusations the company failed to exercise due diligence on mortgage-backed securities before selling them to investors, the Justice Department announced on April 11.
The Wall Street-based global investment banking and securities and investment management firm said that it will pay $2.39 billion civil penalty, $1.8 billion for borrowers who went underwater and $875 million for various other claims.
New York Attorney General Eric Schneiderman said that the settlement will help fund the ongoing recovery for victims of the financial crisis caused by the real estate bubble in 2008.
Statement Of Facts
Goldman did not refute a statement of facts put together by the government prosecutors that give testimony to misleading and false representations to investors, says a report released by the Justice Department
In 2006, Goldman approved an unusually high percentage of residential mortgage-backed securities even as samplings of these RMBS had credit and compliance defects.
Goldman employees and a manager knew that due diligence could not be accomplished because of limited sampling. Yet, Goldman approved the RMBS for securitization. The firm's internal committee responsible for overseeing RMBS followed suit and approved every bunch of bonds that it was presented.
Generating misleading reports to paint a rosy picture is another scheme to get management approval. Back in 2006, an outside analyst publicized a bullish equity report that Countrywide Financial Corp. stocks would be a good buy. Goldman's due diligence head commented, "If they only knew..."
In the same year, Goldman vouched for the integrity of a Fremont General Corp. unit, one of Goldman's underwriters, although Goldman knew that the Fremont unit used "off market" guidelines.
A Settlement For Show?
A CNBC report claims that the "Goldman mortgage settlement is much less than the eye meets." The fine print provisions allow Goldman to save hundreds of millions of dollars from its settlement in the form of government incentives and tax credits.
In one provision, Goldman is obligated to spend $240 million on low-cost housing, but will be spending only 30 percent of that amount because it will receive a large credit for every dollar it spends on the project. It will also get a $1.50 credit for every dollar of loan forgiveness within the first six months after settlement.
Previous settlements had similar provisions. For example, JPMorgan Chase earned a $1.15 credit for each dollar it lost in loan forgiveness if offered within the first year.
Some observers view the settlement deal as a ploy to reveal less and hide more. If SEC and other government regulators only did their job in 2005 and onwards, Wall Street would not have gone astray. Shouldn't they, the regulators, be equally liable?
The Goldman Sachs deal follows other similar settlements made by major financial investment firms like Bank of America, JPMorgan Chase, Morgan Stanley and Citigroup. Other banks, including Deutsche Bank AG and Royal Bank of Scotland Group Plc, are currently being investigated.
